MISIÓN DE FUMIDEL S.A . Somos

As stated in Section 2.1, there is not a single CM, but CM is a collective term for different implementation concepts. In this section, the different implementation concepts are categorized using three different approaches available in the literature [73, 74, 75, 16, 24]. The categorization helps pointing the similarities and differences of the concepts. The following common list of concepts is used:

• Capacity Payments (CP) • Strategic Reserves (SR)

• Centralized Capacity Market (cCM) • Reliability Options (RO)

38 CAPACITY MECHANISMS IN MULTI-SERVICE MARKETS

Capacity

Payments StrategicReserves

Centralized Capacity Market Reliability Options Decentralized Capacity Market Capacity

Subscription Energy-OnlyMarket

Market-Based Mechanism Administrative

Mechanism

Figure 2.10: Capacity mechanisms from administrative to market-based (based on [74])

• Capacity Subscription (CS)

A detailed introduction to the individual concepts follows in Section 2.4.1.

Regulated or market-based

A first categorization of different CMs describes the degree of administra- tion/regulation that is involved to determine the value and consequently the remuneration linked to the security of supply. While the energy-only market (EOM) forms the most market-based mechanism to reveal the value of security of supply in hourly price for energy, Capacity Payments (CP) are described as the mechanism which is most determined by administration. All CMs can be placed in this range (Figure 2.10).

Starting from the left, CP involve a direct influence of the administration to set the level of remuneration. The volume of strategic reserves (SR) is also still very much influenced by the regulator and system operator. Next, four market-wide CMs follow. By increasing the resolution of the demand side, the administrative impact is further reduced and the market clearing is left to more and more market participants. The capacity subscription at the right end of the CM spectrum forms the most market-based mechanism as it offers each individual consumer the possibility to reveal its value of reliability.

Price-based or volume-based

The second categorization follows the distinction based on the quantity considered as a market outcome. Hence, there is a distinction made between price- and volume-based mechanisms. It follows the categorization proposed in [74, 75] (Figure 2.11). It is the most common form of categorization and comes back with possible small adaptations in many publications and reports on CMs.

TERMINOLOGY OF CAPACITY MECHANISMS 39

Capacity

Payments StrategicReserves ReliabilityOptions

Centralized Capacity Market Decentralized Capacity Market Capacity Subscription

Targeted Market-wide Individual

Volume-based Price-based

Capacity Mechanism

Figure 2.11: Categorization of capacity mechanisms based on the determination of price or quantity (based on [74, 75])

Price-based mechanisms drive investment by providing financial incentives. The structure of these incentives determines the resulting installed capacity where the prediction of the response of investors is crucial for its success. It is a complicated matter, requiring detailed knowledge of the market. Therefore, a wrong estimate can easily cause undesired under- or overinvestment.

Alternatively, in quantity-based mechanisms, a regulating authority sets a desired amount of installed capacity and the price evolves from the market clearing. In this way the amount of installed capacity can be controlled and ensured directly by the authority [28]. In case of very steep demand curves, as it is the case for capacity demand, it is preferable to establish a quantity-based mechanism [43].

In an additional level of distinction, the volume-based mechanisms are separated based on the involvement of the supply and demand side. While in targeted mechanisms like the SR, only a limited share of the market actors participate, a market-wide mechanism is considered to be a mechanism in which the majority or all market actors linked to the supply side are active. The distinction to an individual mechanism is linked to the even more detailed resolution of the demand side. In the previous mechanisms, the demand for capacity is either organized via a single buyer or an aggregated representation of the demand side. An individual mechanism is characterized by individual end-consumers expressing their value for security of supply.

Product, Volume & Procurement

The third way of categorizing CMs combines and extends the previous two categorizations. The categorization summarizes the key design choices outlined

40 CAPACITY MECHANISMS IN MULTI-SERVICE MARKETS

in [16]. The CMs are described based on three design choices considered the most relevant distinguishing factors:

• Traded product: While all CMs are based on a product for availability, the traded product can be distinguished between physical capacity and a financial instrument. Most common is the reference to physical capacity: the traded volume represents real existing assets that contribute fully or partly to the security of supply. Physical capacity is the basis for almost all major concepts including capacity payments, strategic reserves, centralized or decentralized capacity markets or capacity subscription. As opposed to physical capacity, it is also possible that a CM uses a financial product to represent the value of physical capacity. An example for such a financial product are reliability options. If desired, the latter would also allow for intermediaries to participate without having a physical representation of the capacity.

