Member States, MEPs and other stakeholders in Brussels are getting ready to develop rules for capacity markets in Europe. Some argue that countries should resort to capacity mechanisms only as a last resort. Other such as France insist on strong capacity markets: they are afraid of blackout risks. And there is disagreement over whether to allow coal power stations to play a role as backup source. Sonja van Renssen reports from Brussels. 

The European Commission wants capacity markets – by many considered a source of distortion of the internal energy market – relegated to a measure of “last resort”. It found no less than 35 previous, existing or planned capacity mechanisms in the 11 Member States in a sector enquiry whose final report was published alongside the Clean Energy Package on 30 November 2016.

Strangely, as we reported at the time of enquiry’s interim report just under a year ago, the UK was not included – although it was the only capacity market the Commission had approved at the time and, in its report, the Commission embraced this kind of capacity mechanism over others such as Germany’s less intrusive strategic reserve (the most common type of capacity mechanism in Europe). Since then it has also approved a capacity market in France. 

“What we like [about capacity mechanisms] is that they give an explicit value to security of supply”

Now Member States, MEPs and other stakeholder are getting their teeth stuck into the concept of capacity markets and the rules that govern them as part of the market design discussions under the Clean Energy Package.

Volatility

One of the most controversial issues is proving to be a last-minute addition from the Commission to limit capacity support to installations emitting 550gCO2/kWh or less. This basically excludes coal. For this reason countries like Poland and companies like Uniper (the production company split off from Eon), which have a lot of coal-fired power stations, are therefore keen to see it go. In a recent interview with Energy Post, the ceo of Uniper, Klaus Schäfer, made it clear that his company likes to play an important role as a backup supplier in European electricity markets.

But there is a more fundamental disagreement too over what role capacity markets should play in a power market increasingly dominated by renewables. Companies like Uniper clearly have a business interest in them. But some countries too, are rising to their defence. One such nation is France. At a conference of the European solar industry in Brussels on 7 March, the French Deputy Permanent Representative Alexis Dutertre expressed concern that “a market based on short-term price volatility alone will not trigger enough investment in security of supply in some member states”.

“Member states should be able to complement the energy-only market with a capacity mechanism,” he said. And yes, he did agree with the Commission that those capacity mechanisms should include mandatory cross-border opening (which he did not support for renewables support schemes). “What we like [about capacity mechanisms] is that they give an explicit value to security of supply,” Dutertre said.

There are still plenty of national markets where the largest generator controls more than half the market, and where the reserve market and demand response are off limits to many

In the debate that followed, he suggested that Europe’s problem of generation overcapacity – and the challenge it poses to getting renewables online – is not true everywhere. France could face a blackout risk, he said. A capacity mechanism “should not only be a last resort”.

The problem is that he also said over-capacity should be assessed on a national level, which is hardly thinking about the European internal energy market as a whole. And yet, at the same time, Dutertre argued that the primary driver of the energy transition should be the market: the carbon market or EU Emission Trading System (ETS).

Indeed the big shift from 2020 to 2030 is that the CO2 target has become “the cornerstone” of climate and energy policy, he said. France has long argued for a carbon price floor (which would offer a welcome boost to electricity prices and by extension its nuclear plants).

Energy only

Paul Kreutzkamp, Co-Manager and Co-Founder of Next Kraftwerke Belgium, a power trader and aggregator, argued at the conference that Europe does not need a new market design in the form of capacity markets – it just needs to give the energy-only market a chance.

Wholesale price formation is normal 70-90% of the time, he said. Even with 50% renewables in the power market (the power equivalent for an EU-wide renewables target of 27% as the Commission has proposed for 2030), he foresees no problems on the wholesale market. And that’s without factoring in batteries or demand response.

The energy-only market cannot be said to have failed because it doesn’t really exist yet, he argued. There are still plenty of national markets where the largest generator controls more than half the market, and where the reserve market and demand response are off limits to many. Nor can we say we do not have enough flexibility, he argued: in Germany, the network has actually become more stable (i.e. fewer minutes interrupted) with more renewables.

What the Commission is proposing with the market design dimension of its Clean Energy Package is “an evolution not a revolution”

Kreutzkamp can envisage a strategic reserve, but even that he argues, is a highly political decision: Belgium, with 14% renewables and 12-14GW peak load, initially proposed a strategic reserve of 3GW (20%), when Germany, with >30% renewables and >80GW peak load, had one of just 2GW (2%). Belgium’s reserve has since been brought down to 750MW (5%).

Jorgo Chatzimarkakis, Secretary General of Hydrogen Europe, representing the hydrogen industry, noted that 4.7TWh of power was curtailed in Germany in 201, at a cost of some €4 billion to the taxpayer. François-Régis Mouton, meanwhile, representing Total and Gas Naturally, a European pro-gas campaign, agreed that capacity mechanisms should be a “last resort”.

At the end of this debate, a Commission representative agreed that in many ways the wholesale market does work well. What the Commission is proposing with the market design dimension of its Clean Energy Package is “an evolution not a revolution”. It’s up to the Commission to convince member states that security of supply is not at risk in an energy-only market, the official acknowledged.

Editor’s Note

Sonja van Renssen is the EU correspondent of Energy Post. This article was first published in Sonja van Renssen’s Brussels Insider section on our subscription-based newsletter Energy Post Weekly of 10 March 2017, but was inaccessible due to a technical error. Brussels Insider appears every week on Energy Post Weekly (46 times a year). To get a free trial click here.

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