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6 REPUBLIC OF ESTONIA MINISTRY OF EcoNoMIc AFFAIRS \J AND COMMUNICATIONS European Cornmission B-1049 Brtissel OurRef: 14.12.2022 No 17-4/21- egium . 0489/7615-1 e-mail: [email protected] Electricity Market Design and demand response Dear Comrnissioner Sirnson. Russia’s invasion of Ukraine has caused a giobal crisis affecting the internal market and econorny of the European Union. For aH Member States, this year has been fufl of challenges and endess ciisis management while seeking a balance between fast interventions required on the energy market and irnplementing the Iong-terrn policies initiated to accelerate the energy transition. Estonia is pleased to see that the European Cornmission has taken the Iead role in these difficult times in actively proposing solutions to tackle the energy crisis. To cope with the impacts of the recent energy crisis, several measures have been implemented by different Member States. Estonia, for exarnple, has Iaunched a universal service1 as a temporary measure for household consumers, local municipal authorities, as weIl as micro and small enterprises. Within this framework these consumer groups are entitled to buy electricity at a regulated price. In addition, the state has irnplemented automatic price compensation rnechanisms to reduce energy expenditure of household consumers. 1 would like to underline that these measures are clearly temporary in nature and are due to expire at a clear end date. Over the past years, the Meniber States alongside the European Cornrnission have put a lot ofeffort to set up a functioning electricity market. We consider that the market has performed weIl hitherto and provided the right signals to the market. Even during the ongoing crisis, the responses by the electricity market have been cear — rising power prices and decreased offer necessitate constrLlcting more production units. This has been the idea of the current market design. There has been an unprecedented increase of new investrnent plans into electricity production in Estonia and we iriust ensure that the fast-acting interventions to the energy market shall not harm the interest to make further progress with these investments. Hereby, 1 refer to the situation where high market prices have Ied many Member States wishing to fundamentally redesign the regulative frarnework of the electricity market. 1 do not see the need for a thorough change iii the system. On the contrary, it would rather represent a step backward considering the targets set by the Union. Energy system management requires clear and predictable regulation. Large-scale changes increase regulative risks and have a negative effect on the investrnent climate. More information regarding universal service available on the ministry’s website — https://mkm.ee/universaalteenus Suur-Ameerika 1 / 10122 Tallinn / ESTONIA Phone: +372 625 6342 / Fax: +372 631 3660 / E-mail: [email protected] / http://www.rnkm.ee it is irnportant to provide ciear, predictabie and concrete frarnework for market participants to be able to pian renewabie energy development and invest in new production capacities. The electricity market design has served the European Union weii and 1 believe that fundarnental changes to it wouid jeopardise pianned investrnenls in renewable energy. On our road towards a decarbonised electricity market. each ofthese investments into renewabies is highiy welcome. The most distinctive feature of the current rnodei is the high peak prices that occur during peak dernand in an electricity system that is under higher stress. In Estonia and in the Baitics as whole we have been iooking for soiutions to efficiently implement the dernand response regulation according to the directive (EU) 2019/944. Despite ali efforts the main regulative shortfail is regrading appiying demand response on the day-ahead market. For exarnpie, on 1 71h august 2022 the record-breaking 4000€/MWh hourly price in the Baitic market area was caused only by 2,14 rnegawatts of consurnption. If the dernand ofthis specific hour in the arnount of 2,14 MW had taken piace during the previous or next hour, the market price ofthis hour likeiy would not have reached this ievel. One solution rnight be the possibiiity to increase invoivement ofdernand response in the day-ahead price formation model. Following this. it wouid be reasonabie to improve the regulation to obiige the market operator starting from an agreed houriy market price ievei (e.g., 200 €/MWh) to ask for a tender from the aggregators regarding dernand response before fixing the market price for that hour. Accompanied with reievant safety measures, this wiii significantly increase the motivation of aggregators to act on the day-ahead market if the activity invoives remuneration from the market. This cornpensation might be the product of the price reduction brought aiong by the demand response and the amount of demand changed by the aggregator during that hour. The cornpensation for this action wouid be transferred to the aggregator by the market operator, in Estonia that is currentiy Nord Pooi AS. Integrating dernand response to the day-ahead market wiii deiiver rnore fiexibiiity to the whoie market, reducing the price spikes as we have witnessed during 2022. At the sarne time, demand response has a potentiai to reduce the need for additional peak production in the eiectricity system, thus decreasing the electricity price for the consumer. The demand response market rnust function autornatically, without ad hoc measures. In conclusion, 1 would like to ask the European Cornmission to refrain from fundamental electricity market reguiation changes. 1 find the current setup of the regulative framework to be ciear and with foreseeable resuits. However, it is possible to cornpiernent the shortcornings of the regulation in the view ofdemand response. Introducing additionai flexibility would have a substantial positive irnpact on a decarbonised electricity market, thus 1 ask the European Comrnission to work towards deeper integration ofdemand response to the day-ahead market price model. With best regards Riina Sikkut Minister for Economic Affairs and infrastructure Rein Vaks +372 625 6347 [email protected] 2 (2)