Energy capacity markets

 

 


 

 

The European Commission's consultation from 15/11/2012 to 07/02/2013 on generation adequacy, capacity mechanisms and the internal market in electricity has sparked a discussion regarding the role of State aid rules in the multiple capacity designs flourishing in Europe.
 

 

To help determine whether a measure or practice in a Member State qualifies as a capacity mechanism within the scope of this inquiry, the Commission has identified the following indicators. Capacity mechanisms: 



- are generally initiated by or with the involvement of governments; 



- have the primary objective of contributing to security of supply; and 



- provide remuneration to capacity providers in addition to revenues they receive in the electricity market, or instead of revenues they could otherwise have received in the electricity market.

 

Commission Staff Working Document of 30.11.2016 Accompanying the document Report from the Commission Final Report of the Sector Inquiry on Capacity Mechanisms {COM(2016) 752 final} SWD(2016) 385 final, p. 52

 

The major European Commission requirements in that regard have been described in Capacity markets vs. Internal Electricity Market – will State aid weapon be used?.
 
On 15 February 2013 ACER issued an opinion on the need for and the design of the energy capacity markets (see ACER's opinion and particularly interesting figure 1 on page 8 thereof showing the current state of  implementation of capacity remuneration mechanisms (CRM) in the EU Member States (with further differentiation into capacity markets, capacity payments and strategic reserve)).
 
The scale of the potential needs for efficient capacity markets is underlined by the fact that under the rules of some intended designs the participation in the pre-qualification process is mandatory for all licensed generation that is eligible to participate.
 
 

 

Proposal for a Regulation of the European Parliament and of the Council on the internal market for electricity (recast), 30.11.2016, COM(2016) 861 final 2016/0379 (COD)

 

Chapter IV
Resource adequacy

 

Article 18
Resource adequacy

 

1. Member States shall monitor resource adequacy within their territory based on the European resource adequacy assessment pursuant to Article 19.

2. Where the European resource adequacy assessment identifies a resource adequacy concern Member States shall identify any regulatory distortions that caused or contributed to the emergence of the concern.

3. Member States shall publish a timeline for adopting measures to eliminate any identified regulatory distortions. When addressing resource adequacy concerns Member States shall in particular consider removing regulatory distortions, enabling scarcity pricing, developing interconnection, energy storage, demand side measures and energy efficiency.

 

Article 19

European resource adequacy assessment

 

1. The European resource adequacy assessment shall cover the overall adequacy of the electricity system to supply current and projected demands for electricity for a ten-year period from the date of that assessment, in a yearly resolution.

2. By [OP: six months after entry into force of this Regulation], the ENTSO for Electricity shall submit to the Agency a draft methodology for the European resource adequacy assessment based on the principles provided for in paragraph 4.

3. Transmission system operators shall provide the ENTSO for Electricity with the data it needs to carry out, every year, the European resource adequacy assessment. The ENTSO for Electricity shall carry out the assessment every year.

4. The European resource adequacy assessment shall be based on a methodology which shall ensure that the assessment:
(a) is carried out on bidding zone level covering at least all Member States;
(b) is based on appropriate scenarios of projected demand and supply including an economic assessment of the likelihood of retirement, new-build of generation assets and measures to reach energy efficiency targets and appropriate sensitivities on wholesale prices and carbon price developments;
(c) appropriately takes account of the contribution of all resources including existing and future generation, energy storage, demand response, and import and export possibilities and their contribution to flexible system operation;
(d) anticipates the likely impact of the measures referred in Article 18(3);
(e) includes scenarios without existing or planned capacity mechanisms;
(f) is based on a market model using, where applicable, the flow-based approach;
(g) applies probabilistic calculations;
(h) applies at least the following indicators:
– "expected energy not served", and
– "loss of load expectation";
(i) identifies the sources of possible resource adequacy concerns, in particular whether it is a network or a resource constraint, or both.

5. By [OP: six months after entry into force of this Regulation], the ENTSO for Electricity shall submit to the Agency a draft methodology for calculating:
(a) the value of lost load;
(b) the "cost of new entry" for generation, or demand response; and
(c) the reliability standard expressed as "expected energy not served" and the "loss of load expectation".

6. The proposals under paragraphs 2 and 5 and the results of the European resource adequacy assessment under paragraph 3 shall be subject to prior consultation and approval by the Agency under the procedure set out in Article 22.

 

Article 20
Reliability standard

 

1. When applying capacity mechanisms Member States shall have a reliability standard in place indicating their desired level of security of supply in a transparent manner.

2. The reliability standard shall be set by the national regulatory authority based on the methodology pursuant to Article 19(5).

