DRAFT. EU consultation on new Energy Market Design ERRA CHAIRMEN MEETING. 6 October 2016

Transcription

1 EU consultation on new Energy Market Design ERRA CHAIRMEN MEETING 6 October 2016

2 Contents 1. The energy-only market (EOM) versus capacity remuneration mechanism (CRM) debate 2. Current Practice in the EU 3. The two EC investigations into market design 4. Outlook possible outcomes Christoph Riechmann

3 The legacy how we got to the CRM debate, politically Concentrated markets ETS and free permit allocation provide investment story for gas generation Fukoshima accident changes political percepion of nuclear Conventional generators not recovering their full cost But perception that new plant needed 1990s s Regulatory challenge CRM? Overcapacity at the outset Large entry of renewable capacity (intermittent + lower marginal costs) Decrease in demand (financial crisis) In nine out of ten Member States, no reliability problems have occurred at all in the last 10 years. But in seven out of ten MS the expectation is that reliability problems will occur in the medium term. (Sector Inquiry into Capacity Mechansms) 2

4 The energy-only market (EOM) provides reward to capacity when needed at least in theory Why does today s EOM contain capacity elements? Standard electricity contracts comprise an unconditional obligation to supply Supply has to be provided at any time (including in scarcity periods) How is the provision of capacity enforced? Market participants out of balance (i.e. not able to honour their obligation to supply (or using more electricity than procured) have to pay a price for balancing to the SO Balancing system is essential for security of supply How does this translate into financing capacity? Market participants hold available own capacity or contract capacity for payment of capacity prices (per MW) Market participants are prepared to pay high energy prices in case they are short in energy in scarcity periods Price peaks cover capacity cost 3

5 but, does the EOM provide for enough security of supply? Possible market distortions Supply gap Supply gap Welfare loss Spill over of Political risk due to public due to high due to abuse foreign and Missing good nature market risks of market capacity Money of electricity for investors power mechanisms Potential market reforms (without CRM; selection) Facilitating market entry for demand flexibility and unconventional power generation (e.g. emergency generators) Improving the rules for balancing e.g. compensation schemes for capacity available in critical situations Explicit political commitment to accept price peaks Stable political framework (e.g. RES support, climate policy) CRM? 4

6 Contents 1. The energy only market (EOM) versus capacity remuneration mechanism (CRM) debate 2. Current Practice in the EU 3. The two EC investigations into market design 4. Conclusion Christoph Riechmann

7 Scope of the included capacity CRM Designs may serve different purposes Centrality of the capacity mechanism Can be transitional Partial insurance Strategic Reserve Energy not (directly) offered in energy market Addresses public good issue Decentralised performance obligation Dec. obligation + Auction (e.g. PJM) System-wide centralised capacity market (e.g. central auction or reliability options) Energy still offered in energy market capacity traded on decentralised market (no administrative rule how cost is passed to consumers) capacity traded in centrally organised auction (and capacity price passed on through an administrative levy) 6

8 CRM proliferation in Europe The UK has a recent capacity market with availability obligations Denmark has an scheme for CHP which makes payments for availability although it was designed for new capacity. It planned a strategic reserve that was not finally implemented Sweden has a strategic reserve Ireland has a market-wide capacity payment, an interruptibility scheme and plans to create a new capacity market (RO) Germany has a strategic network reserve, an exit payment, an interruptibility scheme plan to create strategic capacity reserve Belgium has a strategic reserve and launched a tender for new capacity of OCGT or CCGT that was later abandoned France has tender for new capacity of CCGF in Brittany and plans to create capacity market obligations with tradeable capacity certificates Portugal has 2 targeted capacity payments and an interruptibility scheme Poland has a capacity payment, an interruptibility scheme and plan to create strategic reserve Croatia s State owned electricity company launched a tender for new capacity currently under EC discussions Greece has a direct capacity payment for availability at peak load Spain has 3 existing and more planned targeted capacity payments and an interruptibility scheme Source: Frontier based on ACER Italy has capacity payments, more than 1 interruptibility scheme and plan to create capacity market Strategic reserve Decentral CM Central Capacity Markets Capacity payments Other types of CRM a real concern for the sector inquiry on capacity mechanisms 7

9 CRM experience has included regulatory failures In New England the recent hike in capacity prices has attracted regulatory scrutiny and calls for segmented auctions The UK design has failed to attract large new clean entry In 2014 Belgium launched a new capacity tender however in 2015 it was abandoned In PJM lack of new entry has prompted complaints of windfall rents Colombia has intervened its wholesale market in every stress period and many new entrants have pulled out Spain and Portugal has almost never used their interruptibility mechanisms Proposed Capacity Markets Argentina s capacity payments were distorting price formation 8

