Capacity Remuneration Mechanisms in Energy-Only Markets

: In Pursuit of Creating a Regulatory Framework for the Integration of Capacity Remuneration Mechanisms in the European Union Electricity Markets

  • Taner Sahin

Student thesis: Doctoral ThesisDoctor of Philosophy

Abstract

Liberalisation of electricity markets in Europe produces challenges for ensuring generation adequacy. There are rising concerns in Europe concerning the competence of energy-only markets to provide generation adequacy in the European Union Electricity Markets. Consequently, many Member States in the European Union including the UK, Germany, France, Italy, Belgium, Poland, Denmark, Spain, Portugal, Greece, Croatia, Sweden and Ireland have introduced or are contemplating the introduction of Capacity Remuneration Mechanisms in their jurisdictions with a unilateral approach. It is known, however, that fragmented and uncoordinated Capacity Remuneration Mechanisms in integrated electricity markets, as in Europe, might cause inefficiencies and distort cross-border trade. These developments raise the controversial issue of creating a regulatory framework to integrate Capacity Remuneration Mechanisms in Europe. This thesis is mainly a research on how this regulatory framework can be established.

With this understanding, throughout the thesis, one research question is asked and tried to be answered: What regulatory framework is required to ensure generation adequacy in energy-only markets, and to integrate unilaterally established Capacity Remuneration Mechanisms in the EU in compliance with the spirit of the Internal Electricity Market?

Answering the first part of research question provides this thesis with a Conceptual Framework. This Conceptual Framework is used to understand the main causes and working principles of Capacity Remuneration Mechanisms. Also, it enables to make a comparison between the theoretical backgrounds of Capacity Remuneration Mechanisms and their reflections in the European Union. To reveal this Conceptual Framework, an extensive literature review is made and, hence, what are the main causes of Capacity Remuneration Mechanisms in energy-only markets are put forward from a theoretical point of view. Accordingly, the missing money problem, the increasing share of intermittent RESs, investment (boom-and-bust) cycle problem and lack of adequate forward contracts are evaluated as main causes of Capacity Remuneration Mechanisms. This theoretical conclusion is supported by analyzing several real-world experiences from the United States to South America. Then, as indicated above, these deductions derived from the Conceptual Framework are tested within the context of the European Capacity Remuneration Mechanisms established in recent years. Consequently, the main causes of the European Capacity Remuneration Mechanisms are compared with what the Conceptual Framework is provided. It is revealed that although the underlying reasons of Capacity Remuneration Mechanisms in the European Union are mostly same with what the Conceptual Framework provides, there are several reasons unique to the European Union Member States. These reasons are called as “European-centric reasons” in this thesis and ordered as follow: (1) Low Carbon Prices – Failure of the Emission Trading Scheme, (2) Phasing out nuclear and coal power plants, (3) Flood of cheap shale gas: Increasing competitiveness of coal power plants, (4) The Global Financial Crisis 2008.

Having presented the above, all in all, integration of European Capacity Remuneration Mechanisms is asserted as an inevitable necessity. The said integration is defined as accepting foreign capacity resources (i.e. allowing cross-border participation where physically possible) to national Capacity Remuneration Mechanisms within the context of this thesis. Justifications for this integration are put forward from both legal and economic perspectives. Consequently, the thesis proposes some minimum regulatory requirements to harmonize, and thus integrate, national Capacity Remuneration Mechanisms in Europe. These regulatory requirements include the following (not ranked by priority): Harmonized Generation Adequacy Assessments, Respecting Contracted Capacity Obligations, Allocation of Interconnectors’ Capacity and No Double Counting. Initiated by the European Commission in 2015, the Energy Union Strategy offers one of the most important opportunities, if not the only opportunity, to meet these requirements. It is understood that the Fourth Energy Package to be brought by the Energy Union Strategy, along with other innovations it will bring, will include the necessary legal framework that enable these minimum regulatory requirements. In this sense, it can be guessed that significant amendments will be made especially to the Electricity Directive and the Security of Electricity Directive. The questions of whether these amendments will be adequate for integrating European Capacity Remuneration Mechanisms; and, thus, whether the challenges caused by these mechanisms can be overcome will be the subject of interesting and important research in next years.
Date of Award2018
LanguageEnglish
Awarding Institution
  • University of Dundee
SupervisorStephen Dow (Supervisor) & Rafael Macatangay (Supervisor)

Cite this

Capacity Remuneration Mechanisms in Energy-Only Markets: In Pursuit of Creating a Regulatory Framework for the Integration of Capacity Remuneration Mechanisms in the European Union Electricity Markets
Sahin, T. (Author). 2018

Student thesis: Doctoral ThesisDoctor of Philosophy