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EU electricity market capacity mechanisms ‘unavoidable’

By Siobhan Hall in Brussels

February 19, 2014 - Capacity remuneration mechanisms are "unavoidable" in countries with large shares of renewable electricity, and capacity rather than energy needs will drive future investments, senior power industry executives told an energy conference in Brussels on February 6.

"In a renewables system, capacity will be scarce and energy potentially abundant," said Andreas Regnell, head of strategy and sustainability at Swedish utility Vattenfall.

Renewables' share of the EU's electricity market is expected to reach about 35% by 2020, and the European Commission has recommended it reach up to 45% by 2030 as part of the EU's long-term drive to decarbonize its economy.

Intermittent renewables output can be backed up by any or a mix of storage, gas-fired power and demand response, and the cost of the system will depend on the cost of that back up, Regnell said.

"The energy-only market is an unbeatable instrument to dispatch electricity efficiently and ensure assets are used in the best possible way. It's not a good way to incentivize investment," he said.

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That makes capacity remuneration mechanisms "unavoidable" in countries with large shares of renewables with zero marginal costs, such as Germany, said Paul Giesbertz, head of infrastructure and market policies at Statkraft Markets, the German-based arm of Norwegian utility Statkraft.

"We will need scarcity rent for conventional plant," Giesbertz said.

This could be achieved with regular high prices in some hours, but it was unrealistic to think the public would accept a "structural appearance of scarcity," he said.

Germany is discussing two types of capacity remuneration mechanism, and is expected to start implementing its choice after 2017, said Bernd Calaminus, head of conventional generation technology at German utility EnBW.

One is customer-based, similar to the model planned by France, and the other has a central buyer, similar to the UK's plans, he said.

Both models have drawbacks for generators, Giesbertz said. The UK's model, for example, involves separate yearly auctions for demand-side response, new and existing capacity, which belies the UK government's claims of equal treatment, he said.

"The objective should be to attract a certain level of generation adequacy, [not just new investment], otherwise it will lead to early closure of existing plant," Calaminus added.

There is equal treatment of all capacity providers in the French model, but it leaves open an option to tender for new capacity, which again threatens generators' investment in existing capacity, Giesbertz said.

This is also an issue generators have with Belgium's proposals, which include a tender for new capacity alongside a mandatory strategic reserve. "The tender will just replace existing capacity "there will be no net contribution to adequacy" he said.

Not if but when

An overview of the situation across Europe shows that the debate on the need for capacity mechanisms has moved to "not so much if, but when," Giesbertz said, while Calaminus described it as "a rag rug" with much variation from country to country.

So far some 14 of the 28 EU countries, including Belgium, France, Germany and the UK, as described above, have in place, have considered or are planning some form of capacity mechanism.

Ireland and Greece introduced capacity payments in 2005, for example, while Spain introduced them in 1996, reformed them in 2007 and is discussing further reforms.

Portugal introduced the same capacity payments system as Spain in 2010, while Romania has had a capacity market since 2007.

Italy introduced capacity payments in 2004, but is now considering, like the UK, an auction model, with first auctions in both countries expected this year.

Finland, Poland and Sweden have a strategic reserve mechanism, while the Netherlands developed a strategic reserve model in 2003, but never activated it.

Next page: EU approach to capacity schemes best but unlikely

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