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Gas

Ilaria Conti

Topic of the Month

18.09.2017

The perspectives of gas utilities: which new skin will fit the “utility of the future”?

Written by Ilaria Conti Gas utilities are facing the double challenge – among others – of decarbonisation and digitalisation, which are the main disruptive elements to […] read more

Gas

Ilaria Conti

Topic of the Month

11.09.2017

Surviving without gas Long-term contracts: at which price? The ‘gas supply’ perspective

Written by Ilaria Conti As the European Commission’s « Quo Vadis ? » research project has recently highlighted, gas Long-Term Contracts (LTCs) in Europe are dying out. The […] read more

Electricityundefined

Pradyumna Bhagwat

Topic of the Month

31.07.2017

CRMs and Cross-border effects

written by Pradyumna Bhagwat In a highly interconnected system such as the continental European electricity system, there appears to be a concern that the uncoordinated implementation […] read more

Electricityundefined

Pradyumna Bhagwat

Topic of the Month

24.07.2017

Participation of Renewables in Capacity Mechanisms

written by Pradyumna Bhagwat There are varying opinions on whether intermittent renewable generation should be allowed to participate in capacity remuneration mechanisms. From a security of […] read more

Electricity

Pradyumna Bhagwat

Topic of the Month

17.07.2017

Capacity Mechanisms and the Winter Package

written by Pradyumna Bhagwat A much-debated topic in the discourse on the “Clean Energy for all Europeans” package (Winter Package) is that of capacity mechanisms. In […] read more

Electricity

Pradyumna Bhagwat

Topic of the Month

10.07.2017

Revisiting the “what?” and “why?” of Capacity Remuneration Mechanisms.

written by Pradyumna Bhagwat The debate on whether there is a need for capacity (remuneration) mechanisms (CRMs) in the EU, especially in the presence of growing […] read more

Electricity

Topic of the Month

3.07.2017

How to make it true? A Regulatory reflection

FSR Topic of the Month – June Editor: Gianluigi Migliavacca (SmartNet Project) Written by: Ivana Kockar (University of Strathclyde), Gianluigi Migliavacca (RSE) This final article […] read more

Electricity

Topic of the Month

20.06.2017

Testing TSO-DSO coordination: 3 technological pilots in Europe

FSR Topic of the Month – June Editor: Gianluigi Migliavacca (SmartNet Project) written by: Carlos Madina (SmartNet/Tecnalia), Luca Ortolano (SmartNet/Terna), Henrik Madsen (SmartNet/DTU), Miguel Pardo […] read more

Electricity

Topic of the Month

12.06.2017

TSO-DSO coordination, market architectures and ICT for a changing energy world

FSR Topic of the Month – June Editor: Gianluigi Migliavacca (SmartNet Project) written by Daan Six, Mario Dzamarija, Araz Ashouri, Seppo Horsmanheimo As already pinpointed […] read more

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Pradyumna Bhagwat

CRMs and Cross-border effects

- Electricity, undefined

written by Pradyumna Bhagwat

In a highly interconnected system such as the continental European electricity system, there appears to be a concern that the uncoordinated implementation of capacity mechanisms may cause unintended cross-border effects (Agency for the Cooperation of Energy Regulators (ACER), 2013).

The possible cross-border effects of capacity mechanisms can be explained in a simple manner using the following example. Consider two electricity market regions (A and B) that are interconnected. Region A implements a capacity mechanism while region B remains an energy only market. A strong investment incentive in region A may suppress investment in region B. At the same time, region B may free ride on the security of supply and lower prices, which are paid for by the consumers of region A. However, export of electricity from region A to B would depress power prices in region B by eliminating high prices spikes during scarcity. This spill over would have an adverse effect on the revenues of peak generators in region B. (Bhagwat, 2016; Meyer and Gore, 2015)

In this article, we present the results from a study of the cross-border effects due to capacity mechanisms in interconnected power systems using an agent-based model. The paper analyses two capacity mechanisms namely, strategic reserve and a capacity market. For a detailed description of this analysis, please refer to Bhagwat et al., (2017) and Bhagwat and de Vries, (2017).

