Capacity Remuneration Mechanisms Overview & Strategic Reserves - PowerPoint PPT Presentation

Capacity Remuneration Mechanisms Overview & Strategic Reserves for Belgium Hanspeter H¨ oschle Workshop on Fact Sheets KU Leuven Energiestichting / Energie-Instituut (U-Wetoco) April 30, 2014

Introduction Overview Concepts Belgian SR Lessons Learned 2/16 Outline 1 Introduction 2 Capacity Remuneration Mechanisms (CRMs) 3 Concepts for CRM 4 Strategic Reserves for Belgium 5 Lessons Learned U-Wetoco - H.H¨ oschle - 30.4.2014

Introduction Overview Concepts Belgian SR Lessons Learned 3/16 Introduction Possible Market Failure Price Inframarginal rent ◮ Power generator business model: e /MWh Coverage variable cost ◮ Revenues from selling electricity to cover variable costs ◮ Inframarginal rents to cover fix costs Variable Cost ◮ Current discussion: t ◮ Eroded profitability due to reduced load factors and prices ◮ Missing Money Problem ◮ Problem causes: ◮ Large integration of RES (mostly offering at zero marginal cost) ◮ Merit order effect (Reduced prices & reduced load factors) ◮ Challenges: ◮ Lack of investment in generation capacity ◮ Disvestment of existing capacity U-Wetoco - H.H¨ oschle - 30.4.2014

Introduction Overview Concepts Belgian SR Lessons Learned Security of Supply & Market Design 4/16 ◮ Market design determines Energy-based payment Capacity-based payment remuneration of generators (Output) (Availability) Time horizon e /MWh e /MW ◮ RES cause shift of merit Forward Markets Forward order & increase price Long-term contracting variability Day-Ahead Market Day-Ahead ◮ RES influence revenue energy-only (D-1) (Power exchange) streams of conventional power generators Ancillary Service Markets Realtime Primary (R1), secondary (R2), tertiary reserve (R3),... (RT) ◮ Eroded profitability and lack Remuneration for Output & Flexibility of investment incentives U-Wetoco - H.H¨ oschle - 30.4.2014

Introduction Overview Concepts Belgian SR Lessons Learned Security of Supply & Market Design 4/16 ◮ Market design determines Energy-based payment Capacity-based payment remuneration of generators (Output) (Availability) Time horizon e /MWh e /MW ◮ RES cause shift of merit Forward Markets y r a Forward order & increase price t Long-term contracting n e m y n t o variability e i c i l t p a a s m p m r e a o s C n i C u n a m Day-Ahead Market h e c Day-Ahead R e ◮ RES influence revenue M energy-only (D-1) (Power exchange) streams of conventional power generators Ancillary Service Markets Realtime Primary (R1), secondary (R2), tertiary reserve (R3),... (RT) ◮ Eroded profitability and lack Remuneration for Output & Flexibility of investment incentives Capacity remuneration mechanisms as complementary adaptation if existing markets fail to create adequate investment climate U-Wetoco - H.H¨ oschle - 30.4.2014

Introduction Overview Concepts Belgian SR Lessons Learned Theory - Principle - Desired Outcome 5/16 ◮ Capacity Remuneration Mechanism: ◮ Policy instrument ensuring adequate level of generation capacity ◮ Complementary mechanism besides the energy market influencing the volume and type of generation capacity through remunerating available capacity ◮ Working Principle: ◮ Additional revenue streams valuing the installed capacity [ e /MW] ◮ Replacement of investment incentives from price spikes with a more steady investment incentive ◮ Desired outcome: ◮ Resolve potential problems emerging from market malfunctioning to ensure security of supply U-Wetoco - H.H¨ oschle - 30.4.2014

Introduction Overview Concepts Belgian SR Lessons Learned Starting Point & Design Criteria 6/16 Capacity Remuneration Mechanisms? How does it Which product Yes or No? look like? fits best? Energy System Current Situation ◮ Energy mix ◮ Network congestions ◮ Load flexibility ◮ Demand Response potential ◮ ... A threat for Physical Uncertainties SoS ? ◮ Renewable energy sources Driven by ◮ Ressources (Water, Gas, ...) ◮ Growing Demand 3-5 ◮ Increasing peak-Load years ◮ ... lead time Future context ◮ Technology transition ◮ Regulatory roadmaps ◮ Energy substitution ◮ Drivers of demand ◮ ... U-Wetoco - H.H¨ oschle - 30.4.2014

