Capacity markets — six mitigations for six drawbacks: A Power System Blueprint Deep Dive

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Over the last 10 years Europe has witnessed the growth of capacity remuneration mechanisms (CRMs) — tools intended to provide added confidence of adequate resource when demand is forecasted to peak.

RAP has often documented concerns with certain CRM interventions — forward capacity market auctions in particular. Instead, a more transparent and consumer-focused energy adequacy approach is better suited to the needs of a decarbonising power grid, including implementation of administrative reserve scarcity pricing, a mechanism that values reserves in real-time energy prices equivalently as in operation planning timeframes. As part of a coherent suite of measures, such a mechanism provides confidence that prices and price volatility will adequately reflect the increasing risk of loss of load and the associated opportunity costs of an additional unit of energy demand as resource margins tighten. It thereby incentivises both sufficient security of supply responses in real time and investment by market buyers and sellers in cost-effective additional supply or demand-side measures.

In this Power System Blueprint Deep Dive, we provide insights on drawbacks of and accompanying mitigations for different CRMs since they will likely be an important feature of the European electricity landscape over the next decade. As such, this deep dive highlights six selected drawbacks of interventions to shed light on how these may be mitigated.

Mitigations can help temper the negative effects of various capacity remuneration mechanisms, but they remain largely inadequate in fully overcoming these effects where they pertain to capacity auctions. Overall, this points to the value of implementing the right intervention in the first place, the no-regret nature of reserve scarcity pricing functions and the value in institutionalising in network codes the implementation of administrative reserve scarcity pricing —before resource adequacy becomes a concern.

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Policy and regulatory tools to assist achievement of India’s low-carbon energy goals

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India is on an ambitious path

India has embarked on aggressive plans to reform its electricity sector in keeping with its nationally determined contributions (NDC) submitted to the U.N. Framework Convention on Climate Change (UNFCCC) and with its current and future energy needs. The importance accorded by the Government of India to electricity sector plans and targets reflects the place of electricity within the Indian growth story and its role in all major economic sectors.

Several reforms to meet these nationally determined contributions are underway, including a series of proposed amendments to the Electricity Act, a recent revision of the National Electricity Policy, modifications to wholesale power markets such as an expansion of security-constrained economic dispatch (SCED), enhanced renewable portfolio obligations for states, and expansion of the transmission grid to absorb more renewables. New instruments periodically drive further reforms, such as the 10-year Indian Electricity Grid Code (IEGC) and the Report of the Group on the Development of Electricity Market in India.

Power sector decision-makers are tasked with meeting national ambitions

India has many ways to meet its national goals. Decision-makers already face important choices and will have to grapple with more in the years ahead, including such questions as:

  • How can the transition to competitive wholesale markets be achieved most efficiently and equitably?
  • How will resource adequacy be secured?
  • What can be done to improve the financial health of the distribution companies while maintaining affordable service for Indian homes and businesses?

India has robust and rigorous frameworks that capture such choices, in the form of legislative processes (Parliament approvals) and the subordinate legislative processes (rules, regulations and guidelines from the Ministry of Power [MoP], the Central Electricity Authority [CEA], the Central Electricity Regulatory Commission [CERC] and state electricity regulatory commissions). Regulatory processes are principally informed by local market conditions, as is apt. Even so, examples from other jurisdictions that have undertaken similar efforts and insights from other parts of the world where similar electricity reforms have been underway could be useful touchstones for decision-makers as they implement key changes in India.

A compendium of practical solutions

To that end, the Regulatory Assistance Project is launching a knowledge centre  as a reference source for electricity sector policymakers, regulators and other power industry actors in India. This is a web-based repository of policy briefs, best practices and recommendations, to be updated with new content as further topics of interest or fresh priorities emerge. This page is envisioned as a knowledge hub, to be ever expanding as the needs of India’s government, industry and civil society dictate. Where relevant, we also expect this hub to identify and document best practices in India, i.e., those demonstrated in the Indian power sector, as a helpful resource to other global practitioners.

