capacity remuneration mechanisms - ku leuven · i lack of investment in generation capacity i...

Capacity Remuneration Mechanisms

Overview &Strategic Reserves for Belgium

Hanspeter Hoschle

Workshop on Fact Sheets KU LeuvenEnergiestichting / Energie-Instituut (U-Wetoco)

April 30, 2014

Outline 2/16

Introduction Overview Concepts Belgian SR Lessons Learned

1 Introduction

2 Capacity Remuneration Mechanisms (CRMs)

3 Concepts for CRM

4 Strategic Reserves for Belgium

5 Lessons Learned

U-Wetoco - H.Hoschle - 30.4.2014

Introduction Possible Market Failure 3/16


I Power generator business model:I Revenues from selling electricity

to cover variable costsI Inframarginal rents to cover fix costs

I Current discussion:I Eroded profitability due to reduced load factors and pricesI Missing Money Problem

I Problem causes:I Large integration of RES (mostly offering at zero marginal cost)I Merit order effect (Reduced prices & reduced load factors)

I Challenges:I Lack of investment in generation capacityI Disvestment of existing capacity


VariableCost

t

Pricee/MWh

Inframarginal rentCoverage variable cost

Security of Supply & Market Design 4/16


I Market design determinesremuneration of generators

I RES cause shift of meritorder & increase pricevariability

I RES influence revenuestreams of conventionalpower generators

I Eroded profitability and lackof investment incentives

Energy-based payment(Output)e/MWh

Capacity-based payment(Availability)e/MW

Time horizon

Forward

Day-Ahead(D-1)

Realtime(RT)

Forward MarketsLong-term contracting

Day-Ahead Marketenergy-only

(Power exchange)

Ancillary Service MarketsPrimary (R1), secondary (R2), tertiary reserve (R3),...

Remuneration for Output & Flexibility

Complementary

Capacity

Remuneration

Mechanisms

Capacity remuneration mechanisms as complementary adaptationif existing markets fail to create adequate investment climate


Theory - Principle - Desired Outcome 5/16


I Capacity Remuneration Mechanism:I Policy instrument ensuring adequate level of generation capacity

I Complementary mechanism besides the energy market influencingthe volume and type of generation capacity through remuneratingavailable capacity

I Working Principle:I Additional revenue streams valuing the installed capacity [e/MW]

I Replacement of investment incentives from price spikes with a moresteady investment incentive

I Desired outcome:I Resolve potential problems emerging from market malfunctioning to

ensure security of supply


Starting Point & Design Criteria 6/16


Capacity Remuneration Mechanisms?Yes or No?

How does itlook like?

Which productfits best?

Energy System

Current SituationI Energy mixI Network congestionsI Load flexibilityI Demand Response potentialI ...

Physical UncertaintiesI Renewable energy sourcesI Ressources (Water, Gas, ...)I Growing DemandI Increasing peak-LoadI ...

Future contextI Technology transitionI Regulatory roadmapsI Energy substitutionI Drivers of demandI ...

Driven by

A threatfor

SoS ?

3-5years

lead time

Mechanism Designs

Volume basedvs

Price based

Market widevs

Targeted

Centralized marketvs

Decentralized market

Technology dedicatedvs

Technology neutral

Mechanism Type

CapacityPayment

CapacityAuction

CapacityObligation

ReliabilityOptions

CapacitySubscription

StrategicReserve


Categorization of Capacity Remuneration Mechanisms 7/16


CapacityRemunerationMechanisms

Price-based

Volume-based

Targeted

Market-wide

Mechanism Type

CapacityPayment

CapacityAuction

CapacityObligation

ReliabilityOptions

CapacitySubscription

StrategicReserve

fixing price→ volume emerges

from market

fixing volume→ prices emerges

from market

Planned

PJM Planned

CAISO Planned

Capacity Markets


Concepts Capacity Payments 8/16


Authority

Regulator

System Operator

eConsumer

Retailer

Capacity Provider

CostAllocation

Payment &Verification

Procurement of Capacity

Determination

Level of Payment

Authorization

I New investments derive from financial incentives

I Deration factor of capacity:availability in times of scarcity,technology & flexibility

