POLITECNICO DI MILANO
Facoltà di Ingegneria Industriale e dell’Informazione
Dipartimento di Energia
Corso di Laurea Magistrale in Ingegneria Energetica
AN EMPIRICAL ASSESSMENT OF THE CAPACITY MARKET
IN UNITED KINGDOM
Relatore: Prof. Maria Elena Fumagalli
Relatore estero: Prof. Laurens de Vries
Correlatore: Ing. Paolo Mastropietro
Ing. Pradyumna Bhagwat
Tesi di Laurea di:
Anna Marcheselli
matricola 804897
3
Tra vent’anni sarai più deluso dalle cose
che non hai fatto che da quelle che hai fatto.
Quindi molla gli ormeggi.
Allontanati dal porto sicuro.
Lascia che il vento gonfi le tue vele.
Esplora. Sogna. Scopri.
Twenty years from now
you will be more disappointed by the things
that you didn’t do than by the ones you did.
So throw off the bowlines.
Sail away from the safe harbor.
Catch the trade winds in your sails.
Explore. Dream. Discover.
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Acknowledgment
First of all, I wish to express my sincere gratitude to Prof. Laurens De Vries, who gave me the opportunity to live an extraordinary experience at TU Delft that resulted in this thesis. My strongest thanks go in equal way to Prof. Maria Elena Fumagalli for having accepted to be my supervisor in Milan and for her helpfulness and fruitful comments.
Secondly, the warmest thanks go to my daily supervisors Paolo Mastropietro and Pradyumna Bhagwat, who followed me step by step during the development of the project and helped me to tackle the obstacles that I had to face during my stay in Delft, as regards both the academic field and everyday life.
A nostalgic thought goes to all the people met at E&I section, and in particular to the colleagues of room A3.100, I loved being part of the “Fellowship”.
Moreover, I will always remember all the people met in Delft. First of all, thanks to the “Italians” to have been my safety net during the first period there in the Netherlands, I will always keep our gathering after work at Bouwpub in my heart. A thankful and pleasant thought goes to LBG Delft. Being part of this student association gave me the opportunity to experience the university student life in the way I have always wanted; it gave me the chance to always face new challenges, to improve as person and extend my national horizons, meeting new awesome people from all over the world. My greatest thank goes to the Dutch neighbor of the 9th floor for
your constant and precious support and for having always encouraged me to do not give up in the difficult moments. And of course, a special thank goes to “The Guys” to made me feel home in Delft. I will always remember our Wednesday at “The Roof”, our nights at “Bebop” and all the amazing time spent together.
Finally, I wish to express my gratitude to my old dearest friends in Italy, in particular Alessandra, Mattia and Chiara. Being always in contact with them, even if thousand miles divided us, made me feel the Italian warmth of home. A special thank also to Francesco for helping me with the translations in Italian, to Andrea for his valuable computer advice and to my classmates at PoliMi, for their precious help during lectures and exams in Milan.
Last but not least, the greatest thank goes to my family, my mother Laura, my sister Elena and my grandmother Vanda, for having always supported and encouraged me till the achievement of this important goal and for their unconditional love, and to my father Paolo and my grandfather Ottavio, for always watching and protecting me from up there.
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Index
Acknowledgment ... 5 Index ... 7 List of Figures ... 13 List of Tables ... 15 List of acronyms ... 17 Abstract ... 19 Abstract Italiano ... 21 Riassunto Esteso ... 23 1 Introduction ... 291.1 Power sector liberalizations in the European context ... 29
1.2 Characteristics of EU electricity markets and market failures ... 29
1.2.1 Risk aversion ... 30
1.2.2 Regulatory risk ... 30
1.2.3 Price restrictions ... 30
1.2.4 The reduced role of demand in electricity markets ... 31
1.2.5 Lumpiness of generation investments ... 31
1.2.6 Lack of information ... 31
1.3 Dimensions of the security-of–supply problem ... 31
1.4 Capacity Remuneration Mechanisms as a solution ... 32
1.4.1 Price-based mechanisms ... 33
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1.5 Status of capacity mechanisms in Europe ... 34
1.6 Research objectives and questions ... 35
1.7 Research method and data ... 36
2 Description of Capacity Market in United Kingdom ... 39
2.1 Introduction and general regulatory framework ... 39
2.2 Institutional and governance arrangements ... 40
2.3 Policy framework and final design of Capacity Market ... 42
2.3.1 Stage 1: Definition of the amount of capacity to auction ... 42
2.3.2 Stage 2: Pre-qualification of capacity providers... 44
2.3.3 Stage 3: Auction execution ... 46
2.3.4 Stage 4: Secondary market ... 48
2.3.5 Stage 5: Delivery ... 49
2.4 Participation of demand side response (DSR) ... 50
2.5 Payment model ... 51
2.5.1 Calculating charges and payments ... 51
2.5.2 The settlement body cost ... 52
2.5.3 Invoicing, banking and payments ... 52
2.6 Legal framework for the Capacity Market ... 54
2.6.1 Capacity agreement rights and obligations ... 54
2.6.2 Capacity Market register ... 54
2.6.3 Termination and other remedies ... 54
2.7 First capacity auction results ... 55
3 Literature review ... 57
3.1 Literature review on security of supply issue ... 57
3.2 Literature review on UK Capacity Market ... 58
3.3 Experts’ opinions on UK Capacity Market ... 60
9 4.1 Buying side ... 63 4.1.1 Target ... 63 4.1.2 Centralization ... 64 4.2 Selling side ... 65 4.2.1 Interconnections ... 66 4.2.2 DSR ... 67 4.3 Lag period ... 68 4.4 Contract duration ... 69
4.4.1 Coal-fired power plant controversy... 69
4.5 Reliability product ... 70
4.5.1 Reliability in capacity- and energy-constrained systems ... 70
4.5.2 Critical period... 71
4.5.3 Penalties for non-compliance ... 72
4.5.4 Tradable quantities ... 73
4.6 Conclusions: strengths and weaknesses of the UK CRM ... 74
5 Model Description ... 77
5.1 EMLab Generation Model ... 77
5.1.1 Overview ... 77
5.1.2 The basic model ... 78
5.1.3 Agents ... 79
5.1.4 Market clearing algorithm ... 80
5.1.5 Investment algorithm ... 82
5.2 The Capacity Market Model ... 84
5.2.1 Overview ... 84
5.2.2 The demand side ... 84
5.2.3 The supply side ... 87
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5.2.5 Financial Transaction ... 91
5.2.6 Update revenue in Investment Algorithm ... 92
5.2.7 Integrations algorithm ... 92
6 Conceptualization and Formalization ... 93
6.1 Overview ... 93
6.2 The UK investment algorithm ... 94
6.3 The UK demand side ... 98
6.3.1 The UK demand target ... 98
6.3.2 The UK demand curve... 99
6.4 The UK supply side ... 99
6.5 The UK market clearing auction ... 101
