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Power grids

Capacity markets remained controversial in EU

As renewable power expands, demand for conventional plants decreases. In the process, they become unprofitable. Yet, we still need backup capacity. The proposal to have payments for backup capacity regardless of how much power is produced seems logical but remains highly controversial.

Ireland does it, as does Spain and now Italy, and Germany and the UK are thinking about it: capacity markets. Essentially, instead of paying for kilowatt-hours generated, you pay for kilowatts maintained in service – regardless of how much power is generated by those units.

This approach is designed to address a problem that has become increasingly apparent in countries like Spain, Italy, and Germany, where the large share of intermittent wind and solar power has drastically reduced the number of operating hours for conventional coal and natural gas units. For instance, in his regularly updated collection of slides on power production in Germany, Fraunhofer ISE's Bruno Burger explains the 15.2% drop in consumption of electricity from natural gas in 2012 as being a direct result of “peak load production of PV.” Over at the European Energy Review, energy researcher Timon Dubbeling provided a good overview of the discussion last week, including a chart showing how the number of operating hours of coal plants in Spain has dropped considerably since 2004.

As clear the need for a market redesign is, there is no consensus on what needs to be done either within the renewables sector or within the energy sector at large. Supporters of renewables in Italy, for instance, argue that the money should be spent on smart grids and storage – future technologies – rather than on the monopolist structures of the conventional energy sector. They also believe that capacity payments constitute illegal “state aid” under EU law.

Smart grid EU
Smart grid EU -  The EU wants to have an integrated power market with future technologies, but its member states are moving in a different direction.
The EU wants to have an integrated power market with future technologies, but its member states are moving in a different direction.
European Commission

They may be right. Over a decade ago, German feed-in tariffs were ruled to be legal because they do not constitute state aid; they are open to all market players chosen by consumers and are not payments made to specific companies chosen by the government. But capacity payments will be made to specific power plants owned by specific companies, and though it is possible for grid regulators to make decisions about who should get what capacity payment, grid regulators are generally close to the government. For instance, the head of Germany's Network Agency is appointed by the German government.

As Dubbeling explains it, the European Commission is likely to find capacity markets incompatible with EU law in their upcoming communiqué expected in a few weeks. Indeed, the day after Dubbeling's article was published, the European Commission indicated that it viewed national capacity markets as a renationalization of energy markets not in line with the current efforts to create an EU-wide power grid. As Renewables International recently reported, Germany's Environmental Agency (UBA) also opposes capacity markets and wants to have a “strategic reserve” instead; it is unclear whether this difference will placate the Commission, however. (Craig Morris)

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