Assessment of alternative designs of capacity remuneration mechanisms in the spanish power system in the 2030 horizon

Abstract

Capacity margins in the Spanish electricity system are currently in safe levels. However, this situation may no longer hold in the medium- to long-term, as there is considerable uncertainty about the evolution of the generation fleet and the demand, namely: Nuclear power plants will reach the end of their 40-year design life in the 2020s. Nevertheless, there exists the possibility of a life extension beyond 40 years - A rise in carbon prices would jeopardize the economic viability of coal power plants leading to their shut-down. Additionally, public support to domestic coal power plants may no longer be in force in the future. - Moving towards a low carbon mix would require higher levels of back-up thermal generation, namely CCGT. In this vein, three alternative scenarios have been formulated so as to represent plausible evolutions of the energy mix in the period 2020-2030. Under these hypothesis, the new capacity that would be required so as to assure a secure electricity supply during that period might vary between 13.56 GW and 20.78 GW. However, in the current context of low and volatile market prices and low load factors is not sending the right economic signals for attracting investors. In the discussion about whether or not the energy-only is able to guarantee SoS in the Spanish electricity system, we conclude that there is a market failure that should be addressed through the implementation of a CRM. This mechanism must be able to send a stable long term signal to investors so as to allow them to recover their fixed costs. An analysis of the state of the art of the different alternative design of CRM has been carried out, with a focus on the particular problem that characterizes the Spanish power system. Guidelines and good practices coming from the Spanish regulator and European institutions have been also studied. As a result of the assessment, it has been concluded that the most suited CRM alternatives for bringing into the system the new capacity that Spain requires are a capacity market based on a central auction and a reliability option mechanism. These alternatives are considered to be cost-efficient due to its competitive nature and flexible to adapt to the actual and long-term needs of the system. These alternatives have been introduced in an electricity wholesale market model for long-term analysis. It has been simulated the entrance of new capacity into the system in the amount required so as to take the coverage index into save levels under the hypothesis of the three scenarios. For fostering these investments the existence of two alternative CRM have been simulated, namely: a central buyer model (CM) and a reliability option mechanism (RO). The design basic criteria of these CRM has been to set the level of remuneration so as to be effective and efficient form the point of view of the regulator, in way that: 1. The remuneration level allows plants to recover all their fixed cost, including a reasonable profitability. 2. The cost charged onto consumers will be the lowest possible The results obtained from this study for the year 2030 are shown in the following table: Table. Main results obtained from the simulations of the CRMs in the three scenarios for the year 2030. Low scenario Medium scenario High scenario New net CCGT capacity [GW] 13.56 20.36 20.78 CM Weighed energy price [€/MWh] 84.2 86.7 85.7 Cost of the mechanism [€/MWh] 5.2 6.2 6.7 Total costs for consumers [€/MWh] 89.5 92.9 92.4 Premium [€/kW] 122.5 112.1 115.4 RO Weighed energy price [€/MWh] 82.8 84.5 83.7 Cost of the mechanism [€/MWh] 5.7 7.2 7.6 Total costs for consumers [€/MWh] 88.5 91.8 91.3 Premium [€/kW] 120.9 113.7 116.9 Under the hypothesis assumed, the total energy costs (understood as the sum of the spot energy price and the cost of the CRM), results lower when implementing a CRM than in an energy-only-market approach. On the other hand, the costs of the CRM per unit of energy obtained from the simulations are comparable with those registered in Spain with the current mechanisms. Additionally, it can be demonstrated that the existence of a certain amount of capacity subject to a RO contract leads to a reduction in market energy price., due the stabilizing effect of the ‘scarcity price’. Variations in the level of investment incentives are linked to the load factor of the plants, the spot price and their variable cost.