X Easy to implement and easy to phase out

X Direct support of specific technologies possible

X Very steady revenue stream

× Assumptions about investment response

× Level of payment subject to political discussion

× Implemented with a consumption-independentuse of charge for final consumer


Concepts Capacity Markets (Centralized & Decentralized) 9/16


Authority

Regulator

System Operator

eConsumer

Retailer/LSEs

Capacity Provider

Centralized

CostAllocation


Procurement of Capacity

Determination

Volume of Capacity

Authorization

Authority

Regulator

System Operator

eConsumer

Retailer/LSEs

Capacity Provider

Decentralized

Cost Allocation

Verification

Procurement

ofCapacity

Determination

Volume of Capacity

I Capacity introduced as new commodity

I Demand of capacity determined by authority

I System Operator procures capacity (centralized)

I LSEs procure capacity acoording to their share of demand(decentralized)

I Cost are allocated to the consumers

X Amount of capacity is directly set by the authority

XMarket-based CRM

× Change of current market design→ Effort for Implementation and Administration

× Tracking and Verification of Capacity by System Operator


Concepts Strategic Reserve 10/16


Authority

Regulator

System Operator

eConsumer

Retailer

Capacity Provider

CostAllocation


Procurement &Activation of Capacity

Determination

Volume of Reserve

Authorization

I Emergency capacity held by the system operator

I Contracted capacity taken out of the market

I System operator determines activation

→ In times of critical scarcity or for redispatching

X If market proves efficient,influence of strategic reserve minimal

X Easy to implement, only small changes

X Flexible tool in size and activation

× Incorrect activation lead to market distortion

× Does not address flexibility issue from RES

× Price of strategic reserve forms price cap in themarket


CRM in Europe & Belgium Subject to Current Discussion 11/16


Italy discussedCapacity MarketReliability Options

France discussedCapacity Obligation

Great Britain discussedCapacity Auction

Germany discussedStrategic ReservesCapacity Market

Poland discussedCapacity Market

Spain/PortugalCapacity Payments

Sweden/FinlandStrategic Reserves

GreeceCapacity Obligations

BulgariaCapacity Payments

Belgium: Strategic Reserves

I Situation in BelgiumI Nuclear phase-out in stages until 2025

I Total installed capacity of 5926 GW (∼35% in June 2013)

I Increased share of RES

I Share of total generated electricity 8.9% in 2012 (4.8% in 2007)

I Threatened system adequacy

I Plan WatheletI Secretary of State in charge of environment, energy and mobility

I Melchior Wathelet

I Issued in June 2012, accepted by the government in July 2013

I Strategic reserves to ensure security of supply

Italy discussedCapacity MarketReliability Options

France discussedCapacity Obligation

Great Britain discussedCapacity Auction

Germany discussedStrategic ReservesCapacity Market

Poland discussedCapacity Market

Spain/PortugalCapacity Payments

Sweden/FinlandStrategic Reserves

GreeceCapacity Obligations

BulgariaCapacity Payments

Belgium: Strategic Reserves

I Situation in BelgiumI Nuclear phase-out in stages until 2025

I Total installed capacity of 5926 GW (∼35% in June 2013)

I Increased share of RES

I Share of total generated electricity 8.9% in 2012 (4.8% in 2007)

I Threatened system adequacy

I Plan WatheletI Secretary of State in charge of environment, energy and mobility

I Melchior Wathelet

I Issued in June 2012, accepted by the government in July 2013

I Strategic reserves to ensure security of supply


Strategic Reserves for Belgium General Concept 12/16


Scope & Volume: (Decided)I Contracted for a period from 1.11.2014 to 31.10.2017

(3 winter periods (November-March))

I Volume: 800 MW(can be adapted to react on absent nuclear power plants)

