Potential consequences of capacity mechanisms Arndt von Schemde

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German Norwegian Energy Forum
Conference 2012 in Berlin

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Potential consequences of capacity mechanisms Arndt von Schemde

  1. 1. Berlin, October 23rd 2012POTENTIAL CONSEQUENCES OF CAPACITYMECHANISMS ON THE PLANNED NORDLINKCABLEArndt von Schemde,Partner, THEMA Consulting Group
  2. 2. European integration in electricity Markets Investments 3
  3. 3. Key questions1. What are the effects of market integration?2. What are the effects of new interconnections?3. How could capacity markets have an impact of the effects of market integration and on interconnections? 4
  4. 4. Key questions1. What are the effects of market integration?2. What are the effects of new interconnections?3. How could capacity markets have an impact of the effects of market integration and on interconnections? 5
  5. 5. Effects of market coupling (1) – efficient utilization Wrong Capacity not Flow vs. price on direction utilized German-Danish border prior to market coupling Capacity not Wrong utilized direction Flow vs. price with market coupling 6
  6. 6. Effects of market coupling (2) – social welfare • Model estimates 300 North-West Europe EU 27 273 for North-West Europe 250 • EU 27 results obtained by scaling up€ mill per annum 200 175 164 results • Value of market 150 integration likley 105 to increase with increasing 100 shares of RES 50 0 "Small mistakes" Low estimate "Large mistakes" High estimate Source: THEMA Consulting Group 7
  7. 7. Effects of market coupling (3) – consumer benefits Distributional effects for Northwest Europe Consumer surplus Producer surplus Congestion rent • Clear benefits for 1 200 consumers, 961 1 000 driven by overall 728 lower prices (up 800 to € 1.6 bill p.a. if 600 scaled up for EU 27)€ mill per annum 400 • TSOs lose cable 200 income: price convergence 0 • Nordic countries: -200 -71 -66 water values -400 increase – similar effect as cables -600 -552 -800 -731 -1 000 Low estimate "Small mistakes" "Largeestimate High mistakes" Source: THEMA Consulting Group 8
  8. 8. Effects of market coupling (4) – non-quantifiable • Capacity is optimized taking into account all bids and offers in all markets participating in the market coupling, creating larger markets and moreCompetition competition – promoting price conversion across borders and regions.Forward markets – • Reduced need to hedge – larger markets absorb uncertainties/risks • Improved ability to hedge – integration promotes more liquid forwardsthe need and theability to hedge • More efficient utilization of the resources in the power system promotes security of supply. This is becoming more important with the inclusion of more RES.Security of Supply • Expected improvements in algorithm will further promote SoS • More money to invest – improved ability (and reduced need) to hedge • More efficient investments – better price signals / incentivesInvestments • Reduced need to invest – more efficient utilization of existing resources • Implicit auctions across regions promotes efficient optimization of a more complex power systemRES integration • Efficient market coupling is thus key in promoting efficient inclusion of RES and the in the transition towards a carbon neutral future 9
  9. 9. Key questions1. What are the effects of market integration?2. What are the effects of new interconnections?3. How could capacity markets have an impact of the effects of market integration and on interconnections? 10
  10. 10. Expanding the geographical scopePOLITICAL AMBITIONS Integrating the power system Integrating the markets  Grid in Norway National and regional marketTRADITIONAL FOCUS  Nordic interconnections development and cooperation Security of supply Efficiency Nature conservation… EXTENDED AGENDA  Growing need for grid and Regional, interregional andFOR EUROPE interconnections European market integration and cooperatioon Climate change Independence from import of fossil fuels Energy transition 11
  11. 11. Value created by differencesAnnual variations Peak/off-peak Intermittency 12
  12. 12. Value creation along several variables Effects for consumers Cable income Other effects and producers Arbitrage via hourly price  Cables have price effect Same effects as market differences  Price decrease benefits integration Flat prices in Norway, due consumers, price increase  Competition to hydro benefits producers  Security of supply Volatile prices Germany,  The sum of effects is  Climate and RES due to thermal capacities positive integration and RES  Germany: likely lower  …. peak prices  Norway: In surplus slightly higher prices, in deficit lower prices 13
  13. 13. Effects of interconnections - congestion rent (CR)Historic prices (a typical Monday) CR – from Power price (€/MWH) NOR to GER To Norway from Germany CR – from GER to NOR To Germany from Norway Price Germany (historic) Price Norway (historic) Hour 14
  14. 14. Effects of interconnections - congestion rent (CR)Scenarios:1. Nordic power balance - low value of flexibility Price volatility2. Nordic power balance – high value of flexibility in Germany3. Nordic surplus – low value of flexibility4. Nordic surplus – high value of flexibility 2008 2006 2007 2 3 2005 2003 2009 2002 1 4 2010 Very high 2004 High Medium Low Price differences between Germany and Norway 15
  15. 15. Key questions1. What are the effects of market integration?2. What are the effects of new interconnections?3. How could capacity markets have an impact of the effects of market integration and on interconnections? 16
  16. 16. Do we need capacity mechanisms? Is this enough, or do we need capacity Make sure capacity Other European markets? mechanisms act grid investments neutral w.r.t. other Internal German measures and connections incentives NordLink • Capacity markets should resolve a Integration of form of market balancing markets failure Flow based • Make sure capacity market coupling markets do not create new market More demand flex failures Integration of intraday market Market coupling Market integration Grid and and development interconnections 17
  17. 17. Will a capacity market distort the effects of integration? The energy transition need ? interconnections and more flexible demand/generationReduce value by …but capacity markets may“cutting the price reduce their income,peaks”? including the income of NordLink • Flexibility is traded outsideReduced the regular markets • Limited (or no) access for • Costs to Germancompetition by consumers Norwegian generatorsblocking market • Reduced incentives to • Income to Germanaccess develop competitive flexible generators sources in Norway and to • Lost opportunities to build interconnections to Norwegian generators Germany 18
  18. 18. Local capacity markets could impact revenuesScenarios:1. Nordic power balance - low value of flexibility Price volatility2. Nordic power balance – high value of flexibility in Germany3. Nordic surplus – low value of flexibility4. Nordic surplus – high value of flexibility 2008 2006 2007 2 3 2005 2003 2009 2002 1 4 2010 Very high 2004 High Medium Low Price differences between Germany and Norway 0 19
  19. 19. Capacity mechanisms should not be local solutionsNot taking account ofX-border capacitieswould increase cost ofsolution High cost• Short-term: Higher costs associated with utilization of existing resources• Long-term: Higher costs in addition Low cost Ideal due to different Cap.mrkt. investments Local solutions Cross-border solutions Short-term Long-term 20

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