electricity market day 2015 - colas chabanne, entso-e wg market design and res (rte france) -...
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Capacity MechanismsMarket Design options
Colas ChabanneWG Market Design & RES
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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
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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
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1. Energy and Capacity2. Capacity Market Design Options3. Status of discussions in Europe4. Cross border participation
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1Energy and Capacity
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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
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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 ?
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2Capacity Market Design Options
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Taxonomy of Capacity Mechanisms
Source: ACER
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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
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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
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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
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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?
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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
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3Status of discussions in Europe
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National initiatives
Source : ACER, 2013
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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
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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 ?...
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Converging checklists ?
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4Cross border participation
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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.
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For more details
Please refer to the ENTSO-E Policy Paper
« Cross Border participation to Capacity Mechanisms »
available on the ENTSO-E website
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Thank you for your attention!
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