(The author is a Reuters market analyst. The views expressed
are his own.)
By Gerard Wynn
LONDON Nov 23 The European Union's executive
Commission has spelled out clearer opposition to state
intervention in domestic electricity markets even as countries
including Britain, Germany and France propose capacity markets.
A decision over how and whether to intervene in power
markets is central to how the EU manages more intermittent
renewable power, retires ageing coal and nuclear fleets, avoids
blackouts and limits hikes in retail bills, all at the same
This comes against a backdrop of falling credit quality of
utilities as poor demand and more intermittent renewables
suppress peak power prices, posing the risk of under-investment
in baseload thermal power to balance wind and solar when these
Under its "internal energy market", the Commission believes
blackouts can be avoided by bolstering cross-border gas and
power transmission capacity, sharing and thus balancing risk
more flexibly between countries.
By contrast, several member states want to prop up their
national energy security by focusing on domestic schemes to buy
generating capacity several years in advance of delivery to
maintain safety margins.
Britain on Friday confirmed its plans for such capacity
auctions. Germany and France are also considering these.
Various kinds of capacity markets already exist in the
United States, Russia, Spain, Portugal and Greece.
The present EU debate presents polarised notions of how to
avoid supply shortfalls - by increasing self-sufficiency or
deepening shared capacity.
The answer is likely both, where interconnection can make
better use of existing resources and limited capacity markets
can target extra, dynamic capacity to deal with renewable power
The European Commission last week launched a consultation on
proposed powers to block capacity markets.
It suggested a combination of continued, liberalised power
markets (where private sector investment is driven by wholesale
power prices) plus more investment in interconnectors could
maintain generation margins.
"Security of supply has often been considered primarily on a
local basis. However it can also leave individual Member States
to use very conservative assumptions or even discounting the
potential for cross border solutions to generation adequacy
issues despite increased integration of systems and markets," it
"Member States who continue to rely on normal internal
market rules are affected by the capacity mechanisms implemented
in their neighbours, and might even feel compelled to intervene
on their own markets to compensate for the effects of decisions
in their neighbours."
The Commission's concern is that measures to boost domestic
security will curb cross-border electricity flows and investment
in interconnector capacity.
It proposed detailed criteria for allowing capacity markets,
including where a country would first demonstrate satisfactory
investment had been made in interconnectors and demand
"The necessity for a capacity mechanisms should be clearly
established in the context of ... increased interconnection and
... alternative, less distortionary measures which could be
taken, for example steps to improve energy efficiency or reduce
electricity demand," the consultation document proposed.
Britain on Friday forged ahead with plans for a capacity
market in its forthcoming energy bill to help the country cope
with the retirement over the next decade of a fifth of its
The market would involve administrators deciding future
capacity through auctions or regulated payments.
"(Energy regulator) Ofgem and (transmission operator)
National Grid will forecast where there could be shortages in
supply and, if needed, auction for capacity in advance to ensure
we have enough energy backup to meet consumer demand," the
Department of Energy and Climate Change said in a statement.
As an island Britain struggles to fit the Commission's
notion of security through shared risk, and may fail criteria
based on interconnection.
The country ranks fourth from bottom among the 27 EU member
for cross-border capacity, by megawatt (MW), ahead of Malta,
Cyprus and Lithuania (See Chart 1).
Britain has around 3,000 MW of cross-border capacity,
compared with 30,000 MW in France, according to the Commission.
Its interdependence is set to increase over the next decade,
but fairly modestly, with plans reported by the consultancy
Redpoint for two more cables linking to France in 2015 and 2018
(totalling 1,500 MW), to Belgium in 2020 (1,000 MW) and Norway
in 2022 (1,300 MW).
Chart 1: link.reuters.com/dux24t
Chart 2: link.reuters.com/fux24t
It is not just geographically isolated countries which may
argue for a capacity mechanism.
The underlying motivation is the concept of "missing money".
Because renewable power has zero fuel costs it has zero
marginal cost and therefore earns priority ranking (merit order)
in grid access, suppressing wholesale power prices when it is
Operators of baseload including gas and coal can only recoup
fixed costs by charging ever higher prices when renewables are
unavailable, prices they suspect governments will cap to protect
end users, creating "missing" returns.
This could discourage investment and leads to concerns of a
More interconnection alone cannot solve the problem, if it
simply makes more countries dependent on variable renewable
For example, France and Germany both saw exceptionally high
wholesale gas and power prices last February when a slump in
German wind power output coincided with peak French electric
heating demand. (See Chart 2)
Capacity markets may not be the answer either, however,
unless they can prioritise a particular type of power
generation, which is extra-flexible, gas-fired capacity to
balance rapid changes in renewable power, as well as rewarding
energy-intensive users which can switch off some demand at peak
times, called demand response.
One answer could be limited capacity markets to drive
additional, flexible supply and demand response coupled with
efforts to make more use of existing generating resources
through more energy storage, improved renewable power
forecasting and more cross-border interconnection.
(Reporting by Gerard Wynn; editing by Jason Neely)