French electricity capacity mechanism least distorting model - EFET
France's proposed capacity mechanism system will cause less market distortion than other nationally proposed models, according to Jerome Le Page, market and regulation consultant at the European Federation of Energy Traders (EFET).
The rules are being drafted by the country's transmission system operator, RTE, and industry observers expect them to be published in July (see EDEM 20 December 2012).
The French system is based on capacity certificates to be exchanged between retailers and generators. Under this system, certificates are purchased to meet energy consumption needs, and sold when power generation capacity or demand-side capacity is made available on the market.
Generators sell capacity certificates that retailers purchase in amounts that correspond to their capacity needs. Retailers can also sell certificates corresponding to how much capacity can be offered on the market by contracting with consumers to reduce consumption during hours of peak demand.
The system was outlined in France's 2011 Loi NOME legislation and a decree on the mechanism was published in December 2012.
After the rules of the system have been published in July, there will be a public consultation, with a view to implementing the capacity mechanism in 2015-16, Le Page explained.
According to Jean-Jacques Nieuviaert, senior adviser for strategy and economic studies at the French Union of Electricity (UFE), capacity mechanisms are necessary because current low electricity prices discourage investment, and with many gas-fired plants closing, the lack of new projects is dangerous for the power system.
The European Commission launched a consultation paper on generation adequacy, capacity mechanisms and the internal market last November. In response to this, the UFE argued that the security of supply issues faced by a number of countries reveal the failure of the "energy only" market.
"In some countries, including France, there is a risk that total power available [including import volumes] will be insufficient to meet demand under certain scenarios, says the UFE response to the Commission consultation, submitted on 7 February.
However, capacity mechanisms are "not a substitute for correct incentives on market participants", EFET said in its response to the Commission's consultation. These incentives should be generated by market signals, which should still be the key determinant in investment decisions, it argued.
If market distortions are removed, and market design is adapted to the new energy environment, existing market mechanisms should provide sufficient remuneration to maintain flexible resources available without the need for capacity mechanisms, it said.
A further issue is reversibility. According to Le Page, one of the advantages of the proposed French capacity mechanism is that if meeting peak demand were no longer a problem, the price of the capacity certificates would reflect this, and the mechanism would effectively phase out by itself.
Capacity mechanisms should also be technology neutral, not favouring one type of generation over another, said Le Page. "There are discounts calculated on the reliability of each type of plant, because you can't rely on a wind farm as much as on a nuclear or gas-fired plant, so the French mechanism differentiates between technologies, but it does not favour one type of generation."
In Belgium, the capacity mechanism proposed by the ministry only accounted for combined cycle gas turbines (CCGTs), so the Belgian regulator shut down the whole mechanism because it was discriminatory and contrary to the principle of an internal market, he said.
Cross-border capacity should also be taken into account in capacity mechanisms, according to EFET. "But this is not yet clear with the French mechanism," said Le Page. But the decentralised nature of the exchange-based French mechanism that does not allow the TSO to have complete control is preferable to a centralised system, he explained.
According to the Commission, generation adequacy problems should be dealt with at a European level. The UFE response to the Commission states that, although developing a co-ordinated definition of capacity needs for each area of interconnection at European level is the long-term target, in the shorter term, national capacity mechanisms should be developed in countries facing security-of-supply issues, as long as they do no disrupt local or interconnected energy markets. Beatrice Mavroleon
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