Discussion Papers

No. 406: Capacity Mechanisms – International Experience
Authors: Stephan Schmitt, Matthias Wissner
April 2016

(Full Version only available in German language)

Summary

Against the backdrop of a rising share of renewable energies with intermittent feed-in, in many countries and electricity markets reinforces the question of whether energy-only markets (i.e. markets that only remunerate the electricity delivered) are able to provide the right price signals for investment in (peak load) power plants or if complementary or substituting capacity mechanisms are needed.

Therefore different approaches of such capacity mechanisms in various countries are described in this discussion paper, particularly in regard to their functionality. In detail, these are: capacity payments (Ireland), capacity auctions (UK and USA, PJM (PJM is a merger of several network operators and market areas in the north eastern United States, which originally consisted of the three eponymous states Pennsylvania, New Jersey and Maryland) and a capacity reserve (Finland and Sweden). Which of the named options is actually implemented is highly dependent on the respective circumstances of the country or market. For the investigated Scandinavian countries for example, the lack of capacity in winter months was decisive. On the US market in the PJM region the electricity suppliers pleaded for an appropriate market design, as they - as the committed party – had to provide sufficient generation capacity to meet peak demand. By contrast, in the United Kingdom a high increase in the feed-in from renewable energy and the aging power plant fleet was a decisive reason. In Ireland it became apparent that in the course of the merger of the Irish and Northern Irish market, security of supply in the long term, also due to the lack of interconnectors, could not be guaranteed in the desired extend by the existing energy-only market.

The heterogeneity of approaches and the detailed discussions and consultations in the various countries before the introduction of a capacity mechanism show that no simple solutions may be found in this area. Rather, the nature and scope of a capacity mechanism depend on a variety of parameters, which may differ greatly from country to country (production structure, network expansion, liability issues, financing, etc.).

Especially for Europe, this means that the national market designs differ widely in some parts. Against the background of the goal of a single European internal energy market it is important that markets and market designs converge as far as to ensure that there are no competitive-hurdles through different market designs.

Discussion Paper is available for download.

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