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This article summarises the measures in the agreement on the proposal for the European Union's energy market reform. The reform aims to achieve long-term market stability by promoting power purchase agreements and contracts for differences, as well as developing capacity mechanisms. It also seeks to implement additional protections both in crises and for consumers, reducing their dependence on short-term prices and allowing them to benefit from the energy transition. [ABSTRACT FROM AUTHOR]

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This paper presents a comparative analysis of various capacity mechanisms that are either in force or under approval in key countries/regions in Europe and the US. A detailed analysis on the necessities that led to the establishment of the capacity mechanisms, along with various fundamental technical and operational features associated with the design and operation of different capacity mechanisms, mainly in Europe (Italy, France, Germany, Belgium, Poland, Great Britain, Ireland, Cyprus) and complementarily in the US (PJM, New England), are presented. This analysis is complemented by a real-life application regarding the long-term capacity remuneration mechanism that is expected to be established in Greece in the near future. A detailed simulation of the envisaged capacity mechanism auctions under differentiated scenarios has been performed, regarding the future Greek power system operating conditions during the forthcoming decade (2022–2031). Test results illustrate that the outcome of the auctions is heavily dependent on the future energy generation mix and the market participants' bidding strategy. Whereas, the total cost that will have to be undertaken by the electricity supply companies and, ultimately, by the end-consumers for the financing of the proposed capacity mechanism lies in the range of 5.5–8.7 €/MWh for the entire study period. [ABSTRACT FROM AUTHOR]

This paper presents a comparative analysis of various capacity mechanisms that are either in force or under approval in key countries/regions in Europe and the US. A detailed analysis on the necessities that led to the establishment of the capacity mechanisms, along with various fundamental technical and operational features associated with the design and operation of different capacity mechanisms, mainly in Europe (Italy, France, Germany, Belgium, Poland, Great Britain, Ireland, Cyprus) and complementarily in the US (PJM, New England), are presented. This analysis is complemented by a real-life application regarding the long-term capacity remuneration mechanism that is expected to be established in Greece in the near future. A detailed simulation of the envisaged capacity mechanism auctions under differentiated scenarios has been performed, regarding the future Greek power system operating conditions during the forthcoming decade (2022–2031). Test results illustrate that the outcome of the auctions is heavily dependent on the future energy generation mix and the market participants’ bidding strategy. Whereas, the total cost that will have to be undertaken by the electricity supply companies and, ultimately, by the end-consumers for the financing of the proposed capacity mechanism lies in the range of 5.5–8.7 €/MWh for the entire study period.

The aim of this article is to briefly introduce the latest results of the European legislative process, the so-called winter package, in particular focusing on active consumers and capacity mechanisms, and put everything in context. At the end of the article there is a brief reflection on the appropriate way of incorporating changes into the Czech legal order and the attitude towards the energy union being built.

The impact of renewables on the energy markets–falling wholesale electricity prices and lower investment stability–are apparently creating a shortage of energy project financing, which in future could lead to power supply shortages. Governments have responded by introducing payments for capacity, alongside payments for energy being sold. The increasing use of capacity mechanisms (CMs) in the EU has created tensions between the European Commission, which encourages cross-country cooperation, and Member States that favour backup solutions such as capacity markets and strategic reserves. We seek to trace the influence of the European Commission on national capacity markets as well as learning between Member States. Focusing on the United Kingdom, France and Poland, the analysis shows that energy security concerns have been given more emphasis than the functioning of markets by Member States. Policy developments have primarily been domestically driven, but the European Commission has managed to impose certain elements, most importantly a uniform methodology to assess future supply security, as well as specific requirements for national capacity markets: interconnectors to neighbouring countries, demand side responses and continuous revision of CMs. Learning from other Member States’ experiences also play a role in policy decisions.

The requirement for increased investment in electrical energy infrastructure in the Southern African Power Pool (SAPP) region is contextualised. Background on the SAPP is provided for reference. A brief assessment of historical capacity adequacy in the SAPP region shows historically sustained levels of inadequacy as well as distinctive investment cycles primarily as a result of administratively determined generation capacity investments within each member country. The introduction of an appropriately designed capacity mechanism is proposed for SAPP to facilitate system adequacy and incentivise long-term capacity investment.

