It may be necessary to include strict environmental standards in capacity mechanisms to avoid subsidizing CO2-intensive sources of electricity generation, EU climate action and energy commissioner Miguel Arias Canete told a seminar in Brussels Thursday.
Canete was speaking at economic think-tank Bruegel ahead of the expected publication of the EC's "winter package" of EU energy legislation on November 30.
The EC is to propose a European framework for capacity mechanisms "to ensure coherence, cross-border participation and avoid market distortions" as part of a new EU power market design, Canete said.
The mechanisms "mustn't serve as an excuse to subsidize high-polluting generation assets that would counteract our decarbonization objectives," he said.
"It might be necessary to include strict environmental criteria in such mechanisms to avoid giving wrong incentives that might lead to stranded assets as our emission cap gets tighter," he said.
There was "no logic" in allowing capacity mechanisms that did not take into account carbon intensity, he said.
Experience in the UK capacity market has shown that cheap, polluting diesel engines can win 15-year new-build contracts ahead of cleaner sources.
Only this month, after two auctions and around 700 MW of diesel engine awards, has the UK government moved to propose new NOx emission limits on small-scale generators bidding into the capacity market.
PROMOTING COOPERATION
The EC's winter package is also to include new EU electricity sector risk-preparedness rules to ensure national governments cooperate in order to avert crisis situations.
The aim is to promote better regional and cross-border cooperation "even if some people don't like it," Canete said, a clear reference to current moves to split the German-Austrian electricity price zone.
Austria opposes the split on the grounds that the network bottleneck in question is within Germany, not at the border.
Full market integration would involve more than just building new interconnectors, Canete said.
"We will no longer tolerate situations where bottlenecks are artificially pushed to the border [nor] accept fragmented and uncoordinated national measures to remunerate generation capacity. We need to move to a European framework," he said.
FOCUS ON DEMAND RESPONSE, SHORT-TERM TRADING
The EC's power market design proposals will also focus on consumers and short-term price signals.
"Consumers who want to generate their own energy, to conserve energy, to react to dynamic price signals -- they will play a key role in achieving the flexibility we need to integrate abundant renewables," Canete said.
While the technologies existed to provide widespread demand response, "we don't have active participation yet. We need aggregators and distribution system operators to help, and we need better-integrated short-term markets," he said.
European-wide intraday and cross-border balancing markets would be one of the key proposals in the winter package, Canete said.
"We won't stop there, we will remove road blocks to innovation, opening the door to new energy services and new actors to the market," he said.
The EC would move to increase retail competition, make networks more flexible and allow consumers to switch more easily.
"This should incentivize consumers to engage in the market and benefit from the new services," Canete said.
EC STANDS BY EU ETS, CARBON MARKETS
Strengthening the EU's Emissions Trading System, meanwhile, remained the best market-based solution to drive investment, the commissioner said.
Backloading, the market stability reserve and "very positive amendments" being made by the European Parliament signaled a positive trend in a stronger ETS, he said.
Despite US president-elect Donald Trump's pledge to abandon the global Paris Agreement on climate change, Canete said the UNCCC's commitment to press ahead with ambitious carbon reduction policies was evident at the recent COP 22 meeting in Marrakesh.
"Regardless of the situation in the US, progress will be made in the carbon markets," Canete said.
He highlighted growing cooperation with China, which plans to launch its own economy-wide carbon market.
The EC would organize a conference with China next year on carbon markets, he said, and is looking to cooperate with all carbon market organizers, including at US state level such as in California.
