IEEE Power & Energy Magazine - January/February 2017 - 66

wedge, which would have been the case if there had been no
shale gas effect on coal prices and if there had been a high
CO2 price in the EU ETS.
From March 2007 until the summer of 2008, the wholesale forward electricity prices in the Central West European (CWE) region increased from about €50-55/MWh
to €90-100/MWh, after which they gradually declined,
with a small upsurge in the spring of 2011 (because of the
Fukushima accident and related decisions in the German
market) to levels of about €25-30/MWh in the late summer of 2016. The history from 2011 to 2016 is shown in
Figure 6 for the CWE countries France, Germany, and the
Benelux. This downward trend on wholesale prices makes
it hard for gas-fired units to make a profit. Many European
CCGTs are idle and being mothballed or kept as capacity reserve through a capacity remuneration mechanism.
Discussions as to an appropriate market design ("energy
only" versus "capacity remuneration schemes") are currently ongoing.
As previously mentioned, zero-marginal-cost renewables (with substantial installed capacity in many European
countries) contribute to the downward drive of the wholesale
electricity price when they are producing. In the absence of
subsidies, this would lower their own return on investment,
so they would effectively cannibalize themselves. Notwith-

standing the decreasing wholesale prices, ordinary customers see increasing retail prices, mainly as a consequence
of markups to recover the costs of the renewables' support
schemes. This is illustrated in Figure 7 by the price evolution in Belgium for a typical end customer with annual consumption of 3,500 kWh. Similar retail price increases have
occurred in Germany, with a steady increase from about
€140/MWh in 2000 to a maximum of €291/MWh in 2014,
after which there was a slight decline in 2015 and 2016 to
about €287/MWh.
A final unintended effect of the rapid growth of renewables in the European system is that the convergence of
cross-border electricity prices, which was a major goal of
the common electricity market, has suffered from massive renewables penetration. The reason is that the crossborder high-voltage grid is currently not strong enough to
ensure price convergence (i.e., by being congested) given
the large differences in the generation portfolio among
countries. This is illustrated by the decoupling indicated
by the blue arrow in Figure 6 in the CWE market. The
cross-border market coupling is very weak in situations of
high wind and PV solar power production in this region. A
further issue facing the European market is the so-called
"loop flows" (or "unidentified flows") in certain regions
such as CWE; these are also due to the lack of sufficient
internal and cross-border transmission capacity.
The EU ETS Refurbished

Win
d

Coal

GT
CC
Low nd
ma
De

ETS

ETS
ETS

figure 5. The limited load factors of combined-cycle gas turbines (CCGTs) in Europe.
Zero-marginal-cost renewables, together with low demand, push thermal generation
units out of the merit order (or off the ice wedge). With current European gas and
coal prices, and a very low CO2 price penalty (via the ETS) represented by the baby
seals, CCGT plants risk being the first victims. For higher CO2 penalties, adult ETS
sea lions would do the job of pulling coal-fired plants off the wedge first. For the
relative coal-to-gas prices in the U.S., CCGTs are currently more economic regardless of a CO2 penalty, and coal generation is the prey. In China, the demand is still
sufficiently large so that coal and gas plants are called upon. (Image courtesy of
D. Patteeuw, KU Leuven, used with permission; adapted image inspired by http://
economicsforenergy.blogspot.be/2013/02/los-mecanismos-de-retribucion-de-la.html.)
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ieee power & energy magazine

Faced with low EUA prices in the
ETS market, with the awareness
that many market participants do
not foresee a long-term CO2 price
and hesitate to make long-term investments, European policy makers have decided to "reform" the
current EU ETS. Via market interventions (referred to as "backloading" and a "market-stability
reserve"), a volume of allowances
is being taken out of the market
with the possibility of reintroducing them later. Whether these
measures will alleviate the side effects of the EU energy and climate
policies remains to be seen. The
volume of the backloading seemed
not to be large enough to have a
significant impact. Whether the
market-stability reserve will alleviate the side effects of the EU energy and climate policies remains to
be seen; moreover, the final volume
of allowances has not, in principle,
been altered.
january/february 2017

http://http:// http://economicsforenergy.blogspot.be/2013/02/los-mecanismos-de-retribucion-de-la.html

Table of Contents for the Digital Edition of IEEE Power & Energy Magazine - January/February 2017