French electricity capacity model may ‘constrain’ market price

Author: Joachim Moxon

2015/05/29

French energy regulator CRE is to determine the settlement value of certificates under its new capacity mechanism on the basis of an average exchange-traded price.

But one source close to the matter has warned that an aspect of the mechanism may distort the market price.

The model to determine a settlement price requires an organised trading platform for capacity certificates to be set up within one year but EPEX, the only exchange that has so far revealed an intention to host such a platform, declined on Friday to give any indication of a launch date.

Possible dates include November 2015 or January 2016, a source who asked to remain anonymous told ICIS.

There is not set date for the publication of the reference price, but stakeholders have requested it be known before delivery, meaning it would have to be published on 31 December 2016 at the very latest, an industry source with knowledge of the explained.

According to the legal framework for the capacity mechanism, the reference price should be determined on the basis of four years of trade. But stakeholders have requested visibility on the risk of penalty, and so CRE has moved the publication of the price forward. “Stakeholders wanted the price to be known before delivery so they could hedge their risk,” the source said.

The model will hinge around a 10% formula, whereby participants that are short will have to pay the reference price plus 10%, while long positions will be paid subject to the availability of funds derived from the penalties.

But this means there is a risk the reference price will constrain the market price, the source said. “It could mean market participants have no incentive to trade outside these limits,” he said.

The market impact will therefore be monitored continuously to avoid distortions, CRE said.

The model

The French capacity mechanism was designed to keep flexible but unprofitable power generation available to meet demand spikes. The French system is particularly sensitive to spikes due to the widespread use of electricity for heating in winter.

This means that certain plants are needed to meet demand during crucial periods but are too costly to run when demand is at average levels and power prices are lower.

The model chosen to keep such plants from closing is based on the issuance of capacity certificates, which can be sold on the market and thus provide generators with an additional revenue stream.

Demand for certificates will come from power suppliers, which will be obliged to hold them as a guarantee that they can meet the supply needs of their clients.

The regulator will play no part in determining the price of certificates on the market, but will publish the reference price to be used at financial settlement.

Transactions

The reference price will be based on an average of all transactions on organised trading platforms, of which EPEX is the only current candidate.

Capacity certificates can be sold over-the-counter but these transactions will only be used to determine the reference price if no organised platform has been set up within one year.

The first financial settlement is to take place two years after the first year of delivery in 2017, due to the amount of time it takes to construct a load profile for individual suppliers.

In a separate decision, CRE has also announced that capacity certificates will be included as part of ARENH transactions. The ARENH tariff, the price at which power incumbent EDF is obliged to sell 25% of its nuclear generation to alternative suppliers, is calculated on the basis of the full cost of production. This means that suppliers pay for capacity as part of the transaction. joachim.moxon@icis.com

At a glance:

The French capacity market is designed to ensure unprofitable plants remain available to the power system to meet winter peak demand

Capacity certificates will be issued to power producers and can be sold on to power suppliers

Suppliers will be penalised on the basis of a reference price if they fail to acquire sufficient certificates as guarantee of supply

The reference price is determined on the basis of exchange prices and will be published before the first year of delivery to provide visibility of risk

Therefore participants may not buy or sell certificates outside the range of penalties or rewards which the settlement price will determine

EPEX, the only energy exchange that has so far revealed an intention to host a capacity certificates platform, has not yet set a launch date