Electricity Market Day 2015

1. Capacity Mechanisms
Market Design options
Colas Chabanne
WG Market Design & RES

2. About ENTSO-E
41 TSOs from 34 countries across Europe.
ENTSO-E was established and given legal mandates by the EU’s Third
Legislative Package for the Internal Energy Market in 2009
Main tasks
• Drafting of network codes
• Development of pan-European network plans (TYNDPs)
• Technical cooperation between TSOs
• Adequacy assessment (SOAF, summer & winter outlook)
• Coordination of R&D plans

3. Disclaimer on Capacity Mechanisms
Security of Supply is a national responsibility subject to EU regulation
ENTSO-E has no position in favor of, nor against Capacity Mechanisms

4. 1. Energy and Capacity
2. Capacity Market Design Options
3. Status of discussions in Europe
4. Cross border participation

5. 1
Energy and Capacity

6. The « energy only » theory
Price Duration
curve
Load
Duration
curve
Generation
costs
Fundamental result
Marginal pricing in the energy market ensures cost
recovery for all generation units if the generation mix
is optimal.
« When plant capacity is correct, the differential cost rates covers
both running costs (energy costs) and plant assessed as its
development cost (power costs). »
Boiteux, Peak-load pricing, 1960.
Powerful economic theory, backbone of
liberalized electricity markets
Significant assumptions and limitations
(Scarcity pricing, no dynamic constraints,…)
time
Total cost
(€/MW) Curtaiment
Base
Peak
H0 H1 H2 H3 = 8760 h
Mid
time
Demand
(MW)
Base
Mid
Peak
Curtailment
H0 H1 H2 H3 = 8760 h
time
Price
(€/MWh)
VOLL
H0 H1 H2 H3 = 8760 h
Variablecosts

7. What is the real debate ?
The pure « energy only » market does not exist: in all systems, reserves and ancillary services
are used to ensure system security and short term balancing
But can energy markets be trusted to deliver Security of Supply in the long term
(= adequacy) ?
Raises additional questions
• What is Security of Supply ? How is it defined, measured ?
• Must (all) consumers be served in all circumstances ?
• Impact of subsidized variable RES with zero marginal costs ?
• Should Security of Supply be a political target or a market output ? (social vs private good)
• If the energy market is not sufficient to ensure SoS, what can be done ?

8. 2
Capacity Market Design Options

9. Taxonomy of Capacity Mechanisms
Source: ACER

10. Focus on Capacity Obligations
Source: ACER
Obligations are imposed on large
consumers / suppliers to contract
a certain level of capacity linked to
their self-assessed future
consumption / supply.
The capacity to be contracted is
typically higher, by a reserve
margin determined by an
independent body, than the level
of expected future consumption.
Decentralised market design
The obligated parties can fulfil their
obligation through ownership of
capacity, contracting and/or buying
tradable capacity certificates (issued to
capacity providers).
A (secondary) market for capacity
certificates may be established, to
promote the efficient exchange of
these certificates.
Contracted generators/consumers
are required to make the contracted
capacity available to the market in
periods of shortages, defined
administratively or by market prices
rising above a threshold level.
Failure to do so may result in
penalties.
Ex : French Capacity Market

11. The total required capacity is
set (several years) in
advance of supply by an
independent body.
Focus on Capacity Auctions
Source: ACER
Centralised market design
The total required capacity is
procured through an auction by
an independent body.
The price is set by the forward
auction and paid to all
participants who are successful
in the auction.
The costs are charged to the
suppliers who charge end
consumers.
Contracted capacity should be
available according to the
terms of the contract.
Ex : UK Capacity Market

12. Focus on Reliability Options
Sources: ACER, Terna
Not really a market design as such, rather an difference in the nature of the product
Reliability Options are instruments similar to call options, whereby contracted capacity
providers are required to pay the difference between the wholesale market price (e.g. the spot
price) and a pre-set reference price (i.e. the “strike price”), whenever this difference is positive,
i.e. the option is exercised
Based on an obligation imposed on large
consumers / suppliers to acquire a certain
amount of ROs, linked to their (self-
assessed) future consumption / supply
obligations.
Decentralized variant
Ex : new Italian Capacity Market
Centralized variant

13. Other important considerations
Locational
requirements? Technology dedicated
or technology neutral?
Pure incentive or Commitments
(availability/delivery )?
Cross border
contributions to SoS?Cost allocation?
Participation of
Demand Side?
Lead time?
Duration of contracts?

14. ENTSO-E recommendations
• Focus on the physical needs of the system
• Make existing arrangements work as best as they can
• Make CMs compatible with the European principles of
competitive market
• Promote a coordinated approach

15. 3
Status of discussions in Europe

16. National initiatives
Source : ACER, 2013

17. The electric industry advocates for Capacity Mechanisms
EURELECTRIC believes that
energy, flexibility and capacity
are all needed and that they
should therefore be properly
valued in a future-proof
wholesale market design

18. The European Commission
Guidelines on State
aid for environmental
protection and energy
2014-2020
Generation Adequacy
in the internal
electricity market -
guidance on public
interventions
A Capacity
Mechanism blueprint
?...

19. Converging checklists ?

20. 4
Cross border participation

21. XB CM in a nutshell
The introduction of Capacity Mechanisms in several Member States highlights the
need for more clarity and consistency in the governance framework for SoS.
TSOs play a crucial role in CMs design and operation. XB participation can only
be enabled via close TSOs cooperation and within a well-defined framework.
Especially challenging issues include the calculation of limits to cross border
participation and the management of simultaneous scarcity situations.
Considering the current diversity of market designs in Europe pragmatic step-
wise solutions are needed to ensure compatibility of the different CMs.
An appropriately designed Capacity Mechanism should reveal the value of the
most limiting capacity factor (whether capacity providers or interconnection),
while ensuring a practical and proportionate implementation.

22. For more details
Please refer to the ENTSO-E Policy Paper
« Cross Border participation to Capacity
Mechanisms »
available on the ENTSO-E website

23. Thank you for your attention!