To solve the European energy crisis, decision makers need to focus on three things
20.3.2023
Ulrik Stridbæk, Head of Regulatory & Public Affairs, Ørsted
In the face of Europe’s geopolitical and energy crisis, EU decision makers are under intense pressure to ensure a secure supply of affordable energy, while continuing on the course towards a net-zero world.
In the short term, targeted and temporary emergency measures were necessary to protect vulnerable citizens and businesses, including diversifying fossil fuel imports. But in the longer term, a hasty revolution would have unintended consequences – both for the green transition, and for Europe’s energy security.
The current regulatory framework may not be perfect, but it’s the product of more than 20 years of legislative procedures, scrutiny from impact assessments, and extensive consultations with stakeholders. Any changes we make now mustn’t jeopardise these achievements – or investors’ trust. I believe the key to solving the energy crisis lies within the framework we already have, if decision makers focus on three things.
In the short term, targeted and temporary emergency measures were necessary to protect vulnerable citizens and businesses, including diversifying fossil fuel imports. But in the longer term, a hasty revolution would have unintended consequences – both for the green transition, and for Europe’s energy security.
The current regulatory framework may not be perfect, but it’s the product of more than 20 years of legislative procedures, scrutiny from impact assessments, and extensive consultations with stakeholders. Any changes we make now mustn’t jeopardise these achievements – or investors’ trust. I believe the key to solving the energy crisis lies within the framework we already have, if decision makers focus on three things.
Ulrik Stridbæk, Head of Regulatory & Public Affairs, Ørsted
1. Unlock investments in renewable energy and green infrastructure
The highest priority for Europe’s energy system should be to accelerate the build-out of renewable energy. There have been some promising legislative developments in the context of Fit-for-55 and RePowerEU, which could finally remedy EU-wide barriers to permitting procedures. But other regulatory bottlenecks remain. An excellent example is offshore wind farms connecting to more than one market (offshore hybrids or so-called ‘energy islands’). In order to benefit from the systemic value that offshore hybrids will bring, it is crucial to unleash investments in these projects by eliminating regulatory induced volume and price risk for these large-scale renewable projects.
And of course, the green build-out must be matched by the development of appropriate grid infrastructure, which is the backbone of any functioning electricity market. We need to see investment in Europe’s green energy infrastructure now, and grid operators need to be incentivised to expand and update their networks – along with networks for green hydrogen.
2. Enhance the role of long-term markets
Long-term contracts, like power purchase agreements (PPAs), are an effective way to make inexpensive renewable energy more widely available for industries and households, protecting them from price hikes and limiting the impact of volatile electricity generation. It’s been encouraging to see a greater uptake of PPAs in recent years, and those who entered them early now find themselves at a considerable competitive advantage. We now need to see barriers to PPAs removed, and greater incentives for their wider application.
It is also worth weighing up the ongoing use of contracts for difference (CfDs) as a way of lowering the risk of investments in renewable energy – but only if they remain optional. CfDs have played an important role in the build-out of renewable energy so far, but it would be overly intrusive to obligate all new renewable energy assets to enter into them. If poorly designed, CfDs could harm the commercial flexibility and future system-flexibility of renewable energy production.
3. Safeguard the fundamentals of short-term markets and activate flexibility
Today’s short-term electricity markets are based on the marginal pricing method, or pay-as-cleared framework, which prioritises the least costly energy sources in day-ahead auctions . As such, generators must bid at their true operating (or marginal) cost, to increase their chance of being dispatched to meet the next day’s demand. As a result, this framework incentivises the build-out of inexpensive renewable energy which drives down wholesale costs of electricity in the long run. Marginal pricing is a core principle of the EU electricity market, and any fundamental change here could threaten long-term system efficiency and supply of competitive electricity prices.
Meanwhile, it needs to become easier to activate flexibility services within the energy system. These services can alleviate the exposure of vulnerable consumers to peak price periods by more readily substituting expensive gas-fired power plants for cheaper sources, or changing patterns of electricity consumption to focus on periods with lower prices. But this will only happen if the market sends a clear price signal .
At the same time, it needs to be easier for system operators to balance the stability of the grid by activating a demand response using services like electrolysers that can make use of surplus supply. These flexibility services are vital for an efficient and reliable future energy system, but at present regulatory barriers hinder their activation.
Conclusion
As Ørsted, we are committed to creating a world that runs entirely on green energy. We encourage EU decision makers to prioritise the three areas presented above. This way, they can put the EU on track for net zero, while ensuring a secure and affordable energy supply.
