In the wake of the major strategic directions for energy and climate, the energy mix – and the market as a whole – are being reshaped.

There are many sources of uncertainty, from new or ongoing infrastructures (IFA2, Nordstream2, EPR) to unpredictable economic context, epidemiological contingencies and the flood of announced aid and investment in alternative technologies (hydrogen, batteries, etc.) that followed, and regulatory changes (Arenh, tariffs, taxonomy). Notwithstanding its contribution to the security of the electricity system, the capacity mechanism added an additional source of uncertainty, and will have to adapt to this changing context by becoming more understandable and transparent for market players.

In RTE´s feedback report published last August (as well as in RTE’s latest Generation Adequacy Report), the positive role of the capacity mechanism in ensuring the security of supply of the power system was highlighted, but some of its malfunctions, too. So much so that the CRE (French Energy Regulatory Commission) is questioning “the objectives […] of the mechanism, their relevance in today’s market context, and the mechanism’s ability to meet them at the best cost for consumers”.

Ahead of the major reform planned under the Version 5 of the rules (which will go through Brussels), the V4 rules of Capacity Mechanism provide some of the adaptations requested by market players.

What changes are introduced by these V4 Mecapa rules, which apply already to this 2022 delivery year? We will explain them all to you.

The Covid-19 crisis, with its consequences on the French energy market – in particular on the availability of nuclear power -, has put the spectacular rise in capacity prices on everyone’s lips. Until then, the capacity mechanism had been a relatively quiet river (except for those who have to manage it among the producers and obligated players and for the participants in RTE’s Mecapa working groups) with capacity guarantees being traded on average at around €20 000/MW.

Let us remember from the start that this price hike was not the origin of the debates on the review of the mechanism, which were already planned: as early as 2019, in its 2018 report on the functioning of the electricity and natural gas wholesale markets, the CRE had already raised some questions on the mechanism’s market design, noting that “the mechanism’s architecture does not allow supply and demand to meet efficiently and leads some players not to offer their capacity guarantees at the level of the “missing money” of their capacities”, considering that “a consultation should be launched to change the design of the capacity mechanism”.

However, the price surge has helped to speed things up, to expose some of the mechanism’s malfunctions and to draw the attention to the concept of the cost for the consumer (and, implicitly, the concept of a stable reasonable price), which is very important for the public authorities.

In this new version of the rules, published in the Official Journal at the end of December 2021, and which has been the object of an intense debate, receiving contributions from a variety of 16 different actors[1], it is a question of making some changes to the rules, which will only introduce some regulation adjustment, leaving the architecture of the mechanism unchanged, and which aim to:

• Simplify the operational functioning of the mechanism
• Improve some of the modalities
• And ensure the compliance of the mechanism with the European Regulation on the internal functioning of electricity.

The changes made can be categorised according to the objectives pursued:

• Progressively comply with the EU regulation on the limit of CO₂ emissions of assets to benefit from the capacity payment:
• With a specific emissions criterion that must be below 550g/kWh and an annual emissions criterion below 350kg/kW. An assumption of compliance with the emissions thresholds is applied to generation capacities that do not use fossil fuels.
• Provide more visibility on the drawing process for the peak consumption days (PP1 days) used for assessing the capacity obligations:
  • 11 days in Q1 and 4 days in Q4
  • Removal of the drawing criterion related to the spot price
  • But the rule for PP2 drawing days still allows
    • Between 15 and 25 days, with liberty to place 0 to 10 non-PP1 PP2 days
    • And a maximum of 25% of PP2 days spread across the period March to November
  • Uncertainty therefore remains for producers, and RTE provides visibility mainly to obligated actors (suppliers).
• Reinforced control of certified actors to ensure a better observance and a better account of the reliability of all certified capacities:
  • Assets will be checked at least once a year to ensure that all capacities undergo a load test
  • Activation tests will be reflected in the calculation of the actors’ net effective capacity (NCE).
• Ease certain modalities deemed as restrictive for the players and some others which have not produced the results expected by RTE:
  • For the smallest players (capacity less than 1 GW) who, in practice, have no market power, the certification tunnel exemption process is lightened by implicitly accepting the exemption requests they submit.
  • Multiple second-order “incentive fees” such as non-compliant site fees and non-certified site fees are removed.
  • It also includes the possibility for a local power utility to change, a posteriori, its certification perimeter for a year AL until 31 March AL+1.
• But also, more time for certified actors to rebalance:
  • Who had until 15 January of the year following delivery (AL+1)
  • And who will now be able to rebalance until 30 September AL+1
  • Which should make the June AL+1 auction more interesting (and introduce a floor price for certain players, that is the theoretical remuneration of positive deviations in AL+3).
• And a regular publication of the system balance which should:
  • Avoid the sudden effects of RTE´s rare and one-way announcements regarding the winter period
  • Provide visibility on the risk of system tension (resulting in the application of the administrated price ceiling, especially in the course of the delivery year.
  • Avoid a situation like the one experienced in 2020, where the market overheated (€57 000/MW for AL 2020) only to end up 15 months later at €5 000/MW after RTE announced that the AL2020 period was no longer considered as tense.

This new version should thus give the players some of the expected visibility – that concerning available volumes and system balance – though not that on price. The diffuse temporality of the exchanges does not allow the emergence of a reliable price signal, leading some capacity operators to integrate reserve prices in their bids during the auctions, as CRE points out.

For the latter, it is necessary to accelerate the planned reform for a simplification of the mechanism from 2023 and 2024 as initiated with these V4 rules. The Commission plans, together with RTE and the public authorities, to carry out a study during 2022 involving all the market players with a view to these V5 rules for the capacity mechanism. These V5 rules would come into force for the 2025 delivery year and might include structural changes to the legal framework of the capacity mechanism, thus requiring a reopening of discussions with the European Commission´s DG Competition.

In order to be submitted to the European Commission for review (and prior to their application to AL 2025), the V5 rules should therefore be completed by early 2023.

This reform will therefore be carried out in conjunction with the implementation of the post-Arenh mechanism and will certainly prove to be of a restructuring nature for the French electricity system and for the future of peak production resources.

Some of these changes have direct and immediate consequences on the supply and valuation for the protagonists of the mechanism. Haya Energy Solutions advises many actors on this issue and remains at your disposal to help you adapt your supply and/or capacity valuation strategy in the French capacity mechanism.

Ibrahima Baldé

[1] Two DSOs/Local power utilities associations, three actors’ associations, three pure obligated players, four pure producers, and five obligated actors/producers.