6.5.1 Dismantling algorithm ... 103
6.6 The UK financial transaction ... 103
7 Verification and Validation ... 105
7.1 Verification ... 105 7.2 Validation ... 106 8 Experiment design ... 109 8.1 Introduction ... 109 8.2 Experiment design ... 109 8.2.1 Hypothesis ... 109 8.2.2 Scenario simplification ... 110 8.2.3 Experiment set-up ... 112
8.2.4 The sensitivity analysis ... 112
8.3 Description of Indicators ... 113
8.3.1 Generation mix index ... 113
8.3.2 Adequacy index ... 114
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9.1 Introduction ... 117
9.2 Experiment ... 117
9.2.1 System adequacy performance ... 118
9.2.2 Installed capacity performance... 120
9.3 Sensitivity Analysis ... 123
9.3.1 System adequacy performance ... 123
9.3.2 Installed capacity performance... 129
10 Conclusions and further developments ... 133
Appendix A ... 137
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List of Figures
Figure 1.1. Capacity Remuneration Mechanisms and the Internal Market for electricity (ACER,
2013) ... 33
Figure 1.2 Status of capacity mechanisms in Europe in 2013(ACER, 2013) ... 35
Figure 2.1 Illustrative capacity demand curve (DECC, 2014a) ... 43
Figure 2.2 Capacity Market settlement timetable (DECC, 2014a) ... 53
Figure 5.1 EMLab Generation Model Main Algorithm flowchart, including Capacity Market . 79 Figure 5.2 EMLab Generation Market Model Clearing Algorithm flowchart, including ETS ... 81
Figure 5.3 EMLab Generation Model Investment Algorithm ... 83
Figure 5.4 ForecastDemandRole flowchart ... 85
Figure 5.5 Sloping Demand Curve... 86
Figure 5.6 SubmitBidRole flowchart ... 88
Figure 5.7 ClearCapacityMarketRole flowchart ... 90
Figure 5.8 PaymentFromConsumerToProducerForCapacityRole flowchart ... 91
Figure 6.1 UKDummyPowerPlanInvestmentAlgorithm flowchart... 97
Figure 6.2 UKDemandCurve flowchart ... 98
Figure 6.3 UKSubmitBidToAuction flowchart ... 100
Figure 6.4 UKClearingCapacityMarket flowchart ... 102
Figure 6.5 UKPayment flowchart ... 104
Figure 8.1 Installed Capacity index example ... 114
Figure 8.2 Supply Ratio index example ... 115
Figure 8.3 LOLE index example ... 115
Figure 9.1 Baseline scenario and Capacity Market Supply Ratio graphs ... 118
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Figure 9.3 Baseline scenario and Capacity Market Installed Capacity graphs... 121
Figure 9.4 Peak Capacity Supply Ratio graphs for sensitivity analysis ... 124
Figure 9.5 LOLE (hour/year) graphs for sensitivity analysis ... 126
Figure 9.6 Installed Capacity (MW) graphs for sensitivity analysis ... 129
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List of Tables
Table 2.1 Capacity Market secondary trading arrangements ... 49 Table 4.1 Design element summary of Capacity Market in United Kingdom (DECC, 2014a) .. 74 Table 8.1 The “Big Six” ... 110 Table 8.2 Power Portfolio of United Kingdom ... 111 Table 8.3 Experiment for Sensitivity Analysis ... 113
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List of acronyms
CRM: Capacity Remuneration Mechanism RES-E: Renewable Energy Sources for Electricity UK: United Kingdom
EU: European Union
DECC: Department of Energy & Climate Change EMR: Electricity Market Reform
CfD: Contract for Difference
LCCC: Low Carbon Contracts Company EDR: Electricity Demand Reduction CONE: Cost of New Entry
CCGT: Combined Cycle Gas Turbine OCGT: Open Cycle Gas Turbine CMU: Capacity Market Unit
DSR CMU: Demand Side Response Capacity Market Unit CHP: Combined Heat and Power
RO: Renewables Obligation FIT: Feed in Tariffs
RHI: Renewable Heat Incentive NER300: New Entrants Reserve 300 STOR: Short-Term Operating Reserve CCS: Carbon Capture and Storage
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IEM: Internal Electricity Market LoLE: Loss of Load Expectation PCR: Price Coupling of the Regions ETS: European Trading System
TBM: Technology, Policy and Management EMLab: Energy Modelling Laboratory EP: Energy Producer
IGCC: Integrated Gasification Combined Cycle NPV: Net Present Value
IRM: Installed Reserve Margin
FO&M: Fixed Operation and Maintenance WACC: Weighted Average Cost of Capital PGT: Photo-catalytic Gas Treatment
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Abstract
There is an increasing concern about the capability of energy-only markets to ensure the adequacy of power systems in the long term. This is prompting many European countries to introduce a Capacity Remuneration Mechanism (CMR) in their system, with the objective of attracting the investments required to guarantee security of supply.
The research project presented in this thesis is focused on the capacity mechanism recently introduced in the United Kingdom. In July 2014 the European Commission authorized the United Kingdom to implement a Capacity Market, the first example of this design in Europe. In December 2014, the first auction was held.
The objective of this research is to provide a critical assessment of the UK CRM. Firstly, a broad qualitative analysis of the Capacity Market, based on the design elements that compound it, is carried out, in order to identify the strengths and the weaknesses of this mechanism. Secondly, an agent-based modeling approach is followed in order to assess whether the introduction of the Capacity Market helps the United Kingdom to meet its targets in terms of greenhouse gases emission reduction and renewable penetration, and to enhance the adequacy of its power system. This second part is carried out through EMLab Generation, a software developed at the Energy & Industry section of TPM faculty at TU Delft in order to study the electricity market transition towards a low-carbon regime
The results obtained in this research permit to state that the UK Capacity Market, despite some minor flaws underlined in this thesis, has a strong design, enhances the adequacy of the system and, in combination with renewable energy support schemes, promotes the transition towards low-carbon generation technologies.
Keywords: United Kingdom; Capacity Market; System Adequacy; Security of Supply;
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Abstract Italiano
Si riscontra una crescente sfiducia sull’abilità degli energy-only market di garantire l’adeguatezza del sistema elettrico sul lungo periodo. Pertanto, molti paesi europei stanno introducendo Capacity Remuneration Mechanisms (CMRs) o Meccanismi di Remunerazione della Capacità, con l’obiettivo di attirare gli investimenti necessari per garantire la sicurezza del sistema elettrico.
Il progetto di ricerca presentato in questa tesi si concentra sul meccanismo di capacità introdotto di recente nel Regno Unito. Nel luglio del 2014 la Commissione Europea ha autorizzato il Regno Unito ad implementare un Capacity Market o Mercato della Capacità, primo nel suo genere in Europa. Nel dicembre dello stesso anno si è tenuta la prima asta.
