Arnaud Philibert - Sales & Marketing development SmartGrid/Utilities

Le projet de loi sur la Transition Energétique en France vient de passer la première lecture à l'Assemblée Nationale.

Le circuit d'adoption se fait en accéléré (une seule lecture devant les chambres haute et basse du Parlement). Certains diront que cela est trop rapide pour une loi aussi engageante sur le long-terme. C'est vrai.

D'autres diront qu'il y a eu un long Débat National, préalable à la rédaction de ce projet de loi. C'est aussi vrai.

C'est un sujet hautement politique, qui requiert donc des arbitrages et les frustrations qui s'ensuivent. C'est aussi une urgence, et l'on peut se féliciter qu'aujourd'hui une posture et des engagements ont été dictés, des objectifs et des calendriers fixés.

J'ai eu l'honneur de pouvoir assister aux débats à l'Assemblée Nationale. Une magnifique opportunité de vivre la technicité de l'adoption d'une loi, de confirmer les travaux de la Commission Spéciale présidée par François Brottes, et les rapporteurs, les équipes du ministère, et des députés présents. L'occasion aussi de constater que seuls 45 députés étaient à leur poste pour débattre les quelques 2,000 amendements, un peu moins si l'on annonce que certains ne faisaient preuve que d'acte de présence (à moins que l'on m'explique comment continuer à lire ostensiblement son journal et voter sans lever la main...).

Il "reste" maintenant à rédiger les décrets d'application, vaste tâche, s'il en est pour la Direction Générale de l'Energie et du Climat au sein du Ministère de l'Environnement, du Developpement Durable et de l'Energie. Les travaux de certains députés, fortement impliqués sur ces sujets seront précieux pour la rédaction de ces décrets qui pointent dans le détail l'application d'une loi aussi normative.

Bonne lecture à ceux qui le souhaitent

Loi Transition Energetique.pdf

Would that be an alternative to the sensitive gas transactions?

 

 

EXECUTIVE SUMMARY

This paper provides the readers with the evaluation of the potential for the electricity interconnection of two major areas: the power system of the European Union (globally represented by ENTSO-E) and UPS of Russia. The pilar of the Thesis is the assumption of an energy-based cooperation of these areas, which is also one of the most important topics in the relationship between the EU and Russian Federation. The tensions on the field of gas supply in Europe and the issue of security of supply address the need for diversification of energy sources. One of diversification opportunities could stand with the bilateral power exchange. As European Union is already coupling the electricity markets into the Integrated Energy Market, its extension to the East, already initiated with the Energy Community, sounds plausible and rational.

 

I          BENEFITS OF EU-RUSSIA INTERCONNECTION

i.          Power vs Gas

Europe seek for security of supply, whereas Russia must ensure security of demand.  Gas is the primary resource that can be traded as one party owns huge reserve, and other party can store it easily and use it for power and heating. Gas grid already demonstrated its flexibility during first Ukraine crisis : reverse flow and deviation allowed the supply to continue. This grid management is close to Electricity grid management already.

As for gas, there is an investment barrier by building the grid, however the continuous densification of both networks proves there is profitability in such large projects.

The main difference stands in the fact that electricity flows over a synchronized network can not be controled (it goes following Kirchoff’s law to where energy is lower in intensity and voltage), whereas gas pipelines identify the delivered customer. This sensitive matter is already properly appreciated over Europe since commercial transactions rules over physical transactions, but confidence could be brought to external entities using HVDC interconnectors (systems which can regulate the flow of energy, and desynchronizing the linked networks).

 

ii.         Stability of the Grid

As mentioned, newly deployed HVDC technology as it will be described later on in this report allow the separation of two interconnected grids. Reports from various European TSO representatives as well as members of the taskforce for EU/Russia Energy Dialogue 2050 establish the risk for frequency management should the European network be synchronized with the Russia sector. The synchronization would require the technical adaptation of 30 to 40 power plants in Russia, evaluated unreliable by European technical experts. Indeed, all Europe is under the risk of spreading blackout in case of mismanagement.

HVDC is however compelling for higher level of investment. The new interconnection between France and Spain is estimated at 700M€ for a 65km-long underground interconnection, with a 1,400MW capacity, 8 times more than traditional electricity aerial line.

 

iii.        Stability of the Market

As explained later in this report, the wider is a market, the better convergence in price can be obtained, and the more diluted are any situation, such as suden unavailability of a generation unit, increasing injected volume of intermittent energies. The regulations are set over the two market areas, clarifying how to enter the market, actually the various markets (day-ahead, intraday, capacity, dispatchable demand), and which entity is responsible for clearing all the transactions. Once the two frames of policies would be aligned, the extension of market place would bring additional commercial actors, increasing the fluidity of such market. At a time where it is garanteed the power costs will raise drastically, the seek for any price convergence becomes critical.