Non-conventional renewable energy technologies are already a key element in the expansion of many power systems. These resources, whose deployment was fostered through different types of support mechanisms in the last decades, must now be integrated as much as possible in all the segments of the electricity market. Where capacity mechanisms are in place, renewable technologies should be involved in these mechanisms in the same way as any other technology. Renewables would thus not only be able to receive a capacity remuneration, but would also be subject to the commitments that a capacity contract entails. A key and challenging design feature to allow this participation is the definition of a de-rating methodology to evaluate the expected contribution to reliability from renewable technologies. This article presents a comprehensive review of international experiences on this design element, encompassing eleven power systems in the United States, Latin America, and Europe. It illustrates the great variety of regulatory approaches that can be found worldwide and presents a qualitative discussion on renewable de-rating, showing how these methodologies may have to be refined in the near future. • Renewable resources must be integrated in all the segments of the electricity market. • Renewable resources should be therefore allowed to participate in capacity mechanisms. • This participation requires the definition of a de-rating methodology. • A review of international experiences on wind and solar de-rating is presented. • Several regulatory recommendations can be drawn. [ABSTRACT FROM AUTHOR]

The literature on priority service has developed a blue-print for a market design, which addresses many of the success factors from decades of demand response programs. We show how priority service could improve alternative approaches to supply security and discuss how it may be implemented in the context of European Network Codes and the Clean Energy Package. [ABSTRACT FROM AUTHOR]

The aim of this article is to briefly introduce the latest results of the European legislative process, the so-called winter package, in particular focusing on active consumers and capacity mechanisms, and put everything in context. At the end of the article there is a brief reflection on the appropriate way of incorporating changes into the Czech legal order and the attitude towards the energy union being built. [ABSTRACT FROM AUTHOR]

Capacity mechanisms have been implemented in an uncoordinated way by many countries in Europe in recent years to ensure security of supply. The European Commission has defined, via the state aid guidelines, principles to minimize their impact on trade and competition in European electricity markets. The paper identifies the different drivers of these national reforms, maps the key issues associated with the coordination of capacity mechanisms across countries, and explores alternative approaches to allow for explicit cross-border participation in capacity mechanisms. [ABSTRACT FROM AUTHOR]

The impact of renewables on the energy markets-falling wholesale electricity prices and lower investment stability-are apparently creating a shortage of energy project financing, which in future could lead to power supply shortages. Governments have responded by introducing payments for capacity, alongside payments for energy being sold. The increasing use of capacity mechanisms (CMs) in the EU has created tensions between the European Commission, which encourages cross-country cooperation, and Member States that favour backup solutions such as capacity markets and strategic reserves. We seek to trace the influence of the European Commission on national capacity markets as well as learning between Member States. Focusing on the United Kingdom, France and Poland, the analysis shows that energy security concerns have been given more emphasis than the functioning of markets by Member States. Policy developments have primarily been domestically driven, but the European Commission has managed to impose certain elements, most importantly a uniform methodology to assess future supply security, as well as specific requirements for national capacity markets: interconnectors to neighbouring countries, demand side responses and continuous revision of CMs. Learning from other Member States' experiences also play a role in policy decisions. [ABSTRACT FROM AUTHOR]

The requirement for increased investment in electrical energy infrastructure in the Southern African Power Pool (SAPP) region is contextualised. Background on the SAPP is provided for reference. A brief assessment of historical capacity adequacy in the SAPP region shows historically sustained levels of inadequacy as well as distinctive investment cycles primarily as a result of administratively determined generation capacity investments within each member country. The introduction of an appropriately designed capacity mechanism is proposed for SAPP to facilitate system adequacy and incentivise long-term capacity investment. [ABSTRACT FROM AUTHOR]

Uncertainty in electricity markets introduces risk for investors. High fixed cost and increased dependency on infrequent and uncertain price spikes characterize investments. The risk-averse behavior of investors might lead to poor decision-making and undermines generation adequacy. Electricity market models rarely treat the interaction of market design and risk aversion. The representation of capacity mechanisms in modeling approaches focusing on risk aversion is limited. Our contribution addresses two problems. First, we propose a stochastic market equilibrium model. Investors are represented as risk-averse agents. The conditional value-at-risk is used as risk measure. Second, we propose an algorithm based on the alternating direction method of multipliers to compute a risk-averse equilibrium. We benchmark our approach with a state-of-the-art solver relying on a mixed complementarity problem reformulation. We show that for larger case studies our proposed approach is preferable. The algorithm converges in all cases while conventional solvers fail to compute a risk-averse equilibrium. The methodology is transferable to other risk-averse equilibrium models. With reference to capacity markets, we conclude that they are more beneficial in a risk-averse market. Capacity markets result in lower total cost, while avoiding expected energy not served. This statement still holds with increased price caps in energy-only markets. [ABSTRACT FROM AUTHOR]