Introduction Overview Concepts Belgian SR Lessons Learned Starting Point & Design Criteria 6/16 Capacity Remuneration Mechanisms? How does it Which product Yes or No? look like? fits best? Energy System Mechanism Designs Volume based Current Situation vs ◮ Energy mix Price based ◮ Network congestions ◮ Load flexibility ◮ Demand Response potential ◮ ... A threat Market wide vs for Physical Uncertainties Targeted SoS ? ◮ Renewable energy sources Driven by ◮ Ressources (Water, Gas, ...) ◮ Growing Demand 3-5 ◮ Increasing peak-Load years Centralized market ◮ ... lead time vs Future context Decentralized market ◮ Technology transition ◮ Regulatory roadmaps ◮ Energy substitution ◮ Drivers of demand Technology dedicated ◮ ... vs Technology neutral U-Wetoco - H.H¨ oschle - 30.4.2014

Introduction Overview Concepts Belgian SR Lessons Learned Starting Point & Design Criteria 6/16 Capacity Remuneration Mechanisms? How does it Which product Yes or No? look like? fits best? Energy System Mechanism Designs Mechanism Type Volume based Capacity Current Situation vs Payment ◮ Energy mix Price based ◮ Network congestions ◮ Load flexibility Capacity ◮ Demand Response potential Auction ◮ ... A threat Market wide vs for Physical Uncertainties Capacity Targeted SoS ? ◮ Renewable energy sources Obligation Driven by ◮ Ressources (Water, Gas, ...) ◮ Growing Demand 3-5 ◮ Increasing peak-Load Reliability years Centralized market ◮ ... Options lead time vs Future context Decentralized market ◮ Technology transition Capacity ◮ Regulatory roadmaps Subscription ◮ Energy substitution ◮ Drivers of demand Technology dedicated ◮ ... vs Strategic Technology neutral Reserve U-Wetoco - H.H¨ oschle - 30.4.2014

Introduction Overview Concepts Belgian SR Lessons Learned Categorization of Capacity Remuneration Mechanisms 7/16 Mechanism Type Capacity Price-based Payment fixing price → volume emerges Capacity from market Auction Capacity Capacity Obligation Remuneration Market-wide Mechanisms Reliability Volume-based Options fixing volume → prices emerges Capacity from market Subscription Strategic Targeted Reserve U-Wetoco - H.H¨ oschle - 30.4.2014

Introduction Overview Concepts Belgian SR Lessons Learned Categorization of Capacity Remuneration Mechanisms 7/16 Mechanism Type Capacity Price-based Payment fixing price → volume emerges Capacity from market PJM Planned Auction Capacity Markets Capacity CAISO Planned Capacity Obligation Remuneration Market-wide Mechanisms Reliability Volume-based Options fixing volume → prices emerges Capacity from market Subscription Strategic Targeted Planned Reserve U-Wetoco - H.H¨ oschle - 30.4.2014

Introduction Overview Concepts Belgian SR Lessons Learned Concepts Capacity Payments 8/16 ◮ New investments derive from financial incentives Authority Determination Level of Payment ◮ Deration factor of capacity: availability in times of scarcity, technology & flexibility Capacity Provider Regulator A u t h o � Easy to implement and easy to phase out r P i a z y a m t P e r n i o o t c n u & � Direct support of specific technologies possible r e V m e e r n i fi t c o a f t i C o n � Very steady revenue stream a p a c i t y System Operator Retailer × Assumptions about investment response Cost Allocation × Level of payment subject to political discussion e × Implemented with a consumption-independent use of charge for final consumer Consumer U-Wetoco - H.H¨ oschle - 30.4.2014

Introduction Overview Concepts Belgian SR Lessons Learned Concepts Capacity Markets (Centralized & Decentralized) 9/16 Authority D Centralized V e t o e u l r m m e n i a o t i f o C n a p a c i t y Capacity Provider Regulator ◮ Capacity introduced as new commodity A u t h o Payment & Verification r ◮ Demand of capacity determined by authority i z a Procurement of Capacity t i o n ◮ System Operator procures capacity (centralized) ◮ LSEs procure capacity acoording to their share of demand Retailer/LSEs System Operator (decentralized) n o t i c a o l A l s t ◮ Cost are allocated to the consumers o C e Consumer Authority � Amount of capacity is directly set by the authority D Decentralized V e t o e l u r m m i n e a o t f i o C n a � Market-based CRM p a c i t y Capacity Provider Regulator × Change of current market design Procurement of Capacity Verification → Effort for Implementation and Administration Retailer/LSEs System Operator × Tracking and Verification of Capacity by System Operator Cost Allocation e Consumer U-Wetoco - H.H¨ oschle - 30.4.2014