Commission and member states clash over capacity mechanisms

The proposal has found little support in Poland, as it would mean large parts of its energy portfolio would become unaffordable. [Kamil Porembiński/ Flickr]

The European Commission fears that capacity mechanisms would just translate into subsidies for coal power plants. Therefore, installations exceeding emission limits should not take part in support schemes, according to a proposal under the Energy Union’s Winter Package. EURACTIV Czech Republic reports.

A new electricity market design proposed by the European Commission aims to ensure that stronger price signals will motivate power companies and the industry to invest in their generation units or capabilities for demand response.

“National market rules like price caps and state interventions currently hinder prices from reflecting when electricity is scarce,” the Commission said in the draft regulation on the internal power market, a part of the Winter Package.

That means member states will have to accept that price caps are removed from the EU electricity market and prices may become significantly high at certain moments.

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Markets of individual member states or regions should also be better integrated, as current price zones do not always reflect actual scarcity and follow political borders instead, the Commission explained.

“If there is a strong demand in some area, for sure the price should be high to attract trade into this region,” Oliver Koch from the Commission’s DG Energy said at the SET Plan – Central European Energy Conference (CEEC) in Bratislava, held in the first week of December.

“You can organise a market in a national manner if you wish, but one thing is clear – it will be tremendously more costly. It is difficult to cooperate, but there is no other alternative,” he warned.

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Capacity mechanism

However, several member states are losing their trust in price signals created by the market and have started to arrange so-called capacity mechanisms instead.

Under such schemes, electricity generators or demand response operators are remunerated for keeping their capacities on standby. That should guarantee enough energy will be available when, for example, solar or wind power plants are not able to produce enough electricity.

The Commission’s competition directorate found 35 former, existing or planned capacity mechanisms in eleven member states during a special inquiry launched 18 months ago.

These countries believe that under the current market conditions with low wholesale prices, energy companies need such subsidies otherwise they would not invest in their generation capacities.

According to critics, the schemes may fragment the EU single market, distort competition by favouring certain producers or types of technology, and create barriers to trade across national borders.

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Adequacy assessment

The Commission’s proposal wants to address this problem with EU-wide harmonisation of so-called adequacy assessment. That should help to evaluate whether remunerations are needed to ensure sufficient capacity is available or whether there is enough power that may be imported from another state, for example.

Such an assessment should be carried-out by the European Network of Transmission System Operators for Electricity (ENTSO-E) and approved by the EU’s energy regulating agency, ACER.

“The EU-wide analysis is a highly important basis that must not be ignored when a capacity mechanism is being assessed but we feel it would be an overkill to base the decision only on the EU assessment,” ENTSO-E Secretary-General Konstantin Staschus said at the conference.

He stressed that increasing amount of electricity is being produced by small-scale installations controlled at local level and the role of demand side response is also rising. Therefore, member states should also be allowed to consider their own smart-grid driven analyses.

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Subsidies for coal

Controversies were caused by another proposal included in the fresh regulation. In line with the European Investment Bank’s emissions performance standard, capacity mechanism should not be accessible to newly-built power plants exceeding a benchmark of 550 grams of CO2 per produced KWh.

That would mean coal-fired generation capacities could not take part in the support schemes.

For existing power plants, a transitional period of five years after the regulation’s entry into force should be established.

For coal-reliant countries like Poland, this would mean that significant parts of their energy portfolio would not be profitable to operate. According to Maciej Burny from Poland’s largest power producing company, PGE, the country would face a significant lack of power generation capacities after 2025.

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“Principally, we are against any capacity mechanism if they are not fully justified. But from a broader perspective, there are different conditions and energy mixes in individual member states and according to current EU state aid rules, technologically neutral approach should be always followed,” said Márius Hričovský from Slovak energy company Stredoslovenská energetika.

“The emission performance standard could hinder technological neutrality in this instance,” he added.

“The feeling behind this proposal was that the capacity mechanism could materialise as subsidies securing the survival of plants that should otherwise leave the market,” DG Energy’s Koch explained, adding that this was a political choice by the Commission which entered the proposal at the last minute.

“This is a package for decarbonisation path until 2030, 2040 or 2050. Coal will play a very limited role at that time. This is an assumption which is not shared by everyone, but it is one of the basic ideas of the package,” Koch also said.