National Capacity Mechanisms in the European IEM:
Opening the Doors to Neighbours
Paolo Mastropietro, Pablo Rodilla, Carlos Batlle
6th World Forum on Energy Regulation (WFER) in Istanbul, Turkey
Monday, 25 May 2015
National Capacity Mechanisms in the European IEM: Opening the Doors to Neighbours - Paolo Mastropietro - 2Istanbul, May 25th, 2015
Presentation topics
• Several different Capacity Remuneration Mechanisms (CRMs) are being introduced in the European Union in order to guarantee the security of supply
• Are these national interventions, which affect the long-term development of the European power system, being coordinated?
• How is this issue related with the short-term harmonisation of electricity markets?
• Which are the reasons behind this lack of coordination on the long-term dimension?
• How can the barriers be removed?
National Capacity Mechanisms in the European IEM: Opening the Doors to Neighbours - Paolo Mastropietro - 3Istanbul, May 25th, 2015
Contents
• Introduction• Problem diagnosis• Removing barriers to CRM cross-border trades
National Capacity Mechanisms in the European IEM: Opening the Doors to Neighbours - Paolo Mastropietro - 4Istanbul, May 25th, 2015
IntroductionEuropean IEM: Short-term market coordination…
• The Price Coupling of the Regions NWE pilot phase went live on February 4th 2014.
PCR, 2014. EUPHEMIA: Description and functioning
National Capacity Mechanisms in the European IEM: Opening the Doors to Neighbours - Paolo Mastropietro - 5Istanbul, May 25th, 2015
IntroductionEuropean IEM: Short-term market coordination…
• One single day-ahead market will encompass the entire region with harmonised bidding and pricing rules.
• Several Market Operators, but a single price coupling algorithm– EUPHEMIA (acronym of Pan-European Hybrid Electricity Market Integration Algorithm)
• The algorithm assigns efficiently the transmission capacity connecting different bidding areas. Implicit auction for a regional congestion management.
• Interconnection capacity assigned through the PCR, at the moment is the capacity left by Physical Transmission Rights, but the objective is to assign all the interconnection capacity through the algorithm, moving towards Financial Transmission Rights.
National Capacity Mechanisms in the European IEM: Opening the Doors to Neighbours - Paolo Mastropietro - 6Istanbul, May 25th, 2015
IntroductionEuropean IEM: Short-term market coordination…
• The Price Coupling of the Regions NWE pilot phase went live on February 4th 2014.
PCR, 2014. EUPHEMIA: Description and functioning
National Capacity Mechanisms in the European IEM: Opening the Doors to Neighbours - Paolo Mastropietro - 7Istanbul, May 25th, 2015
IntroductionEuropean IEM:…and long-term national autarkies
• Many European power system are in the process of introducing Capacity Remuneration Mechanisms (CRMs)
EURELECTRIC, 2015. From implicit to explicit cross-border participation in capacity mechanisms
National Capacity Mechanisms in the European IEM: Opening the Doors to Neighbours - Paolo Mastropietro - 8Istanbul, May 25th, 2015
IntroductionConcerns from European Institutions
• EC (2012), “if capacity mechanisms are not well designed and/or are introduced prematurely or without proper coordination at EU level, they risk being counterproductive”
• ACER (2013), “lack of coordination (on generation adequacy measures) has resulted in a patchwork of CRMs in the EU, which may be at the detriment of the market integration process”.
• ENTSO-e (2013) “there would be a clear benefit in reporting in a systematic harmonised fashion the key security metrics across the internal market”
• EURELECTRIC (2013) “CRM should be open to cross-border participation, underpinned by close coordination between Member States and respective system operators (TSOs)”.
