Session 7 Flashcards
What are Energy-only markets?
The market arrangement corresponding to the Screening Curve Model:
- Prices can reach very high levels (no price cap)
- Scarcity prices serve as the incentive to invest in generation capacity
- No publicly arranged capacity mechanisms
Why might scarcity prices not realize? (3)
- If markets don’t clear at any price, load must be shed unvoluntarily.
- System blackout
- Difficult to distinguish scarcity prices from market power abuse
Missing money problem
+ solution
If scarcity prices do not materialize, investment incentives are insufficient –> firms will not invest
Solution: credible policy commitment
Result of price caps
+ effect on retailers
Missing markets: When demand exceeds supply, TSO will implement rolling blackouts
-> creates incentives for all retailers to underprocure energy needs
-> lower price cap exacerbates problem, as more retailers will delay energy purchase to spot market, increasing likelihood of demand > supply
Missing market problem
Without a price cap, retailers would buy forward contracts to hedge price risk.
Price cap limits the incentive (as there won’t be peak prices to hedge upfront); reduces incentive to procure through forwards -> retailers delay procurement to spot market.
Missing market problem: Too few long-term contracts, which are necessary to finance new investments.
Basic idea (nicht Funktionsweise!) of capacity mechanisms
“Replace” the uncertain scarcity price with a reliable capacity payment (to compensate AFC in advance)
Don’t confuse with operational reserves, even if both have capacity payments
Capacity remuneration mechanism (CRM): Design
- Determining the volume
- CRM contract design:
- how are agents incentivized to fulfill contractual commitments?
- how much revenue can agents earn outside of the CRM?
What are capacity remunieration mechanisms (CRM) there for?
Security of supply
Measures of reliability (3)
- LOLP: Loss of load probability: Probability that load exceeds generation at a moment in time
- LOLE: Loss of load expectation: Like LOLP over a time span (hours per year)
- Expected unserved energy (EUE): Accounting for the amount for which load exceeds generation (MWh per year)
How to set the right reliability standard?
- Trade-off
- Cost of new capacity vs cost of supply interruptions
- Maximize welfare: balance the marginal costs of new capacity with the marginal cost of load shedding - Cost of new entry (CONE) = Value of lost load (VOLL)
Target LOLE equation
+ How to determine/ define all parts of the equation?
Target LOLE (h) = CONE (eur/MW) / VOLL (eur/MWh)
Value of lost load (VOLL): based on surveys of consumers aksing the value place on interrupted supply over certain timeframes
Cost of new entry (CONE): based on techno-economic characteristics of available resources
Difference: Price instrument / Quantity instrument
Price instrument (capacity payment):
1. determine price (€/MW/year)
2. Market delivers according quantity (MW)
Quantity instrument (capacity market):
1. Determine firm capacity demand (MW)
2. Procurement auction resulting in capacity price (€/MW/year)
Why & how to use price and quantity instruments (combined)?
Why?
- using only one of both leads to highly volatile outcomes
Solution: Sloped demand curve (/price-quanitity hybrid)
Limited by capacity payment & demand but the reference price and target capacity vary and will find and intersection on the slope
Session 7, Slide 22
Difference between centralized and decentralized CRM (crucial!)
Centralized CRM:
- one central agent (TSO / regulator) identifies the capacity need and purchases on behalf of consumers
- TSO / regulator conducts and auction to procure the desired level of system capacity
- Problem: possible over-procurement
Decentralized CRM:
- retail suppliers are obligated to procure sufficient capacity to cover demand they serve (“supplier obligation”)
- problem: compliance
Functioning + design questions (5) of the classical CRM
Capacity providers receive a fixed payment (€/ MW/ year)
In turn, they commit to be available during scarcity periods.
Design questions:
1. Fulfillment
2. Eligibility (which technologies can participate, cross-border participation)
3. Energy price caps
4. who is buying (central vs. decentral)
5. Timing
Different approaches for availability of CRM
- Certain seasons / time-of-day windows
- Spot price thresholds
- Emergency conditions, e.g. physical scarcity of balancing reserves
Kinds of penalization of non-availability of CRM-partners in critical periods (theoretical approach)
Determination of non-availability requires monitoring and verification. Two kinds of penalty:
1. Implicit penalty: agent must procure equivalent to its contractual commitment on short-term market
2. Explicit penalty: agent must pay pre-determined penalty
Eligibility:
Who can participate?