3. The reliability standard shall be calculated using the value of lost load and the cost of new entry over a given timeframe.

4. The parameters determining the amount of capacity procured in the capacity mechanism shall be approved by the national regulatory authority.

 

Article 21

Cross-border participation in capacity mechanisms

 

1. Mechanisms other than strategic reserves shall be open to direct participation of capacity providers located in another Member State provided there is a network connection between that Member State and the bidding zone applying the mechanism.

2. Member States shall ensure that foreign capacity capable of providing equivalent technical performance to domestic capacities has the opportunity to participate in the same competitive process as domestic capacity.

3. Member States shall not restrict capacity which is located in their territory from participating in capacity mechanisms of other Member States.

4. Cross-border participation in market-wide capacity mechanisms shall not change, alter or otherwise impact cross-zonal schedules and physical flows between Member States which shall be determined solely by the outcome of capacity allocation pursuant to Article 14.

5. Capacity providers shall be able to participate in more than one mechanism for the same delivery period. They shall be subject to non-availability payments in case of non-availability, and subject to two or more non-availability payments where there is concurrent scarcity in two or more bidding zones where the capacity provider is contracted.

6. Regional operational centres established pursuant to Article 32 shall annually calculate the maximum entry capacity available for the participation of foreign capacity taking into account the expected availability of interconnection and the likely concurrence of system stress between the system where the mechanism is applied and the system in which the foreign capacity is located. A calculation is required for each bidding zone border.

7. Member States shall ensure that the entry capacity referred to in paragraph 6 is allocated to eligible capacity providers in a transparent, non-discriminatory and market-based manner.

8. Any difference in the cost of foreign capacity and domestic capacity arising through the allocation referred to in paragraph 7 shall accrue to transmission system operators and be shared between them according to the methodology referred in point (b) of paragraph 10. Transmission system operators shall use such revenues for the purposes set out in Article 17(2).

9. The transmission system operator where the foreign capacity is located shall:
(a) establish whether interested capacity providers can provide the technical performance as required by the capacity mechanism in which the capacity provider intends to participate and register the capacity provider in the registry as eligible capacity providers.
(b) carry out availability checks as appropriate.
10. By [OP: twelve months after entry into force of this Regulation] the ENTSO for Electricity shall submit to the Agency:
(a) a methodology for calculating the maximum entry capacity for cross-border participation as referred to in paragraph 6;
(b) a methodology for sharing the revenues referred to in paragraph 8;
(c) common rules to carry out availability checks referred to in point (b) of paragraph 9;
(d) common rules to determine when a non-availability payment is due;
(e) terms of the operation of the registry as referred to in point (a) of paragraph 9;
(f) common rules to identify capacity eligible to participate as referred to in point (a) of paragraph 9.

The proposal shall be subject to prior consultation and approval by the Agency under the procedure set out in Article 22.

11. The Agency shall verify whether the capacities have been calculated in line with the methodology as referred to in point (a) of paragraph 10.

12. National regulatory authorities shall ensure that cross-border participation in capacity mechanisms is organised in an effective and non-discriminatory manner. They shall in particular provide for adequate administrative arrangements for the enforcement of non-availability payments across borders.

13. Allocated capacities as referred to in paragraph 7 shall be transferable between eligible capacity providers. Eligible capacity providers shall notify any transfer to the registry as referred to in point (a) of paragraph 9.

14. No later than [OP: two years after the entry into force of this Regulation] the ENTSO for Electricity shall set up and operate the registry as referred to in point (a) of paragraph 9. The registry shall be open to all eligible capacity providers, the systems applying the mechanisms and their transmission system operators.

 

Article 22
Approval procedure

 

1. Where reference is made to this Article, the procedure set out in paragraphs 2 to 4 shall be applicable to the approval of a proposal submitted by the ENTSO for Electricity.

2. Prior to submitting the proposal, the ENTSO for Electricity shall conduct a consultation process involving all relevant stakeholders, national regulatory authorities and other national authorities.

3. Within three months from the date of receipt, the Agency shall either approve the proposal or amend it. In the latter case, the Agency shall consult the ENTSO for Electricity before adopting the amended proposal. The adopted proposal shall be published on the Agency's website at the latest three months after the date of receipt of the proposed documents.

4. The Agency may request changes to the approved proposal at any time. Within six months from the request, the ENTSO for Electricity shall submit to the Agency a draft of the proposed changes. Within a period of three months from the date of receipt of the draft, the Agency shall amend or approve the changes and publish it on its website.