The scenario used in our analysis consists of two identical markets (Zone A and Zone B) that are connected by an interconnector. The reference scenario (BL) consists of energy-only markets in both zones. The remaining scenarios are permutations of capacity mechanism implementation as illustrated in Table 1.

Table 1: List of scenarios

Scenario

Zone A

Zone B

BL

Energy-only

Energy-only

SR-EO

Strategic Reserve

Energy-only

CM-EO

Capacity Market

Energy-only

CM-SR

Capacity Market

Strategic Reserve

The indicators that were used in the analysis of the results are 1) Shortage hours (hours/year) 2) The average electricity price (€/MWh). 3) The cost of the capacity mechanism (€/MWh): 4) The cost to consumers (€/MWh): 5) The quantitative results are presented in Figure 1.

 

Figure 2: The percentage change in values of various indicators in Zone A (left) and Zone B (right) on implementation of capacity mechanisms as compared to the baseline scenario (BL)


In the scenarios analysed in this modelling study, interconnection with a neighbouring zone of equal size did not negatively affect the effectiveness of a capacity market as compared to a no interconnection scenario. However, this may have been due to the implementation of a large capacity reserve margin in our model.Figure 2: The percentage change in values of various indicators in Zone A (left) and Zone B (right) on implementation of capacity mechanisms as compared to the baseline scenario (BL)

When a capacity market is implemented, a neighbouring market may experience a positive spill-over and therefore free ride in the capacity market. This may result in a greater level of reliability and lower electricity prices in this neighbouring market. Free riding may increase the cost to the consumers in the capacity market, as they are paying for the additional adequacy. The generators in the neighbouring energy-only zone may be crowded out, in some cases to the extent that an investment cycle develops. While this does not necessarily affect generation adequacy and prices in this zone negatively, policy makers may be uncomfortable with the resulting import dependence.

Allowing generation companies in the zone without a capacity market to sell capacity credits in the capacity market may counter this effect, as it will increase the value of generation capacity in the non-capacity market. Another option is to implement a capacity mechanism in the neighbouring zone as well. Hence, the implementation of a capacity mechanism may cause pressure on neighbouring markets to do the same.

A strategic reserve also has a positive spill-over effect on a neighbouring energy-only market, both regarding the reduction in shortage hours and cost to consumers. However, the presence of an energy-only market in a neighbouring zone hurts the performance of the strategic reserve with respect to the net cost to consumers and the number of shortage hours when compared to an isolated system with a strategic reserve. A strategic reserve can reduce the crowding-out effect on its electricity market caused by the capacity market and thus lower the risk of investment cycles in generation capacity. However, in our research model, in the presence of the capacity market, a strategic reserve in an interconnected zone was unable to recover its costs. In this case, it appears that a smaller strategic reserve would suffice.

Finally, readers must keep in mind that these were results from a modelling study and that models have limitations. The limitations of this model have been described in  Bhagwat et al., (2017).

 

References

Agency for the Cooperation of Energy Regulators (ACER), 2013. Capacity remuneration mechanisms and the internal market for electricity.

Bhagwat, P.C., 2016. Security of supply during the energy transition: The role of capacity mechanisms. Delft University of Technology. doi:10.4233/uuid:9dddbede-5c19-40a9-9024-4dd8cbbe3062

Bhagwat, P.C., de Vries, L.J., 2017. Capacity mechanisms in interconnected markets. doi:10.2870/144768

Bhagwat, P.C., Richstein, J.C., Chappin, E.J.L., Iychettira, K.K., De Vries, L.J., Chappin, É.J.L., De Vries, L.J., 2017. Cross-border effects of capacity mechanisms in interconnected power systems [Working Paper], Utilities Policy. Delft. doi:10.1016/j.jup.2017.03.005

Meyer, R., Gore, O., 2015. Cross-border effects of capacity mechanisms: Do uncoordinated market design changes contradict the goals of the European market integration? Energy Econ. 51, 9–20. doi:10.1016/j.eneco.2015.06.011