L’obiettivo di questa tesi è fornire una valutazione critica del CRM del Regno Unito. Anzitutto si è seguito un approccio di tipo qualitativo conducendo un’ampia analisi delle regole del Mercato della Capacità britannico, basata sugli elementi strutturali che lo compongono, per individuare i punti di forza e le criticità del meccanismo. In secondo luogo si è seguito un approccio di tipo quantitativo per valutare se l’introduzione del mercato delle capacità consenta al Regno Unito di raggiungere i propri obiettivi in termini di riduzione delle emissioni di gas a effetto serra, sfruttamento delle rinnovabili e adeguatezza del sistema elettrico. La seconda parte è stata realizzata mediante l’utilizzo del programma EMLab Generation, software sviluppato dalla sezione Energia e Industria del dipartimento Technology, Policy and Management dell’Università Tecnica di Delft nei Paesi Bassi. Tale software ha come principale obiettivo lo studio dell’evoluzione dei mercati energetici in fase di transizione verso un regime a basse emissioni di carbonio.
I risultati ottenuti in questa ricerca consentono di affermare che il Mercato delle Capacità del Regno Unito, nonostante alcune trascurabili carenze evidenziate nella tesi, ha una struttura solida, migliora l’adeguatezza del sistema e, in combinazione con schemi di supporto alle fonti rinnovabili, promuove la transizione verso tecnologie di generazione di energia a basse emissioni di carbonio.
Parole chiave: Regno Unito; Mercato delle Capacità; Adeguatezza del Sistema; Sicurezza
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Riassunto Esteso
Introduzione
Uno dei più discussi e controversi casi di implementazione di meccanismi di capacità nei mercati elettrici mercati europei è quello del Regno Unito. Infatti, in data 23 luglio 2014 la Commissione Europea ha autorizzato la proposta del Regno Unito di adottare un Capacity Market o Mercato della Capacità, primo del suo genere in Europa. La prima asta ha avuto luogo nel dicembre del 2014. Dalla sua approvazione, il Capacity Market del Regno Unito ha sollevato più di qualche perplessità.
Scopo del lavoro
Il primo obiettivo di questa ricerca è fornire una descrizione del Capacity Market britannico al fine di individuare i suoi punti di forza e di debolezza. Inoltre, si vuole stabilire l’impatto che l’introduzione del Capacity Market nel Regno Unito ha sull’adeguatezza del sistema elettrico. Il terzo obiettivo del progetto è determinare se l’introduzione del Capacity Market aiuti il Regno Unito a raggiungere gli obiettivi energetici comunitari in termini di riduzione delle emissioni di gas serra e aumento di produzione di energia da foni rinnovabili. Le domande di ricerca su cui si articola la tesi sono le seguenti:
1. Quali sono gli elementi di forza e le criticità del Capacity Market adottato nel Regno Unito?
2. Quale impatto ha l’introduzione del Capacity Market nel Regno Unito? Migliora l’adeguatezza del sistema?
3. Come si ripercuote l’adozione del Capacity Market sul mix energetico produttivo del Regno Unito? Favorisce gli investimenti in impianti a bassa emissione di gas serra al fine di rispettare le politiche dell’UE?
Tale ricerca si inserisce all’interno di un progetto più ampio chiamato EMLab Generation presso la sezione Energia e Industria della Facoltà di Technology, Policy and Management dell’Università Tecnica di Delft (Paesi Bassi), il quale ha come principale obiettivo lo studio dei mercati energetici in transizione verso un regime a basse emissioni di gas serra.
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Struttura del lavoro e scelte progettuali
Per cercare di dare una risposta alle domande appena esposte, il progetto sarà diviso in due parti seguendo due diversi approci, uno qualitativo e uno quantitativo. La parte qualitativa si basa sulla descrizione e analisi della struttura del Capacity Market del Regno Unito; per quella quantitativa, invece, si è usato un modello computazionale di analisi del mercato elettrico chiamato EMLab-Generation. Si tratta di un software sviluppato dall’Università TU Delft con il quale è stato possibile creare un modello di Capacity Market sulla base di quello britannico. Tutte le attività realizzate sono descritte con maggior dettaglio in seguito.
Analisi qualitativa
Le principali attività svolte durante la prima parte del progetto sono le seguenti:
Studio della letteratura scientifica di riferimento: in primis, è stato studiato in modo
approfondito la regolazione del Capacity Market del Regno Unito su documenti ufficiali del Department of Energy & Climate Change (DECC) del governo britannico, per analizzare le scelte istituzionali e di governo adottate nel meccanismo, l’esecuzione delle aste, il modello di pagamento e il quadro giuridico. Inoltre, è stata eseguita una ricerca sulla principale letteratura scientifica sul tema dell’adeguatezza del sistema energetico prima e sul Capacity Market del Regno Unito poi, riportando alcuni articoli che trattano l’argomento e l’opinione di alcuni esperti.
Analisi degli elementi della struttura: si è analizzato il Capacity Market britannico seguendo
le indicazioni definite da Batlle et al. (2014) tramite l’identificazione e valutazione dei principali elementi strutturali. Ciò ha permesso di rilevare pregi e criticità del meccanismo. I principali elementi della struttura sono i seguenti:
- Buying side (lato acquisto): si riferisce alla domanda che si esprime durante l’asta della capacità, ovvero la domanda da soddisfare;
- Selling side (lato vendita): rappresenta gli agenti che sono ammessi a presentare un’offerta all’asta della capacità;
- Lag Period: è il tempo che intercorre fra la firma del contratto e la sua entrata in vigore; - Contract duration (durata del contratto): dovrebbe essere abbastanza lungo da rendere
appetibili investimenti in nuova generazione di potenza garantendo ricavi più stabili. Può essere distinta in base all’impianto (nuovo o esistente) e alla tecnologia (p.es. idroelettrica o termica);
- Reliability product: si riferisce alla varietà di prodotti di capacità che il regolatore può acquistare per conto della domanda.
25 Ciascuno elemento strutturale definito sopra è stato prima approfonditamente studiato capendone le principali caratteristiche, poi ridefinito nel modello britannico, infine – dove possibile– è stato valutato seguendo i parametri descritti da Battle et al. (2014) adatti a giudicare la qualità di ciascun elemento della struttura.
Analisi Quantitativa
Le principali attività svolte durante la seconda parte del progetto sono le seguenti:
Studio preliminare di EMLab generation model: Il software EMLab Generation Model,
integrato con il modulo Capacity Market, è un modello computazionale di simulazione del mercato elettrico implementato nel Dipartimento di Technology, Policy and Management (TBM) dell’Università Tecnica di Delft (Paesi Bassi). Il primo obiettivo dell’EMLab Generation Model è di esplorare gli effetti dell’interazione tra politiche energetiche e politiche climatiche sul mercato dell’elettricità a lungo termine. Consultando la bibliografia specifica, sono stati studiati gli elementi principali dell’EMLab Generation Model: il quadro di applicazione, gli agenti esistenti, gli algoritmi principali e le più importanti politiche già attuate nel modello come quelle orientate all’incentivazione di produzione di energia da fonti rinnovabili e l’European Trading System (ETS). In secondo luogo, lo studio si è concentrato sull’analisi degli elementi e algoritmi più importanti del Capacity Market Model, modulo opzionale del più ampio EMLab Generation Model, attivabile e disattivabile in base alla necessità. La struttura del mercato della capacità già adottata nel modello si basa su quella del NYISO ICAP Market, meccanismo introdotto nello Stato di New York (USA) nel 2000, il quale presenta un’asta centralizzata amministrata dall’Operatore di Sistema dove vengono firmati contratti di un anno. Tutti gli impianti possono gareggiare nella stessa asta senza distinzione di tecnologia, età e dimensione.
