“Functional markets are a prerequisite for controlling climate change at the lowest possible cost. When it works well, emissions trading steers emissions reductions to those countries and technologies in the EU where they can be implemented at a low cost, thus making it possible to phase out renewable energy subsidies that skew the market. It can be cheaper to implement the most effective measures – such as investments in renewable energy – in a neighbouring country, which is sometimes challenging in a political sense. In any case, emissions do not recognise borders,” says Pekka Lundmark
Production subsidies only at the start
Lundmark says that our system is already based on wide-ranging subsidies. It will soon be time to decide whether to extend these subsidies to cover the entire energy sector or to start dismantling them altogether.
“Subsidies are necessary when we want to develop new technologies and bring them to market. However, production subsidies are a very expensive system for that purpose. Another challenge related to subsidy policy is the fact that increasing renewable energy has become an end in itself, even though it should primarily be seen as a climate policy tool and method of achieving climate targets. Overlapping targets have resulted in overlapping control measures, the effects of which are now visible in the functioning of the electricity and emissions markets.”
“Finland should be active in terms of supporting and developing the Nordic electricity market and a joint energy policy, because Finnish electricity users have benefited greatly from the joint market.”
“All areas of the energy economy – the import, transmission, distribution and consumption of energy – are constantly developing. Consumer behaviour is changing most right now, and this also drives development in other areas. For example, the increase in decentralised production turns consumers into producers and makes them active parties in the electricity market. Digitalisation allows for services on a new scale, and automated consumption flexibility will become a new and important method of balancing the electricity system.”
Price spikes encourage development and investments
According to Lundmark, price regulation creates a system in which the price of electricity would always be relatively high. Price spikes do not indicate a poorly-functioning market. In fact the opposite is true: when there is scarcity the price rises and the market communicates a need for investment.
“Accepting price spikes is a political choice. For example, when a new electricity market reform was implemented the German government made a commitment to not intervene in price spikes because they encourage investments in flexible capacity, electricity storages, etc.”
From the perspective of a large energy actor, Lundmark believes that the current system has a good tolerance for short-term price spikes and scarcity situations, as demonstrated by last winter.
“It’s a good idea to remember that electricity users have access to a wide range of different hedging products that reduce the impact of price spikes. We should be more concerned about long-term exceptional situations that disturb market activities for extensive periods. That’s where security of supply comes into play.” •