 

II         CHALLENGES POSED BY THE MARKET

 European power utilities usually gather quite easily over the conclusion that power capacity is going to fail meeting the demand in a not so far-away future. For instance, RTE, French transmission system operator, anticipate that by 2017, the available reserve to ensure the security of supply during peak demand will not be sufficient, without considering the 7,2GW power capacity provided by cross-border interconnections. Similar forecast for each European member are publically available, and ENTSOE communicated in their latest SO&AF report (Scenario Outlook & Adequacy Forecast upon which is based the TYNDP), that even though Europe as a whole will mitigate the risk of failure, some countries shall be under stress, even from 2015 : Latvia is forecasted upon Scenario EU 2020 to read a negative (-3%) portion of Remaining Capacity (RC) over its Net Generating Capacity (NGC), following by other countries whom RC/NGC ratio is too close to 0 to remain confident. Net Generating Capacity being the power generation potential of one country, its Remaining Capacity is the part of Reliable Capacity (NGC minus unavailable capacity due to outages and reserves) remaining after the baseload coverage. In other words, this is the capacity available for peak seasonal load management, a kind of buffer for extraordinary events. Knowing a failure in balancing supply and demand can cascade into a gobal blackout, it is critical such risk to be mitigated, either

•          by increasing the NGC of the supervised perimeter

•          through demand management, incentivized or undergone

•          enhance the liquidity of physical electrical flows between congested areas

First point is under stress as utilities claims periodically the lack of investment funds occured by the current energy-only market : The merit-order based market which is the characteristic of European zonal market favors the generators with lower marginal cost (renewables, nuclear), leaving the thermal plants running only when they face an opportunity cost, meaning demand pushes the curve toward peakload areas. Indeed, thermal-fire units are breakeven when the MWh price is high. Utilities communicate their thermal peakload-dedicated plants are « in the money » only few hundred of hours in the year, not profitable, and under the risk, if not already the case, of being decommissioned . Second bullet focuses on dropping or postponing the consumption when anticipated, to erase or minimize the peak. Obviously already an emergency solution from TSO/DSO to avoid extended damage over the grid, this is going to be the subject of another power market, with dispatchable demand management, bringing additional market actors such as Demand Responsible (DR) Aggregator . At last, and definitely not the least, the community might think of managing the grid beyond the domestic frontier. Already characterized by important flows, cross-border interconnections initially targeted the import of energy when reaching the limit of domestic generation capacity ; coming to renewable and intermittent energy, they allowed the export of surplus to avoid any overflow over the grid, to neighboring countries which might be either in need, or interested in relying on cheaper source of electricity. Already TSO members of ENTSOE adhere to regulations to coordinate emergency grid management through the interconnections in case of one node failure. Already the wholesale spot market are coupling to each other with the benefit of aligning MWh prices. By improving the capacity of the interconnections, it shall first optimize the building and/or maintenance of high-marginal-cost generation units, and then increase the liquidity of the power exchange market, occuring economical welfare over the zone.

 

III        SCOPE OF ANALYSIS

The field of possibilities is wide, and ones must focus on specific areas in order to keep this report tight. Integration of the market being at stake, the study shall concentrate on the 2 main barriers that are policies and commercial exchange terms.

 

i.          Regulatory Framework

Regulations are binding the actors around common conditions not only on how to enter the commercial activities, but also on how to clear the transactions, how to run litigation and how to quit the market place. It must address the removal of barriers, but also ensure the fluidity of future transactions without, or with minimum tension. The frame must be flexible enough to open the door to future mechanisms. Before doing so, the list of constraints must be drafted, and this report is focusing on this task. Russia is a monopolistic market, centralized, with pretty clear set of regulations, nation-wide, for who might be native in this area. Europe is a patchwork of national regulations and organizations, with their own strategy, covered by a European set of policies which compell to the same ambition. That is re-inforcing the complexity of the review as interconnection terms might vary depending on the state-member of entry. Baltic countries are an in-between, swinging between their historical partner from former Soviet Union, and the attraction of European Community. This unbiased position might tough be the required neutral regulatory frame for an efficient interconnection.

 

ii.         Market Framework

The strategic target is the integration of Europe of the 28 and Russian Federation. This study is dedicated to the first tactical step which is the analysis of the 2 immediate neighboring regions : Finland and North-West node of Russia. Already some interconnections are in place, transactions are happening. Outcome of the living exchanges can be used. Nordpool on one side is a perfect data supplier for merit-order European market, ATS Energo on the other side is the administrator of energy trades, providing to whom are reading cyrillic, reliable historical data. The market analysis of this report has been based on these 2 dataset.

