Ensuring reliability of the power system and capacity mechanisms

The share of renewable resources with very low variable costs is increasing in Europe. At the same time, a race is underway to find the cheapest, most reliable method to balance the system at times when production from these sources drops, for instance as a result of changes in weather. This phenomenon applies to wind and solar sources, as well as thermal units, which demonstrate certain limitations related to cooling under high temperatures. The current model of the energy market is not keeping up with the changes in generation technology, which has led to an intensive discussion for more than two years in the European Union, including Poland, on how to change this model. There is general agreement that the energy market needs to be reformed. One of the most important threads in this discussion is the expansion of existing capacity remuneration mechanisms, which are expected to secure the appropriate level of reserves and encourage investment.

In this paper we take a broad view of capacity markets. We recommend actions that, regardless of future decisions, can help keep costs at a reasonable level and improve the flexibility of the power system. If decisions are made to support conventional power generation, we propose a capacity mechanism design that should not constitute excessive support for generators and so should not unduly burden customers. It is also important for capacity mechanisms to support innovation in the power sector and the necessary diversification of the domestic resource base.

Key conclusions

• Reform of the energy market is inevitable; a discussion is taking place on this in parallel in Poland and in all countries of the European Union.
• In the current discussion about a capacity market in Poland, it is not clear what problem we are trying to solve: Is it the need to maintain the existing generation fleet, or to inspire new investments? Such a comprehensive discussion cannot be conducted without an energy policy that sets goals 15 and 25 years into the future.
• The reform of the energy market in Poland should, in the first place, focus on improving the flexibility and economic efficiency of the power system. Steps should include reform of the balancing market, the development of demandside response (DSR) and improving energy price signals to correlate with demand for electricity in all time frames.
• Before introducing a new capacity mechanism, there should be a reliable and transparent assessment of resource adequacy in Poland, which should cover not only generation, but also energy efficiency, DSR, cross-border interconnections and the generation of energy from renewable energy sources (RES). It is important to establish a clear reliability standard, as the standard chosen will have a direct impact on system costs.
• If a decision is made to adopt a capacity mechanism,it is important that this solution does not block the transformation of the power sector, that it enables resource diversification after 2020, and that it promotes greater innovation. This mechanism should not only compensate capacity, but also the ability to provide energy services in various time frames. Thermal units have operational limitations, especially in the summer, while the system’s biggest challenge is currently to balance summer peaks.
• A poorly designed capacity mechanism will not only fail to stimulate new investment, but will come at a high price to energy consumers, which will affect household budgets as well as industrial development in Poland.

Title of analysis: "Ensuring reliability of the power system and capacity mechanisms" 
Date of publication: November 2016 
​Authors: Mike Hogan, Edith Bayer from Regulatory Assistance Project and dr Joanna Maćkowiak Pandera, Forum Energii
Substantive supervision: dr Joanna Maćkowiak Pandera, Forum Energii