This article is part of our special report Capacity markets for electricity.
Capacity mechanisms are crucial to secure the finances of power plants that ensure France’s security of electricity supply. They are also essential to attract investments in new necessary capacity by providing visibility to the market thanks to a long-term price signal, writes Virginie Schwarz.
Virginie Schwarz is Director for Energy at the French Ministry of Ecology, Sustainable Development and Energy (MEDE).
During the 2000s and in the early 2010s, France has seen a significant increase in its winter peak consumption, with a rate superior to the energy demand increase. This led to a historic peak on February 8th 2012, with a total consumption of 102.1 GW.
It is in this context almost 8 years ago, when strong tensions were predicted in the supply-demand balance by 2015, that France made the decision to take up capacity mechanisms, and adopted the NOME law of December 7th 2010. In doing so, security of supply was ensured by obliging energy suppliers to buy capacity guarantees at the level of the total consumption of their client portfolio.
Since 2012, efforts made in terms of energy efficiency have led to the stemming of the progression of this extreme peak, which is now progressing according to the same rate as annual consumption. The economic crisis at the beginning of the decade also contributed to revising energy consumption predictions downwards. This momentarily gave the electricity system, which sometimes has overcapacity, more margin.
But with the oil-fired power plant closings, and the coal-fired ones to follow, this margin has been reduced. RTE, the French transmission system operator, stressed the medium-term need for greater vigilance on the supply and demand balance.
The observations made at the turn of the 2010s are thus still relevant, despite the recent evolutions. It is crucial to financially secure the operation of the plants, essential to the security of supply of the electricity system, and to attract investments in any new necessary capacities, by providing the market with more visibility thanks to a long-term price signal.
This can be achieved with a capacity mechanism. It should be complemented by other tools such as flexibility development or long-term contracts. This price signal is not provided by the “energy-only” market, because the spot price is reflecting the supply-demand balance over a short time-frame, rather than the big underlying equations of the peak, with the necessarily imperfect anticipation for situations of future tensions.
This leads to the creation of a market price inferior to the value which would fully reflect the contribution of these facilities for the electricity system, and generates ‘missing money’ for peak capacities.
These observations are now broadly shared at European level, as shown by the plurality of such mechanisms implemented across EU countries: the sector inquiry led by the European Commission shows no less than 35 capacity mechanisms listed in the 11 member states examined! The diversity in their form (centralised mechanisms, decentralised obligations, strategic reserves, etc.), linked particularly to the specificities of each member state, is at the heart of the ongoing European debate regarding the adoption of the Clean Energy Package.
In this variety of existing capacity mechanisms, the French one has several advantages to offer: it relies on the market to set the price of capacity guarantees in a decentralised way, and to allow each supplier to cover at the best price the level of capacity obligation resulting from their clients’ consumption. It is technologically neutral, paying each technology according to the amount of its contribution to supply security, while providing for specific rules not to penalise renewable sources, whose production is variable and unpredictable. It provides rules for participation of demand response adapted to the sector’s features. It allows suppliers to reduce the amount of their supply obligations, encouraging reductions in consumption, in particular through price signals.
These advantages do not mean in any way that the capacity mechanism cannot evolve or be improved to face the challenges of constructing a common market for electricity and the ongoing energy transition.
France is working for its capacity mechanism to be better integrated in the European market by opening up to cross-border capacities. As we have committed, these changes are being developed for implementation planned by the end of 2018. This is crucial if we want to co-ordinate the various national initiatives and preserve the integration of the internal market in the sector. Opening all the capacity mechanisms must be the rule, regardless of their form.
France is also committed to addressing European Commission concerns to implement long-term contracts to secure a capacity price for a 7-year period for new capacities. This will serve to reinforce long-term signals in order to drive investments in new capacities.
Finally, using any kind of capacity mechanisms should not be a barrier to the decarbonisation of the European energy mix, by artificially extending the use of highly-emitting thermal power plants. Their implementation should be complemented by the adoption of high environmental standards, consistent with Europe’s climate ambitions.
In the ongoing negotiations for the Clean Energy Package, France holds a common position, along with other European partners, related to the new regulatory framework that must be implemented to ensure the security of electricity supply at European level: this framework should allow member-states to take necessary measures in terms of supply security.
Indeed, member states will be held responsible by their citizens in the event of a crisis. It is essential to ensure sufficient stability in the regulatory framework, to reduce the costs of uncertainty and thus of security of supply for consumers. The new framework should also consider the variety of capacity mechanisms, without favouring one over the other.
It is also necessary to be demanding so that these mechanisms do not lead to artificially keeping unneeded thermal capacities. We need to introduce environment performance criteria that can prevail, not only for new power stations, but also for existing ones and all types of mechanisms, regardless of their form and the moment when they have been (or will be) approved by the European Commission.