• EFET (2013) underlines that CRMs have to be “non-discriminatory, by taking into account the contribution of non-national generation through interconnection which may decrease local needs”
National Capacity Mechanisms in the European IEM: Opening the Doors to Neighbours - Paolo Mastropietro - 9Istanbul, May 25th, 2015
IntroductionLevels of CRMs harmonisation
• EU-wide capacity mechanism, covering the entire regional demand– Extremely unlikely (political reasons)– Probably not justified from the theoretical point of view (different reliability targets depending on the expected impact of curtailment)
• Different national capacity mechanisms, BUT with a basic requirement. With the words of EC (2013), “mechanisms to ensure generation adequacy should be open to all capacity which can effectively contribute to meeting the required generation adequacy standard, including from other Member States”
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IntroductionCurrent designs of European CRMs
• DECC (2014), “interconnected capacity is not currently eligible to participate in the Capacity Market. However, the Government acknowledges the benefits that interconnected capacity can provide in relation to security of supply and notes the importance of recognising this value through the Capacity Market”
• RTE (2014), “Notably prerequisite to allow the explicit participation of cross-border capacities are not currently fulfilled and an additional implementation time is required. Consequently, the explicit participation of cross-border capacities is not foreseeable in a short-term vision, though RTE would like to keep it as an ‘open-option’ for the future”
• AEEG (2011), “la domanda di CDP è rappresentata dalla corrispondente curva di domanda (...) traslata per tenere conto del’importazione netta dalle interconnessioni con l’estero attesa nel picco di carico sulla base di valutazioni conservative”
National Capacity Mechanisms in the European IEM: Opening the Doors to Neighbours - Paolo Mastropietro - 11Istanbul, May 25th, 2015
Contents
• Introduction• Problem diagnosis• Removing barriers to CRM cross-border trades
National Capacity Mechanisms in the European IEM: Opening the Doors to Neighbours - Paolo Mastropietro - 12Istanbul, May 25th, 2015
Problem diagnosisFirst barrier: mistrust of CRM cross-border contracts
• Article 4.3 in the Security of Supply Directive (2005/89/EC), when it states that “Member States shall not discriminate between cross-border contracts and national contracts”
• HOWEVER, electricity laws and national network codes in force in the Member States still contain clauses that maintain that exports to other countries will be interrupted in case of a domestic emergency of supply
National Capacity Mechanisms in the European IEM: Opening the Doors to Neighbours - Paolo Mastropietro - 13Istanbul, May 25th, 2015
Problem diagnosisFirst barrier: the Iberian MIBEL example
OMIE Proceedingsin case of scarcity
conditions, the missing energy will be spread among all the demand
REE Operation Procedures
in case of scarcity conditions, export
programmes can be interrupted(apparently, the same ambiguity exists between Article
4.3 and the current ENTSO-e draft guidelines on Capacity Allocation and Congestion Management)
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Problem diagnosisSecond barrier: uncertainties on cross-border contracts
• PCR automatically allocates the entire transmission capacity through the short-term market clearing algorithm, being the flows through the interconnections determined by the equilibrium between generation and demand in the different zones
• Fulfilment of capacity mechanism contracts by foreign agents during system stress events cannot be guaranteed
National Capacity Mechanisms in the European IEM: Opening the Doors to Neighbours - Paolo Mastropietro - 15Istanbul, May 25th, 2015
Problem diagnosisSecond barrier: uncertainties on cross-border contracts
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Assigned by the coupling algorithmbased on price differentials
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Problem diagnosisSecond barrier: concerns from Member States
• DECC (2013), “the Target Model being introduced across Europe to promote efficient operation of the Internal Energy Market means that interconnector flows will be determined largely by energy price differentials between interconnected markets” and that this arrangement could impede a foreign reliability provider to export towards Great Britain when scarcity conditions arise in this system
• RTE (2014), “what should happen to capacity contracted through a capacity mechanism and the energy it generates (when there is a shortage in two countries simultaneously)? The market coupling algorithm might not be able to clear in those situations”
• Further concern: during these scarcity conditions in the entire regional system, national generation which could have committed in the CRM could “slip out” through the interconnection driven by price differentials with neighbouring countries
National Capacity Mechanisms in the European IEM: Opening the Doors to Neighbours - Paolo Mastropietro - 17Istanbul, May 25th, 2015
Contents
• Introduction• Problem diagnosis• Removing barriers to CRM cross-border trades
National Capacity Mechanisms in the European IEM: Opening the Doors to Neighbours - Paolo Mastropietro - 18Istanbul, May 25th, 2015
Removing barriers to CRM cross-border tradesRemoving the first barrier
• The only way to remove the first barrier (mistrust of CRM cross-border contracts) is to improve the coordination among TSOs during scarcity conditions and to ensure the fulfilment of the Security of Supply Directive
