Eurelectric Contribution to a Reference Model for European Capacity Markets, Position Paper March 2015

Eurelectric Contribution to a Reference Model for
European Capacity Markets, Position Paper March 2015

Energy markets today are evolving as Europe continues to pursue its
ambitious low-carbon agenda. Amid the fundamental changes taking place,
EURELECTRIC believes that the full execution of an efficient integrated
European energy market, i.e. the completion of the Internal Energy Market
(IEM), is the cornerstone on which all further market developments should rest.
This includes the implementation of the Third Energy Package and the
integration of wholesale markets across all timeframes.

Energy-only markets remain the reference for the completion of the IEM.
However, as in many markets the introduction of a capacity element is becoming
increasingly important, EURELECTRIC recognises that properly designed capacity
markets, developed in line with the objective of the IEM, are an integral part
of a future market design. Conventional generation, renewable energy sources,
demand response and storage should participate in energy, flexibility and
capacity markets on an equal footing and should be remunerated according to
their contributions to the respective markets.

Proper capacity markets value firm capacity and deliver price signals
that encourage sufficient capacity to stay in the system or else attract
investments for necessary new capacity to be built. Such markets will ensure
that only the capacity strictly needed for long-term system adequacy is
remunerated. They should not provide a safeguard for poor, non-competitive
investments. Moreover, they should reach beyond national borders, optimising
capacity across regions of Europe.

With this paper, EURELECTRIC presents a reference model of how European
capacity markets should be designed to meet the basic principles outlined
above. Most notably, in developing regional capacity markets, attention should
be paid to the following elements:

• Establishing regional capacity markets requires common regional
adequacy assessments;

• Capacity needs should be determined by a homogeneous, transparent
methodology;

• A standard – or at least similar – product definition is needed to
provide a level playing field for all capacity across regions;

• Capacity providers should have the right to free exit, i.e. entitled
to freely decide when to operate/mothball/close down their assets if their capacity
has not been contracted;

• Product details must be adequately defined to meet the goals of the
capacity market: in particular, the lead time and the duration of capacity
contracts are critical for the time dimension of capacity markets. Both should
reflect long-term investment horizons where such investment is needed to achieve
long-term system adequacy;

• Penalty regimes for unavailability of contracted assets should
incentivise capacity providers to deliver appropriate firmness. Such penalty
regimes should be established according to common principles;

• Coordination requirements for transmission system operators (TSOs)
should be clear, as TSOs should be jointly responsible for managing
infrastructure in a way that allows contracted assets in capacity markets to
optimally contribute to the security of the regional systems;

• Capacity should always be valued in a competitive market. Capacity
prices should be allowed to move freely without distortive price regulation.

Cross-border participation in capacity markets should be seen as a
stepping-stone towards regional capacity markets. It should therefore be
established quickly. To this effect, EURELECTRIC supports a cross-border
participation model where the market participant is the cross-border capacity
provider and the product being traded cross-border is availability.

EURELECTRIC believes that the following set of key principles for
cross-border participation in capacity markets should be respected:

• All capacity market participants should be subject to common
requirements and coherent market rules (e.g. regarding certification, penalty
regime, availability requirement, etc.);

• Participating with the same capacity in more than one capacity market
during the same contract timeframe should not be possible (no double commitment
and earnings);

• TSOs should offer a certain amount of cross-border participation,
based on nondiscriminatory conditions and only limited by objective physical
limitations (to be approved by national regulatory authorities and ACER);

• TSOs should not be allowed to neglect existing cross-border capacity
contracts in situations of system stress.

No reservation of cross-border capacity should be introduced in order
not to interfere with the functioning of the forward, day-ahead, intra-day and
balancing markets, which will determine the actual direction of the energy
flow. These fundamental principles, coupled with a regional approach to
capacity markets, deliver security of supply cost-efficiently and in a market
oriented way.

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