One of the primary challenges of the power industry, worldwide, is making the capacity investment appropriate for the achievement of security of supply. This challenge is becoming even more relevant as power generation is increasingly based on renewables that are intermittent and seasonally dependent. In this context, policy makers and regulators implement capacity mechanisms that seek to overcome the intrinsic shortcomings of renewables. Failing to do so, given the uncertainty and complexity involved, means either that excessive overcapacity will become persistent and remain idle, or that under-capacity will prompt blackouts and high electricity prices. To help manage the uncertainty and complexity, this paper contributes to a better understanding of the effects of the capacity mechanism on electricity markets with a high share of hydropower – by using a system dynamics modelling approach applied to Colombia. In the past, though the capacity mechanism induced large reserve margins, the system has been at serious risk of experience blackouts and has resulted in extremely high electricity prices over a prolonged period. In the future, worse scenarios are possible: historically-familiar events – when backup plants were not available – may recur when new capacity is delayed, posing an even greater threat to the system. [ABSTRACT FROM AUTHOR]

Deregulation in electricity markets has changed the conditions for maintaining long-term adequacy of supply. Particularly in the last decade, security of supply has become a major issue for policymakers due to a number of changes in technology, especially the introduction of renewables, where regulators have introduced capacity mechanisms. In this paper, we focus on the use of two different capacity mechanisms: procurement for long-term strategic reserves contracting, and centralized auctioning for capacity contracts. We investigate the effect of uncertainty on the effectiveness of these two mechanisms in maintaining a stable and sufficient supply of capacity. We use simulation to establish the behavior as the level of uncertainty is increased. Our results suggest that a market's level of uncertainty plays an important role in the effectiveness of these two interventions. The results raise questions about when it is appropriate to introduce either of them. [ABSTRACT FROM AUTHOR]

A number of mechanisms have been suggested for capacity adequacy. A study using laboratory experiments both of procurement of long-term strategic reserve contracting and of centralized auctioning for capacity contracts suggests that the centralized auctioning process stabilizes laboratory markets and provides economic welfare comparable to a free market. The strategic reserve contracting process does not seem to improve either of the two aspects compared to a non-regulated market. [ABSTRACT FROM AUTHOR]

As the penetration of variable renewable energy in electricity markets grows, there is increasing need for capacity markets to account for the contribution of renewables to system adequacy. An important issue is the inconsistent industry definition of capacity credits for resources whose availability may be limited, such as renewable generation. Inaccurate credits can subsidize or penalize different resources, and consequently distort investment between renewables and non-renewables, and also among different types and locations of renewables. Using Electric Reliability Council of Texas (ERCOT) data, we use a market equilibrium model to quantify the resulting loss of efficiency due to capacity credits alone and in combination with renewable tax subsidies and portfolio standards. Layering inaccurate capacity credits with existing US federal tax subsidies decreases efficiency as much as 6.3% compared to optimal capacity crediting under those subsidies. Compensating producers based on their marginal contributions to system adequacy, considering how renewable penetration affects the timing of net load peaks, can yield an efficient capacity market design. [ABSTRACT FROM AUTHOR]

Energy efficiency has been given high strategic priority in European Union energy law. In addition to energy efficiency, reducing or shifting demand have been identified as key elements not only for improving the functioning of the internal electricity market but also for achieving the EU sustainability objectives and ensuring security of supply. This article argues that the EU regulatory framework for ensuring generation adequacy and introducing capacity mechanisms should be interpreted to prioritise demand side measures over capacity mechanisms. Through this contextual interpretation of the relevant regulatory framework, this article aims to identify the ways in which the Commission uses demand side assessments as justification for declaring capacity mechanisms (in)compatible with the internal market and how energy efficiency and demand side measures can, in practice, be designed to complement capacity remuneration for supply side measures. [ABSTRACT FROM AUTHOR]

