Capacity mechanism General Directorate for Energy and Climate August 30, 2012 Ministère de l économie, des Finances et de l Industrie Ministère de l'écologie, du Développement durable, des Transports et du Logement www.developpement-durable.gouv.fr
Introduction The French Power System Why did we introduce a capacity mechanism? The capacity mechanism to be implemented in France
The French Power System Today s challenge: sensitivity of electricity demand to temperature Electricity demand is still on the rise A limited growth in electricity demand (+0,6%/year from 2010 to 2030 in the reference scenario) But peak demand increases faster (80 GW in 2000, 101,7 GW this year, 107.7 GW in 2020?) Electricity demand sensitivity to temperature is very high (2300 MW/ C) Development of electric heating (still in progress) is the main reason
The French Power System Tomorrow s challenge: integration of intermittent RES Generation from RES to confirm its take-off Wind energy of course (thanks to feed-in tariffs) 6,6 GW installed Target = 25 GW by 2020 (among which 6 GW offshore) But also PV solar (maybe even a greater potential) 2.2 GW installed Target = 5,4 GW by 2020, should be reached in 2013
The French Power System The development of demand side response New offers of demand response are emerging Experimentation by the TSO of demand response offers on the balancing market Aggregators of industrial customers as well as household customers have been operating for several years Further development of demand response would be profitable for all the stakeholders Reducing the need for investment in network and generation Providing value to customers The current business model has to be strengthen According to industrial customers, the potential of demand response is up to several GW Current energy market is not sufficient to really foster the development of demand response, in terms of price but also in terms of volume Stakeholders call for additional regulation that would give a value to capacity
Why did we introduce a capacity mechanism? In the past, the French market was designed as an energy-only market No price cap (except on the power exchange : a technical price cap at 3000 /MWh) No mandatory pool; market players were trading on a voluntary power exchange, or OTC (trading is possible up to 1 hour before physical delivery) A large excess in capacity was identified in 2000 just after deregulation and market openingup (low prices, exports from France to neighbouring countries, few new investments in capacity) In 2005, concerns rose about a potential lack of investments in new capacities in France The existing excess in capacity began to curb; few new investments were planned, notably regarding CCGT RTE published its second adequacy forecast in June 2005, insisting that new investments were needed before 2010 to maintain system adequacy.
Why did we introduce a capacity mechanism? In 2010, a new political context and new drivers for change arised Public controversy about demand response participation to the market -> put the emphasis on price spikes and consumption peaks Public parliamentary report commissioned on consumption peaks, issued April 2010 (20+ recommendations to mitigate peaks, boost demand response, including capacity mechanism) Warning from generators on alleged difficulties in fixed costs recovery on energy-only markets New law under discussion to force EDF to divest rights to use nuclear capacity to competitors
Why did we introduce a capacity mechanism? The NOME law (Dec. 7, 2010) is based on two pillars Competition enhancing : Regulated access to historical nuclear electricity (so called ARENH) for all alternative suppliers The end of regulated tariffs for medium and large firms (2015) Capacity obligation : obligation for every supplier to participate to security of supply Decrees to be promulgated for the application of NOME law ARENH : decree signed and released on 20/05/2011 Capacity mechanism : decree ready to be signed, waiting for political decision
The capacity mechanism to be implemented in France Preliminary remarks The draft decree was elaborated thanks to a wide consultation process Lasting from March 2011 (workgroups RTE) to April 2012 (Conseil d'etat) The draft decree sets up a framework Suppliers and capacity owners obligations ; TSOs and regulation authorities' respective roles ; Global layout of the mechanism. Further regulation will have to set the rules for the capacity mechanism by 1st of November 2013 Rules parameters to calculate capacity obligation, penalty settlement, certification methodology, etc. - will be defined in a ministerial decree ; Another wide consultation process will take place.