Concettualizzazione e formalizzazione: Questa fase ha compreso le attività di identificazione
degli elementi innovativi introdotti dal Capacity Marekt inglese e la formalizzazione di tali concetti al fine di essere codificati nel Capacity Market Model. Si è riscontrata la presenza di due rilevanti elementi innovativi introdotti nella regolamentazione del mercato britannico. Il primo è che anche impianti non ancora costruiti possono partecipare all’asta delle capacità e aggiudicarsi contratti; ciò ha conseguenze sull’algoritmo degli investimenti, in cui si è dovuto affiancare un nuovo algoritmo aggiuntivo per includere gli impianti non ancora esistenti. Quest’ultimi sono stati codificati nel modello come “impianti fittizi” che prendono parte all’asta. Se un impianto fittizio si aggiudica un contratto, riceve un’istanza di costruzione, altrimenti viene cancellato. Il secondo importante elemento innovativo introdotto nella regolamentazione del Capacity Market del Regno Unito è la diversificazione dei contratti di
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capacità in base alla età dell’impianto e, in particolare, la possibilità per nuovi impianti di aggiudicarsi contratti di lungo periodo. Impianti nuovi possono stipulare accordi fino a 15 anni, impianti vecchi fino a 1, che diventano 3 in caso di impianti in via di ristrutturazione. Tutto questo incide sui seguenti elementi del Capacity Market Model:
- Algoritmo Submit Bid to Auction: è stato introdotto un loop aggiuntivo per includere la differenziazione fra vecchi e nuovi impianti. Gli impianti in via di ristrutturazione non sono stati presi in considerazione;
- Algoritmo Market Clearing Price: si è aggiunto un loop per includere la possibilità per i nuovi impianti di aggiudicarsi contratti di lunga durata. La durata del contratto decresce con l’età dell’impianto;
- Algoritmo Financial Transaction from Consumers to EP: modificato per includere un pagamento differenziato fra un impianto titolare di accordo annuale e quello titolare di accordo di lunga durata.
Progettazione dell’esperimento: terminata la fase di modifica degli algoritmi, è stato
progettato un esperimento che riflettesse adeguatamente gli obiettivi della ricerca, ovvero valutare l’impatto del Capacity Market sul mix energetico del Regno Unito e stabilire se tale strumento di regolamentazione migliori effettivamente l’adeguatezza del sistema. A questo scopo, gli obiettivi della ricerca sono stati tradotti nelle seguenti tre ipotesi:
- Ipotesi 1 – l’introduzione di un Capacity Market, in combinazione ad una politica di incentivazione alle energie rinnovabili, aumenta l’adeguatezza del sistema elettrico nel Regno Unito;
- Ipotesi 2 - l’introduzione di un Capacity Market, in combinazione ad una politica di incentivazione alle energie rinnovabili, aumenta lo sfruttamento di energie rinnovabili nel Regno Unito;
- Ipotesi 3 - l’introduzione di un Capacity Market, in combinazione ad una politica di incentivazione alle energie rinnovabili, fa crescere la percentuale di impianti a gas nel Regno Unito;
Le tre ipotesi sono state verificate eseguendo un esperimento realizzato confrontando due scenari: il “Base Case scenario” e il “Capacity Market scenario”. Essi differiscono solo in base all’implementazione del Capacity Market, che si verifica solo nel secondo; gli altri elementi rimangono invariati. Per ciascuno scenario si è analizzato un periodo di 40 anni, facendo girare il modello per 120 volte al fine di ottenere un risultato statisticamente robusto. In seguito, è stata condotta un’analisi di sensitività dell’esperimento per determinare come le prestazioni del modello di Capacity Market del Regno Unito rispondono alle modifiche di determinati
27 parametri strutturali. I diversi scenari implementati per l’analisi di sensitività sono stati creati per verificare i seguenti tre elementi: la durata del contratto per impianti nuovi, il lag period (periodo tra la firma del contratto e la sua entrata in vigore) e il margine di riserva installata. La scelta è caduta su queste variabili perché sono quelle più rappresentative del Capacity Market britannico, nonché le principali modifiche apportate al modello di Capacity Market già implementato in EMLab. Gli scenari, cinque in totale, sono stati progettati combinando insieme tre diversi valori di durata contrattuale per nuovi impianti (15, 13 e 17 anni), due lag period (4 e 6 anni) e due valori di margine di riserva installata (10% e 16%).
Esecuzione del modello e analisi dei risultati: l’ultima parte del progetto ha previsto l’attività
di coding del modello del Capacity Market del Regno Unito in EMLab, l’esecuzione dell’esperimento e dell’analisi di sensitività descritti in precedenza e l’analisi dei risultati così ottenuti.
Risultati e conclusioni
Tramite l’analisi qualitativa è stato possibile identificare i molti punti di forza e i meno numerosi punti critici del Capacity Market britannico. L’asta delle capacità è centralizzata e trasparente, impedendo una perfetta integrazione verticale tra produttore e rivenditore finale, garantendo così un certo grado di competizione nel mercato. Il lag period pare sufficientemente lungo da permettere a tutti gli impianti di nuova costruzione di essere pronti in tempo per rispettare gli eventuali contratti di capacità. La durata dei contratti, nonché la loro differenziazione sulla base di impianti nuovi, esistenti e in via di ristrutturazione, risulta adatta a rispettare le esigenze delle diverse categorie di agenti. Inoltre, lo schema di penalità previsto per i fornitori di capacità emerge come il modo più appropriato per scoraggiare i produttori che meno affidabili a gareggiare nell’asta, mentre i tetti sanzionatori proteggono gli agenti da esposizioni finanziarie troppo alte.
Dall’altro lato, il mercato della capacitò del Regno Unito presenta alcune debolezze. Anzitutto, l’esclusione dell’interconnected capacity dalla prima asta può portare all’installazione di un numero eccessivo di impianti di generazione nel primo periodo, fatto che potrebbe non essere economicamente controbilanciato da una effettivo miglioramento dell’adeguatezza del sistema dovuto alla partecipazione di tali risorse. In secondo luogo, il periodo critico previsto in caso di evento di stress nel sistema, da notificarsi a cura dell’Operatore di sistema con 4 ore di anticipo, può portare ad inefficienze nell’implementazione del meccanismo. Infatti, potrebbe risultare molto difficile per alcuni agenti tener fede ai propri obblighi, essendo il preavviso di evento di stress del sistema troppo breve perché questi riescano a fornire il contributo richiesto.
