In certain cases, public intervention in the energy market may be necessary. For example, renewable energy projects cannot be financed by the market.
The EU issues guidance to help ensure government support schemes attract investor confidence and do not distort the functioning of the internal energy market or increase prices for European consumers.
Guidance for renewables
In the past, renewable technologies such as wind and solar needed significant state intervention. Recently however, the costs of these technologies have fallen thanks to technological innovation resulting from increased deployment.
EU guidance for the design and reform of renewables support schemes calls for flexible and market-based solutions. This is to avoid market distortion through overcompensation. The EU's competition policies also ensure the proper functioning of the EU's internal energy market by checking that state aid schemes for renewables do not distort the market
The EU also encourages countries to use cooperation mechanisms to meet their 2020 renewables targets.
Guidance for backup capacity
Transforming the electricity system creates new challenges for ensuring security of supply. Renewables are not able to deliver sufficient energy at all times and investors may not see satisfactory revenues from power plants that are only used for short periods as backup generation.
The EU's work to complete the internal electricity market is aimed at ensuring that integrated markets reward flexibility. At the same time, many EU countries have been planning how to organise and finance investments in the capacity they need to complement renewables and meet peaks in energy demand. This has led some to consider implementing capacity mechanisms.
To help governments design public interventions such as capacity mechanisms effectively, the European Commission has released guidance. It suggests:
- before creating a capacity mechanism, EU countries should look into the cause of inadequate generation and remove any problems which prevent the market from delivering new generation capacity. This can include removing regulated prices or poorly designed support schemes for renewable energy
- EU countries should design capacity mechanisms with the EU's integrated energy market in mind. Existing back-up capacity should not be excluded because it lies in another country
- consumer flexibility should be promoted by providing them with incentives to use electricity when it is cheapest and most plentiful. Consumers can contribute to ensuring sufficient energy flow at peak times and this will help to avoid costly investments in new power plants.