2nd BMWi Power Plant Forum Debates New EWI Study on Design of Electricity Markets to Ensure Sufficient Power Plant Capacity

After a new study by the Institute of Energy Economics at the University of Cologne (EWI) on the best market design to secure sufficient power plant capacity in a country that is increasingly relying on renewable energy, the Federal Ministry of Economics and Technology (BMWi) invited to the second Power Plant Forum to dicuss the findings with the federal states and the trade associations.

In line with the findings and warnings by others in the recent past, the EWI scientists found that ensuring the security of supply has increasingly become a challenge for the wholesale electricity markets. From the various models and proposals for a capacity management that are being discussed and have been put into practice in some countries, the EWI scientists reviewed two models. For reasons of efficiency they recommend a competition based design, a so-called “security supply market” (“Versorgungssicherheitsmarkt”) in which capacities are secured in auctions, leaving the spot market unaffected. In contrast they reject the alternative design of a strategic reserve as they believe it would lead to unnecessary high electricity costs.

In the “strategic reserve scenario” the electricity market will be divided in a traditional market for electricity and the strategic reserve market. The traditional market works like any other electricty market, i.e. investments have to be recouped from the revenue obtained by the electricity sales. The strategic reserved is procured by a central authority through an auction and is paid for by the funds raised in the auction. A predetermined (high) electricity price triggers the auctions. The scientists see two main disadvantages, forecasting the necessary reserve capacity that cannot be delivered by the market itself (as market participants could be inclined to hold back capacities) and setting and maintaing a high striking price for the auctions.

The security supply market contracts preferred by the scientists, on the other hand, create a market in which the demand for a secure supply of electricity is met by auctions in which suppliers, i.e. existing plants, new plants as well as demand side management, are provided and remunerated, giving the suppliers guaranteed returns that will finance their investments. Price fixing at the spot market is not affected. Besides the customers will be cushioned against price spikes by so-called “availability options” (Verfügbarkeitsoptionen), which the suppliers of secure energy have to sign. They are some kind of fine which suppliers of the security supply market have to pay when a pretermined strike price (Ausübungspreis) at the spot market is exceeded. The strike price is determined by the central coordination authority. When the spot market price exceeds the strike price, the suppliers of secure energy are obliged to pay the difference to the central authority, which passes the money on to the regular energy suppliers.The study points out that the security supply market model also requires a central coordination body and will take time and effort to be implemented.

BMWi has asked the states and the trade associations to submit comments on the findings of the study and possibly draw conclusions until summer this year.

The study shows the dilemma of the German electricity market design. The priority for renewable energy with regard to the guaranteed purchase, transmission and remuneration (fixed feed-in tariffs) pursuant to the more and more complex Renewable Energy Energy Sources Act (EEG; see latest plans for a solar feed-in tariff reduction despite the amendment of EEG at the beginning of 2012) leads to less and less load hours for power plants that are (still) needed to provide security of supply, i.e. mostly conventional power plants. In return some kind of new market design for a secure supply of energy seems almost inevitable, but can itself potentially distort the market or at least render the whole market design even more complex and less transparent. This may lead to new market entry barriers.

Source: Federal Ministry of Economics and Technology

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