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Tramite l’analisi quantitativa e i relativi risultati ottenuti dal modello si è potuto concludere che il Capacity Market inglese aumenta l’adeguatezza del sistema e che, unitamente a meccanismi di supporto alle energie rinnovabili, promuove gli investimenti in tecnologie a basse emissioni di CO2. Ciò non implica che il Capacity Market sia il miglior strumento strategico per
raggiungere questo secondo obiettivo. L’esito degli esperimenti mostra infatti che la capacita totale installata cresce di circa il 50%, con cospicui investimenti in nuovi impianti a gas a ciclo aperto (OCGT) che registrano l’incremento maggiore, e con minori stanziamenti in impianti nucleari e a carbone. In merito agli indici di affidabilità, sia l’indicatore di Loss Of Load Expectation (LOLE) sia il supply ratio sono più elevati nello scenario del Capacity Market rispetto a quello che non lo prevede. Altri risultati interessanti provengono dall’analisi di sensitività, che dimostra come il mercato britannico della capacità sia molto sensibile all’indice di margine di riserva installata (IRM) mentre risenta molto meno del lag period e della durata del contratto. Infatti, più il margine iniziale di riserva installata è inferiore, minore risulta il valore finale di LOLE così come la capacità totale installata. Inoltre, se il valore dell’IRM non è sufficientemente alto, esso non invia un segnale di mercato adeguato agli investitori, inducendo così a realizzare minori investimenti nella capacità di generazione e, di conseguenza, a livelli inferiori di adeguatezza.
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1 Introduction
1.1 Power sector liberalizations in the European context
Modern society depends critically on the availability of electricity and the consequences of a lack of supply are known to affect regions and countries profoundly in their social, economic and political dimension (Rodilla and Batlle, 2013). For this reason, the security of electricity supply has always been one of the main concerns of governments and electricity market regulators.
In this prospective, during the 1990s, several power sector liberalizations took place in Europe. The main argument supporting liberalizations was the idea that a market-based approach results in the most efficient allocation of available resources. Moreover, short-term prices fixed through a competitive market were supposed to provide efficient signals both in the short and in the long term, resulting in the optimal operation of the system and in its efficient development. In fact, infra-marginal energy revenues were supposed to provide the necessary income for the recovery of both operating and investment costs (Caramanis et al., 1982). One of the assumptions on which this theory was based was that demand will have been able to manage the long-term risk encompassed in electricity markets, thus learning to sign long-term contracts if necessary to ensure the security of its supply.
This kind of electricity market, in which the regulator does not intervene in order to guarantee the long-term security of supply, is called “energy-only market” (Hogan, 2005), and it is based on the assumption that the short-term market price on its own is a signal strong enough to attract sufficient investment to guarantee the adequacy of the system. This approach was the one selected by many European regulators at the moment of liberalizing the electricity sector, Spain being the main exception.
1.2 Characteristics of EU electricity markets and market failures
European electricity markets, even if based on more or less different designs, have some common features. Firstly, they are not based usually on a mandatory pool, as in the United States context: agents exchange electricity either in the short-term (day-ahead) market or through long-term contracts, and they just have to notify their planned operation to the system
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operator. Secondly, they are largely interconnected with neighboring markets. Moreover, apart from Scandinavian countries, generation from hydropower plants has a limited role in European markets and this means that most of the European electricity systems are capacity-constrained rather than energy-constrained (De Vries et al., 2012). Comparing the ideal electricity market described by Caramanis et al. (1982), European markets, as all markets in the world, point out imperfections that distort the efficient price signal. These imperfections are presented below.
1.2.1 Risk aversion
Risk aversion affects both generation and demand behaviors. From the standpoint of generators, the risk involved in electricity markets is very high with respect to other sectors, and this affects their long-term investment strategy and medium-term resource management decisions. The main sources of uncertainty for the generator are to be found in the regulatory risk (analyzed below) and in the volatility of the short-term price. In pursuit of protection against low price scenarios, generators tend to install less capacity than what it would be optimal, thus increasing the probability of having high prices. Also demand can be considered conservative and risk averse. In fact, consumers, in pursue of protection against high prices, prefer a system with greater installed capacity and resource availability than if they were risk-neutral (Rodilla and Batlle, 2013).
1.2.2 Regulatory risk
Since electricity is an essential good nowadays, politicians are aware of the necessity to ensure continuous, reliable electricity supply in order to avoid social and political implications that a power shortage could create. Furthermore, in many countries the regulator and the government are considered as responsible for electricity tariffs, and this kept on being true also after the liberalization of the sector. High electricity prices can result in public protests, or at least loss of political consensus, thus prompting regulatory interventions in the market in order to avoid price spikes. This interference leads to distortions of the optimal market signal (De Vries et al., 2012).
1.2.3 Price restrictions
Related to the previous risk, the introduction of either a price or a bid cap can be deemed to be necessary to protect consumers against high prices during scarcity conditions. From the theory, such price cap should be equal to the value of lost load. However, it is not always easy (when not impossible) to determine the right value of lost load, thus the right price cap. The
31 consequence of setting a wrong price cap is a level of investment in generation capacity which is sub-optimal (De Vries, 2012).
1.2.4 The reduced role of demand in electricity markets
In electricity markets, demand is not always exposed to the short-term price, because it is commonly entitled by the regulator of some kind of regulated or default tariff. This leads to an inelastic demand, which does not react to price variations with a change in the quantity required.
1.2.5 Lumpiness of generation investments
For most generation technologies, the power production cost per unit decreases with the growing of the plant size, therefore investments in large power plant are encouraged. Thus, if the size of new generation investment is in the same order of magnitude of the peak demand of the system, the short-term prices would not be able to send the optimal signal for investment because it would be strongly affected by the new investment. If it is this case, the optimal amount of the investment is not economically viable (Rodilla and Batlle, 2013).
1.2.6 Lack of information
Producers often lack the information needed for socially optimal investment decision, like the exact function of demand or the expected development of total available capacity, so the risk increases, reducing the willingness to invest in generation (De Vries, 2007).
1.3 Dimensions of the security-of–supply problem
Because of these market failures, security-of-supply issues arise in liberalized power sectors. As stated in the paper written by Rodilla and Batlle (2010), the security of electricity supply problem presents four main dimensions, which are presented below.
- Security: it regards the very short-term time frame; it is the ability of the electrical system to support unexpected disturbances such as electrical short circuits or unexpected loss of components of the system.
- Firmness: it concerns the short- to the medium-term time frame; it is defined as the ability of the facilities already installed in the system to supply electricity in an efficient way. This dimension is conditioned by the characteristics of the generation mix in place and the medium-term resource-management decisions of the electricity producers (fuel provision, water reservoir management, maintenance scheduling, etc.).
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- Adequacy: it regards the long-term time frame; it is defined as the existence of enough available generation capacity, both installed or in construction, to efficiently meet the demand in the long term.
