When power capacity markets cross borderlines

Starting last December, a capacity market has been introduced in France. This compensation of generation capacities by peak period consumers, planned since 2010 by the NOME [New Organisation of the Market for Electricity] law, was granted by Europe on the express condition that cross-border players could participate. Article 4.3 of the directive on security of supply (2005/89/CE) does indeed stipulate that ‘the Member States shall not discriminate between cross-border contracts and national contracts’.

Such cross-border participation in a European capacity compensation mechanism would be a first (the British capacity mechanism only provides for interconnection participation as of the 2019 supply). Despite this, last month, RTE [Electricity Transmission Network] diligently launched a consultation on cross-border participation in the French capacity market, providing for an application starting from the 2019 supply year. Should we risk being the guinea pigs?

A commitment to the European integration of capacity compensation mechanisms…

European efforts for market integration have thus far concentrated on safety and economic efficiency in the short term: the day-ahead market, the intraday market and, more recently, the reserve mechanism market (see our article on this subject).

Capacity compensation mechanisms, when envisaged, entail very little coordination, relying almost entirely on the mix of domestic generation, with the primary purpose of maintaining a reliable, autonomous electrical system – an approach that has been deeply undermined by the European Union on the grounds that it appears to contradict a regional approach to security of supply. The Commission is also planning the strict framework for capacity mechanisms, with particular designs to condition them according to the results of the adequacy studies conducted at the European level by the European Network of Transmission System Operators for Electricity (GRT) [ENTSO-E].

For the EU, the mechanisms ensuring generation adequacy should be open to all capacities that can effectively contribute to the level of reliability required, including the capacities of other Member States. A principle which, nevertheless, will not apply before 2019 to the capacity mechanism that has been in force in the United Kingdom since…2013.

Technical hurdles

If the CM models implemented thus far in the EU do not allow for explicit cross-border participation, it is partly because in order to include the generation of a neighbouring system in a capacity mechanism, the country’s transmission system operator setting up the capacity market should ensure that, in conditions of scarcity, foreign resources are in a position to fulfil their physical supply commitment in relation to the capacity mechanism. RTE is more realistic as regards such explicit participation: foreign resources would only have to demonstrate their availability during times of scarcity.

Indeed, as IRENA notes, the majority of the laws on electricity and national network codes in force in the Member States still contain clauses maintaining that exports to other countries will be interrupted in the event of a domestic supply emergency. Removing this first barrier requires a coordinated modification of the network codes and national (and regional) operating procedures by the TSOs.

Questions regarding the cost to the French consumer

The transition from an implicit participation model of cross-border means to one that is explicit should not change the clearing price, as the supply/demand equilibrium should be preserved [the excess in supply must be offset by an excess in demand linked to the increase of the safety coefficient].

A sensitive parameter could be the safety coefficient of 93%, which was applied to cross-border capacities in order to integrate the implicit contribution of interconnections at the risk of failure. At constant capacity price, if explicit cross-border participation raises this safety coefficient from 93% to 98%, the cost of the capacity mechanism for the French consumer would increase by 5%. However, a portion of the supplementary income generated by the mechanism will be transferred from French players to cross-border players.

In short, part of this income will be recovered by the network operator via the cross-border transport capacity reservation tickets. If these tickets pick up a significant portion of the capacity price, consumers could recover their costs linked to CM.

A multi-layered mechanism

However, the problem is even more linked to the disparity in European energy policies, between mechanisms for redistribution or nuclear energy access, heterogeneous subsidies of renewable energies depending on the Member States, electrical market differentials (France-Italy or France-Spain spread) or terms of access for interconnection access capacities. How do we go about coordinating such different price signals to ensure network security at the lowest financial and environmental cost?

