FRENCH CAPACITY
MARKET
Report accompanying
the draft rules
RTE Réseau de transport d’électricité SA shall not be liable for damages of any nature, direct or indirect, arising from the use of data and information contained in this
document, including any operational, financial or commercial losses.
FRENCH CAPACITY MARKET
Report accompanying
the draft rules APRIL 9 2014
SUMMARY
The principle: A mechanism to ensure security of supply
French law 2010-1488 of 7 December 2010 reforming the
levels indicated in requests are compared with effective availabil-
organi­sation of the electricity market (NOME Act), codified in arti-
ity and settlements are calculated to reflect imbalances.
cles L. 335-1 et seq. of the Energy Code, calls for the creation
of a capacity obligation scheme. It specifies that “each supplier
The provisions proposed define a new market mechanism, regu-
contributes, in accordance with the demand characteristics of its
lated by public authorities, through which holders of certificates
customers, in terms of power and energy, to the security of elec-
can trade them with obligated parties to enable the latter to meet
tricity supply in continental France.”
a legal obligation.
Decree 2012-1405 of 14 December 2012 defines the general
This mechanism is intended to provide a form of “insurance”:
organisational framework for the new scheme.
operators are rewarded for the contributions their capacities
make to the power system by being available during periods of
Obligations will be assigned to suppliers based on the actual
tight supply. Starting four years before the delivery period, the
consumption of their customers during peak periods. To meet
mechanism will generate economic signals complementing
its obligation, a supplier will have to secure capacity certifi-
those generated by the energy market.
cates, either by certifying the capacities it operates (generation
or demand-side capacities) or by purchasing certificates from
The decree includes a detailed explanation of the principles to be
players that hold them. Individual obligations, defined based on
applied in certifying operators’ capacities, allocating obligations
parameters established four years before the target delivery year,
to suppliers and organising capacity certificate trading along with
will be updated to reflect the effective consumption data meas-
the related transparency mechanisms.
ured within the supplier's portfolio.
The principles outlined in the decree must be further refined so
Capacity certificates will initially be issued by RTE to opera-
the mechanism can be operational in time for the 2016-2017
tors based on the projected contribution of their capacities to
winter period. This is the purpose of the rules, contracts and
reducing the shortfall risk during peak periods. Generators must
agreements submitted by RTE on 9 April 2014, in accordance
request certification for their capacities at least three years before
with the responsibilities assigned to it in the decree, for approval
the target delivery year, while demand-side operators can submit
by the Minister and the opinion of the Energy Regulatory Com-
requests up until the start of the same delivery year. Availability
mission (Commission de régulation de l’énergie – CRE).
***
4
France will have to surmount major challenges to successfully man-
1980s (development of hydro- and nuclear power, increased use of
age its energy transition. Gone are the days when society could count
electricity through the promotion of electric heating, enhancement
on abundant non-renewable sources: it must now find more efficient
of France’s energy independence). These choices helped make the
and environmentally sound modes of production, transport and
country more energy independent and competitive, and reduced
consumption. This will require using less energy, optimising produc-
its carbon footprint, but they have also given rise to a particularly
tion systems and making greater use of renewable energy sources.
intense peak demand phenomenon. In recent years, though growth
As it stands, France boasts a competitive and low-carbon power
in average consumption (in energy terms) has slowed, peak power
industry mainly because of energy choices made in the 1970s and
demand has continued to trend sharply higher.
SUMMARY
The French capacity mechanism was designed to address this
location or suppliers with which sites are affiliated) will facilitate its
issue by modifying consumption behaviour during peak peri-
integration. Generally speaking, the market design choices made
ods (demand-based approach) while encouraging adequate
for France factor in demand response as a structural solution to
investment in generation and demand response capacities
the capacity adequacy problem.
(supply-based approach), at a time when energy markets’ ability to stimulate such investments was being questioned in
Introducing a capacity mechanism in France supports public
much of Europe.
authorities’ objective of making the load curve more flexible, set
forth in Law 2013-415 of 15 April 2013 (“Brottes Act”). It is by no
Peak demand is not a problem in and of itself, if it is managed
means intended as an alternative to or substitute for the develop-
in an economical and environmentally sound way without put-
ment of demand response capacity: on the contrary, the capac-
ting security of supply at risk. And managing it efficiently is all the
ity obligation marks the final step in a four-year effort to open
more important since the decarbonisation policies implemented
all market mechanisms to demand response and allow it to par-
to reach the climate targets set by the European Council in 2009
ticipate directly in energy markets. Over the coming months, RTE
and adopted in the Commission's 2050 Energy Roadmap could
will complete the process by removing the last technical barriers
result in even greater use of electricity, for instance to power a
to aggregation, consolidating France's position as the European
growing fleet of electric vehicles, meaning the peak demand phe-
leader when it comes to leveraging demand response to the
nomenon could become permanent.
extent permitted by the economic fundamentals of the sector.