- Strategic expansion: it concerns the very long-term availability of energy resources and infrastructures. This dimension usually entails the diversification of fuels used in the power sector and the technologies to be included in the future generation mix.
In recent years, since power systems are hosting an increasingly high rate of energy produced from renewable and non-dispatchable resources, a new security-of-supply dimension is taking place, i.e., flexibility, which is the ability to adapt production or consumption to the system needs within a given time frame (Henriot and Glachant, 2014). In this research project, the attention is focused on the adequacy dimension, which is the one commonly addressed through capacity mechanisms.
1.4 Capacity Remuneration Mechanisms as a solution
In liberalized power sectors, the regulator has to decide, considering the potential market failures outlined above, whether or not relying on the market to solve the security-of-supply problem. Two different approaches have been used to face this situation:
- Energy-only market: method based on the belief that the market left to its own devices is able to provide agents with an economic signal that result in the optimal development of the system. The regulator does not interfere with the market and the demand has to manage the long-term risk involved in the electricity market (Rodilla and Batlle, 2013). - Capacity Remuneration Mechanisms or CRMs: method based on the belief that, due to
market failures, it is impossible to achieve the optimal development of the system without regulatory intervention. The regulator designs a mechanism in order to guarantee the adequacy of the system, commonly based on some sort of extra remuneration for market agents for the provision of a reliability service (Rodilla and Batlle, 2013).
As mentioned above, after two decades from the original liberalizations, many regulators of the systems which originally opted for an energy-only market (especially in Europe) have introduced, or are in the process of introducing, a Capacity Remuneration Mechanism in their system. Several capacity mechanism designs can be used to ensure the adequate level of investment in generation capacity. As presented in Figure 1.1, CRMs can be classified in two main categories, price-based and quantity-based mechanisms.
33 Figure 1.1. Capacity Remuneration Mechanisms and the Internal Market for electricity (ACER,
2013)
1.4.1 Price-based mechanisms
Price-based mechanisms rely on payments to both existing and new power generators in proportion to their contribution to the system adequacy and they do not specify or limit the volume of product that can receive this payment. Price-based mechanisms are represented basically by the so-called capacity payments (Rodilla and Batlle, 2013). They commonly provide generators with an extra payment for their installed capacity.
1.4.2 Quantity-based mechanisms
In quantity-based mechanisms, the regulator establishes the desired adequacy level and allows the market to set a price for a reliability product aimed at achieving such level. Quantity-based mechanisms are classified according to the different design they present and the most widely used are described below:
- Strategic Reserves: the system operator acquires power plants as strategic reserve, in order to use them during scarcity conditions. Even if the reserve capacity is kept out of the market, thus being supposed not to affect the normal functioning of the short-term power exchange, it obviously has an influence on spot prices during scarcity conditions (De Vries, 2012).
- Capacity Obligation: large consumers and load serving entities (retailers) are required to subscribe contracts to cover their self-assessed future consumption or supply
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obligations. The capacity to be contracted is generally higher than the level of expected future consumption in order to ensure a certain reserve margin (ACER, 2013).
- Reliability Options: capacity providers who signed reliability contracts are required to pay any positive difference between the wholesale market price and a pre-set strike price and in exchange they receive a fixed premium fee, thus they benefit from a more stable and predictable income stream (ACER, 2013). When the spot price exceeds the strike price, capacity providers are also required to produce electricity and this ensures that they are backed by firm generation.
- Capacity Auction: the total required capacity in a certain year in the future is estimated by the regulator and it is procured through a centralized auction by an independent body. The price is set through the competitive tender and paid to all participants who are successful in the auction (ACER, 2013). This creates a capacity market (and capacity remuneration) besides the energy market.
1.5 Status of capacity mechanisms in Europe
After the initial liberalizations, many regulators in the American continent (both North and Latin America) opted for the introduction of some sort of capacity mechanism, while many European regulators preferred to implement energy-only markets. However, a general rethinking on the system adequacy problem has been taking place during the last decade also in Europe. Many European countries have introduced, or are in the process of introducing, a capacity mechanism, with the objective of guaranteeing the security of supply in the long term. Figure 1.2 presents the situation of capacity mechanisms in Europe. Along with Spain, which introduced capacity payments from the very beginning, many European countries as, e.g., Finland, Greece, Ireland, United Kingdom, Belgium, or Italy have already introduced a capacity mechanism, while others, such as France, Germany, Italy (which is switching to another mechanism) are going to implement a CRM soon. Moreover, each country has followed a different approach, resulting in a great variety of capacity mechanism designs in the continent (ACER, 2013).
35 Figure 1.2 Status of capacity mechanisms in Europe in 2013(ACER, 2013)
1.6 Research objectives and questions
One of the most discussed and criticized case of implementation of capacity mechanism in European markets is that of the United Kingdom. Indeed, July 23th 2014 the European Commission gave the authorization to the United Kingdom’s proposal of implementation of a Capacity Market, the first implementation of this design in Europe (Van Renssen, 2014). The first auction has taken place in December 2014. Since its approval, the UK Capacity Market has raised more than a few criticisms from several sectors.
The first objective of this research is to give a description of the UK Capacity Market in order to assess the strengths and the weakness and to evaluate in a qualitative way if the design of the capacity is well-implemented or not, to evaluate the impact that the introduction of the Capacity Market in the United Kingdom has in terms of improving the social welfare, and to understand whether it is the most suitable regulatory tool in order to increase the adequacy of the system. Moreover, the second objective of the project is to evaluate if the introduction of capacity market helps the UK to meet the European energy target in terms of reduction of greenhouse gas emissions and improvements of RES-E (Renewable Energy Sources for Electricity) generation capacity penetration. The main research questions on which this thesis focuses can be summarized as follows:
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1) Which are the strengths and the weaknesses of the Capacity Market to be implemented in the United Kingdom?
2) What is the impact of the implementation of the Capacity Market in the United Kingdom? Does it improve the adequacy1 of the system?
3) How does the implementation of the Capacity Market in the United Kingdom affect the British generation mix? Does it promote investment in renewable and gas power plants in order to meet the EU policy of greenhouse gas emission reduction?
1.7 Research method and data
In order to find answers to these research questions, the project will follow two different approaches: a qualitative one and a model-based one. The qualitative part is based on the description and analysis of the UK Capacity Market design. The literature produced on the initial design proposal is presented and then the mechanism is analyzed in a qualitative way following the approach defined by Battle et al. (2014), who analyze CRMs through their design elements. Information and data will be gathered from official documents from the Department of Energy & Climate Change (DECC) of the British Government and from specific literature produced on this topic.
The modelling part consists in the application of the agent-based electricity market model EMLab-Generation, software developed by TU Delft University that allows studying the impact of different policy instruments and their implementation in interconnected systems. The work will consists in adjusting the capacity-market module already present in the model to the United Kingdom case. The last step will consist in running the model and analyzing the output obtained. Data of supply and demand functions for electricity and fuel prices in United Kingdom are already present in the EMLab-Generation database.