- All technologies vs some (technology neutrality)
- de-rating of technologies (accounting for non-firmness)
- comprehensive vs targeted (new investment only or also existing assets)
- cross-border participation (if and how)
Eligible technologies for CRM
Many CRMs are formally tech-neutral
Certain technologies pose challenges for CRM design, e.g. VRE
What /why is de-rating of CRM technology
+ formula
No technology is available 100% of the time.
De-rating factor = 1 - capacity credit
De-rating is complex:
- different methods in practice
- trade-off between accuracy & complexity
What influences de-rating (3)
- Estimating system reliability (run many simulations)
- System reliability target, e.g. LOLE of 2hrs/yr
- Evaluating a resource:
- adding source decreases LOLE
- add load until initial level of reliability target is reached
- Capacity credit or “effective load carrying capability” (ELCC) is the ratio of the two
ELCC = added load / added capacity
What are cross-border participation (in CRM) issues? (4)
- Coincidental scarcity
- Interconnector availability during scarcity events
- verification in flow-based market coupling
- common certification rules
What 4 forms of cross-border participation are there?
1. Statistical contribution
Reduce total capacity procured by imports but don’t allow participation
2. Interconnector participation
Interconnectors offer their capacity in the CRM
3. Foreign capacity participation
Foreign assets offer their capacity directly in the CRM
4. Cross-border CRM
CRM spanning several zones
Comprehensive vs. targeted approach
+ disadvantage of each
+ Solution
Comprehensive CRMs:
All generators are eligible, including existing
Disadv.: Offering long-term capacity contracts to existing assets may prevent uncompetitve/ polluting assets from shutting down.
Targeted CRMs:
Only certain vintages are eligible, e.g. only new investments
Disadv.: Only new assets: Reduced signal for availability during scarcity conditions
Declining wholesale market prices due to significant new capacity additions.
Solution:
Short contract lengths for existing generation, longer contracts for newly built assets.
Energy price caps
(Karte nochmal überarbeiten, das ist nicht intuitiv)
CRM suppliers can participate in the energy market (except strategic reserves)
Problems of price caps:
- Cross-border trade: export from zones with price caps to zones without during scarcity conditions.
- no incentive to produce for plants with var. costs > price cap
- price signal for demand distorted
What is a lag period?
Essentially determines the maximum time for construction of new assets as they must be available at the beginning of the delivery period.
-> implicitly determine which newly built technologies can participate
slide 35
CRMs used in Europe (which where)
- Nordic: Strategic reserves
- UK& Poland: Central capacity market
- France: Comprehensive CRM
- Spain: Capacity payments
- Belgium: Auction-based CRM
Strategic reserves
A capacity reserve that is not allowed to sell electricity to the energy markets
Activation: Strategic reserves may only be used under exceptional circumstances.
Inefficient: Unused capacity
Germany’s strategic reserve
+ penalty for non-availability?
- 2 GW of power plant capacity
- Price limit 100€/kW/yr
- In 2022-24: cleared at 1 GW and 63€/kW/yr
- Penalty for non-availability: 15% of annual payment for each unresponded activation
Reliability option
- what is it
- how does it work on the energy market
- which energy resources are they good for?
An insurance against high prices:
Seller pays buyer difference between spot price and strike price. (basically a CfD)
Energy market remains intact (no spot price cap, seller always earns the spot price if producing)
Good hedge for resources with high variable costs
Advantages of reliability options (3)
- Compatible w/ energy markets (no need to cap power prices)
- Just another hedging product
- Generates income: During scarcity, the buyer (e.g. gov) generates income
What is the capacity credit expressing? Definition!
How much a generator contributes to system reliability.
Example capacity credit: If a wind farm (200 MW) has a 30% capacity credit, what does this mean and what’s the de-rating factor?
Only 30% (60 MW) of the nameplate capacity will be considered reliable for planning purposes. The system can increase load only up to 60 MW while keeping the reliability target.
