Cross-Border Participation in Capacity Mechanisms

Abstract

To keep the generation adequacy of the power system up to standards, more and more countries in Europe are setting up capacity mechanisms. In a capacity mechanism power generation units receive payments for having their capacity available when this is needed (during moments of electrical supply shortage). These payments are received on top of payments that could be received from the energy markets or ancillary service markets [4]. This gives incentives to generation units to be available when needed and create a better investment climate in generation capacity. In this way, these capacity mechanisms can increase the security of supply. In the past, countries in Europe could implement such a capacity mechanisms locally, only local capacity providers (e.g. generation units) were allowed to participate. But the European Commission has developed new regulations which state that it is allowed for capacity providers to participate in cross­border capacity mechanisms. In this way capacity providers can receive additional payments from participating in foreign capacity mechanisms. But this raises questions, because the contribution (capacity value) of a capacity providers is thought to be dependent on its location. This thesis analyzes what the effect of the new EU regulations regarding cross-­border participation is on the payments resulting from capacity mechanisms. To answer this, the relevant EU wide regulations are analyzed and combined with the regulations of the capacity mechanism as implemented in Great Britain (at the time of writing), to find a likely implementation of a capacity mechanism in which cross­-border participation is allowed. A generation adequacy model was built and combined with the likely implementation of a capacity mechanism to analyze what the expected payments from the capacity mechanism will be to local and cross-­border capacity providers. This was done to analyze how attractive it is for capacity providers to participate in two capacity mechanisms. The generation adequacy model that is used consists of two areas, these areas represent Great Britain and France. For the model the same input data was used as in [38]. A Monte Carlo sampling method was used to analyze when payments are due. It was found that with the implementation of the new regulations regarding cross-­border participation in capacity mechanisms it is very attractive for capacity providers to be participating in two capacity mechanisms. But EU regulations set a limit on the amount of capacity that is allowed to participate in a cross­border capacity mechanism. Capacity providers have to compete with other capacity providers in a market based manner to be allocated to participate in a cross­-border capacity mechanism. This will likely lead to a break even point where participating in two capacity mechanisms generates an equal income as participating in just a local capacity mechanism. To analyze how much generation units contribute to the security of supply of a cross-­border capacity mechanism, the two area adequacy model was used. An analytical method was used to calculate the capacity value of the generation units. It was found that generation units can contribute to the security of supply of a cross­-border area, although it does support the area it is located in more than the cross-­border area. When the interconnection between the areas has a larger capacity, the effect of a generation unit to the cross-­border area becomes larger. It was concluded by implementing the new regulations in the model in this thesis, that the capacity-mechanisms do not give financial incentives to invest in generation capacity for the security of supply of a cross­-border area. This might lead to sub­optimal investments, because generation units can contribute to the security of supply of a cross­-border area.