The  contents draw on our own experience in India and elsewhere in the world, to identify options that might be adaptable to India’s unique circumstances and, when feasible, the contexts of individual states. The practical solutions outlined will not be prescriptive; RAP, working across North America, Europe, China and India, understands that what works in one place might not in another. The best tool for a job depends on many factors, and those applying the tools are best placed to make the final choice from an array of suitable options. Some may find certain tools more effective than others.

Which “tools” are included?

RAP will populate this page with practical and succinct documents in which we will describe and interpret international experience on a range of topics identified through conversations with Indian public sector stakeholders. The full documents are available for download by clicking on their title.

  • Resource adequacy[click to read more]: In the fall of 2022, the CEA issued Draft Guidelines for Resource Adequacy Planning. Putting in place sensible, enforceable resource adequacy requirements is, as the CEA notes, a necessary element of a power system in which “demand is reliably met in future, in all time horizons.” Of particular import, observes the CEA, is that the share of variable renewable energy sources in the system is growing significantly and, consequently, “a fresh look at the manner in which distribution licensees contract for power” is needed. In this component of the regulatory knowledge centre, we look at resource adequacy planning in the eastern United States and draw insights that we think might have particular applicability in India.
  • Distributed energy resources (DERs) [click to read more]: The most recent Draft National Electricity Policy, 2021, issued by the Ministry of Power on 15 May, 2023, acknowledges the benefits of DERs and specifies requirements for the Forum of Regulators to implement a framework for DER aggregation in the country. Further, the newly issued Indian Electricity Grid Code references the utilisation of demand response and distributed generation resources in the context of demand estimation and resource adequacy. Deploying DERs at scale provides an opportunity to improve electric system efficiency, reduce consumer costs and reduce emissions. Drawing upon examples from the United States, this brief describes the benefits of DERs; the role of DER aggregators and private market players who can bring in capital and technical expertise; and the steps that regulators can take to facilitate DERs — including modifying distribution company business models, issuing business rules for DER aggregators and educating customers.
  • Energy efficiency [click to read more]: Over the past two decades, the Indian power sector has seen two legislated acts of Parliament — the Energy Conservation Act (2001) and the Electricity Act (2003) — paving the way for enhanced energy efficiency in end-use sectors. Complementing the two pieces of legislation, a slew of subordinate legislation in the form of notified regulations by state electricity regulatory commissions — primarily the Demand-side Management Regulations — inform and direct distribution licensees to identify end-use energy efficiency and load shifting opportunities as system resources. In this component of the regulatory knowledge centre, we identify robust legislative and regulatory support measures the end-use efficiency sector has received in India and ways to maximise the potential of implementation opportunities at the end-use level. U.S. insights on on-bill financing and energy efficiency costs are also included.

As additional topics linked to decarbonisation take centre stage in India’s electricity regulatory landscape, RAP will produce and share helpful examples from other jurisdictions worldwide that will be responsive to the concerns that are front and centre for India’s central and state decision-makers.

If you would like RAP to keep you abreast of new briefs added to the knowledge centre, would like to share suggestions and requests on major topics that this knowledge centre should cover, or have feedback on any of the publications already included, please contact us.


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  • 第一,形成统一的区域电力现货市场是实现《规则》中所提出目标的最佳方式。这可以从简单的设计开始并逐步进行完善。
  • 第二,容量市场存在减缓低碳转型和带来不必要系统成本的风险,如果在建立区域现货市场后最终仍会采用容量市场,我们建议以减少风险的方式来实施。

Key issues at stake as EU electricity market reform nears finishing line

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A quick side-by-side of the positions in Parliament and Council

Reform of the European electricity market design should enter the final stages ahead of next year’s elections. Will the racers be able to cross the finish line in time? This largely depends on how far removed the positions of team Parliament, Council, and Commission are from each other.

Although political motivations are, as usual, a big factor in the fate of the file, we will not speculate about them here.

The triple whammy of scarce Russian fossil pipeline gas, low hydropower reservoirs in a summer drought, and defect-crippled French nuclear plants pushed energy prices in 2022 to uncharted territory, causing many to call for rethinking the design of European energy markets.

The European Commission eventually presented proposals in March 2023 to improve the electricity market’s functioning. These are not revolutionary but build on the 2019 ‘clean energy package’ to better protect vulnerable consumers, support non-fossil flexible resources and stabilise prices over the long term.