 

Article 23

Design principles for capacity mechanisms

 

1. To address residual concerns that cannot be eliminated by the measures pursuant to Article 18(3), Member States may introduce capacity mechanisms, subject to the provisions of this Article and to the Union State aid rules.

2. Where a Member State wishes to implement a capacity mechanism, it shall consult on the proposed mechanism at least with its electrically connected neighbouring Member States.

3. Capacity mechanisms shall not create unnecessary market distortions and not limit cross-border trade. The amount of capacity committed in the mechanism shall not go beyond what is necessary to address the concern.

4. Generation capacity for which a final investment decision has been made after [OP: entry into force] shall only be eligible to participate in a capacity mechanism if its emissions are below 550 gr CO2/kWh. Generation capacity emitting 550 gr CO2/kWh or more shall not be committed in capacity mechanisms 5 years after the entry into force of this Regulation.

5. Where the European resource adequacy assessment has not identified a resource adequacy concern, Member States shall not apply capacity mechanisms.

 

Article 24
Existing mechanisms

 

Member States applying capacity mechanisms on [OP: entry into force of this Regulation] shall adapt their mechanisms to comply with Articles 18, 21 and 23 of this Regulation.

 

  

 

 

 

 

We welcome the intention of the European Commission to establish rules in European legislation on capacity mechanisms. We support the provisions of Article 18 and 19 of the draft recast Regulation mandating Member States to perform a coordinated resource adequacy assessment at European level that should be the basis of any possible establishment of a capacity mechanism according to Article 23.5 of the draft recast Regulation. We also support Article 23.3 of the draft recast Regulation, which foresees that capacity mechanisms shall not create unnecessary market distortions and not limit cross-border trade and that the amount of capacity committed in the mechanism shall not go beyond what is necessary to address the capacity adequacy concern.

 

However, we believe that the final report of the sector inquiry on capacity mechanisms and the draft recast Electricity Regulation are quite a disappointment in terms of how capacity mechanism should or should not be designed, where they are deemed needed. We see no significant addition compared to the earlier publications of the European Commission on the subject since 2012. We were notably expecting a real “blue print” guidance for Member States in Article 23 of the draft recast Regulation to avoid the patchwork situation we are in at the moment with capacity mechanisms. This “blue print” guidance should include at least the following elements: all capacity mechanisms shall be open to cross-border participation; all capacities – all types of generation, demand or storage, existing or new – should be treated equally; mechanisms shall be designed to phase-out in case they are no longer necessary; the regulation should clearly state a deadline for compliance of existing mechanisms with the new rules.

 

A major novelty, and the only binding design criterion for capacity mechanisms that the European Commission has seen fit to include in the Clean Energy Package is a on greenhouse gas (GHG) emission standard in Article 23.4 of the draft recast Regulation. EFET rejects this concept as it contradicts the core principles of non- discrimination, effective competition and the efficient functioning of the market. A capacity mechanism needs to ensure security of supply – it is not a tool for promoting decarbonisation. The most efficient way to bring about decarbonisation is to internalise the externality of carbon emissions by putting a price on carbon. This is what the EU ETS seeks to do. Picking winners and losers through emissions limits is likely to introduce inefficient market distortions. To exclude specific technologies in this way may result in these technologies exiting the market and hence creating a requirement for costly new investment in (other) conventional power plants. Hence this measure is likely to bring no additional benefit in terms of emissions reductions while imposing higher costs on consumers. The measure will have the detrimental effect of weakening the carbon price in the EU ETS, which in itself undermines GHG reduction targets in the long-term. It will not reduce GHG emissions in the traded sector, since these are set by the EU ETS cap.

 

Somehow worrisome in the whole discussion on capacity adequacy is the lack of importance given to the relation between scarcity pricing and competition. Energy prices should be allowed to reflect the true value of scarcity during times of system stress and high demand for power; similarly, when energy is in abundance prices should be allowed to reflect the value of displacing that generation and even go negative. To this end we believe there should be no price caps or floors imposed on the market unless they are set at the value of lost load, as foreseen in Article 9.1 of the draft recast Regulation, without exception4. Making the market more efficient will result in a more efficient use of capacities and therefore translate into lower prices overall, which better reflect the match between supply and demand. We reiterate that assessments of capacity adequacy – to be performed at pan-European, or at least regional level – will remain inaccurate if the market framework in a specific country or region does not allow the free formation of prices.

 

EFET commentary on the Clean Energy Package for All Europeans, 20 April 2017, 20 April 2017, p. 19, 20

 

 

 


 

 

Documentation

 
 
 
 
 
 
 
 
 
 
 
 
 
 

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Last Updated on Wednesday, 31 May 2017 21:49
 

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