Many, including the British Prime Minister Theresa May, believe that the United Kingdom should continue to participate in the European Union’s Internal Energy Market. Whilst superficially both attractive and reasonable, this would only be in British interests if that EU market were genuinely liberal. Unfortunately, there are clear signs that the Internal Energy Market is heading down an entirely different path.
In her Mansion House speech of the 2nd of March, the British Prime Minister, Theresa May, has announced her commitment to “exploring options for the UK’s continued participation in the EU’s internal energy market”, a promise that has been largely welcomed by the energy sector. Energy UK, a trade body representing many of the major companies, observed that “There is a real consensus across the energy industry that it will benefit both the UK – and our European colleagues – to maintain the extensive links and cooperation that have been built up over many years.”
All this will seem very prudent, and there is every reason for believing that the consumer interest in the UK, and elsewhere, would be favoured by a Europe-wide liberal market in energy. The question is whether the EU’s Internal Energy Market (IEM) is as a matter of fact heading in a liberal direction, or whether the logic of EU climate policy and certain national, particularly German policies favouring renewables, will necessarily take it towards a destination of an entirely different kind.
This is not an obscure or difficult question, for there are very clear signs that the character of the European electricity market will be determined by exports from Germany, which have grown from little or nothing in the early 2000s to well over 50 TWh per year in 2016, rougly ten per cent of all generation in Germany. This has come about overwhelmingly because of national policy decisions, to favour renewables, on the one hand, and to favour brown coal (lignite) generation on the other. The following chart is drawn from a recent technical paper by the well known Danish grid engineer, Paul-Frederik Bach:
Figure 1: Net German export (negative values) and import (postive values) of electrical energy from 2000 to 2016. Source: Paul-Frederik Bach 2017.
The underlying causes of this very remarkable shift in market position can be seen in the following figure summarising the German generation fuel mix from 2000 to 2016:
Figure 2: German electricity generation fuel mix, 2000 to 2016. Braunkohle = Brown coal; Kernenenergie = Nuclear energy; Steinkohle = Hard coal; Erdgas = Natural gas; Mineralölprodukte = Petroleum products; Erneuerbare = Renewables; Übrige Energieträger = Others. Source: Paul-Frederik Bach 2017.
Note the significant increase in renewable electricity, a reduction in hard coal, but a stable level of generation from Braunhohle, lignite, mostly in the former DDR, where the societal consequences of phasing out the extraction and use of this cheap but polluting fuel would be politically unacceptable.
Germany is now far and away the largest net exporter of electricity, having overtaken France, and together these two countries form an export block dwarfing all others. Sweden, with a net export of 12 TWh is by comparison a minor player. Mr Bach also provides a diagram, unique in the public domain as far as I know, summarising the information available from the Transparency Initiative of the European Network of Transmission System Operators (ENTSOE).
Figure 3: Net balances and exchanges of electricial energy between Germany and surrounding countries, 2016. Source: Paul-Frederik Bach 2017.
While of comparable scale, there are major differences between the dominant exporters. France transmits a high value, low cost, despatchable product from its nuclear power stations, and chooses to do so. Germany exports because of its policy decisions to support lignite and renewables, and electricity from the latter is a low value surplus of domestically subsidised renewable electricity that is necessarily exported, this being the only way it can balance its electricity network. Mr Bach tells me that the correlation of wind and solar with export stands at approximately 64%. It is not the only reason for export – lignite probably explains a good deal of the rest – but it is a very large part of the reason.
Arguably as a consequence of this German export, French exports are being constricted. For much of the last decade France has exported up to 70 TWh per year, so the 37 TWh sold to neighbours in 2016 represents a significant reduction in what, as it happens, is one of the country’s largest exports of any kind, at one time earning about €3billion a year.