The clock is ticking. Ideally, negotiations between the three institutions start in September, allowing them to finish before the end of 2023. Some parliamentarians are trying to disrupt the next step of plenary adoption as a last-ditch effort to weaken the compromise, but it seems unlikely this will have a substantive impact.

Regardless, the Belgian presidency begins in January, and they effectively only have a few months before attention turns to the European and Belgian national elections.

Tracking the different positions

There are many minor and major differences between the Parliament and Council positions.

For starters, the Parliament made specific additions to the Commission’s stance on grid operator governance in support of demand-side flexibility and increased transparency. They mention locational price signals and propose a detailed framework to assess the need for flexibility in the Member States.

All of this should support the transition to a clean energy system. Parliament is also very expansive about energy sharing, adding lots of detail. This should enable owners of solar installations to distribute production among other consumers.

The Council doesn’t go into the same level of detail on grid governance, flexibility and energy sharing, but the differences don’t seem insurmountable. Parliament also suggests important additional consumer protection clauses, including a ban on disconnections.

The Council has reportedly settled on most of the issues in their position. They tend to be more cautious than Parliament, asking the Commission to analyse positive new elements like regional hubs and long-term transmission rights.

The Commission proposes to give transmission system operators the option to procure peak-shaving services directly in the market to limit the need for fossil-gas peaker plants — similar to a product National Grid offers in the UK. The Council would strictly limit this option to times when there is a price crisis to prevent such a product from interfering with the existing regular market and keep the power system in balance.

A much more controversial aspect of the reform is the Commission’s proposal to reinforce long-term contracts between private actors (defined as PPAs – power purchase agreements) or with a public entity (defined as CfD – contracts for difference).

The Commission proposes that if investments in clean energy need support, the go-to tools are ‘double-sided’ contracts for difference. Double-sided, because they have a floor, below which the public pays the project for the difference, but also a ceiling, above which the project owners have to pay the public entity back. This is considered the most cost-effective support mechanism, lowering financing costs and acting as a buffer against windfall profits.

The Council has not finalised its position on long-term contracts yet. Parliament, for its part, is lukewarm on double-sided contracts for difference as best practice for investment support. It also created a very broad — and therefore probably not very useful — list of how the costs and revenues involved with CfDs can be distributed among different consumer classes.

For instance, more focus would probably be advisable to support low-income households and those at risk of energy poverty. Distributing costs and revenue to businesses risks distorting intra-European competition. It may also shield industry from the price signals that should incentivise them to change their energy and production processes.

We understand that the design and the distribution of costs and revenues of CfDs is also what the Council is still debating. As usual, a lot of energy is being spent on treating nuclear energy in this file. More focus on smart CfDs and vulnerable consumers would be most aligned with the original intention of the reform proposals.

The biggest gap between the Council’s position and that of Parliament, along with the original Commission proposal, is on capacity mechanisms. The standing regulation considers these temporary patches to resolve security of supply concerns. They come with a risk of over-procurement, especially from large fossil power plants. This may lead to higher costs to consumers than necessary and risk locking in polluting fossil fuel power plants.

The Council seems intent on making capacity mechanisms permanent. They are even considering a derogation for coal and lignite plants to allow them to receive capacity subsidies beyond the current deadline of 2025. Considering the time and effort that went into the 2019 clean energy package capacity mechanism discussion, there is a real risk that re-opening this discussion under tight time constraints could derail the whole file.

The sprint to the finish

There is still room to finalise the new legislation before the 2024 elections — by refocusing the long-term contract sections, accepting safeguards to diminish the risk of peak shaving services distorting markets, and moving deliberations on capacity mechanisms to another file altogether.

The electricity market reform is meant to achieve better consumer protection, more and cheaper renewables and a financial return for people making the flexibility in their heat pump or electric vehicle available to the grid.

The finish line may seem elusive, but it’s close.


A version of this article originally appeared on Euractiv.

Solar and wind only cannibalise prices if you let them: A Power System Blueprint Deep Dive

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A recurring theme in energy market discussions is the fear that increasing shares of solar and wind with negligible running costs will lead to plummeting electricity prices — so-called price cannibalisation — making further investments in renewables uneconomic.

