Capacity mechanisms run risk of energy market distortion - analysts
Electricity capacity mechanisms in Europe could result in one country subsidising power generation while bordering markets receive greater benefit by importing additional volumes, analysts have warned.
A number of markets are implementing capacity mechanisms to promote construction of new gas-fired power plants in the face of historically low profit margins for gas generation on the forward curve.
The mechanisms will generally make payments to operators of capacity to ensure they can ramp-up generation at short notice. The mechanisms are intended to balance national-scale electricity supply systems that include a deep penetration of variable renewable generation, and as such they will be open to other types of capacity that may be used to balance systems, including demand reduction.
However, analysts have highlighted issues of distortion related to capacity payments.
Independent utilities analyst Lakis Athanasiou said a scenario could be encountered where one country is paying for the remuneration of plants while a bordering market receives greater benefit by importing the cheap energy.
"If you're getting a lot of capacity payments coming through, this would distort the market because of distortion of prices across borders," Athanasiou said. "That's why the EU gets twitchy about country-specific capacity payments."
Policy makers have already been warned that disparate capacity models between interconnected markets - or the existence of a model in one market linked to another that has no model at all - goes against the EU's push for a single electricity market (see EDEM 24 January 2012).
Some sources went on to express concerns of price collapse.
An equities analyst told ICIS that, in the UK's case, the potential oversupply from additional installed capacity would make conditions worse for existing plants and inflate the subsidy pool.
"Subsidising capacity on top of existing oversupply makes the situation worse," he said. "With oversupply comes lower prices, and so the delta between the wholesale power price and the strike price [a planned guaranteed payment for low-carbon generators] widens, and therefore more subsidies have to be paid."
EU policy-makers are currently discussing how to deal with national capacity mechanisms and their effect on the internal energy market. The Agency for Cooperation of European Energy Regulators (ACER) has said that capacity mechanisms could be needed to secure power supply, but they should be avoided when they distort cross-border trade (see EDEM/ESGM 12 March 2013). Katie Mcque
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