A Harmonized Approach Towards Capacity Adequacy in the EU Internal Electricity Market: Policy Options to Reconcile Unilateral Capacity Mechanisms.

Abstract

This master thesis aims at identifying policy options, which facilitate a more harmonized approach towards capacity adequacy in the EU internal market. Although there is no evidence for any acute EU-wide generation capacity shortage, European electricity markets are increasingly under stress: Major EU utilities announced to mothball or decommission their CCGT, CHP and other gas-fired peak units, since these generation units struggle to recover their costs at power exchanges. But these dispatchable peak-load plants are highly needed in European electricity markets with rising shares of intermittent renewable supply.In the absence of a supranational capacity adequacy policy, several EU member states have implemented or consider introducing capacity mechanisms on a pure unilateral basis in order to remedy the missing-money-problem of their utilities’ conventional power plants. As these unilateral capacity adequacy regimes have diverging regulatory rationales and try to solve very different domestic capacity adequacy issues, it becomes challenging to reconcile them within the EU internal market. Given that the needs to invest in new conventional generation capacities and cost recovery prospects of certain power plant technologies highly diverge between the member states, a EU standard capacity adequacy regime would be too premature. However, these unilateral capacity mechanisms harm the functioning of the internal market and undermine its central features of market coupling and physical integration, which significantly contribute to domestic supply security. Both price-coupling of regional power markets and enhanced grid interconnectors optimize cross-border electricity flows and ensure efficient investment allocation of generation and transmission capacities in the long-run. But non-harmonized unilateral capacity mechanisms are likely to cause inefficient overcapacities and lead to adverse long-term structural changes in generation investments across the internal market.The thesis finds that the legal and regulatory framework of the EU to harmonize these unilateral capacity adequacy regimes is rather weak and leaves many loopholes to the member states. The EU could persuade national regulators and TSOs to evaluate a common approach towards capacity adequacy assessments and forecasting methodologies. Moreover, the EU could ensure that national regulators and TSOs consider regulatory alternatives to demonstrate the necessity and appropriateness of complex capacity adequacy regimes as well as to facilitate explicit cross-border participation of foreign generators, although many technical and regulatory challenges remain unsolved.In view of the limited scope of action for the EU, there are five policy options, which could facilitate a more harmonized approach towards capacity adequacy in the EU internal market: First, national regulators and TSOs should conceive and mutually agree on EU-wide adequacy assessments and forecasting methodologies, which would represent a powerful instrument to bring transparency into the regulatory debate on the necessity of purely unilateral capacity mechanisms and objectify investment needs in new generation capacity across member states’ markets. Second, member states and the EU should focus on a predictable EU-wide regulatory environment with coherent carbon, market design, and renewable support policies and avoid any overlapping regulatory objectives between these policies. Third, national regulators and TSOs should ensure a more stringent implementation of cross-border transmission grid plans to alleviate local load and grid congestions, which have forced some member states to implement capacity mechanisms and directly remunerate generation units in congested regions. Fourth, instead of introducing complex capacity mechanisms, national regulators and TSOs should allow for greater competition among generators to offer short-term ancillary services on existing real-time balancing markets, because they would provide a stronger price signal to invest in flexible generation capacity. Finally, the EU should require national regulators and TSOs to facilitate explicit cross-border participation of foreign generators in unilaterally designed capacity mechanisms to minimize the adverse cross-border market impacts.