This article is part of our special report Electricity market reform: A European tour.
So-called “capacity mechanisms” are being set up across EU member states to remunerate power stations that remain on standby in case of demand peak. While a European framework is needed to regulate those schemes, Fabien Roques believes they should be adapted to local circumstances.
Fabien Roques is the Executive Vice President of Compass Lexecon Consulting. He is an expert on energy and environmental issues, and an associate professor at the University of Paris Dauphine.
The European Commission wants to tighten obligations on member states which put in place so-called “capacity mechanisms” for electricity. Why is the Commission so wary of these mechanisms?
The European Commission must ensure that capacity mechanisms do not hinder competition in the European electricity market.
However, capacity mechanisms are designed to ensure the security of energy supplies in each country: they must be adapted to the situation in each of them. Consequently there needs to be national solutions, a single European model won’t work.
There are different models in Europe…
Indeed, not all European countries follow the same model. France, Italy, Poland and the UK have opted for capacity markets.
In France for example, energy suppliers have to possess sufficient capacity certificates to cover the increased demand of their clients as well as a security margin, in order to operate on the market. These certificates are sold by power suppliers and load management operators, which must have the certificates delivered by the French national grid operator RTE.
In Greece, Spain and Portugal power suppliers receive capacity grants. While Germany, some Nordic countries and Belgium rely on strategic reserves: the grid operator signs agreements with load management plants outside the market, to make sure that they are available in the event of power shortages.
Given the diversity of national schemes, what is the prospect of developing a European mechanism?
For now, the European dimension for capacity mechanisms is limited to the possibility of cross-border cooperation, so that power plants or/and load management facilities can play a role directly or indirectly in neighbouring countries’ capacity mechanisms.
The establishment of a real European capacity mechanism would require solidarity at the European level, and would need a political agreement allowing for, in a worst case scenario, the possibility of power cuts in one state to ensure supplies in another one.
Beyond the risks for competition which you mentioned earlier, the European Commission has expressed doubt that such mechanisms are necessary in all circumstances to ensure security of electricity supply. Have national mechanisms proven their worth?
In Europe we have little to go on since these mechanisms have been put into place only recently. The only conclusion we can draw for the time being is that these mechanisms are still being adapted and can be improved upon.
In France, where the mechanism was introduced three years ago, it made it possible for certain plants to remain in operation. This has helped to secure the system and to cope with peaks in electricity consumption.
However, the capacity market has yet to give positive signals, particularly on long-term investment. Long-term contracts are therefore being considered which would provide more visibility to operators and encourage investment in new generating capacity.
The European Commission wants an environmental clause banning power stations which emit more than 550 grams of CO2 per kWh from taking part in capacity schemes. What do you think of this?
The main problem with this rule is that the Commission is trying to kill two birds with one stone, by trying to limit greenhouse gas emissions, while at the same time securing electricity supplies in one go.
Economically, it would be more effective to use two different tools, and in particular the European carbon market.
This rule could prevent some power plants from being part of capacity mechanisms, therefore making them less profitable and forcing them out of the market. This might involve making new investments which could increase the costs for consumers in order to secure the system. I’m talking about peak-lopping plants, which only generate electricity during peaks in consumption. Consequently they produce higher emissions but over a shorter period.
Ultimately, if these plants are no longer profitable and close down, they will have to be replaced by new capacities, which will involve additional costs.