Concepts and Experiences with Capacity Mechanisms

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1 Concepts and Experiences with Capacity Mechanisms Manuel Baritaud, International Energy Agency Conference Capacity Mechanisms: Experiences in Various European Countries Bundesministerium fur Wirtschaft und Technologie DENA Berlin, 30 August 2012

2 Outline Energy-only markets: Australia and Texas Capacity markets in the US: some lessons learned Impact of low-carbon policies on electricity markets What is the current situation in Europe? Policy options to ensure security of electricity supply during the transition to a low-carbon economy

3 Pool price ($/MWh) Australia: prices can reach $A/MWh but high price periods are rare South Australian price duration curve, ,000 1, ,100,10,1 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% Duration of year Source: Australian Energy Market Operator, South Australian Supply and Demand Outlook, July 2011 On energy-only markets, prices have to be very high to cover the fixed-costs of peak power plants running only a few hours each year

4 Megawatts Australia: supply response has been adequate with an energy-only market Peak demand and pool price South Australia and Victoria (MW) 50,000 45,000 40,000 35,000 30,000 25,000 20,000 15,000 10,000 5,000,0 Market capacity Market demand Market forecast demand

5 2011 AUD million Australia: average revenue has been above the annual cost of a gas turbine,30 Costs and revenues of notional peaking gas-fired generators in South Australian wholesale market ,25,20,15,10, Revenue from pool price periods >$2000/MWh Average revenue from pool price periods >$2000/MWh CCGT 100 MW, total cost (annualised capital + variable) OCGT 100 MW, total cost (annualised capital + variable) Energy-revenues of peaking plants are very volatile

6 GW United States: Gas has dominated investment in liberalised electricity markets Liberalised electricity markets in the US Capacity added by technology in the US, Combined cycle Gas Turbine Coal and coal products Renewables Hydro

7 Texas: until recently, the energy-only market has maintained adequate reserve margins ERCOT Summer Reserve margins (%) Source: DOE Energy Information Administration, ERCOT is considering to increase price caps, to expand interruptible load 2 GW of previously mothballed plants will be bring back into service

8 $/ MW PJM: revenues from energy are lower than Cost of New Entry (CONE), but reserve margins are high 20-year levelised fixed cost and Economic Dispatch Net revenue, ($ per installed MW-year) 140, , ,000 Missing Money? 80,000 60,000 40,000 20, Fixed cost Energy revenues Source: Monitoring Analytics, 2010 State of the Market report for PJM, October 2011, p. 176 In PJM, scarcity prices didn t exceed 1000 US$/MWh (lower than the price cap) and have been too low to cover costs of peaking plants

9 Designing capacity markets is complex and requires setting many technical parameters. Main parameters of capacity markets defined by regulators and system operators Capacity definition Horizon and duration Capacity Requirements Network Constraints Cost of New Entry Energy Revenues Capacity Demand Curves Capacity Cost Recovery Penalties Peak generators, dispatchable plants, intermittent sources, demand response Annual to multiple years, period of capacity availability (definition of peak period) Uncertain demand forecasts, coherence with reliability standard Definition of locational capacity requirements New power plant, mothballed plants, power uprate, demand side Ex ante or ex post determination Fixed capacity requirements Vs variable demand slope to smooth revenues Suppliers or socialized payments? Control of availability, outage rates, penalties Source: Adapted from Hogan, 2011

10 US: Capacity market clearing price depends on parameters of demand curve slope set by ISOs Capacity Supply and Demand curve 2010/2011* *Reliability Pricing Model Base residual Auction Source: Monitoring analytics, 2010 State of the Market report for PJM, October 2011, p. 392 Capacity demand parameters can be adjusted to generate the targeted level of revenues

11 US: Gas-Fired Generation receives revenues from energy, ancillary services and capacity markets Comparison of Net Revenue of Gas-Fired Generation ($/kw per year), Source: Potomac Economics, 2011 Capacity markets represent a significant fraction of gas power plants revenues