With renewables forecast to grow further in German and in France both countries will be faced with the necessity of exporting more electricity, but the available consumers for those exports may be unable or unwilling to soak up this surplus. Clearly something will have to give, domestically in Germany and France, to ease the situation by making way for renewables, assuming that the policy protection for these technologies continues. French nuclear is clearly vulnerable, a fact that has been foregrounded in a recent study by the pro-renewables German think tank Agora Energiewende  in collaboration with the French Institute for Sustainable Development and International Relations (IDDRI).
Agora Energiewende and IDDRI note the strong links between the French and German electricity systems, which are beyond doubt as can be seen from Bach’s diagram above, and then recommends “strong expansion of wind power and photovoltaics as well as reduction in power generation from conventional sources – namely coal in Germany and nuclear in France”, for the following reason:
Clear strategies regarding these conventional generation assets are necessary to achieve climate targets in Germany and to avoid an oversized and unprofitable power sector in France.
France should “for economic” reasons, but obviously also to help Germany, reduce the output of its nuclear fleet, already capped at 63 GW, to 50 GW by 2030. Germany on the other hand should reduce its reliance on coal generation “for climate reasons”, though presumably also to reduce the export pressure within Germany itself.
However, bearing in mind the fact that both countries are aiming for high levels of electricity from renewables, the French target being for 40% of electricity by 2030, while Germany is aiming for 65%, both France and Germany will still need to export on a large scale. Agora Energiewende and IDDRI describe the likely situation:
With a nuclear power generation capacity kept at a level exceeding 40 gigawatts in 2030 in France, the national electricity export surplus will grow compared to today and the objective of reducing the share of nuclear power production to 50 per cent will be pushed beyond 2030. Over 50 gigawatts nuclear generation capacity, the risk of stranded assets increases significantly for the electricity market players. If France keeps today’s level of nuclear power generation capacity of 63 gigawatts and thus modernises most of its existing nuclear power plants while also expanding renewable energy, this would result in a significant electricity surplus. This would lead to a decrease in the market price for electricity in France and in the EU, as well as to significant electricity exports to Germany and other European countries. However, such an export strategy in France will not generate sufficient income to recover the cost of modernising nuclear power plants, and thus result in financial losses for the players.
This account is plausible, though it is nothing short of perverse of the authors to suggest a resolution through a dramatic reduction of French nuclear generation, which can export economically, in order to make way for renewables in both countries which must be exported because there is no alternative.
In essence, the picture presented by Agora Energiewende and the IDDRI is one where the entire European system, and that in France in particular, is designed to accommodate EU and particularly German governmental policy and preferences. It is uncertain whether this situation could be acceptable to the French people, since scaling back its nuclear generation fleet would not only increase domestic electricity prices but would also imply that still more of the income earning exports of that fleet must be foregone. Some might even see important national security implications.
Would the UK’s interests would be well served by being part of such a curiously distorted market? Apropos of Mrs May’s speech, Mr Tim Yeo, formerly a prominent Member of Parliament with many interests in the green energy sector, has been quoted in the press as observing with alarm that if the UK were not part of Europe’s Internal Energy Market, this would “certainly kill off any new interconnector projects”. This could be true, but on the other hand limits to the connection with the illiberal situation that is currently materialising in Europe might be no bad thing. Indeed, the Netherlands already has a phase shifting transformer on the German border to give it the option of rejecting imports, and both Poland and the Czech republic are in the process of taking similar self-defensive measures. – They do not wish to expensively reinforce their systems to carry surplus wind and solar energy from Germany. If Britain, were to naively commit itself to the European market and also encouraged the construction of further interconnectors on the mistaken assumption that this was a liberal market trading for mutual benefit, it might well have to do the same.
Truly free trade in energy, as in other commodities, can be expected to deliver benefit to all parties, and thus to foster equable and amicable international and interregional relations. European trade in renewable electricity promises to be rather different. As the Agora Energiewende/IDDRI study unwittingly makes clear, importing markets will be required to distort their own systems and to accept low value electricity for the convenience of a wealthy and dominant neighbour with superior market powers and many other strengths. This will inevitably result in justified resentment and intense political friction. The United Kingdom may well wish to keep clear.