Both the qualitative part and the modelling one are fundamental to give proper answers to the research questions. Indeed, the qualitative analysis is used to provide a first empirical assessment of the UK Capacity Market design, and it is then complemented by the quantitative model-based analysis, which addresses the questions left unanswered by the qualitative approach.
1The reliability of an electric system can be viewed as two interrelated elements: adequacy and security. Adequacy
refers to the amount of capacity resources needed to meet peak demand and security refers to the ability of the system to withstand contingencies (or sudden changes) on a daily and hourly basis, such as the loss of a generating unit or transmission line. Without adequate generation, security concerns are greater.
37 The report of the project is structured in the following chapters:
- Chapter 2 presents a detailed description of the Capacity Market design in United Kingdom. It defines the institutional and government arrangements implemented in the mechanism, the auction execution, the payment model and the legal framework;
- Chapter 3 consists both of the literature review on the security of supply issue and the UK Capacity Market and of the analysis of several experts’ opinions on the topic; - Chapter 4 presents a qualitative analysis of UK Capacity Market following the
approach defined by Battle et al. (2014) based on the design elements; it also provides an answer to the first research question;
- Chapter 5 reports first an overall description of the elements, the algorithms and the functioning of EMLab Generation model and second a detailed description of the capacity market module already implement in EMLab;
- Chapter 6 describes the assumptions and simplifications carried out to abstract the UK Capacity Market design and the main modifications applied to the existing model; - Chapter 7 reports a brief dissertation about model verification and validation;
- Chapter 8 describes all the aspects of the experimental set-up, starting from the hypotheses that have to be tested, the assumptions used to reflect the hypotheses and the data employed to determine the scenarios and the sensitivity analysis;
- Chapter 9 reports the results of the modeling exercise and of the sensitivity analysis, as well as their interpretation; also, it provides answers to the second and third research questions; finally it contains several concluding remarks and directions for further work.
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2 Description of Capacity Market in United
Kingdom
2.1 Introduction and general regulatory framework
With the objective of achieving improvements in the three pillars of energy policy, i.e., competitiveness, security of supply, and decarbonization, in December 2010 the United Kingdom announced the largest reform of the electricity market since its privatization and liberalization at the beginning of the 1990s. This overall Electricity Market Reform (EMR) is coupled with other interventions targeting specific aspects of the energy sector. In fact, the UK government is implementing a carbon policy as part of the Climate Change Act of 2008, which sets legally binding five-year carbon reduction targets on a path towards 80% reduction of 1990 levels by 2050 (Pollitt and Haney, 2013). In addition, it has set a target for renewables to represent 15% of total final energy consumption by 2020 (Pollitt and Haney, 2013).
In order to face all these challenges, and to ensure the security of supply, the UK government has introduced in 2014 the Electricity Market Reform, which is a set of measures to promote investments in secure and low-carbon electricity generation, while improving affordability for consumers. This reform has the objective to enable the UK to develop a clean, diverse and competitive mix of electricity generation, ensuring the reliability of the system. The EMR has two key policy mechanisms to incentivize investments in the power sector:
- Contracts for Difference (CFDs): a private law contract between a low carbon
electricity generator and the Low Carbon Contracts Company (LCCC), a Government-owned company. A generator party to a CFD is paid the difference between the ‘strike price’ – a price for electricity reflecting the cost of investing in a particular low-carbon technology – and the ‘reference price’ – a measure of the average market price for electricity in the UK market. The contract gives greater certainty and stability of revenues to electricity generators, by reducing their exposure to volatile wholesale prices, while protecting consumers from paying for higher support costs when electricity prices are high.
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- Capacity Market: a mechanism to ensure sufficient investment in the overall level of
reliable capacity (both supply and demand side) needed to provide secure electricity supplies. The Capacity Market provides certain, regular payments to capacity providers, in return for which they must be available and producing electricity (or reducing demand) when scarcity conditions are in place in the system, or else face penalties. National Grid will also contract short-term balancing services to ensure the real-time balancing of the system.
Both CFDs and the Capacity Market work alongside the electricity (energy) market – which is where most participants earn the majority of their revenues – and encourage competition, in order to minimize costs, while also delivering the required investment. Beside these two mechanisms, EMR also launches an Electricity Demand Reduction (EDR) pilot-program, to encourage greater energy efficiency and savings capacity through the installation of efficient electrical equipment. The EDR project could contribute to the Capacity Market, as it reduces the system peak load and in turn lower the amount of generation capacity that needs to be delivered to meet that demand.
Besides the EMR, the new policy regarding nuclear power investments must be mentioned. In October 2014, the UK Government and EDF Group have reached a commercial agreement for the construction of the new Hinkley Point C nuclear power station in Somerset, the first new nuclear power plant to be built since Sizewell B, which started generating electricity in 1995 (DECC, 2013a). According to the Regulator, this agreement paves the way for the replacement of the existing fleet of nuclear plants, which are due to be close in the 2020s, in order to provide a new clean source of domestic energy, to improve electricity reliability, to cut emissions and to reduce consumers bills over the long term (DECC, 2013a).
After this brief introduction on the main regulatory discussions currently taking place in the UK, this chapter will focus on the detailed description of the British Capacity Market, which is the actual subject of this research project. The chapter is structured following the same organization of the documents provided by the Regulator (DECC, 2014a), and it has the objective to introduce the reader to the design of the capacity mechanism. A critical analysis of the design exceeds the scope of this chapter and will be the subject of Chapter 4.
2.2 Institutional and governance arrangements
The Capacity Market is overseen and delivered by a combination of the Government, the Regulator (Ofgem), the Delivery Body (National Grid), and the Electricity Settlements
41 Company. Each of these institutions has specific tasks and responsibilities in the Capacity Market as explained below (DECC, 2014a).
Government
The Government is responsible for the strategic oversight of the Capacity Market, as having a five year review on its need and role, and for changes to the regulations and payment regulations. It publishes the ‘Electricity Capacity Regulations’ and ‘Supplier Payment Regulations’ which include general eligibility criteria for entry to Capacity Market auctions, auction parameters such as the demand curve and target volume, reliability standards and settlement of payments.
Ofgem
Ofgem has important roles of control over the Capacity Market: it has to ensure that participants in the Capacity Market comply with rules and regulations or that National Grid carries out its Capacity Market delivery duties efficiently, cost effectively and in a timely fashion. Moreover, Ofgem has to provide the Government with an annual report on the operation of the Capacity Market and National Grid performance and a five-year report on the effectiveness of Capacity Market focusing on whether existing code arrangements are fit for purpose. It is further responsible for appeals made by applicants to the Delivery Body in respect of certain decisions by National Grid in exercising Capacity Market functions.
