Capacity Mechanisms in EU Energy Markets: Law, Policy, and Economics

Cover
Capacity Mechanisms in the EU Energy Market: Law, Policy, and Economics
Copyright
Editors´ preface
Table of Contents
Table of Cases
	EU COURTS (alphabetical order)
	OTHER TRIBUNALS (chronological order)
Table of Legislation 
(chronological order)
	1. INTERNATIONAL TREATIES AND AGREEMENTS
	2. EU LEGISLATION
		(1) Regulations
		(2) Directives
		(3) Decisions
		Council Decisions 
(chronological order)
		Commission Decisions (alphabetical order)
		Other EU Decisions
	3. NATIONAL LEGISLATION
		(1) EU COUNTRIES
			Austria
			Belgium
				Primary legislation
				Secondary legislation
			France
				Primary leg
				Secondary legislation
			Germany
			Greece
				Primary legislation
				Secondary legislation
			Ireland
			Italy
			Netherlands
			Norway
			Poland
				Primary legislation
				Secondary legislation
			Spain
				Primary legislation
				Secondary le
			UK
				Primary legislation
				Secondary legislation
				Acts of the National Regulatory Authority
		(2) NON-EU COUNTRIES
			Colombia
			Peru
			US
Table of Relevant Non-Legislative Documents
	EU DOCUMENTS (documents issued by EU institutions and agencies, chronological order)
