EC Finds Flaws With Power Capacity Mechanisms
An interim report about electricity capacity mechanisms by the European Commission released on April 13 has found that many could be better targeted and more cost-effective.
"European consumers and companies should not have to face black-outs, and capacity mechanisms can help to reduce this risk,” said EU competition commissioner Margrethe Vestager: "At the same time, consumers should not overpay for electricity and competition should not be undermined.”
The commission’s inquiry, which is ongoing, identified 28 existing or planned capacity mechanisms in the 11 member states studied: Belgium, Croatia, Denmark, France, Germany, Ireland, Italy, Poland, Portugal, Spain and Sweden.
Six different mechanism types were identified. A strategic reserve, where the state pays specific plants to keep running at times of need, was the most common. Others were targeted capacity payments; a central buyer; decentralised obligations; market-wide capacity payments; and tendering for new capacity. For the latter, it identified tenders held in Belgium (2014), the French region of Brittany (2011) and Ireland (2003-06) for a total of 1,800 MW new gas-fired generation capacity.
Across the spectrum of capacity mechanisms, the report identified four main problems. First, many EU states did not adequately assess what would be the best way to increase the security of supply. Second, in most the price paid for the electricity capacity is not determined through a competitive process but set by the state, or else negotiated bilaterally between the state and the capacity-provider – creating a serious risk of overpayment. Although this interim report did not cite this, the £93/MWh payment guaranteed to EDF by the UK if it builds the new Hinkley Point nuclear plant has been criticised by many, including the Austrian government, as one such over-the-market bilateral arrangement.
Third, many capacity mechanisms do not allow all potential capacity providers or technologies to participate, which may curtail competition and inflate prices paid for the capacity. For example Spain allowed only coal-fired plants to be eligible for targeted payments on an environmental scheme. Finally, the inquiry showed that power plants from other member states are rarely allowed to directly or indirectly participate in national capacity mechanisms, although it found a recent UK capacity auction did allow foreign interconnectors to participate.
Comments are invited on the interim report and annexed document by July 6.
The annex notes that [when] “renewable sources are not available, gas generation is considered, among fossil fuels, to be a particularly suitable back-up….due to its ability to ramp up and down relatively quickly” and also notes that coal-fired plants are candidates to be gradually phased out, not only because of their age but also because of environmental policies. Despite this, it found only in Poland was there investment interest in building new gas-fired generation. Elsewhere across the EU so many new gas-fired plants were built late last decade which, this decade, were priced out the market by coal-fired plants until only recently.
The results of the inquiry will feed into legislative proposals on a revised electricity market design due later in 2016.
Mark Smedley