With variable wind and solar power generation accounting for a growing share of electricity generation, power systems across the European Union (EU) are undergoing significant transformation. For governments, this is raising new concerns about security of electricity supply when the sun does not shine or the wind does not blow, or, conversely, when high electricity supply exceeds demand. At the same time, the growth in renewable electricity generation, combined with falling demand among other factors, has led to a loss of flexible capacity (particularly CCGT). Accordingly, the power system is losing flexible capacity at a time when increased flexibility is necessary to complement an increasing share of variable electricity supply from wind and solar.
Concerns of insufficient incentives to invest in new capacity and/or or to prevent the retirement of existing capacity have re-ignited interest in capacity mechanisms across the European Union (EU). Capacity mechanisms come in many different forms, but they are generally designed to offer payments to electricity market operators for their capacity to produce electricity or to reduce or shift electricity demand.
Because of concerns that these support mechanisms may distort competition and undermine the internal energy market, the European Commission (hereafter ‘the Commission’), and more specifically DG Competition, has launched a sector wide inquiry into capacity mechanisms, the findings of which will support the development of a legislative proposal for a new electricity market design in the EU. It is unsurprising that DG Competition takes a primary focus on competition issues in the sector inquiry. However, insufficient consideration of the implications of capacity mechanisms for their primary objective, security of supply, and for reaching decarbonisation objectives alongside competition issues risks resulting in incoherent or counterproductive guidelines or policies for electricity markets. This needs to be prevented. This document presents three main critiques of the interim report of the sector inquiry relating to: 1) the objective and necessity of capacity mechanisms; 2) the need to consider options to improve market operations and regulatory frameworks first, before resorting to capacity mechanisms; and 3) the design of capacity mechanisms.
|Published||July 8, 2016|