	OTHER DOCUMENTS
		1. EU Level (chronological order)
		2. Member State Level (countries are listed
			Austria
			Belgium
			France
			Germany
			Greece
			Ireland
			Italy
			Netherlands
			Norway
			Poland
			Spain
			UK
List of Contributors
List of Abbreviations
Part I: Policy
	1: EU Policy on Capacity Mechanisms
		1.1 Why capacity mechanisms? The missing money problem and RES capacity
		1.2 Core features of capacity mechanisms
			1.2.1 Supply and demand of capacity
			1.2.2 The role of demand side response (DSR)
			1.2.3 Capacity mechanisms in the EU
				1.2.3.1 Strategic reserve
				1.2.3.2 Capacity auctions
				1.2.3.3 Capacity obligations
				1.2.3.4 Reliability options
				1.2.3.5 Capacity payments
		1.3 The EU approach to capacity mechanisms before the 20/20/20 Package
			1.3.1 The 2003 Electricity Directive
			1.3.2 The 2003 Irish CADA case
		1.4 The EU approach to capacity mechanisms after the 20/20/20 Package (and before the November 2013 Communication)
			1.4.1 The 2009 Electricity Directive
			1.4.2 The 2010 Latvian case
			1.4.3 The 2011 Estonian case
			1.4.4 The 2009 RES Directive and its impact on RES development
			1.4.5 The 2012 consultation on generation adequacy
		1.5 The November 2013 Communication
			1.5.1 Some of the recommended steps are questionable in and of themselves
			1.5.2 The emphasis on demand side response
			1.5.3 Removing regulatory failures
			1.5.4 Cross-border participation in capacity mechanisms
			1.5.5 Technological neutrality and environmental protection
		1.6 Conclusion-where next with capacity mechanisms in the EU?
	2: The Regulators´ View
		2.1 Introduction
		2.2 The contribution of energy-only markets to generation adequacy
		2.3 Impact of capacity mechanisms: design and distortions
		2.4 Cross-border participation in capacity mechanisms
		2.5 Conclusions and recommendations
	3: Capacity Mechanisms in the European Market
		3.1 Introduction
		3.2 The pervasive impact of capacity mechanisms on the remuneration of flexibility
			3.2.1 Ensuring generation requires flexible resources
			3.2.2 The impact of capacity mechanisms will hence not be limited to `capacity´
		3.3 The costs of self-sufficient capacity mechanisms
			3.3.1 Designing purely national capacity mechanisms is expensive
				3.3.1.1 Self-sufficiency leads to excess capacity
				3.3.1.2 Reminder: generation adequacy policies will also impact energy markets
			3.3.2 and will not be accepted by the Commission
		3.4 A framework for coordination of national capacity mechanisms at EU level
			3.4.1 A consistent assessment of adequacy needs and measurement of cross-border resources
			3.4.2 Risk allocation and remuneration of cross-border resources
			3.4.3 Definition of rights over the system resources at times of extreme scarcity
		3.5 Conclusion
Part II: Economics
	4: Energy Market Design with C
apacity Mechanisms
		4.1 Introduction
		4.2 Energy-only market-can it be sustainable?
			4.2.1 Functioning of the energy-only market
			4.2.2 Current low electricity margins as a justification for capacity mechanisms?
				4.2.2.1 Evolving market environment
				4.2.2.2 Political intervention
				4.2.2.3 Design flaws
				4.2.2.4 Market failures
			4.2.3 Possible fundamental market failures
				4.2.3.1 Security of supply as `public good´
				4.2.3.2 Underinvestment due to prohibitive price risk (uncertainty for investors)
				4.2.3.3 The threat of exercise of market power in peaking periods
				4.2.3.4 Missing money problem due to threat of regulatory intervention
		4.3 What are the policy options-and how would they perform?
			4.3.1 Reform without capacity mechanism
			4.3.2 Which capacity mechanisms are debated?
			4.3.3 Which design options address which market failures?
		4.4 How do renewable energies fit into the market design?
			4.4.1 Balancing obligation for RES
			4.4.2 What is the role of the extent of renewable support?
			4.4.3 What is the role of volatile, non-dispatchable renewable generation?
		4.5 What are the challenges in the EU context?
			4.5.1 Issues in the EU dimension
			4.5.2 Guidance by the Commission
		4.6 Summary-when to use which capacity mechanisms?
			4.6.1 Reforms of the existing market design
			4.6.2 Reforms with capacity mechanisms
			4.6.3 The European dimension has to be taken into account
	5: Different Approaches for Capacity Mechanisms in Europe: Rationale and Potential for Coordination?
		5.1 Introduction
		5.2 A patchwork of capacity mechanisms in Europe: different designs fit different needs
			5.2.1 Different drivers for capacity mechanisms explain the range of approaches
		5.3 Toward coordination of capacity mechanisms in Europe
			5.3.1 Capacity mechanisms in the wider context of EU power markets integration
			5.3.2 Potential distortions associated with uncoordinated capacity mechanisms
		5.4 Capacity mechanisms and the new EEAG 2014-2020: Key issues
			5.4.1 Should state aid rules apply to capacity mechanisms in the first place?
			5.4.2 Does the capacity mechanism aim at a well-defined objective of common interest?
			5.4.3 Is the aid well designed to address the problem?
			5.4.4 Are the distortions of competition and the effect on trade limited or avoided, so that the overall balance is positive?
