Capacity Remuneration Mechanisms
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1 Remuneration Mechanisms Overview & Strategic Reserves for Belgium Hanspeter Höschle Workshop on Fact Sheets KU Leuven Energiestichting / Energie-Instituut (U-Wetoco) April 30, 2014
2 Outline 2/16 1 Introduction 2 Remuneration Mechanisms (CRMs) 3 Concepts for CRM 4 Strategic Reserves for Belgium 5 Lessons Learned
3 Introduction Possible Market Failure 3/16 Power generator business model: Revenues from selling electricity to cover variable costs Inframarginal rents to cover fix costs Price Inframarginal rent e/mwh Coverage variable cost Variable Cost Current discussion: Eroded profitability due to reduced load factors and prices Missing Money Problem t Problem causes: Large integration of RES (mostly offering at zero marginal cost) Merit order effect (Reduced prices & reduced load factors) Challenges: Lack of investment in generation capacity Disvestment of existing capacity
4 Security of Supply & Market Design 4/16 Market design determines remuneration of generators Time horizon Energy-based payment (Output) e/mwh -based payment (Availability) e/mw RES cause shift of merit order & increase price variability RES influence revenue streams of conventional power generators Eroded profitability and lack of investment incentives Forward Day-Ahead (D-1) Realtime (RT) Forward Markets Long-term contracting Day-Ahead Market energy-only (Power exchange) Ancillary Service Markets Primary (R1), secondary (R2), tertiary reserve (R3),... Remuneration for Output & Flexibility
5 Security of Supply & Market Design 4/16 Market design determines remuneration of generators Time horizon Energy-based payment (Output) e/mwh -based payment (Availability) e/mw RES cause shift of merit order & increase price variability RES influence revenue streams of conventional power generators Eroded profitability and lack of investment incentives Forward Day-Ahead (D-1) Realtime (RT) Forward Markets Long-term contracting Day-Ahead Market energy-only (Power exchange) Complementary Remuneration Mechanisms Ancillary Service Markets Primary (R1), secondary (R2), tertiary reserve (R3),... Remuneration for Output & Flexibility remuneration mechanisms as complementary adaptation if existing markets fail to create adequate investment climate
6 Theory - Principle - Desired Outcome 5/16 Remuneration Mechanism: Policy instrument ensuring adequate level of generation capacity Complementary mechanism besides the energy market influencing the volume and type of generation capacity through remunerating available capacity Working Principle: Additional revenue streams valuing the installed capacity [e/mw] Replacement of investment incentives from price spikes with a more steady investment incentive Desired outcome: Resolve potential problems emerging from market malfunctioning to ensure security of supply
7 Starting Point & Design Criteria 6/16 Remuneration Mechanisms? Yes or No? Energy System How does it look like? Which product fits best? A threat for SoS? 3-5 years lead time Current Situation Energy mix Network congestions Load flexibility Demand Response potential... Physical Uncertainties Renewable energy sources Driven by Ressources (Water, Gas,...) Growing Demand Increasing peak-load... Future context Technology transition Regulatory roadmaps Energy substitution Drivers of demand...
8 Starting Point & Design Criteria 6/16 Remuneration Mechanisms? Yes or No? How does it look like? Which product fits best? A threat for SoS? 3-5 years lead time Energy System Current Situation Energy mix Network congestions Load flexibility Demand Response potential... Physical Uncertainties Renewable energy sources Driven by Ressources (Water, Gas,...) Growing Demand Increasing peak-load... Future context Technology transition Regulatory roadmaps Energy substitution Drivers of demand... Mechanism Designs Volume based vs Price based Market wide vs Targeted Centralized market vs Decentralized market Technology dedicated vs Technology neutral
9 Starting Point & Design Criteria 6/16 Remuneration Mechanisms? Yes or No? How does it look like? Which product fits best? Energy System Mechanism Designs Mechanism Type A threat for SoS? 3-5 years lead time Current Situation Energy mix Network congestions Load flexibility Demand Response potential... Physical Uncertainties Renewable energy sources Driven by Ressources (Water, Gas,...) Growing Demand Increasing peak-load... Future context Technology transition Regulatory roadmaps Energy substitution Drivers of demand... Volume based vs Price based Market wide vs Targeted Centralized market vs Decentralized market Technology dedicated vs Technology neutral Payment Auction Obligation Reliability Options Subscription Strategic Reserve
10 Categorization of Remuneration Mechanisms 7/16 Mechanism Type Price-based fixing price volume emerges from market Payment Auction Remuneration Mechanisms Volume-based Market-wide Obligation Reliability Options fixing volume prices emerges from market Subscription Targeted Strategic Reserve
11 Categorization of Remuneration Mechanisms 7/16 Mechanism Type Price-based fixing price volume emerges from market Payment Auction PJM Markets Planned Remuneration Mechanisms Volume-based Market-wide Obligation Reliability Options CAISO Planned fixing volume prices emerges from market Subscription Targeted Strategic Reserve Planned
12 Concepts Payments 8/16 Provider Authority Determination Level of Payment Regulator New investments derive from financial incentives Deration factor of capacity: availability in times of scarcity, technology & flexibility Payment & Verification Procurement of Authorization Easy to implement and easy to phase out Direct support of specific technologies possible Very steady revenue stream Retailer System Operator e Consumer Cost Allocation Assumptions about investment response Level of payment subject to political discussion Implemented with a consumption-independent use of charge for final consumer
