Capacity MechanismsMarket Design options

Colas ChabanneWG Market Design & RES

About ENTSO-E

41 TSOs from 34 countries across Europe.

ENTSO-E was established and given legal mandates by the EU’s Third Legislative Package for the Internal Energy Market in 2009

Main tasks

• Drafting of network codes

• Development of pan-European network plans (TYNDPs)

• Technical cooperation between TSOs

• Adequacy assessment (SOAF, summer & winter outlook)

• Coordination of R&D plans

Disclaimer on Capacity Mechanisms

Security of Supply is a national responsibility subject to EU regulation

ENTSO-E has no position in favor of, nor against Capacity Mechanisms

1. Energy and Capacity2. Capacity Market Design Options3. Status of discussions in Europe4. Cross border participation

1Energy and Capacity

The « energy only » theory

Price Duration curve

Load

Duration

curve

Generation costs

Fundamental result

Marginal pricing in the energy market ensures cost recovery for all generation units if the generation mix

is optimal.

« When plant capacity is correct, the differential cost rates covers both running costs (energy costs) and plant assessed as

its development cost (power costs). » Boiteux, Peak-load pricing, 1960.

Powerful economic theory, backbone of liberalized electricity markets

Significant assumptions and limitations

(Scarcity pricing, no dynamic constraints,…)

time

Total cost (€/MW) Curtaiment

Base

Peak

H0 H1 H2 H3 = 8760 h

Mid

time

Demand (MW)

Base

Mid

Peak

Curtailment

H0 H1 H2 H3 = 8760 h

time

Price (€/MWh)

VOLL

H0 H1 H2 H3 = 8760 h

Var

iab

le c

osts

What is the real debate ?

The pure « energy only » market does not exist: in all systems, reserves and ancillary services are used to ensure system security and short term balancing

But can energy markets be trusted to deliver Security of Supply in the long term

(= adequacy) ?

Raises additional questions

• What is Security of Supply ? How is it defined, measured ?

• Must (all) consumers be served in all circumstances ?

• Impact of subsidized variable RES with zero marginal costs ?

• Should Security of Supply be a political target or a market output ? (social vs private good)

• If the energy market is not sufficient to ensure SoS, what can be done ?

2Capacity Market Design Options

Taxonomy of Capacity Mechanisms

Source: ACER

Focus on Capacity Obligations

Source: ACER

Obligations are imposed on large consumers / suppliers to contract a certain level of capacity linked

to their self-assessed future consumption / supply.

The capacity to be contracted is typically higher, by a reserve

margin determined by an independent body, than the level of expected future consumption.

Decentralised market design

The obligated parties can fulfil their obligation through ownership of

capacity, contracting and/or buying tradable capacity certificates (issued to

capacity providers).

A (secondary) market for capacity certificates may be established, to promote the efficient exchange of

these certificates.

Contracted generators/consumers are required to make the contracted capacity available to the market in

periods of shortages, defined administratively or by market prices

rising above a threshold level. Failure to do so may result in

penalties.

Ex : French Capacity Market

The total required capacity is set (several years) in

advance of supply by an independent body.

Focus on Capacity Auctions

Source: ACER

Centralised market design

The total required capacity is procured through an auction by

an independent body.

The price is set by the forward auction and paid to all

participants who are successful in the auction.

The costs are charged to the suppliers who charge end

consumers.

Contracted capacity should be available according to the

terms of the contract.

Ex : UK Capacity Market

Focus on Reliability Options

Sources: ACER, Terna

Not really a market design as such, rather an difference in the nature of the product

Reliability Options are instruments similar to call options, whereby contracted capacity providers are required to pay the difference between the wholesale market price (e.g. the spot

price) and a pre-set reference price (i.e. the “strike price”), whenever this difference is positive, i.e. the option is exercised

Based on an obligation imposed on large consumers / suppliers to acquire a certain

amount of ROs, linked to their (self-assessed) future consumption / supply

obligations.

Decentralized variant

Ex : new Italian Capacity Market

Centralized variant

Other important considerations

Locational requirements? Technology dedicated

or technology neutral?

Pure incentive or Commitments (availability/delivery )?

Cross border contributions to SoS?Cost allocation?

Participation of Demand Side?

Lead time?

Duration of contracts?

ENTSO-E recommendations

• Focus on the physical needs of the system

• Make existing arrangements work as best as they can

• Make CMs compatible with the European principles of competitive market

• Promote a coordinated approach

3Status of discussions in Europe

National initiatives

Source : ACER, 2013

The electric industry advocates for Capacity Mechanisms

EURELECTRIC believes that energy, flexibility and capacity are all needed and that they should therefore be properly valued in a future-proof wholesale market design

The European Commission

Guidelines on State aid for environmental protection and energy

2014-2020

Generation Adequacy in the internal

electricity market - guidance on public

interventions

A Capacity Mechanism blueprint ?...

Converging checklists ?

4Cross border participation

XB CM in a nutshell

The introduction of Capacity Mechanisms in several Member States highlights the need for more clarity and consistency in the governance framework for SoS.

TSOs play a crucial role in CMs design and operation. XB participation can only be enabled via close TSOs cooperation and within a well-defined framework. Especially challenging issues include the calculation of limits to cross border

participation and the management of simultaneous scarcity situations.

Considering the current diversity of market designs in Europe pragmatic step-wise solutions are needed to ensure compatibility of the different CMs.

An appropriately designed Capacity Mechanism should reveal the value of the most limiting capacity factor (whether capacity providers or interconnection),

while ensuring a practical and proportionate implementation.

For more details

Please refer to the ENTSO-E Policy Paper

« Cross Border participation to Capacity Mechanisms »

available on the ENTSO-E website

Thank you for your attention!