Berlin likely to put electricity plant investments before market - source

13 June 2014 14:56 Source:ICIS

There is no evidence that Germany has to launch a capacity market to meet future demand. This is the result of two much anticipated studies commissioned by the German energy ministry to assess the need for a capacity market in Europe’s largest electricity market, a source with knowledge of the issue told ICIS on Thursday.

But there is a strong probability the German government will still chose to implement a capacity market mechanism because it will stabilise future investments in conventional power plants, the source said.

Under a capacity market mechanism, power plant operators get paid for providing capacity rather than just the power they generate as it is the case in the current so called energy-only market.

This has become a political focus as an increasing share of volatile wind and solar power is reducing the running times of in particular natural gas and hard coal-fired plants. This is squeezing financial earnings for utilities and risks closures of power plants that are losing money but still needed to cover demand when the wind is not blowing or the sun not shining.

A capacity market mechanism is in contrast to another solution currently championed by economists – a long-term option auction for transmission system operators (TSOs) to buy power generation capacity, according to the source. While this would also remunerate power plant operators for providing securely available capacity it is a market based mechanism rather than a full blown capacity market where the government or regulator sets the price the price for providing capacity.

Under an option model, regulators determine the amount of capacity needed to meet peak demand. If this is more than the generation capacity available, TSOs have to call an auction where they would pay to either to increase generation or reduce load.

For instance, generators could bid for payments to switch on extra capacity, industrial power consumers to reduce their consumption or other technology providers could provide storage through large-scale batteries.

The cost would be passed on to the consumers via household bills, the source said.

This mean the market sets the price for the capacity and is more cost efficient than any other capacity mechanism, the source said: “It could be demand-side management or some flexibility serving technologies which we don’t even think about today.”

The option model would put a market price on flexibility, something that is currently missing in the German power market, the source said.

However, politicians could view it as too risky that the option model does not prescribe how to make enough capacity available to meet demand and instead chose a safer way of subsidising new generation capacity where a payment guarantees that a power plant is being build or kept online.

The option model cited by the source is similar to a proposal by Germany’s energy regulator BNetzA first floated in January ( see EDEM 24 January 2014 ).

At the time, BNetzA president Jochen Homann told ICIS that “the basic idea is to get an instrument similar to balancing power which can be auctioned as an additional long-term product. This way additional revenues can be made but no capacity needs to leave the market”.

The energy ministry told ICIS in an email response on Thursday that because of a risk of a capacity shortage by the end of the decade “a competitive capacity mechanism is to be developed in the medium term which is open to any technology”.

This mechanism should be developed taking into account cost efficiency and in accordance with European regulation so that market participants can rely on it long term.

The result of the two studies will be published this summer, the energy ministry said. “The studies will form an important foundation for the political process … to work out the details and a framework of the future capacity mechanism. The ministry vows to put thoroughness before speed when implementing such a mechanism to ensure long term stability,” it said in the email. Martin Degen

By Martin Degen