Regulatory reforms of the power sectors in South America have always been driven by the need of attracting enough investment to guarantee an expansion rate capable of covering the fast-paced demand growth in the continent. In order to achieve this objective, in the last decade several countries in the region have reshaped their regulatory frameworks in the direction of long-term auctioning. This paper first provides a detailed description of the regulatory evolution that resulted in the implementation of auction schemes and then it presents an updated review of the mechanisms implemented in five South American countries, comparing their main design elements. [ABSTRACT FROM PUBLISHER]

Since the nuclear accident in Fukushima the European electricity economy has been in transition. The ongoing shut down of nuclear power plants and the widespread installation of wind power and photovoltaic generation capacities, especially in Germany, has led to a high share of intermittent renewable electricity production. This high amount of generation with very little variable cost has led to a significant decline of the prices at the European energy exchange. This has meant that many thermal power plants are no longer able to work economically and have already been shut down, although they would be needed in times of high demands and as backup capacities. Therefore, a redesign of the European electricity market is needed and in order to find out the right characteristics and effects of such a redesign pre-investigations based on simulation models are reasonable. This paper introduces ATLANTIS, which is a simulation model of the European electricity economy and covers technical as well as economic and environmental issues and allows the calculation of different scenarios up to 2050 and even beyond regarding the specific characteristics of the electricity economy. After a comprehensive introduction of the model some example applications and an outlook are presented. [ABSTRACT FROM AUTHOR]

The Directorate General for Competition at the European Commission enforces competition law in the areas of antitrust, merger control, and state aids. In this year's review of the recent economic work undertaken at DG Competition we focus on a theme in each of these three areas. For merger control, we review the application of both the theoretical analysis and the empirical techniques to bidding competition in the GE/Alstom case. In terms of antitrust enforcement, we review the economic issues that were raised by an Article 101 decision with respect to information exchange in the market for container shipping. Finally, with respect to state aid we provide an overview of the sector inquiry in electricity markets that targeted capacity mechanisms, as means to ensure security of supply in the European Union. [ABSTRACT FROM AUTHOR]

In Germany and beyond, various capacity mechanisms are currently being discussed with a view to improving the security of electricity supply. One of these mechanisms is a strategic reserve that retains generation capacity for use in times of critical supply shortage. We argue that strategic reserves have specific advantages compared to other capacity mechanisms in the context of the European energy transition. To date, however, the debate on capacity mechanisms has largely been restricted to national contexts. Against this background, we discuss the feasibility and potential benefits of coordinated cross-border strategic reserves to safeguard electricity supply and aid the energy transition in Germany and neighboring countries at large. Setting aside strategic reserve capacity which is deployed only in the event of extreme supply shortages could improve the security of electricity supply without distorting the EU's internal electricity market. In addition, overall costs may decrease when reserve procurement and activation are coordinated among countries, particularly if combined with flow-based market coupling. [ABSTRACT FROM AUTHOR]

Colombia enacted its first legal framework for promoting alternative energies in 2001 and a second framework in 2014. Since the generation technology mix has not changed since 2000, there is a need to understand how regulation and market structure affect the adoption of technologies. In this paper we address the question of what has been the impact of the capacity mechanisms adopted during the 2000s on technology choices for power generation in Colombia. Our approach is to analyze the evolution of market structure and regulation. We found that regulatory uncertainty and low prices drove a surge of small hydro plants during the 2000s. During the 2010s, the new regulatory focus on reliability of supply has resulted in increased coal-fueled generation and large hydro. This increased reliance on hydro power can further delay the entry of renewable technologies and the diversification of the Colombian portfolio. [ABSTRACT FROM AUTHOR]

To ensure sufficient investment in electricity generation capacity, mechanisms such as strategic reserves are being considered or already implemented. We analyze the effectiveness of a strategic reserve in the presence of a growing portfolio share of renewable energy sources (RES) with EMLab-Generation, an agent-based electricity market model. A strategic reserve can stabilize investment, but within limits. Uncertainty regarding future demand may cause the market to become instable, potentially leading to periods with very high electricity prices. In the presence of a large share of variable renewable energy sources, the reserve design should be adjusted or replaced by an alternative capacity mechanism. [ABSTRACT FROM AUTHOR]

