EUU, Alm.del - 2015-16 - Bilag 754: Notat og høringssvar vedrørende Europa-Kommissionens foreløbige sektorundersøgelse af el-kapacitetsmekanismer

Europaudvalget 2015-16
EUU Alm.del Bilag 754
Offentligt

Denmark´s response to the European Commission´s public con-

sultation with regard to the interim report of the sector inquiry into

capacity mechanisms

June 2016

General remarks

The Danish government

welcomes the interim report of the sector inquiry into ca-

pacity mechanisms. Denmark strongly supports the Commission’s view that the

need for capacity mechanisms should be based on harmonised regional assess-

ments. Denmark believes that the overall aim for the European internal energy

market must be to eliminate the need for capacity mechanisms through a well-

functioning energy-only market that sends appropriate short and long term price

signals to invest in new and existing capacity as well as infrastructure. Capacity

mechanisms should be temporary measures to be employed whilst existing market

design failures in wholesale electricity markets are rectified. The introduction of

capacity mechanisms should, therefore, be accompanied by a roadmap for reme-

dying the underlying market failures that are responsible for the adequacy con-

cerns, including a deadline for when the mechanism should be phased out.

Denmark’s key points are as follows:



The energy-only market should be the main instrument to ensure genera-

tion adequacy; capacity mechanisms or other national initiatives to ensure

generation adequacy should be temporary measures of last resort;

The introduction of a temporary capacity mechanism should be accompa-

nied by a roadmap for removing existing market design failures, including a

deadline for a phase out of the mechanism;

The need for a capacity mechanism should be based on a harmonised re-

gional generation adequacy assessment;

The introduction and choice of capacity mechanism should be based on a

comprehensive regional social welfare economic analysis;

Harmonised principles for capacity mechanisms should be developed, in-

cluding principles for cross-border participation.



Danish Ministry of Energy,

Utilities and Climate

Stormgade 2-6

DK-1470 Copenhagen K

P: +45 3392 2800

E: [email protected]

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EUU, Alm.del - 2015-16 - Bilag 754: Notat og høringssvar vedrørende Europa-Kommissionens foreløbige sektorundersøgelse af el-kapacitetsmekanismer

The energy only market should be the main instrument to ensure generation ade-

quacy

In a well-functioning internal energy market comprising markets for electricity and

markets for ancillary services, investors will receive accurate short and long term

price signals to invest in new transmission or production capacity and/or retrofit

existing capacity. Similarly, the consumers will be confronted with the true costs of

using electricity and thus receive the right incentives to react to the price signal.

Therefore, it is important to identify the market barriers causing the generation ade-

quacy problem with an aim to removing these barriers before introducing new initia-

tives to ensure generation adequacy. Removing barriers entails

inter alia

address-

ing insufficient transmission capacity both across and within borders, developing

efficient short and long term markets, and facilitating a higher level of consumer

participation in the market.

However, as stated in the interim report some barriers may be difficult to remedy or

require time to address properly. Consequently, it can be necessary to introduce

temporary capacity mechanisms in order to ensure generation adequacy as a last

resort when facing challenges of the electricity market. If introduced, Member

States should be obliged to ensure that the design of capacity mechanisms do not

delay the long term ambition of developing a well-functioning, integrated European

electricity market in which market based electricity price signals – rather than sup-

port for capacity - ensure the necessary investments.

The introduction of a temporary capacity mechanism should be accompanied by a

roadmap for removing existing market design failures including a deadline for a

phase out of the mechanism

The interim report mainly focuses on how capacity mechanisms should ideally be

designed in order to address specific types of adequacy problems. The interim

report e.g. presents preliminary conclusions regarding which types of mechanisms

are more appropriate in order to address a

short term

capacity problem in contrast

to a

long term

capacity problem.

In general the report refers to market failures, but it does not define what consti-

tutes a market failure or how the market failure can be removed. The report should

both aim to identify how market failures create short or long term capacity problems

as well as present recommendations on how market failures can be removed. In

order to reach the objective of a well-functioning internal electricity market, the final

report should in addition address how and to what extent capacity markets distort

the energy-only market.

Denmark strongly believes that capacity mechanisms should not be an alternative

to a well-functioning electricity market, as capacity mechanisms distort the energy-

only market. Therefore, it is important that the introduction of capacity mechanisms

is accompanied with a road map for how to remedy the market failures creating the

adequacy problem. This road map should also include a timeline for the phase out

of the capacity mechanism.