I SGR: Contracting of Generation with 3-year-contracts

I SDR: Contracting of Demand (≥ 50 MW) with 1-year-contracts

I Application period starts in July 2014

I Proposed volume by ELIA (based on simulation/forecast):

I Winter 2014/2015: 0 - 800 MWI Winter 2015/2016: 1200 - 2200 MWI Winter 2016/2017: 1300 - 2300 MW

Tendering & Remuneration: (Discussed)I “Competitive Negotiated Tendering”

I Accepted offers are paid-as-bid


Strategic Reserves for Belgium supplied via Generation (SGR) 13/16


I Certification (Obligation to make offer)I Power plants with programmed closure,

announced closure & temporarily closure

I RemunerationI For Reservation: Unit price [e/MW/h * 3624h]I For Notification, Prolongation & Injection: cost reflective remuneration

I ReservationI Contract for 3 years, SGR service during 5 Winter months

I NotificationI From notification to activation in less than 5.5h

I Activation Process

Pmax

Pmin

Set Point

t

P

≤-5.5h

warm-up period≤-1.5h

ramp-up≤-0.5h

Notification Verification

Activation


CurrentDiscussion

Strategic Reserves for Belgium supplied via Demand (SDR) 14/16


I CertificationI Connected to ELIA gridI No interference with demand side based imbalance productsI Sizing based on historical demand profile

I Remuneration for reservation and activation (based on offer)

I ReservationI SDR 4 (Duration: up to 4h, Delay between 2 activations: 4h,

40 activations/contract)I SDR 12 (Duration: up to 12h, Delay between 2 activations: 12h,

20 activations/contract)

I Notification & Activation Process

9h 13h

PeakHours

17h 21h

PeakHours Demand Profile

Shedding Limit

ReferenceReserve Capacity

h

D

AdaptedDemand Profile

Activation(≤4h)

NotificationVerification

Set Point

≤-5hwarm-up

≤-1h

ramp-down

Shedding Limit

ReferenceReserve Capacity

h

D


CurrentDiscussion

Capacity Remuneration Mechanisms Lessons Learned 15/16


I Increased volatile generation from RES erode profitably ofconventional generation capacity

I Energy-only markets can result in a missing money problem

I Problems to incentivize adequate investments in generationcapacity

I Capacity remuneration mechanisms are subject of discussionI Instruments reducing investment risk by ensuring steady revenue

streamsI Price-based or volume-based & Market-wide or targetedI Regulatory intervention which may lead to market distortions if not

properly configured


End 16/16


Thank you.

Questions?

Contact:

Hanspeter HoschleKastelpark Arenberg 10, PB 2445

3001 Heverlee, Belgium

� +32 16 37 78 87

[email protected]


tel:+3216377887

mailto:[email protected]?subject=Capacity Remuneration Mechanisms

Appendix Further reading 17/16


I General:I Fabien A. Roques

Market design for generation adequacy: Healing causes rather thansymptoms Direct Link

I Carlos Batlle, Ignacio J. Perez-ArriagaDesign criteria for implementing a capacity mechanism in deregulatedelectricity markets Direct Link

I Energy Institute Fact SheetDirect Link

I Belgium:I Plan Wathelet

Direct LinkI Elia → Users’ Group → Strategic Reserves Implementation Task Force

Direct LinkI H. Hoschle, C. De Jonghe, and D. Van Hertem,

Capacity mechanisms driving dynamic capacity investment decisionmaking with increased renewable energy sources Direct Link


http://dx.doi.org/10.1016/j.jup.2008.01.008

http://dx.doi.org/10.1016/j.jup.2007.10.004

http://www.mech.kuleuven.be/en/tme/research/energy_environment/Pdf/ei-factsheet3-eng-def.pdf

http://wathelet.belgium.be/wp-content/uploads/2012/07/Plan-Wathelet-Elektriciteit.pdf

http://www.elia.be/en/about-elia/Users-group/Strategic-Reserves-Implementation-Task-Force

https://lirias.kuleuven.be/bitstream/123456789/411816/1/paper_IAEE.pdf

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