• Determination of the volume: In order for a CM to result in a market clearing, a demand for capacity must be established. As in most cases it is not feasible to assess the capacity demand based on individual decision- making, the determination is often aggregated. Consequently, CMs can be distinguished based on the method the capacity demand is established. From the list of discussed CMs, four different methods can be described. First, with capacity payments, the volume is actually determined by the market response to the payment set by an authority. The next choice is that the volume, or the associated demand curve, is set centrally by the authority. This often includes the advice from system operators. In a decentralized approach, the authority distributes the demand among other market actors, typically retailers. This can be via a direct obligation for a certain volume or indirectly via a communicated methodology that only determines the volume after realization. Finally, the most decentralized choice is based on individual consumers determining their volume. • Responsibility for procurement: The last design choice is a follow-up of the

choice on how to determine the volume. It describes how the market is organized and which market participant is responsible for the procurement of capacity. Basically, two options are available. On the one hand, a market with a single buyer can be put in place. In this case, the authority itself or the system operator on assignment by the authority are responsible for the procurement. On the other hand, a double-sided market can be established: the demand side explicitly participates in the market-based mechanism for capacity. Either aggregating market participants like retailers or individual consumers are responsible for the procurement of capacity to cover their demand.

TERMINOLOGY OF CAPACITY MECHANISMS 41

Responsibility for procurement

Determination ofvolume

Traded pro_duct

Physical capacity Financial instrument Single buyer Double-sided market Centralized price-based Centralized volume-based Decentralized volume-based Individual volume-based Decentralized

Capacity Market _Capacity Payments Strategic Reserves Reliability Options Centralized Capacity Market Capacity Subscription

Figure 2.12: Categorization of capacity mechanisms along the design choices Applied to the same six implementation concepts, the categorization is summarized in Table 2.2.

Figure 2.12 visualizes the same information in a three-dimensional plot to make the relationship of the different concepts clearer. The figure does not present the end of developments. Also other mechanisms might be thinkable that combine the design choices in a different way and fill out the empty spots.

Other design choices

For completeness, more design choices can be added to describe a CM. They can be attributed to all implementation concepts, in one way or the other. The description is kept short as they are, on the one hand, very implementation- specific and on the other hand, only limited represented in the modeling framework. Yet, a non-exhaustive list of design choices based on [16, 24] is the following:

42 CAPACITY MECHANISMS IN MULTI-SERVICE MARKETS

Table 2.2: Categorization of capacity mechanisms along the design choices (based on [16])

Traded Determination Responsibility

Mechanism product of volume for procurement

Capacity Payments Physical capacity _{volume found via market}Price set by authority, Payments by_authority Strategic Reserves Physical capacity determined by authorityVolume demand

with system operator

Single buyer (authority, assigned

system operator) Centralized

Capacity Market Physical capacity determined by authorityVolume demand

Single buyer (authority, assigned

system operator) Reliability Options Financial instrument _{determined by authority}Volume demand (authority, assignedSingle buyer

system operator) Decetralized

Capacity Markets Physical capacity

Volume demand / methodology determined

by authority

Double-sided market (aggregated with retailers

or individual consumers) Capacity

Subscription Physical capacity

Volume demand individually determined

by consumers

Double-sided market (individual consumers)

• Lead-time: Market clearing for CM can be held with a certain lead-time to for example allow new projects to participate prior to commissioning. • Contract duration: Instead of annual market clearings, CMs can offer

contracts with a duration of multiple years to further decrease the risk for capacity providers.

• Penalties for non-delivery: All implementations of CMs include a kind of penalty system. The penalty for non-delivery at a single event can be based on a fixed payment, on a share of the initially received remuneration or on a full compensation.

• Price caps: The price cap and by extension the shape of the demand curve can be decisive for the market-based mechanism. Depending on the extent of the mechanism typical price caps are oriented towards the CONE or the missing difference to the net revenues from other markets.

• Derating and pre-qualification: The derating of capacity based on its ex- pected availability can either be organized in an administrative process supervised by for example the system operator. However, it is also possible to let capacity providers decide on the offered value based on a trade-off of expected revenues and penalties for non-delivery. Another element of pre-qualification, i.e., access to the mechanism, is linked to the design

CURRENT IMPLEMENTATIONS 43

choice if capacity providers need to have real assets or can also be financial traders.

• Auction type: CMs may also vary in the type of auction or market clearing used. Mechanisms exist that implement sealed-bid auctions, descending- clock auctions, sequential auctions or contracting based on tendering processes.

• Self-supply: The topic of self-supply is important for decentralized CMs where capacity providers might coincide with participants of the demand side. In this case, a distinction is made if capacity is traded mandatory via a market clearing or can be accounted for self-supply.

• Locational elements: CMs can include a locational element in both the pre- qualification phase and the market clearing if technical limitations require it such as grid congestions.

2.4

Current Implementations

This section describes the different implementation concepts for a CM. Same as for the design elements, there is a wide range of literature available that describes the concepts in all details among others [75, 16, 74]. If applicable, for each implementation concept, one or more country examples are provided. Figure 2.13 shows a world map. Current implementations of CMs are highlighted. A detailed map of Europe is shown in Figure 2.20. The findings are based on [16].

Given the scope of the thesis, the description is focused on the main elements. Additional emphasis is put on the interactions of entities involved. The interactions are visualized in diagrams showing the main actors in a CM. These interactions set the stage for the modeled agents in the following chapters.