A Target Model for Electricity Capacity Remuneration Schemes – FSR Policy Workshop Series 2014-15

“many Member States currently have inadequate security of electricity supply frameworks in place and they use outdated and inconsistent approaches to assessing security of electricity supply. […] Capacity mechanisms should only be developed to address security of supply if a regional system adequacy assessment points to such a need, taking into account the potential for energy efficiency and demand-side response”.

However, many Member States have already introduced or are introducing capacity remuneration mechanisms (CRMs typically in an uncoordinated way, to address generation capacity adequacy concerns, as noted by the Commission in 2013:

”concerns about the adequacy of generation capacity have led some Member States to consider new public intervention, such as support schemes for investments in new electricity generation capacity or for remunerating existing plants to remain operational”.

In this context the Commission considered that: “those measures should not result in inefficient plants being artificially kept in operation through public support, or in unnecessary new generation capacity being built” and, in the context of the increasingly integrated EU energy markets, that:

“where markets are linked, public intervention affects prices not only nationally but also in neighbouring markets. The resulting distortions of the internal electricity market can be both short-term (affecting system stability, spot market prices and electricity production), and long-term (crowding out investments in new capacity or diverting them to sub-optimal projects)”.

To reduce the potential of any adverse effects on the internal electricity market, in 2014 the Commission, in its Guidelines on State aid for environmental protection and energy 2014-2020,while recognising that:

“measures for generation adequacy can be designed in a variety of ways, in the form of investment and operating aid (in principle only rewarding the commitment to be available to deliver electricity), and can pursue different objectives”

provided a set of criteria which Member States should follow in deciding on CRMs and for their design:

• the precise objective, at which the measure is aimed, should be clearly defined, including when and where the generation adequacy problem is expected to arise. The identification of a generation adequacy problem should be consistent with the generation adequacy analysis carried out regularly by the European Network of Transmission Operators for electricity in accordance with the internal energy market legislation;
• the Member States should clearly demonstrate the reasons why the market cannot be expected to deliver adequate capacity in the absence of intervention, by taking account of on-going market and technology developments.
• any aid involved in CRMs should remunerate solely the service of pure availability provided by the generator, that is to say, the commitment of being available to deliver electricity and the corresponding compensation for it, for example, in terms of remuneration per MW of capacity being made available. The aid should not include any remuneration for the sale of electricity, that is to say, remuneration per MWh sold;
• the measure should be open and provide adequate incentives to both existing and future generators and to operators using substitutable technologies, such as demand-side response or storage solutions. The aid should therefore be delivered through a mechanism which allows for potentially different lead times, corresponding to the time needed to realise new investments by new generators using different technologies. The measure should also take into account to what extent interconnection capacity could remedy any possible problem of generation adequacy.
• The measure should be designed in a way so as to make it possible for any capacity which can effectively contribute to addressing the generation adequacy problem to participate in the measure, in particular, taking into account the following factors:
  • The participation of generators using different technologies and of operators offering measures with equivalent technical performance, for example, demand side management, interconnectors and storage;
  • The participation of operators from other Member States where such participation is physically possible in particular in the regional context, that is to say, where the capacity can be physically provided to the Member State implementing the measure and the obligations set out in the measure can be enforced ;
  • Participation of a sufficient number of generators to establish a competitive price for the capacity;
  • Avoidance of negative effects on the internal market, for example due to export restrictions, wholesale price caps, bidding restrictions or other measures undermining the operation of market coupling, including intra-day and balancing markets.
• The measure should:
  • not reduce incentives to invest in interconnection capacity;
  • not undermine market coupling, including balancing markets;
  • not undermine investment decisions on generation which preceded the measure or decisions by operators regarding the balancing or ancillary services market;
  • not unduly strengthen market dominance;
  • give preference to low-carbon generators in case of equivalent technical and economic parameters.

In this latter respect, the Commission also noted that

“aid for generation adequacy may contradict the objective of phasing out environmentally harmful subsidies including for fossil fuels. Member States should therefore primarily consider alternative ways of achieving generation adequacy which do not have a negative impact on the objective of phasing out environmentally or economically harmful subsidies, such as facilitating demand side management and increasing interconnection capacity”.

Finally, in its Energy Union Strategy, the Commission indicated that it intends to

“propose a new European electricity market design in 2015”.

While this new design is expected to confirm most elements on the Electricity Target Model which is being implemented through the Network Codes and their voluntary early implementation (e.g. the significant progress achieved already in day-ahead market coupling), it will likely contain a blueprint for CRMs. Ahead of such proposal from the Commission, this Workshop aims at:

• Reviewing and comparing the existing or planned CRMs;
• Assessing the extent to which they comply with the design criteria already defined by the Commission;
• Identifying a set of detailed specification for a “CRM Target Model”. Key questions in this respect are the degree of harmonisation required for national CRMs and the conditions under which cross-border participation in national CRMs can be implemented.

Accordingly, the Workshop will be structured in two sessions.

• Session I will review existing or planned CRMs and assess them vis-à-vis the criteria set by the Commission.
• Session II will address the challenge of developing a CRM Target Model.

An updated version of the programme can be downloaded below.