 

IV        PREVIOUS STUDIES ON EU/RUSSIA INTERCONNECTIONS

Outside from European Commission, through the EU/Russia Energy Dialogue 2050, not so many studies have been performed. ENTSOE and contacted TSO representatives confirms that there might be an opportunity however this interconnection is definitely not in their immediate priorities. Finland, and by extension NordPool, are alreadty interfacing and thus have lead analysis. It is worth mentionning all reports available on NordPoolSpot website (www.nordpoolspot.com/How-Does-It-Work/), Finnish Transmission System Operator Fingrid (www.fingrid.fi), and Lapperaanta University (www.lut.fi) who position themselves as International Hub of Russian relations. We extend a special thank to these institutions representatives who were particularly helpful. 

 

V         CHALLENGES POSED BY THE STUDY

First challenge of the study is to continuously constrain the analysis. Every step forward was the discover of the correlation of the analysis with external factors. Naturally, there is a will to integrate these external factors, which would have extended the field of investigation without limit. The methodology has been sharpen and has required shortcuts to be decided, assumptions to be made.

Another challenge has been to collect relevant data : Over European side, the data is enormous and a tremendous selection had to be made to ensure relevancy and fairness in the message. Over Russia, from European prospective, there is a necessity of undertanding the culture and read cyrillic as critical inputs are not supposed to be translated.

 

VI        MAIN OUTCOMES OF THE STUDY

The main focus of this paper is to set the comparison of the market structures and regulatory regimes. The evaluation of the challenges caused by the current development stage is made. The current outline of the available technology leads to the conclusion HVDC (High Voltage Direct Current) is the most feasible technology for such project. It indeed ensures the transportation of large volume of electricity, over long distance (renewable production sites stand far away from consumption areas), by avoiding distorsion upon the frequency management (Adequacy analysis clearly demonstrate how close and often the grid can be to the risk of blackout). Should interoperability is performed over manufacturers, as it is currently the case with Network Codes negociations, forthcoming evolution of the R&D upon DC breakers and related cost curve improvement allow the sector to believe in the massive deployment of DC power grids.

The major interrogation point from the regulatory analysis stands with the necessary correlation of a zonal market (European) and a nodal market (Russian). Prior to any transaction, the regulator would have to solve the debate of who should bear the cost for transmission at the border, and when (by anticipation, or once the transaction is performed). The differences and similarities are described and compared in this paper, al well as some examples of existing electricity interconnections, such as Baltic area and Finland-Russia interconnections, which are proven to become the most adequate locations for profitable projects. Such analysis shall have to be updated based on the forthcoming impact of correlated power markets, such as capacity markets (obviously differents between the two blocs, as well as within the IEM, in their formats and schedules), and ancillaries markets, as well as the integration of dispatchable demand opportunities.

With the background information and historical data provided by NordPoolSpot, it was possible to run an analysis of the electricity markets structures across Europe and Russia and their functioning. For that purpose, a price modeling tool has been designed, based on the marginal-cost and merit-order method, to reproduce the electricity spot price of one relevant region – Finland- and re-calculate this wholesale price, should interconnection with North-West region of Russia be emphasized. The behavior of this spot price is reflecting the possible effect over the EU28 integrated market, assuming an efficient electricity market interconnection between the European Union and Russia.

The outcome of this simulations proves cross-border interconnection always brings value to the market. Ad minima, it garantees better fluidity of the energy to be exchanged, and peak-demand management are to be handled at reduced cost. The forecasted evolution of the current reserve in Nordic regions do not bring confidence about their ability to face an increasing frequency and amplitude of the extreme peak events. Hence, the question is not about “if” but “when” and “where” the interconnection are required, and how should an interconnection with Russia should be managed to provide the most profitable social advantage.

With the current development of the Russian gas price, the bidirectional electricity interconnection will make sense. In terms of political influence, Russia could become a big support for Europe in achieving 20/20/20 goals, produce more renewable-originated electricity, and offer social benefit, should adequate political mindset be adopted.

 

VII       CONCLUSION AND SIGNPOSTS TO BE WATCHED

It is worth highlighting the signposts that must be surveied in the future to identify when and how the interconnection between Europe and Russia shall become a valuable concern :

Technology outbreaks :

•          HVDC being assumed the next base technology for the matter of interconnection, this is mandatory to watch out the cost of production of Circuit-Breakers, commercially available and down to equivalent profitability as for AC technology. ABB seems to be pioneering on this matter.