• This can be accomplished ONLY through a modification of current national and regional network codes and operation procedures
National Capacity Mechanisms in the European IEM: Opening the Doors to Neighbours - Paolo Mastropietro - 19Istanbul, May 25th, 2015
Removing barriers to CRM cross-border tradesRemoving the first barrier
• The underlying requirement is an actual responsibility transfer on security of supply issues
• The outcome of a properly designed market (short- and long-term markets) should not be modified by the system operator, unless because of the occurrence of technical issues
System Operator Market Operator
Security of Supply
Responsibility transfer
National Capacity Mechanisms in the European IEM: Opening the Doors to Neighbours - Paolo Mastropietro - 20Istanbul, May 25th, 2015
Removing barriers to CRM cross-border tradesRemoving the second barrier
• The current design of the upcoming PCR market coupling (interconnection capacity completely assigned through the PCR algorithm) does not guarantee the fulfilment of CRM cross-border contracts during concurrent (or regional) scarcity conditions
• Financial Transmission Rights can be used to hedge the price risk, but they do not ensure physical delivery
National Capacity Mechanisms in the European IEM: Opening the Doors to Neighbours - Paolo Mastropietro - 21Istanbul, May 25th, 2015
Removing barriers to CRM cross-border tradesThe “conditional nomination” concept
• The possibility of a “conditional nomination” should be included in the PCR algorithm– “Nomination” refers to the possibility for the agent putting a selling offer in the regional market to state the zone in which that offer is to be withdrawn
– “Conditional” refers to the fact that the nomination does not need to be operational at all times. It must be activated only when the CRM-system is requiring the contracted capacity AND the interconnection is not congested in the importing direction (towards the CRM-system)
• The nomination ensures the fulfilment of cross-border CRM contracts during scarcity conditions and its conditionality allows not to affect the efficiency of the market coupling during normal operation
National Capacity Mechanisms in the European IEM: Opening the Doors to Neighbours - Paolo Mastropietro - 22Istanbul, May 25th, 2015
Removing barriers to CRM cross-border tradesThe “conditional nomination” concept
• When scarcity conditions occur only in the CRM-system, the interconnection is likely to be congested in the importing direction (towards the CRM-system) and no nomination is needed. Efficiency is not affected
• When concurrent or regional scarcity conditions are in place, conditional nominations must be applied in order to guarantee the physical delivery. This may modify in some cases the outcome of the short-term market. However, this outcome is likely to be based on the activation of price caps and its efficiency is already affected. The conditional nomination only solves a tie situation and do not hamper the short-term market efficiency
National Capacity Mechanisms in the European IEM: Opening the Doors to Neighbours - Paolo Mastropietro - 23Istanbul, May 25th, 2015
Further reading
TitleNational capacity mechanisms in the European Internal Energy Market: Opening the doors to neighbours
AuthorsPaolo Mastropietro, Pablo Rodilla,Carlos Batlle
StatusPublished in Energy Policy, Volume 82, July 2015, Pages 38-47.
National Capacity Mechanisms in the European IEM: Opening the Doors to Neighbours - Paolo Mastropietro - 24Istanbul, May 25th, 2015
References (i)• ACER, Agency for the Cooperation of Energy Regulators (2013). Capacity remuneration
mechanisms and the internal market for electricity. Report released on 30 July 2013.
• AEEG, Autorità per l’Energia Elettrica e il Gas (2011). Criteri e condizioni per la disciplina del sistema di remunerazione della disponibilità di capacità produttiva di energia elettrica, ai sensi dell’articolo 2 del decreto legislativo 19 dicembre 2003, n. 379. Deliberazione 21 luglio 2011‑ARG/elt 98/11.
• Batlle, C., Mastropietro, P., Gómez-Elvira, R. (2014). “Towards a fuller integration of the EU electricity market: physical or financial transmission rights?”. The Electricity Journal, vol. 27, iss. 1, pp. 8-17, January–February 2014.
• DECC, Department of Energy & Climate Change (2014). Implementing Electricity Market Reform (ERM) – Finalised policy positions for implementation of EMR. Policy document, released in June 2014.
• DECC, Department of Energy & Climate Change (2013). Electricity market reform: capacity market – detailed design proposals. Released in June 2013.
• EC, European Commission (2013). Generation adequacy in the internal electricity market - guidance on public interventions. Commission staff working document, accompanying the Communication from the Commission on Delivering the internal electricity market and making the most of public intervention.
• EC, European Commission (2012). Consultation paper on generation adequacy, capacity mechanisms and the internal market in electricity. Released on 15 November 2012.
• EFET, European Federation of Energy Traders (2013). Design principles for capacity mechanisms. Discussion paper released on February 2013.
• ENTSO-e, European Network of Transmission System Operator for electricity (2013). European Commission consultation on generation adequacy, capacity mechanisms and the internal market in electricity. Response paper released on February 2013.
National Capacity Mechanisms in the European IEM: Opening the Doors to Neighbours - Paolo Mastropietro - 25Istanbul, May 25th, 2015
References (ii)• EURELECTRIC (2013). Options for coordinating different capacity mechanisms. Background note
released on December 2013.
