ICIS Long-Term Power: Belgian TSO Elia highlights the need for 3.6GW of additional capacity to enable nuclear phase-out

This is a condensed version of our analysis for ICIS EU Long-Term Power subscribers that was originally published on 29 June by Matthew Jones, Senior Analyst – EU Carbon & Power Markets and Daisy De Selliers, Market Reporter.

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On Friday 25 June Belgian TSO Elia published its biennial adequacy and flexibility study, which predicted the need for 3.6GW of new capacity by 2025 to enable the country’s nuclear phase-out while maintaining security of supply. The country is launching a new capacity market to help bring forward the required capacity, with utilities Eneco, Engie, RWE and industrial group Tessenderlo confirming to ICIS that they had participated in the prequalification process for the first T-4 auction. The six gas plant projects operated by these companies would add a combined 4.8GW of capacity by 2025 if they were to be successful in the first auction, due in October.

Main conclusions of Elia’s adequacy study

• Elia’s study suggested that there would be a generation capacity shortfall of 3.6GW by 2025 (100% available 100% flexible). This is down slightly from the 3.9GW forecast for the same year in the last version of the assessment in 2019.
• Only a very small amount of this capacity will be feasible via the energy-only market, which emphasises the need for the CRM to be introduced.
• Existing capacity exiting the market could increase the adequacy risk, meaning that “absolute vigilance is required” to keep this capacity on the market.
• The availability of surplus generation in Europe is coming under increased pressure due to the speeding up of capacity phase-outs in neighbouring countries and the underperformance of the region’s nuclear fleet compared to predicted availability over the past few years.

Overview of the new CRM

• The Belgium CRM will be market-wide and technology-neutral, meaning that all capacity can enter so long as it does not receive direct subsidy (which rules out almost all existing renewables).
• Auctions will be held four years ahead of the delivery period (T-4), with an additional auction 1 year ahead (T-1). The first delivery period is for October 2025-November 2025, which means that the first T-4 auction will be held by October this year.
• Capacity is de-rated according to the degree to which the technology is likely to contribute to security of supply during a supply crunch. For instance, the de-rating factor is 91% for CCGT and 90% for OCGT, but just 4% for solar.
• For the T-4 auction for 2025 delivery period, the Ministerial Decree set a maximum volume of 6.4GW for Point A of the demand curve and a required volume of 7.3GW for points B. Point A is where the price is the maximum possible in the auction at €75/kW/year, while point B is where the price is €50/kW/year.
• A further 2.5GW will be set aside for the T-1 auction for the same delivery period, with 1GW of this capacity earmarked for indirect foreign capacity.

Analysis

The need for a CRM

• The need for a CRM in Belgium has been discussed for several years, with previous versions of Elia’s adequacy assessment in 2017 and 2019 pointing to the capacity shortfall expected by 2025.
• The deficit is primarily created by the country’s nuclear phase-out, which will remove 5.9GW from the market by 2026. The first reactors that French utility Engie will close are expected to be the 1GW Doel 3 in 2022, 1GW Tihange 2 in 2023 and 0.4GW Doel 1 in 2024. The remaining 0.4GW Doel 2, 1GW Doel 4, 1GW Tihange 1 and 1GW Tihange 3 will be closed in 2025.
• There had been discussions over the potential to extend some of the nuclear reactors, though this was ruled out in March 2021 when Engie announced that they had stopped preparation work for the extensions.

New gas capacity

• The owners behind six new gas plant projects confirmed to ICIS that they had applied to participate to the first auction of the CRM. They represent a total of 4.8GW in total and the developers are Engie, Eneco and Tessenderlo.

 

 

• The main uncertainty is over how many of these projects are likely to be awarded in the first auction given competition from existing capacity as well as new sources such as demand side response and storage.
• In our base case, we currently assume that 2.5GW of new gas-fired capacity will be successful in the first auction, which is far below the 4.8GW of new capacity that has entered prequalification.

Differences to other CRMs

• While the overview of the CRM provided above suggests a very similar system to that used in Great Britain, there are a couple of features that stand out for their difference:
• While the British system is multi-round and descending clock, the Belgian CRM will be single round and sealed bid.
• In a multi-round, descending clock auction the information revealed by each round leads to greater price discovery and transparency for bidders, but the potential for greater market power abuse, especially in small markets with only a few large bidders. The Belgian system is designed to avoid this risk, as well as to reduce complexity.
• Unlike the British pay-as-cleared approach the Belgian CRM will be pay-as-bid. This means that under the Belgian system each successful bidder will receive the price they bid rather than all companies receiving the most expensive bid that clears the auction.
• The aim of pay-as-bid is to reduce the overall cost of the CRM and to avoid existing capacity obtaining windfall profits by benefitting from the higher price required for new capacity. However, the system encourages entrants to bid in close to their estimates for the market clearing price rather than bidding in at their true costs, as they are incentivised to do under a pay-as-cleared system.

Next steps

• Prequalification results: TSO Elia will publish the results of the prequalification process by September 2021 at the latest. Prequalification is mandatory to take part in the auction. Participants had until 15 June to submit their prequalification file.
• First CRM auction: Auction bidding for the first CRM auction with delivery period 2025 will take place at the end of September. Candidates will be requested to submit bids for which they will have to sign a binding capacity contract if they are selected by the auction clearing system. Auction clearing is expected in October. The second auction for delivery period 2025 will take place in October 2024.
• Pre-delivery period: During the period between the auction clearing and the delivery period, capacity holders who signed capacity contracts are monitored to assess the ability of the capacity to be ready for the delivery period.

 Market impact

• Neutral at present as Elia’s new adequacy assessment is broadly in line with their previous assessment from 2019.
• The entry of six new gas plants with a combined capacity of 4.8GW into prequalification for the capacity market is a sign that there is likely to be significant competition in the first auction. Given that it will be the first auction, and given the pay-as-bid rules, it is difficult to determine at this stage what the likely bidding strategies and outcome will be.
• We currently assume that 2.5GW of new CCGT capacity will be successful in the auction, though may revise this in the coming months.