National Grid (Delivery Body)
National Grid is the Delivery Body in charge of undertaking the delivery role in the Capacity Market, which includes:
- Conduct analysis to support the Government’s setting of some of the auction parameters, including analysis on demand and capacity contributions from electricity market participants ineligible for the Capacity Market;
- Establish, update and maintain a Capacity Market Register;
- Publish capacity auction guidelines before the pre-qualification window opens, runs the pre-qualification process and notify the results to the government;
- Calculate the central de-rating factor, that reflects the percentage of how much each capacity has to be de-rated in order to reach the amount of capacity each plant can be relied upon to deliver at times of peak demand;
- Conduct the capacity auction, publish its results and notify them to the Government;
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- Notify each bidder in the capacity auction whether or not its bid was successful and issue a capacity agreement notice to each capacity provider;
- Issue Capacity Market warnings (identifying system stress events, during which the capacity obligation must be fulfilled).
Settlement Body
The Settlement Body’s key roles are to make capacity payments and to retain overall accountability and control of the Capacity Market settlement process. It collects payments from suppliers and passes to generators and vice versa, it holds collateral from participants in the capacity auctions and transitional arrangements, it monitors and reviews the regulations relating to settlement functions of the Capacity Market and identifies and reports to the Secretary of State any recommended changes.
2.3 Policy framework and final design of Capacity Market
The Capacity Market consists of the following five operational stages, which are going to be presented in detail in this subchapter.
- Stage 1: Definition of the amount of capacity to auction; - Stage 2: Pre-qualification of capacity providers;
- Stage 3: Auction execution; - Stage 4: Secondary market; - Stage 5: Delivery.
2.3.1 Stage 1: Definition of the amount of capacity to auction
In setting the total amount of capacity required to be auctioned, the procedure explained below is followed:
1) The Secretary of State establishes a reliability standard, which provides an indication on the acceptable level of security of supply.
2) The Delivery Body calculates the amount of capacity required to meet the reliability standard.
3) The Government determines the capacity demand curve, according to the methodology presented below.
The Government publishes a methodology for calculating the demand curves for capacity auctions every year, half a year before each auction. Each demand curve for the capacity auction will be a line passing through the following points (DECC, 2014a), as shown in Figure 2.1:
43 - Point A: price cap (in £/kW) at a capacity of 0 GW. It is set administratively by the
Government;
- Point B: for the four-year ahead auction, the price cap at a capacity 1.5 GW less than the target level. For the year ahead auction, the price cap at a capacity 5% less than the target level;
- Point C: intersection between target capacity level and net-CONE, which is the net cost of new entry, determined by the cost of a new build combined cycle gas turbine (CCGT) plant minus expected electricity market and ancillary service revenues;
- Point D: for the four-year ahead auction, 0 £/kW at a capacity 1.5 GW more than the target level. For the year ahead auction, 0 £/kW at a capacity 5% more than the target level;
- Point E: where the price is zero, as much capacity is available will be contracted. Figure 2.1 Illustrative capacity demand curve (DECC, 2014a)
For the first auction which was run in December 2014, the Regulator has set the value of the CONE at 47 £/kW, the price cap equal to 75 £/kW, and the reliability standard equal to 3-hour loss of load expectation per year (McNamara, 2014).
The target capacity level, which is set by the Delivery Body based on its calculations, reflects the amount of capacity that has to be procured to meet the reliability standard. It takes into
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account the level of capacity expected to be available outside the Capacity Market (e.g., capacity supported by Contracts for Difference and expected imports via interconnectors). Demand curves are revised downwards when pre-qualification concludes, so less capacity is auctioned if some plants have opted out of participating in the mechanism but have indicated they will remain operational during the delivery year.
The slope of each demand curve (between the points B, C and D in Errore. L'origine
riferimento non è stata trovata.1) identifies how the amount auctioned will differ according to
the price at which capacity is available, and it represents the elasticity of electricity demand. For the four-year ahead auctions, the Government sets the slope so that demand is equal to the target level of capacity plus 1.5 GW at a price of 0 £/kW. Similarly, demand is equal to the target level of capacity minus 1.5 GW at the price cap. 1.5 GW represents the de-rated capacity of approximately two large CCGT plant. For the year-ahead auctions, the Government calibrates the demand curve differently so that demand is equal to the target level of capacity plus 5% at a price of 0 £/kW. Similarly, demand is equal to the target level of capacity minus 5% at the price cap.
2.3.2 Stage 2: Pre-qualification of capacity providers
The auctioned capacity can be offered by the so-called Capacity Market Units (or CMUs). This section intends to give a brief CMUs classification first, followed by a general overview on the eligibility criteria for capacity to be bid in the auction and the process for prequalifying capacity in advance of auction.
2.3.2.1 CMUs classification
Capacity Market resources are divided in two main categories: - Generating Capacity Market units (generating CMUs) - Demand side response Capacity Market units (DSR CMUs).
Generation CMUs, to meet their capacity obligations if successful in an auction, are required to inject in the grid the committed capacity. Instead, DSR CMUs are required to reduce the demand or to increase the on-site generation, always accordingly with their commitment. Generation CMUs are further classified in three categories as follow (DECC, 2014a):
- Transmission CMUs: generation unit connected with the transmission system which participates in the balancing mechanism, a tool used by National Grid to balance electricity supply and demand close to real time to ensure the security and quality of
45 electricity supply. This type of CMU includes (traditional) conventional large scale generating units, storage and combined heat and power capacity (CHP);
-
Embedded distribution CMUs: generating unit connected to the distribution system which participates in the balancing mechanism. This type of CMU is generally of a smaller scale and it could also include smaller scale CHP and storage;- Non-embedded distribution CMUs: distribution-connected generating unit that does not participate in the balancing mechanism. This type of CMU is of a smaller scale and it could also include smaller scale CHP and storage.
2.3.2.2 Eligible capacity
Types of capacity eligible to participate in the Capacity Market are: - New generation capacity;
- Existing generation capacity; - Electricity storage;
- Demand response, including in-site generation and storage. Instead, the following forms of capacity are not eligible:
- Low carbon capacity already in receipt of other forms of support as Renewables Obligation (RO), Contracts for Difference (CFDs), small-scale Feed in Tariffs (FIT), Renewable Heat Incentive (RHI), New Entrants Reserve 300 (NER300), or UK Carbon Capture and Storage Commercialization Programme;
- Capacity fitted with Carbon Capture and Storage (CCS) already in receipt of a CFD. - Applicants who hold long-term contracts to provide Short-Term Operating Reserve
(STOR), that is reserve power in the form of either generation or demand reduction to be able to deal with actual demand being greater than forecast demand and/or plant unavailability, and which do not make an irrevocable declaration to terminate their STOR contracts if awarded a capacity agreement.
- Interconnected non-UK capacity, and the interconnectors themselves (it is intended that this capacity will be eligible in the future)
Regarding low carbon capacity, to verify that plants opting in to the Capacity Market are not in receipt of low carbon support, it will be required to self-certify whether they are receiving or are accredited for low carbon support. A system of spot checks will check that declarations are accurate. The threshold under which capacity is not eligible is set at 2 MW, nevertheless there is the possibility to combine with other capacity in order to reach the minimum level to be able to participate in the auction.