Main principles Burden-sharing : every supplier has to contribute to supply security and prove its ability to provide with the capacity its clients need. Suppliers are subject to penalties if they do not own, for each delivery year, an amount of capacity certificates calculated as follows: The reference is the consumption of their own clients located in metropolitan France during peak demand hours... also taking into account an extreme reference temperature A security margin is included. All capacity owners in metropolitan France must have their production tools certified Capacity includes power plants and demand response The decree does not make a difference between generation technologies, neither between generation and demand-response. Promoting demand-response is an objective. To give visibility to players on the market, capacities should be certified with anticipation before they are operational. A contract is signed between capacity owners and TSO, including the amount of certificates they get, their commitment to be available during peak demand hours, control and testing methods, and adjustment methods If availibility commitment is not reached, capacity operator pays a penalty Small capacity owners will benefit from specific certification methods, so that certification costs remain limited Requirement of suppliers and certification of capacity operators leads to the emergence of a capacity certificate market
Main principles The mechanism does not interfere (in the short term) with the energy market Capacity certificates are completely set apart from the energy market. Consequently, owning a capacity certificate does not give any right to the corresponding energy. Notably, the mechanism has no impact on interconnection capacity reservation nor cross-border energy flows. Certificates market design: high transparency and monitoring, and a flexible governance High transparency Offer: a certificates register allows to have figures. Demand: TSO publishes forecasts Prices: the regulation authority publishes prices statistics Market monitoring Each trade and each bid is reported to the regulator, including self-supply (of integrated operators) Exchanges organization : The draft decree does not set a compulsory«pool». It is expected that an exchange platform will be created on a private initiative Yet, if needed, regulation could create a capacity certificates stock exchange
Main principles The certification of capacities located abroad is not possible at this stage Due to market coupling, it is not possible : To follow, for each operator, energy flows across borders; To assume that a capacity located on a given territory contributes only to that territory s supply security Capacity certification abroad would require at least : Allocating interconnection capacities to the facilities at stake (which is not consistent with EU directives on internal market) That foreign TSOs commit not to take those capacities into account for their local S&D balance At this stage, the mechanism takes into account implicitly the contribution of capacity located abroad. The total amount required of installed capacity in France corresponds to the total amount of capacity demand, minus import flows determined on a statistical basis. The draft decree includes a monitoring of potential capacity mechanism integration at the european level If a neighbouring country sets up a similar capacity mechanism (market), it would be possible to connect it with the French one. Such «nodal markets» are implemented in the US
The capacity mechanism to be implemented in France Timeline N-4 N-3 N D E M A N D O F F E R Rules for N are published (e.g. margin rate) Certification of capacities Capacity need forecasts by TSO Suppliers can estimate their obligation Certificates that can be sold Exchanges of certificates (OTC / organized market) After peak period, TSO calculates suppliers obligation They can adjust their positions TSO checks if suppliers bought enough certificates TSO checks if capacity owners fulfilled their disponibility commitment P E N A L T Y P E N A L T Y
Thank you Ministère de l économie, des Finances et de l Industrie Ministère de l'écologie, du Développement durable, des Transports et du Logement www.developpement-durable.gouv.fr
The capacity mechanism to be implemented in France Further elements Emergency mechanism In case of unusual lack of capacities To ensure that new capacity is built in advance when needed Call for tenders for new capacities Contract pro difference Capacities operators can sell their certificates to suppliers The cost of these new capacities is supported/ mutualized by suppliers
The capacity mechanism to be implemented in France Emergency mechanism timeline N-4 N-3 N D E M A N D O F F E R Rules for N are published (e.g. margin rate) Certification of capacities Capacity need forecasts by TSO Suppliers can estimate their obligation Certificates that can be sold Unusual need for additional capacities is identified Exchanges of certificates (OTC / organized market) Certificates that can be sold Call for tenders New capacities After peak period, TSO calculates suppliers obligation They can adjust their positions TSO checks if suppliers bought enough certificates TSO checks if capacity owners fulfilled their disponibility commitment Capacity owners get price difference calculated by reg. authority P E N A L T Y P E N A L T Y
The capacity mechanism to be implemented in France Further elements Flexibilities are given to capacity operators Capacities can be aggregated by a certification perimeter manager The penalties paid in case of a lack of availability can be mitigated Capacity operators can ask for an adjustment before delivery year if they anticipate a change in availability If so, they pay a fee