Stefan Goebel - Putting a Price on Security of Supply – Capacity Mechanisms

PUTTING A PRICE ON SECURITY OF SUPPLY – CAPACITY MECHANISMS

Berlin, 23 October 2014

Stefan-Jörg Göbel

Our two quite opposite experiences

Positive: >10.000 MW European

third party RES under management!

Putting a Price on Security of Supply

Negative: 3 digit million EUR write-

offs in German CCGTs!

2

Decline in power price

3

Yearly average Spot price for base and peak load at the EPEX-DE

Putting a Price on Security of Supply

0102030405060708090

100

2008 2009 2010 2011 2012 2013 2014(implied)

EUR

/MW

h

Base

Peak

Margins for gas units on the term market

Putting a Price on Security of Supply 4

-20

-15

-10

-5

0

5

10

15

20

25

30

Jan 10 Jul 10 Jan 11 Jul 11 Jan 12 Jul 12 Jan 13 Jul 13 Jan 14 Jul 14

[€/M

Wh

]

Clean Spark Spread Peak

Cal_11

Cal_11 Lieferung

Cal_12

Cal_12 Lieferung

Cal_13

Cal_13 Lieferung

Cal_14

Cal_14 Lieferung

Cal_15

Statkraft production decline and CCGT economics

in Germany

Capacity utilisation of gas power plant

fleet dropped to insignificant levels

1200 MW CCGT´s have fixed

operational costs of about 18m EUR/a

(15 EUR/kW/a)

Currently however only marginal costs

can be recovered

There is no commercial role for gas-to-

power!

5

0

0,5

1

1,5

2

2,5

3

3,5

2009 2010 2011 2012 2013 2014

Pro

du

ctio

n in

TW

h

Year

Production of Statkraft Fleet

Knapsack 1

Herdecke

Emden

Robert Frank

Knapsack II

Some speculation about capacity development: From overcapacity to a new equilibrium?

Putting a Price on Security of Supply 6 Source: Kurzstudie zur Kapazitätsentwicklung in Süddeutschland bis 2025 unter Berücksichtigung der Situation in Deutschland und den europäischen Nachbarstaaten, 17 September 2014; own speculation

Optimistic Scenario

Demand

Dispatchable Supply

2015 2020 2025 2030

Speculation 1: Bust and Boom

Speculation 2: Steady Fall

Generation capacity on its way to a new equilibrium?

Starting point - decline:

•Dispatchable supply is falling because of cash burn of existing generators. Oct 2014: 49 units representing 13500 MW applied for decommissioning.

•No new capacity to come online under existing market framework and conditions.

Break point - stabilising:

•All capacity earns back operating costs (O&M mainly) or believes to do so soon.

•No consensus if this is at a point giving security of supply.

Turning point - increase:

•New capacity or significant plant refurbishment is not only able to recover operating costs but also investments.

•Statkraft believes this point will never be reached under the current market conditions.

Putting a Price on Security of Supply 7

In a zero marginal cost dominated system cost coverage must come from very few hours

Putting a Price on Security of Supply 8

hours

price

Price distribution in a renewable

dominated world

„Traditional“ price distribution

In theory generators are indifferent if they sell at 400

EUR/MWh in 500 hours or at 40 EUR/MWh in 5000

hours.

But what would set the price at 400 EUR/MWh?

Also in practice generators are afraid of political

intervention.

Current Interventions in the so called Energy Only Market (EOM) in Germany

Redispatch: Frequent TSO interference for balancing various areas of the grid,

marginal cost compensation only

The „Irsching case“: Irsching CCGT run mainly under redispatch and thus

qualifying for full cost coverage, no transparency, possibly discriminating

„Netzreserve“: Capacity contracted by TSOs in the south as redispatch

potential. Intransparent cost compensation, non-German capacity more

generously treated.

„Stilllegungsverbot“: 12 months notice period before a plant may be

decommissioned, if TSOs veto decommssioning yearly fix OPEX will be taken

over

Putting a Price on Security of Supply 9

The Government‘s timeline

Studies on market design

- Results: “The power market works in principle and can provide security of supply”

Green Book: Publication November 2014, Consultation until March 2015

White Book: Publication May 2015, Consultation until September 2015

New energy law until Q3/2016

Consultation with neighboring states in parallel

Putting a Price on Security of Supply 10

How would a EOM+CRM look like, what would it cost: An illustration of one of million options

A yearly auction to secure a capacity level which is set by the regulator

All capacity can participate: New, old, all fuels, demand side, no minimum size,

domestic and foreign

A capacity price merit order is made and the last unit still needed to cover the

targeted capacity level sets the clearing capacity price

All capacity can still participate in the EOM

Existing capacity will thus bid the expected „missing money“ between EOM

income and yearly fixed operational costs

This means that in a market without missing money and overcapacity the

capacity price will be zero!

Putting a Price on Security of Supply 11

Current arguments – some quotes from Frontier Economics‘ study concluding CRM not needed

„Please note: Political control over the level of capacity / security of supply is

no economic value as such.“

„EOM can provide security of supply if reforms will take place.“

„EOM can in principle also provide sufficient security of supply without „explicit“

capacity prices.“

„… it takes a clear commitment from the political side and the administration to

accept scarcity induced price peaks.“

„Difference between system costs as NPV (2015) over model horizon (2015-

2039) and all regions (Central Europe) compared to EOM: 2.2bn – 9bn EUR.“

Assumed CO2 price 2024: 30 EUR/t, 2034: 50 EUR/t

Assumed demand side management participation 2035: 3.7 – 9 GW

Putting a Price on Security of Supply 12

Putting possible CRM costs into perspective

Putting a Price on Security of Supply 13

Frontier Economics additional cost estimate vs. EOM: 0.1-0.4bn EUR/a

Nominal CRM payment if capacity price is set by CCGT yearly fixed operational cost @15 EUR/kW/a and 80 GW:

1.2bn EUR/a

2014 EEG levy: 24bn EUR/a

2011-2014 “savings” effect @15 EUR/MWh price decline and 600 TWh:

9bn EUR/a

Recommendations

A well-designed Capacity Market is necessary, to achieve security of supply,

climate protection, integration of RES and affordability of energy

Several variants of a Capacity Market can work, as long as these are market-

wide and allow for full and fair competition between all capacity providers and

cross-border participation is ensured.

A Capacity Market should not aim to keep all overcapacity alive

Fast implementation of Capacity Market is needed to avoid inefficient closure

of efficient gas-fired capacity.

Closure would mean capital destruction for society.

Putting a Price on Security of Supply 14

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Questions? Answers!

www.statkraft.com

THANK YOU Stefan-Jörg Göbel +49 211 60244-124 [email protected] Statkraft Markets GmbH Niederkasseler Lohweg 175 40547 Düsseldorf