This has fuelled concerns that investment in renewables — having at last reached cost competitiveness — may yet stall and fail to deliver the required total decarbonisation of the power sector. Merchant investment might be unfeasible. Ever-growing subsidies might be required, and perhaps even these won’t suffice to decarbonise completely. We find this to be entirely avoidable.

In this deep dive — part of our Power System Blueprint website — we look at the options policymakers have in avoiding price cannibalisation and make the case for how to deploy renewables in a cannibalisation-free environment. We also assess the extent to which options to counter unhelpful price cannibalisation are currently deployed in the current European market design and regulatory framework. Since it comes out as a mixed bag, we identify needed improvements to build on the strengths of European policy framework.

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作为一种重要的监管“工具”,电力市场需要充分发挥配置资源的决定性作用,形成能够反映电能供需情况的电价,并最终实现社会福利最大化–包括增加系统可靠性,完成低碳目标,同时降低系统成本。本篇文章回顾了电力现货市场设计的几个关键问题的概念和原则,梳理了欧美国家与电力市场监管相关的法律框架,这些法律法规促进了欧美国家向低碳高效的电力系统转型。我们为中国政策制定者在考虑电力市场相关的法律制修订提供的备选方案包括:1)明确电力市场各个组成和监管机构的职责 2)制定有关稀缺电价、经济调度、输电容量分配,区域市场和缓解市场力的要求 3)增强法律之间,以及各行业政策之间的协调和互相促进。


对《关于加强新型电力系统稳定工作的 指导意见(征求意见稿)》的建议

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国家能源局于今年4月20日发布了《关于加强新型电力系统稳定工作的指导意见(征求意见稿)》(以下简称《征求意见稿》),向社会公开征求意见。睿博能源智库认为,该《征求意见稿》提出的一系列措施对支持电力系统稳定、促进清洁能源转型和实现双碳目标,都起到了至关重要的作用。我们尤其关注《征求意见稿》中第四条的总体思路:“远近结合、科学谋划电力系统转型的发展方向和路径,统筹规划、建设、运行、市场、科研等各项工作,建立适应新型电力系统的稳定管理体系,确保稳定工作要求在新型电力系统全过程、全环节、全方位落实。” 这份方案综合考虑了在清洁能源转型方面所需创建的框架,并突出了对可持续能源发展的重视。



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Integrate to zero: Policies for on-site, on-road, on-grid distributed energy resource integration

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To meet decarbonisation goals, global renewable power capacity will need to more than triple by 2030, according to leading energy agencies. Centralised renewable generation will not deliver this level of change on its own, nor should it. Distributed energy resources (DERs) such as heat pumps, electric vehicles, small-scale solar generation and battery storage are essential to ensuring that clean power is the most affordable and reliable option for all countries.

Distributed energy resources must be effectively integrated with the grid if they are to fulfil their potential. Integration allows them to be used flexibly to draw power from or feed power into the grid according to the value their flexibility provides to the electricity system. This reduces carbon emissions from fossil generation used to meet peaks in electricity demand, increases system resilience, and benefits all consumers through the lower prices resulting from avoided generation and network capacity costs.

RAP sets out four key policy approaches that will help promote the effective integration of behind-the-meter distributed energy resources:

  1. A strong set of enabling policies can remove barriers to DER integration. Together, they augment the flexibility potential of DERs and enable their participation in power system optimisation.
  2. Price signals should reflect power system optimisation needs. Payments for energy services should vary in proportion to how much, when and where they are used or delivered.
  3. Cost-reflective price signals should be combined with fair market access for distributed energy resources. With nondiscriminatory access to energy service markets and with pricing that reflects the full value of DERs, third-party service providers can shield consumers from price volatility in return for flexible management of DERs within agreed boundaries.
  4. International collaboration among policymakers and regulators can spread best practice. Cross-border knowledge transfer among regulators is a growing phenomenon and can help each place to find its own way, guided by local circumstances, politics and experience.

The authors explore each of these insights in greater detail. They also highlight best practices from around the world, with contributions from RAP colleagues Raj Addepalli, Max Dupuy and Jessica Shipley.