10 Initial experiences with CRM Design is crucial for effectiveness The effectiveness critically hinges on the detailed design, e.g. Unless there is a clear enforcement mechanism (including penalties for non-compliance) there is a risk that desired capacity may not be built (see UK, Colombia) Price outcomes will critically depend on the design and with poor design capacity prices will be volatile (e.g. is the volume of capacity contracted sensitive to price?) Effective competition can drive down price UK has enjoyed capacity prices considerably below expectations See next slide Complex, prone to delays and hard to get right first time round Auction design Pre-qualification (including securitisation) Comparability of existing and new projects (with different lead times and contract durations) 9

11 Initial experience UK capacity auction Source: National Grid Company (2016):Provisional Auction Results, T-4 Capacity Market Auction for 2019/20 10

12 Contents 1. The energy only market (EOM) versus capacity remuneration mechanism (CRM) debate 2. Current Practice in the EU 3. The two EC investigations into market design 4. Conclusion Christoph Riechmann

13 Two EU processes exploring electricity market design Sector Inquiry Market design process Leading Stakeholder and aim DG Comp Compliance check with State Aid Law DG Ener Identify need for and define common principles for all MS Material point under review Need for a CRM Proportionality of CRM Non-discrimination of CRM Adequacy Framework Design principles of CRM International Participation Formal Outcome Report without direct legal implications Separately investigating individual Member states Legal Initiative (Directive, Regulation, Code?) Timeline Draft report and consultation June 2016 Proposal by Christmas

14 Emerging thinking in the sector enquiry by DG Comp Common Interest Need Appropriateness Incentive Proportionality Avoid distortion to competition Adequacy assessment National CRM Cross-Border Participation Need to show need for CRM through adequacy assessment EU-wide common approach to assessment? Common modelling for assessment? National choice of level of adequacy? Focus on cause of adequacy issue Exploit reform of energyonly market (e.g. balancing arrangements) first Competitive design (auction or certificate system) Non-discrimination (between technologies, players ) Interconnectors or generators? Proof of interconnector (IC) availability? Derating of IC capacity? Transitional exemptions (for pragmatic reasons) 13

15 Emerging thinking in the DG Ener Impact assessment I II III IV Variable decentral generation Uncertain future generation investment Ignoring neighbouring systems Inefficient downstream markets Inefficient short term markets Preferential market access for renewables Poor consumer engagement Untapped demand response Lack of adequate investment signals due to regulatory and market failures Uncoordinated state interventions to deal with capacity problems Crisis plans and actions national in focus Lack of information sharing and transparency No common approach to identifying and assessing risks Weak competition in retail markets Conflicts of interest regarding management and handling of data Poor consumer engagement Create level playing field among resources Strengthen shortterm markets Pull DRM and distributed resource into market EU wide adequacy assessment CRM to comply with design principles EU framework for x- border participation Minimum EU rules for prevention & crisis management Regional cooperation Systematic monitoring Harmonisation and co-ridination within the EU Standard defintion of energy poverty Phasing out of retail price regulation EU data management rules Facilitate customer switching 14

16 Cross-border security of supply actions build on market design EU wide adequacy assessment CRM to comply with design principles Security of Supply actions (incuding monitoring) EU framework for x-border participation Coordinated curtailment of firm x-zonal T capacities Redispatch and Intra-TSO-Trade Demand disconnection Balancing bids marked unavailable Active power assistance from TSO Multiple Years- Ahead Year- Ahead Month- Ahead Day- Ahead Intraday Balancing Real-time 15

17 2020/ /16 Regional adequacy assessment - PLEF study estimates effects of international exchanges on national SoS levels (LOLE values*) Isolated case Interconected case BE 177 FR 217 BE 0 FR 14 AT 0 CH 1251 DE 0 NL 0 LU 8760 LOLEreduction AT 0 CH 0 DE 0 NL 0 LU 0 International dependence increases over time BE 308 FR 151 BE 0 FR 6 AT 3 CH 1086 DE 0 NL 32 LU 8760 LOLEreduction AT 0 CH 0 DE 0 NL 0 LU 0 * LOLE = Loss of Load Expectation (= number of hours in a year with partial load curtailment, if there were no operational reserves ) 16

18 Contents 1. The energy only market (EOM) versus capacity remuneration mechanism (CRM) debate 2. Current Practice in the EU 3. The two EC investigations into market design 4. Conclusion Christoph Riechmann

19 Conclusion Reform the energy market first Analyse system adequacy Taylor CRMs to the issue Ensure cross border participation Most countries have headroom to reform energy markets Strengthen balancing arrangements Avoid price caps Create level playing field and mobilise all resources Need to understand adequacy situation Need to coordinate international Need to show threat to adequacy to justify CRMs Choose the least intervention needed to address the identified issue Permanent or temporary regime Market-wide or focussed mechanism Assign responsibilities central (e.g. TSO) or decentrally (retailer) Interconnectors or generators? Proof of interconnector (IC) availability? Derating of IC capacity? Co-ordinate on security of supply Minimum EU rules for prevention & crisis management Regional co-operation Systematic monitoring 18