• National Grid (2014). Report with results from work undertaken by National Grid for DECC in order to support the development of Capacity Market volume to procure. National Grid EMR Electricity Capacity Report, released in June 2014
• Rodilla, P., Batlle, C. (2013). “Security of generation supply in electricity markets.” In Regulation of the Power Sector, 2013, Springer, Pérez-Arriaga, Ignacio J. (Ed.), ISBN 978-1-4471-5033-6.
• RTE, Réseau de Transport d'Électricité (2014). French capacity market. Report accompanying the draft rules. Document released in April 2014.
National Capacity Mechanisms in the European IEM:
Opening the Doors to Neighbours
Paolo Mastropietro
Institute for Research in TechnologyComillas Pontifical UniversitySta. Cruz de Marcenado 26, 28015 Madrid, [email protected]+34 91 542 2800 ext. 2740
National Capacity Mechanisms in the European IEM: Opening the Doors to Neighbours - Paolo Mastropietro - 27Istanbul, May 25th, 2015
AppendixA two-system case study
• Case 1: pA > sA , pA > pB (i)
IAB
NRPACap
acity
mec
hani
smRel
iabi
lity
option
cont
ract
s RPA RPB
NRPB
BpB <pA
ApA > sA
_
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AppendixA two-system case study
• Case 1: pA > sA , pA > pB (ii)
IAB
NRPACap
acity
mec
hani
smRel
iabi
lity
option
cont
ract
s RPA RPB
NRPB
BpB <pA
ApA > sA _
National Capacity Mechanisms in the European IEM: Opening the Doors to Neighbours - Paolo Mastropietro - 29Istanbul, May 25th, 2015
AppendixA two-system case study
• Case 1: pA > sA , pA < pB
IAB
NRPACap
acity
mec
hani
smRel
iabi
lity
option
cont
ract
s RPA RPB
NRPB
BpB >pA
ApA > sA
_
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AppendixA two-system case study
• Case 1: pA > sA , pA = pB (same price cap?)
IAB
NRPACap
acity
mec
hani
smRel
iabi
lity
option
cont
ract
s RPA RPB
NRPB
BpB =pA
ApA > sA
National Capacity Mechanisms in the European IEM: Opening the Doors to Neighbours - Paolo Mastropietro - 31Istanbul, May 25th, 2015
AppendixAssumptions
• CRMs based on contracts
Capacity Remuneration Mechanisms must be based on contracts to be exercised during scarcity
conditions in the system. The spot price is the best critical period indicator and this is likely to turn to
be more valid in the future, in a scenario of increased elasticity of the demand
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AppendixAssumptions
• Fulfilment of the Security of Supply Directive
Countries in the regional market must always fulfil article 4.3 of the Security of Supply Directive, which states that “Member States shall not discriminate
between cross-border contracts and national contracts”. This requirement should be
accomplished through the modification of network codes and operation procedures of several system
operators
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AppendixAssumptions
• Coordinated accounting
If an agent in the regional market commits part of its capacity in the CRM of one system, then it
cannot commit that same part of its capacity in any other capacity mechanism whatsoever to which it has access. This can be accomplished through a
centralised and coordinated accounting of capacity mechanisms contracts
National Capacity Mechanisms in the European IEM: Opening the Doors to Neighbours - Paolo Mastropietro - 34Istanbul, May 25th, 2015
AppendixAssumptions
• Zonal CRM auction
If a system implements a CRM open to all the agents in the relevant regional market, it will
procure reliable capacity from abroad only up to the maximum transmission capacity of the
interconnection, by means of a zonal auction
National Capacity Mechanisms in the European IEM: Opening the Doors to Neighbours - Paolo Mastropietro - 35Istanbul, May 25th, 2015
AppendixAssumptions
• Performance assessment
The performance assessment of cross-border reliability providers has to be carried out only when
the interconnection is not saturated in the importing direction (towards the system
implementing the CRM)
National Capacity Mechanisms in the European IEM: Opening the Doors to Neighbours - Paolo Mastropietro - 36Istanbul, May 25th, 2015
AppendixAssumptions
• Conditional nomination rule in the PCR algorithm
In case all the transmission capacity is assigned through the market coupling, a conditional
nomination rule must be included in the clearing algorithm, which ensures the fulfilment of reliability contracts during concurrent scarcity conditions on both sides of the interconnection. Such conditional
nomination enhances the firmness of the cross-border reliability contracts