Project example

Our centre of expertise engages in various research projects with external partners. Below is an example of such a project.

The realisation of energy transition is a socially important, but costly, exercise. To keep the costs of this transition to a minimum, it is important to uphold the basic principles of the organisation of the electricity market. These are conclusions drawn by Machiel Mulder, professor of Regulation of Energy Markets at the University of Groningen, on the basis of research on the effects of sustainable energy on electricity market forces. The research was funded by the Netherlands Organisation for Scientific Research (NWO), Energie-Nederland, TenneT, Netbeheer Nederland, VEMW and the Dutch consumer association ( de Consumentenbond) , with support from the Authority for Consumers & Markets (ACM) and Statkraft.

The Netherlands has undertaken to increase the proportion of renewable energy in its total electricity consumption from the current 15% to approximately 60% by 2030. Cost management is crucial if this highly ambitious goal is to be achieved. According to Mulder, it is essential to embrace the principles of electricity market forces. ‘The electricity market has evolved into its current form over the past 20 years and seems to be functioning well: more competition, lower prices, innovation in the consumer market and sufficient investment have all led to a reliable electricity supply. The electricity market has become increasingly international, resulting in lower generation costs, more competition and greater supply security.’

In his policy paper, Mulder discusses these basic principles and the extent to which they must be adjusted because of the energy transition. The topics discussed include the wholesale market pricing, investments in power stations, the way in which the network operators keep the electricity network in balance, the opportunities which supplier have to increase consumer involvement in the electricity market, citizens' desire for setting up local energy cooperatives, the increase in the degree to which the electricity markets in different countries are interconnected and the relationship with the European Union's emissions-trading system.

Local energy systems counter-productive

Mulder is arguing the case for an integrated international electricity market. ‘Removing the barriers to international trade in electricity and choosing international instead of national or local objectives will help us to keep the costs of the energy transition to a minimum. Local energy systems may seem attractive, but they increase the costs of energy transition and are therefore less successful. By trying to find sustainable solutions for their own energy demands, regions are actually increasing the bill for society as a whole. On an international market, everyone can benefit from peaks in production, for example from windmills in a neighbouring country, while a region that uses only the energy it generates itself will miss out on this opportunity and end up paying more.’

Flexible German market as example

A region that wants to supply its own energy will face higher costs for fluctuations in the supply of wind and solar power than it would in an international market. Mulder: ‘Experience in Germany, where the energy transition is already fairly advanced, shows that the electricity market is perfectly able to cope with increased fluctuation in the supply of energy from renewable sources. The market system provides enough flexibility without the need to invest in electricity storage.’

Governments should not take over the role of market participants

Local and national governments may feel that the energy transition process is too slow, however, they should not take over the role of market participants.

Machiel: 'Market prices cannot fulfill their driving and and informing role well unless they are resultant of independent decentralised decisions made by supplier and consumers, and, besides that, all participants are exposed to these market prices. Moreover, it may be that the market is less dynamic in taking the energy transition on board than governments would want them to, that doesn't that the market doesn't work. Usually, the reason for market participants to not proactively implement green-energy projects is that the costs exceed their private or commercial interests. When local or national governments want to stimulate these market participants to take action in this respect, something will have to be done about the market participants' costs or revenues; their role must not be taken over by governments.'

Market incentives make subsidies more effective

To keep the costs of the energy transition in check, it is also important to incorporate market incentives in subsidy schemes for sustainable energy wherever possible, says Mulder. ‘In the past, guaranteed compensation for producing renewable energy, irrespective of the price of electricity, proved to be a good incentive, but this is not sustainable. Schemes like this are expensive, lead to unnecessary profits for people who invest in solar panels, for example, and interfere with the energy market. A commitment system like the one introduced in England is a good example of a system that keeps the costs of sustainable energy to a minimum. Suppliers are obliged to supply a specific percentage of sustainable energy, so look for the cheapest suppliers themselves. This not only causes prices to drop, but also means that more sustainable energy is realized for the same amount of subsidy. In the Netherlands, the SDE+ subsidy scheme encourages the reduction of the cost of sustainable energy.

Minimising the costs of creating imbalances

To need of having an electricity system in which every party is responsible for its contribution to the grid stability is in the changing environment of energy transition is of the utmost importance. Especially in case of ever more decentralised organisation of the electricity system, responsible parties have to be able to take on the duty of delivering the promised behaviour.

Machiel: 'Basic principle is that the responsibility for footing the bill must be taken by those who have caused the costs or can influence them. As far as electricity grids are concerned, this implies that programme responsibility for keeping own portfolios in balance is a vital component of the incentives required to stimulate participants to produce or consume, as the case may be, the electricity which they have sold or bough in the forward markets as well as that the market participants minimise the costs of creating imbalance.'

Reducing CO2 emissions

The ultimate aim of energy transition is to reduce CO2 emissions. National policy designed to stimulate the energy transition has a direct impact on all those taking part in the trading system through the European Emissions Trading System (ETS): it becomes cheaper for electricity companies and the chemical industry, for example, to reduce their emissions. Energy transition therefore provides enough financial leeway to do more about reducing emissions than strictly necessary under the terms of the trading system.

Mulder: ‘The simplest way for governments, companies and citizens to realize this reduction in emissions is to buy up emission rights and cancel them without using them. This increases scarcity in the market for emission rights, causing the price of CO2 rights to rise and prompting more action to reduce emissions somewhere within the ETS. In this way, we will not only ensure that more of the energy we consume is sustainable energy, but we will reduce CO2 emissions too.’

Partners

This publication is the result of a multidisciplinary research project on the effects of sustainable energy on energy market forces. The research was funded by the Netherlands Organisation for Scientific Research (NWO) with co-funding from Energie-Nederland, TenneT, Netbeheer Nederland, VEMW and the Dutch consumer association (de Consumentenbond), and support from the Authority for Consumers & Markets (ACM) and Statkraft.

More information

• Contact: Prof. Machiel Mulder
• Download the full publication: Energy transition and the electricity market