		5.5 Coordinating capacity mechanisms in Europe
			5.5.1 Where to start to coordinate capacity mechanisms? A primer
			5.5.2 Why take into account cross-border contribution?
			5.5.3 How to open capacity mechanisms to cross-border capacity?
			5.5.4 What are the prerequisites for cross-border exchange of capacity?
		5.6 Conclusions
	6: Capacity Mechanisms and Cross-Border Participation
		6.1 Elements of the EU debate on cross-border participation
			6.1.1 Capacity rights and reliability rights
			6.1.2 Three simplifying hypotheses
		6.2 Explicit cross-border participation with congested capacity of interconnections
			6.2.1 Physical and economic fundaments of capacity rights trade
			6.2.2 Market coupling against the fiction of traceability
			6.2.3 Limits of the solidarity principle in the market coupling
			6.2.4 Comparison with implicit cross-border participation
		6.3 Social efficiency of cross-border participation from the national perspective
			6.3.1 Additional capacity contributing to system X´s domestic capacity
			6.3.2 Lowering the cost of system X´s adequacy policy
		6.4 Social efficiency of cross-border participation from the EU perspective
			6.4.1 The defence of implicit cross-border participation
			6.4.2 Which social benefits of an explicit cross-border participation?
				6.4.2.1 Limited social benefits of explicit cross-border participation when there is no congestion
				6.4.2.2 No social benefits of explicit cross-border participation, in case of congestion
			6.4.3 Distortive effects of cross-border trade with different capacity mechanisms
				6.4.3.1 Comparison of implicit and explicit cross-border participation without congestion
				6.4.3.2 Comparison of implicit and explicit cross-border participation with congestion between systems
			6.4.4 Efficient combination of market coupling and implicit cross-border participation
		6.5 Conclusion
	7: The System Adequacy Problem
		7.1 Introduction
		7.2 Design elements
		7.3 Target market
			7.3.1 The buying side
				7.3.1.1 Level of centralization
			7.3.2 The selling side
				7.3.2.1 The role of existing plants
				7.3.2.2 Technological neutrality or not?
		7.4 Lag period (or lead time)
		7.5 Contract duration
		7.6 Defining the requirements associated with the `reliability product´
			7.6.1 Reliability in capacity- and energy-constrained systems
			7.6.2 When are agents selected in the auction required to fulfil their commitment? The definition of the critical period
			7.6.3 Penalties for non-compliance
			7.6.4 Constraints on tradable quantities
		7.7 Indexation and warranties
			7.7.1 Indexation formulas
			7.7.2 Financial warranties
		7.8 Summary and high-level recommendations
	8: The Generation Mix, Price Caps, and Capacity Payments
		8.1 Introduction
		8.2 Optimal generation mix
		8.3 A competitive market leads to an optimal generation mix
		8.4 A price cap distorts investment levels
		8.5 Capacity payments restore efficiency
		8.6 Renewable energy and demand participation
		8.7 Conclusion
Part III: Law
	9: Capacity Mechanisms and State Aid Control
		9.1 Introduction
		9.2 Policy evolution
			9.2.1 State Aid Modernisation (SAM)
		9.3 Funding capacity mechanisms: When do the state aid rules apply?
			9.3.1 Article 107(1) TFEU
			9.3.2 The concept of economic advantage
			9.3.3 Compensation for PSOs
			9.3.4 Financed by or through state resources
			9.3.5 Conclusion
		9.4 Compatible support-the new EEAG 2014-2020
			9.4.1 Common assessment principles
		9.5 Assessment
			9.5.1 The first application of the EEAG 2014 to capacity mechanisms
			9.5.2 Articles 30 and 110 TFEU
		9.6 Conclusion
	10: Antitrust Law
		10.1 Introduction
		10.2 EU antitrust enforcement in the energy sector-a primer
		10.3 A typology of antitrust issues related to capacity mechanisms
		10.4 The problem with the market definition
		10.5 Selected anticompetitive practices under Articles 101 and 102 TFEU
			10.5.1 The anticompetitive behaviour of firms in capacity auctions
				10.5.1.1 Gaming as an abuse of a dominant position by a single generator
				10.5.1.2 Gaming as a result of collusion
				10.5.1.3 The limitations of antitrust enforcement
				10.5.1.4 Ex ante intervention through auction design
				10.5.1.5 Ex ante intervention through market monitoring and enforcing REMIT
			10.5.2 The anticompetitive practices of TSOs
		10.6 Conclusions