•          Regulators, hence ACER at first, should initiate the standardization of HVDC technology, and the work of ENTSOE to render homogeneous the policies around grid management, that are Network Codes negotiations lead in Lubjiana, should be under scope to detect the integration of DC technology.

Economical indexes :

•          Gas price over European hub is the most critical element of decision. Should Russian gas reach the expected inflation over coming years, as planned by the government, the increase of +15% of the spot price would alterate the profitability of current Finland/Russia interconnection. Other potential interconnection to be built would occur the same sanction. However, a stabilized gas price, when nuclear is inflating due to newly established safety regulations and need for decommissioning of old units, is re-inforcing the position of gas-fire power plant as an alternative to uranium. Outbreaks of LNG markets will be the trigger, if long-term gas contracts embed less oil-index terms and Europe hub succeed in setting itself against Henry hub and Japan exchange place.

•          Carbon tax is also a critical influencer : Should it increase sufficiently to render gas as equivalent to coal in the merit-order ranking for power wholesale market, coal would suffer and gas would become the prefered alternative. As Russia power generation is mainly relying on gas-fire plant, the economical interest of electrical interconnection would raise. However should the CO2 tax raise the expected 30€/ton and above, gas would be pushed again forward in the merit-order effect, leaving greater room to implementation of renewable energy units. Current Russian investment plan for renewable does not allow the thinking of greater portion of it in close future.

Political surge :

•          Russia, as centralized as it is, and focused over the will of few decision makers, can also be the subject of rapid turnover over Energy planification. Either due to reviewed ROI in the head of current governing team, or alternative ambition of next team, Russia could very fast order a energy transition, with larger renewable integration. As this would match the requirement of EU28 in terms of Climate management, Energy Roadmap 2050 negotiations would be relaunched at the most efficient pace.

 

EU-Russia Electricity Market wo appendix.pdf 

Copyright © 2014

All rights reserved by the Authors: Alexander Kvitnitsky, Arnaud Philibert and Daria Samarenko.

This report was prepared on the base of information, available for the Authors at the moment of its compilation (August 2014).

Some declarations in this report aren’t real facts, but only declarations, related to the future. Such words as “plans”, “will”, “is expected”, “will come”, “considers”, “will form”, “will happen” and etc. are based on forecasting and imply the risk of possible non-fulfillment of the predicted events and actions. Due to these reasons the Authors warn that actual development of some events may significantly differ from the forecasted way, presented in this paper.

Excluding the cases, foreseen by legislation, the Authors are not responsible for review and confirmation of expectations and assessments, and also for the publication of updates and changes on the declarations in connection with consecutive events or acquisition of new information.

Although every effort has been made to ensure the accuracy of the material and the integrity of the analysis presented herein, the Authors accept no liability for any actions or investment decisions taken on the basis of its contents.

No part of this publication may be reproduced, stored in a retrieval system or transmitted in any form or by any means electronic, mechanical, photocopying, and recording or otherwise without the prior written permission of the Authors.

 

No reproduction, transmission or translation of this publication may be made without prior written permission. Applications should be sent to: kvitnitsky@gmail.com; arnaud.philibert@me.com; daria.samarenko@gmail.com. 

C'est chose faite, une année à me consacrer pleinement à l'apprentissage des mécanismes et stratégies de ce secteur qu'est l'Energie. Pétrole, gaz, charbon, solaire, éolien, thermique, co-génération, électricité, tout y est passé, ce fût passionnant.

Mon sujet de thèse de Master fût ambitieux, et certainement anachronique: qui eut pu penser de mener l'étude du marché de l'électricité Européen et son extension vers le réseau Russe? La géopolitique a cela de bien, que ce qui est aujourd'hui inconcevable, le sera peut-être demain. En attendant, ce furent nombre de rencontres avec des experts au sein des TSO, des DSO, des producteurs, des opérateurs alternatifs, des places boursières. Ce fut l'élaboration d'un outil de calcul du prix spot et son évolution en fonction des critères retenus pour la constitutions des coûts marginaux de production. Ce fut l'analyse poussée, réglementaire et économique, des gestions d'un réseau zonal et d'un réseau nodal. Ce fut certainement une bien meilleure maîtrise de ce qu'est vraiment le débat sur la transition énergétique en France, l'Energiewende en Allemagne, et toutes les réflexions équivalents en Europe comme en Russie.

La soutenance a été menée il y a quelques semaines, rondement, et le jury est convaincu.

Reste à convaincre les entreprises et les collectivités territoriales.