Regulatory reforms of the electricity industry in South America have always been prompted by the need of attracting enough investment to cover the fast-paced demand growth. In order to achieve this goal, the countries in the region which in the eighties and early nineties opted for market-oriented schemes, have rebuilt in the last decade their regulatory frameworks around long-term auctioning. These new mechanisms, initially implemented to attract investment in any sort of conventional generation technology so as to ensure the system adequacy, are also being increasingly used to bring in non-conventional renewable energy resources. These schemes have been until now run in parallel, but the steep learning curve of Renewable Energy Sources for electricity (RES-E) technologies is apparently opening the door to the implementation of new tendering procedures open to all kinds of generation technologies. In this article, we review the auction mechanisms for new generation implemented in South America. We argue that although the first impression might lead to the conclusion that conventional and RES-E technologies are in some cases close and even ostensibly competing in the same auctions, the fact is that the full convergence is still far to happen, as the rules and products applied to the different technologies differ significantly. [ABSTRACT FROM AUTHOR]

Abstract: This paper discusses a series of issues regarding the integration of intermittent renewables into European electricity markets. As intermittent renewables constitute a significant share of the generation mix, they cannot be kept isolated from the market. We argue that RES integration is an issue of economic efficiency, and we review the main frameworks that have emerged in the literature. We first consider to what extent intermittent resources should be treated as dispatchable resources. We then analyse the different tools that have been proposed to ensure the required flexibility would be delivered, with an emphasis on the redefinition of time and space, joint optimisation of reserve products and energy products, and Capacity Remuneration Mechanisms. [Copyright &y& Elsevier]

• The calculation of de-rating factors is a pivotal element of capacity mechanisms. • The ex-ante definition of de-rating factors affects the resulting resource mix. • A model is used to assess the impact of the computation of de-rating factors. • Based on the results of the model, policy implications are discussed. Capacity mechanisms aim at enhancing mid- to long-term reliability by adding an extra income for generation and demand response resources, based on their firm capacity, a parameter commonly defined by the regulator. The firm capacity is often calculated by multiplying the installed capacity by a de-rating factor, to reflect the expected capability of the resources to contribute to system reliability. Computing de-rating factors is quite a challenging and pivotal task, for any error in its determination can seriously affect the performance of the capacity mechanism. In this paper, using a two-step model that simulates both the capacity auction and the short-term market, we show that the ex-ante definition of firm capacity influences investment decisions, altering the resulting resource mix and, in the end, the very contribution to the system reliability of the resources. Being aware of this potential mismatch caused by the definition of the firm capacity is fundamental for regulators to avoid paying for something that may be unable to contribute to meet the desired reliability target, or which could even deteriorate system adequacy. The discussion is illustrated with a case example, focusing on the impact of the definition of solar PV de-rating on the outcome of the capacity mechanism and the reliability of the system. [ABSTRACT FROM AUTHOR]

Abstract: This paper proposes a decentralized market-based model for long-term capacity investment decisions in a liberalized electricity market. Investment decisions are fundamentally based on total revenues gained by investors. In most electricity markets, the complementary mechanisms are designed to ensure a desired level of reliability while covering investment costs of the suppliers. In such an environment, investment decisions are highly sensitive to expectation of price signals in both of energy market and capacity mechanisms. In this work, the system dynamics concepts are used to model the structural characteristics of electricity market such as, long-term firms’ behavior and relationships between variables, feedbacks, and time delays by appropriately bundling the energy market and capacity mechanisms. The market oriented capacity price as well as non-competitive capacity payments and a proposed hybrid capacity mechanism are linked with the energy market in the model. Such a decision model enables both the generation companies and the regulators gaining perfect insights into the possible consequences of different decisions they make under different policies and market conditions. In order to examine the performance of the electricity market with different capacity mechanisms, a case study is presented which exhibits the effectiveness of the proposed model. [ABSTRACT FROM AUTHOR]

Capacity mechanisms have been controversial in theory as well as practice. Lessons from experience with different capacity mechanisms led to the development of the reliability options. This mechanism promises two advantages over other types of capacity mechanisms. Firstly, it ensures the availability of capacity contracted via the capacity mechanism during scarcity. Secondly, the reliability option mechanism limits any energy market distortion due to its implementation and provides the consumer a hedge from high prices. We assess the ability of reliability options in delivering the two promises by analysing the reliability option designs in Italy and Ireland. We find that they deliver on the first promise but only partly on the second. [ABSTRACT FROM AUTHOR]