20 Back-Up materials 19

21 Emerging thinking in the DG Ener Impact assessment Variable decentral generation Inefficient short term markets Preferential market access for renewables Poor consumer engagement Untapped demand response Create level playing field among resources Strengthen shortterm markets Pull DRM and distributed resource into market Abolish priority dispatch and introduce clear curtailment rules to replace priority access, with the exception of emerging technologies and small CHP and RES plants Balancing responsibility for all parties, with the exception of emerging technologies and small CHP and RES plants Principles for transparent, non-discriminatory market-based framework for the provision of these services EU wide principles to make tariffs structures become more transparent and more accurately reflect the impact of each system user on the grid, especially during different times of the day; NRAs to implement more detailed requirements Regional sizing and procurement of balancing reserves, daily procurement of upward/downward products Selected harmonisation of national intra-day markets of gate closure times and products, with gradual implementation Give consumers access to enabling technologies that will expose them to market price signals and a common European framework defining roles and responsibilities of aggregators 20

22 Emerging thinking in the DG Ener Impact assessment Uncertain future generation investment Lack of adequate investment signals due to regulatory and market failures Uncoordinated state interventions to deal with capacity problems Mobilise demand response and embedded generation Price caps at VoLL (value of lost load) Strengthened bidding zone design and limited use of congestion rent Review of network charge structures Common EU wide assessment by ENTSO-E National, but only where needed based on EU-wide generation adequacy assessment EU wide adequacy assessment CRM to comply with design principles Harmonized EU framework for cross-border participation EU framework for x- border participation 21

23 Cross border participation raises specific issues Participation Obligation Options Generators and/or interconnectors Physical delivery or Availability Consideration Want to incentivise expansion where the bottleneck lies By country, this can be generation or IC capacity With gen participation: ICs can benefit indirectly Availability rule distorts despatch less Absent full ETM implementation, availability may not be a fully effective criterion Derating of capacity over IC IC capacity reservation See ENTSO-e (2015): Cross-border participation to capacity mechanisms, Policy paper, 13 February 2015 and Frontier Economics (2014): Participation of interconnected capacity in the GB capacity market, report for DECC, Sep 2014 for physical availability and for coincident stress in host system Explicit physical capacity reservation or No reservation The technical availability of ICs limits how much can be imported In case of coincident stress, capacity may not be able to support both countries Reserving IC capacity for shortage events is inefficient But if IC capacity is ignored, there is risk of too optimistic adequacy outlook and given distinct technical challenges, market/liquidity conditions and political attitudes, national solutions (when taken in isolation) may differ 22

24 EU legislation* allows TSOs a number of opportunities to curtail exports if national system security is endangered Shortage clearance in coupled markets according to overall supply-demand ratio and cross-zonal capacity If cooperation measures insufficient (NC ER, Art. 20) LTC Day-Ahead Intraday Balancing Physical Shortage 4 Demand disconnection Firm crosszonal capacity After firmness (NC FCA, Art. 59) Redispatch and Intra-TSO-Trade (Reg. 714/2009, Art. 16.2) Firm cross-zonal capacity Coordinated curtailment of firm x- zonal capacities in cases of Force Majeure or Emergency situation, after firmness deadline with compensation to LTC holders (NC FCA, Art. 30, Art ) Balancing bids can be marked as unavailable in an Alert State or an Emergency State (NC EB Art. 30 (2), NC ER, Art. 19)) Coordinated curtailment of firm x-zonal capacities in cases of Force Majeure situation or an Emergency Situation (Reg 2015/1222, Art. 72; NC ER, Art. 12) Active power assistance from neighbouring TSO (NC ER, Art. 19) Cooperation required only if no danger to own system (NE ER, Art. 12) *as of October

25 Need for coordination in current market rules Implication for coordination Implication for coordination 1 Curtail-ment by TSOs Either agree on common rules/procedures for power curtailment; or on rules in system stress events to limit power flows 5 X-border parti-cipation Need to elaborate on how to set the right incentives for availability in times of system stress without distorting the markets 2 Balancing prices Desirable to agree on a common procedure on how to calculate imbalance settlement prices ideally reflecting the VoLL (see UK approach) 6 X-border derating Foreign capacity needs to be de-rated requires probabilistic models that consider simultaneous scarcity ( de-rating ) 3 Market Coupling MC rules for load curtailment have to be defined with correspondence to preference for SoS/willingness to pay and financing of generation assets 7 Strategic Reserve Need to harmonise balancing prices across Europe; or Curtailment of x-border flows in scarcity events (e.g. don t allow for intra-day trade) 4 Flow-based MC TSOs need to improve FB model Countries / power exchanges should reconsider Day-Ahead bid limit of 3,000 /MWh 24

26 Frontier Economics Ltd is a member of the Frontier Economics network, which consists of two separate companies based in Europe (Frontier Economics Ltd, with offices in Brussels, Cologne, Dublin, London & Madrid) and Australia (Frontier Economics Pty Ltd, with offices in Melbourne & Sydney). Both companies are independently owned, and legal commitments entered into by one company do not impose any obligations on the other company in the network. All views expressed in this document are the views of Frontier Economics Ltd.