	11: Free Movement of Goods in the Labyrinth of Energy Policy and Capacity Mechanisms
		11.1 Introduction
		11.2 Energy as goods
		11.3 Free movement of goods and state aid
		11.4 Free movement of goods: Restrictions
			11.4.1 General
			11.4.2 Article 30 TFEU
			11.4.3 Article 110 TFEU
			11.4.4 Article 34 TFEU
			11.4.5 Article 35 TFEU
		11.5 Free movement of goods: Justification
			11.5.1 General
			11.5.2 Proportionality
				11.5.2.1 The classic test
				11.5.2.2 Failure by the public authority to direct its mind
				11.5.2.3 Failure to allow an adequate transitional period
				11.5.2.4 Consistency and coherence
			11.5.3 Arbitrary discrimination
			11.5.4 The grounds of justification
				11.5.4.1 Public policy and public security
				11.5.4.2 Environmental protection
		11.6 Conclusion
Part IV: Case Studies
	12: Austria
		12.1 Introduction
		12.2 Setting the scene
			12.2.1 Market characteristics
			12.2.2 Regulatory framework
				12.2.2.1 Green Energy Act 2012
				12.2.2.2 Energy Intervention Powers Act 2012
				12.2.2.3 E-Control
			12.2.3 Generation adequacy
		12.3 Energy-only market
			12.3.1 Recent efforts to establish an additional support scheme for electricity generation
		12.4 European dimension
			12.4.1 Acknowledging the EU context
			12.4.2 Assessment of proposed capacity mechanism under EU law
		12.5 Conclusion
	13: Belgium
		13.1 Introduction
		13.2 Setting the scene
			13.2.1 Market characteristics
			13.2.2 Regulatory framework
			13.2.3 Generation adequacy
		13.3 Capacity mechanism
			13.3.1 Existing capacity mechanisms
			13.3.2 Proposed capacity mechanisms
				13.3.2.1 State tendering for new capacities
				13.3.2.2 Strategic reserve
		13.4 European dimension
			13.4.1 State tendering for new capacities
			13.4.2 Strategic reserve
		13.5 Conclusion
	14: France
		14.1 Introduction
		14.2 Setting the scene
			14.2.1 From the late 1990s to the Sido-Poignant Report in April 2010
				14.2.1.1 Multi-year plan of investment (MPI)
				14.2.1.2 The working group
		14.3 Capacity mechanism
			14.3.1 The NOME Law
				14.3.1.1 The parliamentary debate on the NOME Law
				14.3.1.2 The design of the French capacity mechanism provided by the NOME Law
				14.3.1.3 Principles of the French capacity mechanism defined by the NOME Law
			14.3.2 The Capacity Decree
				14.3.2.1 Determination and control of the capacity obligation of each electricity supplier
				14.3.2.2 Certification and control of electricity generation or demand response capacities
				14.3.2.3 Organization of capacity certificates exchanges and transactions
			14.3.3 Status of the adoption of technical rules
		14.4 European dimension
			14.4.1 Compatibility with the internal energy market directives and free movement rules
			14.4.2 Antitrust issues
			14.4.3 Compatibility with state aid rules
		14.5 Conclusion
	15: Germany
		15.1 Introduction
		15.2 Setting the scene
			15.2.1 The challenge
			15.2.2 Market characteristics
			15.2.3 Regulatory framework
			15.2.4 Generation adequacy
		15.3 Energy-only market and network reserve
			15.3.1 Background
			15.3.2 Key features
				15.3.2.1 General measures by TSOs
				15.3.2.2 Network reserve
				15.3.2.3 Notification requirement and the twelve-month moratorium on the closure of plants
				15.3.2.4 No final shut down of system relevant generation and storage units
				15.3.2.5 Fuel prerogatives of large gas-fired power plants
				15.3.2.6 Article 53 EnWG
			15.3.3 Enforcement
			15.3.4 Alternative measures
				15.3.4.1 Federal Government
				15.3.4.2 German Association of Energy and Water Industries (BDEW)
					(a) Decentralized capacity mechanism
					(b) Strategic reserve
				15.3.4.3 Position of the European Energy Exchange (EEX)
		15.4 European dimension
		15.5 Conclusion
	16: Greece
		16.1 Introduction
		16.2 Setting the scene
			16.2.1 Market characteristics
			16.2.2 Regulatory framework
			16.2.3 Generation adequacy
		16.3 Capacity mechanism
			16.3.1 Capacity Assurance Mechanism (CAM)
			16.3.2 Transitional Capacity Assurance Mechanism (Transitional CAM)
			16.3.3 The future of the capacity mechanism in Greece
		16.4 European dimension
			16.4.1 Compatibility of the transitional CAM with EU state aid rules
			16.4.2 Compatibility of the CAM with the free movement of goods rules
			16.4.3 Compatibility of the CAM with the sector-specific provisions
		16.5 Conclusion
	17: Italy
		17.1 Introduction
		17.2 Setting the scene
