ICIS Power Perspective: Council and Parliament set for fight over capacity mechanism rules

08 March 2018 13:53 Source:ICIS

The European Parliament recently adopted its position on the Electricity Market Directive and Electricity Market Design Regulation, which are two of the main files in the clean energy package. As the files now move to trilogue negotiations, the Parliament and Council are set to clash over the timings and limits pertaining to the use of coal-fired plants in capacity mechanisms.

Background

  • Voting
    • In adopting its position, the ITRE committee voted for the mandate to enter inter-institutional negotiations directly, bypassing a plenary vote
    • This means that unless the vote is challenged in this month’s plenary, ITRE’s draft becomes the official Parliament position for trilogue negotiations with the Council
  • Capacity mechanisms
    • Capacity mechanisms are used by national governments to ensure security of supply by granting payments to plant operators to keep existing plants online or invest in new capacity
    • There are several types of capacity mechanism in use or being planned in Europe, market-wide capacity markets and targeted strategic reserves are the two most discussed mechanisms
    • The EU recently approved six capacity mechanisms in Europe, including market-wide capacity markets in Polandand Italy

Positions

  • Council
    • New plants will only be eligible to receive payments in a capacity market from 31 December 2025 if their emissions are below 550 gr CO2/KWh, or if their emissions are less than 700 Kg CO2 on average per year per installed KW
    • For existing plants, the rules would apply from 31 December 2030
    • For capacity contracts with less than five years to run as of 31 December 2030, the payments could continue (in theory until 31 December 2035)
  • Parliament
    • New plants will only be eligible to receive payments in a capacity market if their emissions are below 550 gr CO2/KWh once the regulation enters into force (likely later this year)
    • Existing plants would have an additional five years before having to meet the limits (so likely late-2023)
    • Only the 550 gr CO2/KWh limit would apply – plants would not be able to avoid the limits if their emissions are less than 700 Kg CO2 on average per year per installed KW
    • However, a specific lower limit of 200 Kg CO2 on average per year per installed KW is applied to plants in a strategic reserve

Analysis

  • Differing positions
    • The proposals of both the Council and Parliament will have an impact on the ability of coal-fired power plants to enter capacity mechanisms, since their emissions will be inevitably higher than the 550 gr CO2/KWh limit
    • The Parliament’s position is far stricter than the Council, with new plants affected two years sooner than the Council and existing plants seven years sooner
    • The Parliament’s specific limit relating to strategic reserves recognises the fact that coal-fired plants kept back from the market and only used in exceptional circumstances would not be emitting high levels of CO2 annually – this differs from a capacity market in which plants can produce throughout the year
    • The Council’s additional limit based on yearly emissions has a similar logic, enabling coal-fired plants (as well as gas peaking plants that may have emissions over 550 gr CO2/KWh) to continue to receive payments in a capacity mechanism so long as they are only called on to produce occasionally – however, the Council’s yearly emissions limit would apply to all capacity mechanisms rather than just to strategic reserves
    • It is estimated that a plant emitting 750g CO2/KWh could run for around 40 days per year before breaching the 700Kg/KW limit
  • Coal closures
    • Several organisations, including EFET and EURELECTRIC, have expressed fears that the limits could lead to coal plant closures, which could endanger security of supply or necessitate the construction of costly new gas-fired capacity
    • The organisations have also stated that the limits could weaken the carbon price in the EU ETS, which would itself undermine greenhouse gas reduction targets in the long-term
    • It is not yet clear how much coal-fired capacity in the EU could face closure under either the Council of Parliament’s positions
  • National implications
    • The position of both the Parliament and Council would have the most significant impact on market-wide capacity markets or capacity payment mechanisms, where coal-fired plants are paid for remaining online, rather than just being called upon to produce in emergency situations
    • The capacity markets in the UK and Italy are unlikely to be significantly affected as both countries plan to phase out coal by 2025, though the Parliament’s position of stopping payments five years after entry into law (so likely late 2023) could still have an impact if adopted
    • The new Irish capacity marketand Spanish capacity payment systems would also be significantly affected by the new limits
    • The new rules will have the largest impact on Poland’s upcoming capacity market, which is due to be dominated by coal plants – unsurprisingly, the Polish government has strongly criticised the Parliament’s more stringent limits
    • Strategic reserves, such as those for lignite plants in Germany, would likely be less affected by either the Parliament or Council’s position due to the low running hours of plants
    • There has been a clear trend towards capacity markets in Europe in recent years that is likely to continue as older plants close and the market fails to send to right signals to invest in new capacity – as a result, the new rules could have an impact in the future on most EU countries that still rely on coal and lignite plants

Next steps

  • No date for the start of trilogue talks has yet been announced, but they are likely to begin in April/May 2018
  • We expect a final agreement on the Electricity Market Directive and Design Regulation to be reached in late 2018
  • It remains unclear whether the Parliament or Council will win out regarding the capacity market limits and timings, or if a compromise between the two positions will be agreed

Matthew Jones is Analyst - EU Carbon & Power Markets at ICIS. He can be reached at Matthew.Jones@icis.com

This story has originally been published for ICIS Power Perspective subscribers on 06 March 2018 18:01 CET.

Our ICIS Power Perspective customers have access to extensive modelling of different options and proposals. If you have not yet subscribed to our products, please get in contact with Neil Dewet (Neil.Dewet@icis.com).

By Staff Reporter