Europe's electricity markets: why they are the way they are

Leonardo Meeus

By Leonardo Meeus

Visiting Professor of Nonmarket Strategies

20 November 2020

“European climate and energy policy typically sets targets for decades at a time: 2020, 2030 and 2050,” says Professor Leonardo Meeus, director of the Vlerick Energy Centre. “So I thought it would be appropriate to publish a book on energy in a year with a round number like 2020.” The Evolution of Electricity Markets in Europe has just been published. The title speaks for itself: the book describes the evolution of the electricity market since liberalisation began in the late 1990s. What have the most significant challenges been? What solutions were found and how have these solutions led to new problems that needed new solutions of their own?


Russian doll

“I like to compare the European electricity market to a Russian doll,” Leonardo smiles. “You know, those wooden dolls that you open up and find another doll inside with another one inside that, and so on.”

Admittedly there are already a few very good theoretical books that explain the basic principles of how electricity markets work in great detail. In this book, however you will find out how things really work in practice. For example, the rules of the market are constantly being adjusted and refined. This is because new players are appearing all the time, with new technologies and new business models that challenge the existing rules. Take renewable energy, for example. Solar power and wind power were subsidised in the early days, but these subsidies are gradually disappearing. And then some well-intentioned rules of the market suddenly posed a problem.

Leonardo gives a few examples of what he means. “Network operators relied on the balancing capacity of gas-fired power stations to compensate for surpluses and shortages. Renewable sources can also offer this flexibility, but generally only in one direction: it is easy enough to turn wind turbines off when there is surplus electricity, but it is difficult for them to make up for a shortage. Another example: power plants were only allowed to participate in some electricity markets if they had a certain capacity, say 1 MW, which excluded aggregators that pool many small, decentralised producers of renewable energy. Clearly these rules were not designed to keep aggregators out of the market, but they date from the time before aggregators existed.”

So you should just change the rules, right? It's not always that simple, and this book explains why.

Jargon made accessible

“The European electricity market has changed radically over the years. Even experts can hardly keep up. I have noticed that often enough in my own team of researchers,” Leonardo remarks. “They have more of the latest developments at their fingertips than anyone, but they don’t know the history. That realisation is what prompted me to write this book.”

The Evolution of Electricity Markets in Europe is particularly suitable for experts – academics and professional practitioners – both in the EU and beyond. For those outside Europe, the European electricity market may be a source of inspiration. “It’s not that we claim to have a monopoly on wisdom”, Leonardo hastens to add. “Other people can learn from our mistakes as well.”

Still, the book is eminently readable for non-experts, he assures us: “I have deliberately decided not shy to away from the jargon, but I do explain it. After all, you need this vocabulary to understand other publications. For experts who really want to check up on the details, a regulatory guide was added in an appendix, courtesy of the researchers I work with: Athir Nouicer, Valerie Reif and Tim Schittekatte. It is precisely because we have brought all the technical details together in a separate part of the book that we have been able to make it so readable. What's more, you will find a very large number of references to research.”

Key moments

The book is also peppered with anecdotes. “You might think that the evolution of the European electricity market is a structured and reasoned process. But when you look back at the past 20 years, you realise that there have been key moments, events that accelerated things”, Leonardo says. For example, in 2006, the brand new cruise ship Norwegian Pearl sailed down the River Ems to the North Sea from the shipyard in Papenburg, Germany. So that the ship could pass safely, the high-voltage power line over the Ems was switched off. The ensuing power cut caused a blackout over virtually the whole of Europe.”

One thing was clear: there was something wrong with the safety procedures. It turned out that the network operators in different countries did not communicate with each other enough, and there was no central authority to streamline their cooperation. Although solar parks and wind farms were still relatively new at the time, research showed that there were so many of them that if they all cut out, as they did that time, this had a significant impact on the power supply. “Experts were indeed aware of the problems at the time, even if they might have underestimated them a little,” Leonardo continues, “but after the incident with the Norwegian Pearl there was suddenly enough political will to find a solution and to push through other measures that probably would not have been implemented otherwise. The EU's Third Package for the Internal Energy Market still has an effect today, for example because it introduced network codes.”

To be continued

At the end of his book, Leonardo looks ahead. What will the electricity market look like in the future? “So far, the main emphasis has been on horizontal integration, which has harmonised and integrated the wholesale market at the European level”, he says. “That has been an impressive project. It is important to preserve and refine that horizontal integration. At the same time though, we are seeing increasingly decentralised production, so a vertical integration between the European wholesale market and local players is called for.”

This raises some fundamental questions, including ones about electricity prices. Formulae for time-based pricing and prices that vary from hour to hour or even every quarter of an hour already exist, but the prices are the same at different places within a given country. That is no longer sustainable, according to academics, including Leonardo. “We will evolve towards a system where those prices differ at distribution network level, for each town or village. The wholesale players have not yet been won over, but it is bound to happen sooner or later.”

How all that will pan out is something you will no doubt read in the next edition of this book, because one thing is certain: it will definitely be written.

Read more?
The Evolution of Electricity Markets in Europe is published by Edward Elgar Publishing. You can also order the book from Amazon. It is the perfect complement to Leonardo Meeus’ earlier book, Electricity Network Regulation in the EU – The Challenges Ahead‎ for Transmission and Distribution.

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