12 New products and requirements can be defined to reward flexibility on operating reserve markets ISO-NE Operating Reserve Products ISO-NE Locational Forward Reserve Market Function Product Characteristics Primary frequency control response Secondary Frequency control response: Tertiary Frequency control response: Source: Ellison, 2011 No market Regulation Reserve Ten-Minute Spinning Ten-Minute non-spinning Thirty Minute Operating Summer and Winter Summer Nominated capacity must be delivered in less than five minutes, a and Winter minimum ramp rate of one MW/min, and output must be maintained during a minimum duration of sixty minutes Daily Nominated capacity must be delivered in less than ten minutes, a and output must be maintained during a minimum duration of sixty minutes Daily Nominated capacity must be synchronized at nominated capacity in less than ten minutes, a and output must be maintained during a minimum duration of sixty minutes Hourly Nominated capacity must be synchronized at nominated capacity in less than thirty minutes Weekly Determination of forward Reserve Requirements Forward Reserve Auction Assignment by Participants of Specific Resource to Meet Forward Reserve Obligations Submission of Bid Data / Self - schedule for Units Assigned a Forward Reserve Obligation Determination of Forward Reserve MW Delivered to the Real - Time Market Market Settlement / Billing The design of reserve products markets can be improved so as to remunerate flexible capabilities

13 Low carbon policies increase the challenges of designing electricity markets Shape of the residual load curve More peak and mid-merit power plant needed Less base-load generation Renewable curtailment Variability of wind and solar generation Contribution to generation adequacy (Peak load) Minimum load balancing Ramp-rates Wind and solar forecast uncertainty Residual demand is more uncertain and faces policy risk Pace of deployment of wind and solar power Nuclear policies Effectiveness of energy efficiency policies and demand response

14 GW New generation capacity in Europe is dominated by policy-driven renewables Europe, new generating capacity completed or under construction, by year of first generation and by fuel group, RENEWABLES GAS NUCLEAR COAL Sources: Platts, IEA, European Wind Energy Association Forecast Renewable policies have been successful in attracting investments in Europe

15 Renewable curtailment: a growing concern in Spain, Ireland, Texas, ERCOT: Marginal Fuel Frequency, West Zone Empirical evidence Prices (and price duration curve) Source: Potomac Economics, 2010 State of the Market Report for ERCOT, August 2011 When renewable generation exceeds electricity demand in certain zones, it can be exported or curtailed

16 Minimum load balancing can be more efficient if all solutions compete on a single market platform If variable renewable (VRE) increase (or load decrease) Risk: lost VRE output (cost* > $/MWh) Mitigation strategy: Increase flexibility Margin Margin Margin Mitigation actions Increase demand Flex Flex Flex Increase exports Demand Non - flex Non - flex Non - flex Reduce power plant minimum load and must run units Curtail renewables VRE VRE Lost Prod VRE Lost Prod -> How to ensure the efficient set of actions? Renewable support instruments should be designed in a way compatible with efficient participation of renewables in the markets The opportunity cost of lost renewable output is the value of electricity lost during these periods (30 and 100 $/MWh during off peak periods)

17 What is the situation in Europe? Capacity mechanisms already exist Spain: capacity payments Nordic countries : strategic reserves Ireland Targeted contracting to maintain network reliability Is generation adequacy an urgent concern? Excess generating capacity due to the economic crisis Exception: the UK needs to replace ageing capacity Is mothballing a threat for flexibility? In a context of economic crisis, closing-down or mothballing of power plants is under consideration, rather than the construction of new capacity

18 TWh Europe: residual demand is more uncertain and faces policy uncertainties Electricity supplied in OECD Europe ( ) Renewable generation (non hydro) 235 TWh Electricity supplied Electricity supplied excl. non hydro renewables In Europe, residual electricity supply (i.e. net of non hydro renewables) decreased by 6% between 2008 and 2011

19 Policy options to address generation investment and operations issues Basic package Possible optional measures A Improved Climate and Low-Carbon Policies B Better Energy Markets C Standards & Procedures D Targeted Contracting E Market-wide Capacity Mechanism Improve certainty/credibility of energy policies Design of low carbon support instruments Ex: - UK carbon price floor - US Clean Energy Standards - Renewable premium in Germany Remove restrictions on electricity prices Locational Marginal Pricing (LMP) Develop missing markets Integrate day ahead, intraday, balancing and reserve markets Ex: ERCOT, ISO-NE, Australia Reliability criteria Generation adequacy forecasts (planning) Technical flexibility and controllability requirements Contracts to: avoid mothballing of existing assets trigger new investments relieve congestions promote demand side response Ex: Strategic reserve Capacity payments Central buyer of capacity Decentralised capacity market Combined capacity and flexibility market Ex: PJM, ISO-NE, Spain, France

20 Concluding remarks Improve climate and renewable policies, but this takes time Design renewable support instruments compatible with their efficient participation in the markets Enhance the design of existing electricity markets so as to remunerate flexible capabilities Targeted contracting of capacity can quickly fix adequacy issues and network-related constraints Capacity markets can create a safety-net but they are complex and difficult to design

21 Thank you for your attention

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