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A comparative view of the French and British capacity markets (Part III)

Early in February, the European Commission approved six electricity capacity schemes as compliant with EU State aid rules, including the Italian and Polish market-wide mechanisms [i]. Such a decision had been taken previously for the French and British capacity markets[ii], which have completed their first and fourth years of auction respectively.

In the 1st part we recall the theoretical rationale behind implementing such a scheme (part I). In the 2nd part, we focus on the French and British contexts (part II).

This 3rd and last part is dedicated to the description of the French and UK schemes features.*

CONFRONTING THE FR AND UK SCHEMES

What are the main scheme features?

FR and UK capacity market

What have the first auction resulted in?

FR and UK capacity market

And the following auctions compared to the first one?

FR and UK capacity market

CRITICS:

Critics of the scheme think there are several problems with current capacity market configuration as:

  • It provides continuing subsidies to fossil fuel generators, and highly polluting diesel plants, at a time when the UK is trying to decarbonise its electricity system.
  • It awards payments to plants that would not have missing money. In fact, around a third of the plants, which won contracts, signalled they would have stayed open with no or very little payments. These windfall payments are arguably not the best use of bill payers’ money.
  • As can be seen from the graph above, demand response providers have been awarded very few contracts so far.
  • Agreements contracts are mostly awarded by existing and inflexible power plants (coal and nuclear). This does not fit to the capacity market objective to motivate new capacity to help integrate variable renewables

And globally:

  • For the UK case, having both capacity market and balancing services market could be redundant as the balancing market do the job of relieving system stress, if the system operator pays generators and consumers enough to balance demand and supply in real time [viii]
  • As IEA’s Executive Director Maria van der Hoeven said “Capacity mechanisms are “a short-term fix for a long term issue”. Today, the main cause behind capacity market implementation is the increase of renewable penetration, which has lead to oversupply and low wholesale prices. However, this trend would remain for the next years and hence capacity market model could not be viable.

 

Authors

Amal Abid, Consultant
Naïc Marcangeli, Consultant

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