			17.2.1 Market characteristics
			17.2.2 Regulatory framework
		17.3 Capacity mechanism
			17.3.1 The existing capacity mechanism
			17.3.2 The final capacity mechanism
				17.3.2.1 Key elements
				17.3.2.2 Eligibility criteria
				17.3.2.3 Enforcement powers
		17.4 European dimension
			17.4.1 Acknowledging the EU context
			17.4.2 Assessment of capacity mechanisms under EU law
				17.4.2.1 The internal market dimension and the Italian experience
				17.4.2.2 The external dimension: The relation with Switzerland
				17.4.2.3 Conclusion on the EU dimension
		17.5 Conclusion
	18: Netherlands
		18.1 Introduction
		18.2 Setting the scene
			18.2.1 Market characteristics
			18.2.2 Regulatory framework
			18.2.3 Generation adequacy
		18.3 Energy-only market and the European dimension
			18.3.1 Position of the Dutch government on capacity mechanisms
			18.3.2 ACM´s position on capacity mechanisms
		18.4 Conclusion
	19: Norway
		19.1 Introduction
		19.2 Setting the scene
			19.2.1 Market characteristics
			19.2.2 Regulatory framework
			19.2.3 Generation adequacy
		19.3 Energy-only market
			19.3.1 Background
			19.3.2 Key features
				19.3.2.1 Cross-border trade of electricity
				19.3.2.2 The common Nordic electricity market
					(a) Wholesale trade through Nord Pool Spot AS
					(b) Retail trade
					(c) The regulation power market
				19.3.2.3 The Norwegian-Swedish electricity certificates market
				19.3.2.4 The electricity grid
				19.3.2.5 Enforcement of energy market regulations
		19.4 European dimension
			19.4.1 Acknowledging the EU context
			19.4.2 Acknowledging the Nordic context
			19.4.3 Assessment of capacity mechanisms under EU law
		19.5 Conclusion
	20: Poland
		20.1 Introduction
		20.2 Setting the scene
			20.2.1 Market characteristics
			20.2.2 Regulatory framework
			20.2.3 Generation adequacy
				20.2.3.1 Ministry´s Report of 2013 and follow-up actions
				20.2.3.2 URE´s Investment Report of 2014
		20.3 Energy-only market, capacity measures, and a `capacity debate´
			20.3.1 Capacity measures
				20.3.1.1 Cold intervention reserve
				20.3.1.2 Changes in the procurement of the operating capacity reserve
				20.3.1.3 Tenders for DSR contracts
			20.3.2 Discussion on a market-wide capacity mechanism
				20.3.2.1 Centralized capacity mechanism (vs the UK model)
				20.3.2.2 Decentralized capacity mechanism (vs the French model)
				20.3.2.3 Contracts for Difference (CfDs)
				20.3.2.4 Timeline
		20.4 European dimension
		20.5 Conclusions
	21: Spain
		21.1 Introduction
		21.2 Setting the scene
			21.2.1 Market characteristics
			21.2.2 Regulatory framework
			21.2.3 Generation adequacy
			21.2.4 The Spanish electricity tariff deficit
			21.2.5 Authorization procedure for the construction of new generation capacity
		21.3 Capacity mechanism
			21.3.1 Background
			21.3.2 Capacity payments between 1997 and 2007
			21.3.3 Capacity payments from 2007 to date
			21.3.4 The reduction and abolishment of some of the capacity payments in 2012 and 2013
			21.3.5 Judicial review of regulations introducing capacity payments
			21.3.6 Capacity payments in the 2013 Electricity Sector Act
		21.4 European dimension
		21.5 Conclusion
	22: United Kingdom
		22.1 Introduction
		22.2 Setting the scene
			22.2.1 Market characteristics
			22.2.2 Regulatory framework
			22.2.3 Generation adequacy
				22.2.3.1 Background
				22.2.3.2 Reasons for the gap
				22.2.3.3 Scale of the gap
				22.2.3.4 Minimizing the need for a capacity mechanism-improving the current market
		22.3 Capacity mechanism
			22.3.1 Background
				22.3.1.1 Assessment of the options
				22.3.1.2 Assessment of the strategic reserve and capacity market options
				22.3.1.3 Selection of the capacity market as preferred option
				22.3.1.4 Refinement of the capacity market design
			22.3.2 Legislative framework
			22.3.3 Structure of the capacity market
				22.3.3.1 Stage 1-determination of the capacity required
				22.3.3.2 Stage 2-eligibility and pre-qualification
				22.3.3.3 Stage 3-the auction
				22.3.3.4 Stage 4-secondary market
				22.3.3.5 Stage 5-delivery
				22.3.3.6 Stage 6-payment
				22.3.3.7 Exiting the capacity market
			22.3.4 Enforcement
				22.3.4.1 Enforcement mechanism
				22.3.4.2 Minimizing the scope for distortion
		22.4 European dimension
			22.4.1 Acknowledging the EU context
			22.4.2 Exclusion of interconnected capacity
		22.5 Conclusion
Index