1 Capacity mechanisms - IFIEC position June 12 th 2012

2 RES development and related market distortions The undesired interactions between the electricity market and regulated RES support : Priority is given to intermittent electricity generation from RES, reducing runtimes of traditional power plants. The high guaranteed incentives for RES allow RE generators to offer their production at price 0. As a consequence, market prices might fall below the level for cost-effectiveness of standard power plants. Can this market distortion lead to a lack of investment in new and flexible capacities? Isnt it, on the contrary, a signal that no new investment is needed yet?

3 The capacity mechanisms and the question of the missing money Are capacity mechanisms the best answer to solve this problem? Capacity mechanisms are to be used as a last resort solution, when it is clearly demonstrated that the market itself has failed Why adding another market intervention with capacity mechanisms? Is there really missing money? Money might just not flow to those really interested in investing in additional generation capacity. Higher price volatility also leads to higher peak prices. Consumers are not willing nor able to pay for double marginal price: In the energy market: the marginal cost of the marginal generation unit (generally gas or coal). In the capacity market: the capacity cost of the marginal technology (e.g. new nuclear/hydro). Generators must produce clear evidence of the missing money theorem before starting a discussion on the need for capacity mechanisms

4 Alternative solutions proposed by IFIEC (1/2) The following alternative solutions all deserve to be studied: 1.Limit support to RES to the difference between the effective generation cost and the electricity price of the reference market. This will incentivise renewables producers to sell their electricity as efficiently as possible in the market. 2.Centrally decide of the back-up investments to ensure the necessary base-load and semi-base supply, the investment cost being included in the RES support scheme amount. 3.Improve the functioning and the efficiency of the gas market to increase the revenues of (flexible) gas powered electricity plants. 4.Simplify permitting procedures and remove other policy obstacles to the construction of new power plants.

5 Alternative solutions proposed by IFIEC (2/2) 5.Extend the lifetime of existing (semi-)baseload capacity as long as it is technically and economically viable. 6.Increase investments in interconnections especially between countries with high and low natural storage capacities. 7.Promote voluntary demand response participation with appropriate financial incentives. 8.Stimulate research and investments in energy storage systems to promote new technologies that are able to reduce volatility with the least possible costs. 9.Allow and support long term contracts between consumers and investors into power plants for the benefit of both parties.