13 Concepts Markets (Centralized & Decentralized) 9/16 Centralized Authority Determination Volume of Provider Regulator introduced as new commodity Authorization Demand of capacity determined by authority Payment & Verification Procurement of System Operator procures capacity (centralized) Retailer/LSEs e Consumer Cost Allocation System Operator LSEs procure capacity acoording to their share of demand (decentralized) Cost are allocated to the consumers Decentralized Provider Authority Determination Volume of Regulator Amount of capacity is directly set by the authority Market-based CRM Procurement of Retailer/LSEs Verification System Operator Change of current market design Effort for Implementation and Administration Tracking and Verification of by System Operator Cost Allocation e Consumer
14 Concepts Strategic Reserve 10/16 Authority Determination Volume of Reserve Emergency capacity held by the system operator Contracted capacity taken out of the market Provider Retailer Authorization Payment & Verification Procurement & Activation of Regulator System Operator System operator determines activation In times of critical scarcity or for redispatching If market proves efficient, influence of strategic reserve minimal Easy to implement, only small changes Flexible tool in size and activation e Consumer Cost Allocation Incorrect activation lead to market distortion Does not address flexibility issue from RES Price of strategic reserve forms price cap in the market
15 CRM in Europe & Belgium Subject to Current Discussion 11/16 Great Britain discussed Auction Sweden/Finland Strategic Reserves Poland discussed Market France discussed Obligation Germany discussed Strategic Reserves Market Bulgaria Payments Spain/Portugal Payments Italy discussed Market Reliability Options Greece Obligations
16 CRM in Europe & Belgium Subject to Current Discussion 11/16 Belgium: Strategic Reserves Situation in Belgium Nuclear phase-out in stages until 2025 Total installed capacity of 5926 GW ( 35% in June 2013) Increased share of RES Share of total generated electricity 8.9% in 2012 (4.8% in 2007) Great Britain discussed Auction Sweden/Finland Strategic Reserves Threatened system adequacy Poland discussed Market Plan Wathelet Secretary of State in charge of environment, energy and mobility Melchior Wathelet Issued in June 2012, accepted by the government in July 2013 Strategic reserves to ensure security of supply France discussed Obligation Spain/Portugal Payments Germany discussed Strategic Reserves Market Italy discussed Market Reliability Options Bulgaria Payments Greece Obligations
17 Strategic Reserves for Belgium General Concept 12/16 Scope & Volume: (Decided) Contracted for a period from to (3 winter periods (November-March)) Volume: 800 MW (can be adapted to react on absent nuclear power plants) SGR: Contracting of Generation with 3-year-contracts SDR: Contracting of Demand ( 50 MW) with 1-year-contracts Application period starts in July 2014 Proposed volume by ELIA (based on simulation/forecast): Winter 2014/2015: MW Winter 2015/2016: MW Winter 2016/2017: MW Tendering & Remuneration: (Discussed) Competitive Negotiated Tendering Accepted offers are paid-as-bid
18 Strategic Reserves for Belgium supplied via Generation (SGR) 13/16 Certification (Obligation to make offer) Power plants with programmed closure, announced closure & temporarily closure Remuneration For Reservation: Unit price [e/mw/h * 3624h] For Notification, Prolongation & Injection: cost reflective remuneration Reservation Contract for 3 years, SGR service during 5 Winter months Notification From notification to activation in less than 5.5h Activation Process P Notification Verification Current Discussion Set Point Activation Pmax Pmin -5.5h warm-up period -1.5h -0.5h ramp-up t
19 Strategic Reserves for Belgium supplied via Demand (SDR) 14/16 Certification Connected to ELIA grid No interference with demand side based imbalance products Sizing based on historical demand profile Remuneration for reservation and activation (based on offer) Reservation SDR 4 (Duration: up to 4h, Delay between 2 activations: 4h, 40 activations/contract) SDR 12 (Duration: up to 12h, Delay between 2 activations: 12h, 20 activations/contract) Current Discussion D Peak Hours Peak Hours Demand Profile Reference Reserve Shedding Limit 9h 13h 17h 21h h
20 Strategic Reserves for Belgium supplied via Demand (SDR) 14/16 Certification Connected to ELIA grid No interference with demand side based imbalance products Sizing based on historical demand profile Remuneration for reservation and activation (based on offer) Reservation SDR 4 (Duration: up to 4h, Delay between 2 activations: 4h, 40 activations/contract) SDR 12 (Duration: up to 12h, Delay between 2 activations: 12h, 20 activations/contract) Notification & Activation Process D Notification Verification Current Discussion Adapted Demand Profile Reference Reserve Set Point Activation ( 4h) Shedding Limit -5h -1h warm-up ramp-down h
21 Remuneration Mechanisms Lessons Learned 15/16 Increased volatile generation from RES erode profitably of conventional generation capacity Energy-only markets can result in a missing money problem Problems to incentivize adequate investments in generation capacity remuneration mechanisms are subject of discussion Instruments reducing investment risk by ensuring steady revenue streams Price-based or volume-based & Market-wide or targeted Regulatory intervention which may lead to market distortions if not properly configured
22 End 16/16 Thank you. Questions? Contact: Hanspeter Höschle Kastelpark Arenberg 10, PB Heverlee, Belgium
23 Appendix Further reading 17/16 General: Fabien A. Roques Market design for generation adequacy: Healing causes rather than symptoms Direct Link Carlos Batlle, Ignacio J. Pérez-Arriaga Design criteria for implementing a capacity mechanism in deregulated electricity markets Direct Link Energy Institute Fact Sheet Direct Link Belgium: Plan Wathelet Direct Link Elia Users Group Strategic Reserves Implementation Task Force Direct Link H. Höschle, C. De Jonghe, and D. Van Hertem, mechanisms driving dynamic capacity investment decision making with increased renewable energy sources Direct Link
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