Yet the experience of capacity markets has shown that the overlapping of support arrangements introduced market distortions and led to some big surprises. Take New England as an example, which found itself obliged to set up a ‘threshold’ participation price for its capacity market, aiming to prevent unprofitable or subsidised (renewable) capacities from distorting market prices by setting a price level below which new entrants must demonstrate their costs or withdraw from the capacity auction. More recently, consider the United Kingdom, where, in December 2016, the CCGTs were outclassed at the T4 auction by small open-cycle units, pulling prices down well below expected levels and causing polluting emissions to rise!

Some beautiful contemplation in perspective

Cross-border participation in the capacity mechanism, while very limited in terms of volume by interconnection, will thus further complicate the readability of a capacity market price signal in France that is already very opaque. However, above all, it will build a link between European investment signals. At a time when other countries, including Germany, are considering turning towards a ‘strategic’ reserve mechanism (i.e. supporting the only means of production already established), ensuring the consistency of all of these mechanisms and their convergence towards a sustainable European energy mix will soon be a balancing act.

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Profesional Experience

Céline, a young and dynamic person, had a first experience in the tourism sector as a community manager at Loups du Gévaudan, in Lozère. She joined HES team in November 2021 to diversify her knowledge: learning about the energy sector, specialising in marketing strategies in order to improve the company’s customer relations and, at the same time, developing her skills in coordination and project management.

Education

Céline graduated in Spanish and English Language, Literature and Civilisation at La Sorbonne IV (2018). She also holds a master’s degree II in cultural projects and establishments management, with a special focus on international tourism. She also studied abroad at the University of London (England) and Universidad de Morón (Argentina).

Céline Haya Sauvage

Marketing Responsible

DSC_0323

“Decarbonization of the Energy and Transport sectors is arguably today’s main economic driver for the industry.”

Profesional Experience

His career started in civil engineering as a Project Manager in France, Martinique and Australia. Afterwards, he became the General Manager of a subsidiary in Venezuela. In 1992, he established Dalkia in Germany (district heating, cogeneration, and partnerships) and represented Véolia in Thailand. In 2000, he opened the commercial office of Endesa in France to take advantage of the liberalized retail market. From 2006, as a development Manager at Endesa France, he led Endesa’s plan for Combined Cycle generation in France and developed the wind and PV portfolio of Snet at the same time. Philippe Boulanger worked for 3 years at E.ON’s headquarters coordinating the company´s activities in France. He was strongly involved in the French hydro concession renewal project. As a Senior Vice President – Project Director at Solvay Energy Services from April 2012 to February 2014 he was in charge of the H2/Power to gas and European direct market access deployment projects. Philippe has been an HES expert since 2014.

Education

Philippe Boulanger holds engineering degrees both from the Ecole Polytechnique and the Ecole Nationale des Ponts & Chaussées (France) and has a combined experience of more than 25 years in energy and infrastructure. In addition to English, Mr. Boulanger is fluent in French, German & Spanish.

Philippe Boulanger

Electricity Expert

HES-Philippe-Boulanger

“The world is changing. New investors pay particular attention to the energy sector while historical actors adapt their position to the market.”

Profesional Experience

Antonio started his career in the electricity sector in 1991 working as a member of staff for the General Manager of Sevillana de Electricidad (Spain). In 1997, he was in charge of the commercial regulation at Endesa Distribution. In 2000, he joined Endesa’s European M&A department. He was appointed CEO of Endesa Power Trading Ltd in 2003. He became Head of Energy Management for SNET, France, in 2004 and was appointed CEO of this company in 2008. In 2009, he held the position of Head of Corporate Development for E.ON France. In 2011, he founded Haya Energy Solutions (HES), a consulting firm which assists companies in optimizing their value chain: from strategy definition to day-to-day operations, based on a strong experience and understanding of the energy industry. From 2015 to 2018, Antonio was Chairman and CEO of 2 French CCGTs (2x410MW), owned by KKR. At the end of 2018, he joined Asterion Industrial Partners, a dedicated infrastructure investment fund, as an Operating Partner.

Education

Antonio graduated from the Escuela Técnica Superior de Ingenieros of Seville (Spain) and holds an MBA degree from Deusto University (Spain).

Antonio Haya

CEO