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EUU, Alm.del - 2015-16 - Bilag 754: Notat og høringssvar vedrørende Europa-Kommissionens foreløbige sektorundersøgelse af el-kapacitetsmekanismer

The need for capacity mechanisms should be based on harmonised regional gen-

eration adequacy assessment

The applied methodologies, models and assumptions when carrying out generation

adequacy assessments varies greatly between Member States. In order to develop

a fully integrated internal energy market, a harmonised methodology to assess

generation adequacy is needed. The harmonised methodology should be applied

on a regional level in order to fully account for the contribution of interconnectors

and capacity in neighbouring countries. A harmonised method to assess system

adequacy must eliminate the current bias towards thermal, domestic generating

capacity that is often found in existing generation adequacy assessments. When

evaluating system adequacy, it is at present common practice to reduce the availa-

bility of interconnector capacities and for sensitivity analysis to be performed on the

assumption that interconnectors are not available. These tendencies contribute to a

perception that import is a less reliable source of supply than domestic generation.

This leads to overestimation of the level of domestic capacity required to maintain

the desired level of adequacy which ultimately results in market distortions. Moreo-

ver, the contribution of renewable energy to system adequacy is similarly underes-

timated, which reduces the value of renewable energy for the system and can re-

sult in the retention of generating capacity that is often not competitive in the mar-

ket.

A harmonised methodology should be based on a probabilistic method. A probabil-

istic method provides a more accurate picture of the probability of having sufficient

power to satisfy consumption than current methodologies. A probabilistic method

ensures that the intermittent nature of wind and solar based production, small-scale

hydro, small and large power plants, combined heat and power, demand side re-

sponse, transmission lines as well as interconnectors are represented in the calcu-

lation in a manner that more accurately reflects their contribution to system ade-

quacy. A probabilistic method would also make it easier to analyse the potential for

more shared security of supply across borders. Consequently, a probabilistic meth-

od would provide a better basis for decisions on new investments to improve secu-

rity of supply.

The introduction and choice of capacity mechanism should be based on a compre-

hensive regional social welfare economic analysis

The introduction of capacity mechanisms in Member States can have a great im-

pact on the markets in neighbouring countries. If one country decides to implement

a capacity market, there is a risk that neighbouring countries are forced to also

implement a capacity market, since the introduction of a capacity market in one

country can potentially have a negative effect on electricity prices in neighbouring

countries, which in turn reduces the incentive to invest based on electricity price

signals. Furthermore, if two neighbouring countries decide to implement different

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EUU, Alm.del - 2015-16 - Bilag 754: Notat og høringssvar vedrørende Europa-Kommissionens foreløbige sektorundersøgelse af el-kapacitetsmekanismer

types of capacity mechanisms it will most likely be inefficient and make the market

less transparent.

Member States should retain the prerogative to determine national reliability stand-

ards. However, to ensure a cost effective solution and minimise the distortion on

the internal energy market the choice of capacity mechanism should be based on a

regional social welfare economic analysis, which takes the effects the introduction

of a capacity mechanism will have on the neighbouring countries into account. This

requires a higher level of coordination between TSOs.

Harmonised principles for capacity mechanisms should be developed, including

principles for cross-border participation

To ensure that capacity mechanisms distort the market to a minimum the Commis-

sion should develop harmonised principles for the design of capacity mechanisms.

In general capacity mechanisms should be time-limited, technology neutral and

allow for cross-border participation and demand response.

Annex 2 in the interim report highlights important considerations which should be

taken into account when developing general principles of cross-border participation

in capacity mechanisms. We agree with the working group that the need for cross-

border participation in a strategic reserve is limited, as strategic reserves should not

be activated before all possibilities for imports have been exhausted. However, as

the markets become more integrated and TSO-cooperation intensifies it could be

beneficial to develop regional strategic reserves. This would most likely ensure a

more cost effective solution than introducing separate national capacity mecha-

nisms.

Factual comments to the interim report



In the report the Danish reserve is referred to as abandoned, however Den-

mark has not abandoned the plan to introduce a strategic reserve in 2017-

2018. The implementation of the strategic reserve has been postponed until it

can be clarified whether it fulfils the state aid guidelines.

General remark to figure 2, 4, 11, 12, 13 and 19: In Denmark a high share of

our power plants uses biomass as main fuel. We therefore suggest separating

biomass and fossil fuels.

Figure 13: Denmark has a large share of combined heat and power (CHP)

plants. Consequently, the drop in the level of Danish capacity utilisation of

combustible fuels is limited compared to other Member States with high pene-

tration of wind, due to the dual function of CHPs (heat and electricity). In addi-

tion, a large share of thermal production uses biomass rather than fossil fuels.



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