Against this backdrop, demand response can and must play
A changing energy mix also is also creating greater need for flex-
a central role. Though the capacity mechanism proposed is
ibility, notably on the demand side, due to the growing penetra-
technology-neutral and does not structurally favour any one
tion of variable generation. The central risk factor for the French
resource over another, it does make it possible to recognise the
power system could thus gradually evolve. Going forward, the
capacities that actually serve security of supply needs, which load
capacity mechanism will be able to shift from an exclusive
curve management efforts clearly do. The specific procedures
focus on national peak demand to an approach that ensures
proposed for demand response (flexible certification up until the
adequate flexibility in a system characterised by increasing
start of the delivery year, option to aggregate independently of
intermittent energy penetration.
***
A new capacity mechanism cannot be implemented without
function highlights a certain number of shortcomings in the so-
first carefully analysing the shortcomings of the existing market
called “energy-only” market when it comes to guaranteeing fair
model. In its Communication of 5 November 2013 on public
remuneration of the capacities required to balance supply and
intervention in the electricity market, the European Commission
demand on the system during peak periods.
stressed that the first steps should be to analyse the causes of
generation inadequacy and to assess the impact of any measures
Security of supply is a public good. If it cannot be delivered – at
proposed.
least over the medium term – through the individual gratification of private preferences, then the desired level of security of
Thanks in part to the introduction of coupling mechanisms that
supply must be defined by public authorities. In the absence of
help optimise and increase energy exchanges between countries
a specific mechanism, there is no reason why the energy market
across Europe, the existing market model has definitely produced
alone, even one that functions perfectly, would be able to achieve
results in terms of optimising electricity generation and flows
the target level, as positive externalities would not be internalised.
in the short term. That being said, market stakeholders, Member States and academics are increasingly questioning whether
Concerns about the functioning of electricity markets have a
the model can ensure security of supply over the long term by
special resonance in France due to the specific characteristics
efficiently regulating investments in supply- and demand-side
of its power sector and notably the peak demand phenomenon
capacity. Indeed, a theoretical analysis of how electricity markets
observed. The Poignant-Sido report of 2010 on peak demand
5
management notably underscored the electricity market's inabil-
involving the closure of new and efficient facilities with low green-
ity, in its current form, to generate the right economic signals to
house gas emissions would in theory go against the objectives
stimulate the investments necessary to guarantee that adequate
set forth in European guidelines.
levels of supply- or demand-side capacity will be installed and
available during peak periods. And concerns have increased since
The second relates to demand response. Though load modu-
the report was published, as evidenced by the recent study on the
lation efforts appear vital to the power systems of the future,
crisis in European electricity markets conducted by the General
analyses show that they can only continue if their contribution
Commission for Strategy and Economic Foresight for the Prime
to security of supply is adequately remunerated. The capacity
Minister. Similar doubts have been raised elsewhere in Europe
mechanism does not by any means seek to lock in generation
and brought to the attention of the European Commission.
capacity’s share in the mix, but instead supports policies that promote the development of demand response.
Two examples illustrate the challenges at hand.
Addressing these issues requires carefully reviewing the archiThe first relates to generation capacity. The steep investments
tecture of the French electricity market while preserving the
made in combined-cycled gas turbine plants in Europe between
benefits of European energy integration. The adoption of the
2004 and 2012 created a paradox: A combination of slower
capacity mechanism will not result in less attention being paid
demand growth and the massive development of renewable
to the other structural changes under way, such as the integra-
sources resulted in a temporary situation of excess capacity that
tion of energy markets across all borders and time horizons, the
market stakeholders failed to anticipate. It could be corrected by
development of cross-border interconnections, the inclusion of
taking a large number of unprofitable assets offline, but this could
demand in all market mechanisms and the overhaul of renewable
suddenly put security of supply at risk, and there might not be
energy support mechanisms. It will merely complement these
enough power immediately available if weather conditions were
developments.
particularly unfavourable for variable generation. An adjustment
***
A number of European countries have already taken similar
their capacity obligation. A market-wide mechanism was chosen
approaches (Sweden, Finland, Ireland, Spain and Italy), are in the
to provide effective guarantees in terms of security of supply and
process of doing so (United Kingdom, Belgium) or are considering
ensure that the effects of the mechanism are proportionate to
capacity mechanisms (Germany). These national mechanisms may
the objective pursued.
differ in their intent and form, but share common characteristics.
Conversely, a targeted mechanism such as a strategic reserve
French Decree 2012-1405 of 14 December 2012 established
would, in France's case, have to be regulated in such a way as
three fundamental principles to be applied in defining the
to address low-probability, high-impact events, such as one-in-
architecture of the capacity mechanism. It must (i) be a market
ten-year cold spells, since demand in France is highly tempera-
mechanism (market-based) based on volumes (quantity-based),
ture sensitive (a 1°C drop in the temperature during peak winter
(ii) applying to all capacity (market-wide), and (iii) involving the
periods generates 2,400 MW of additional demand). This type of
assignment of individual obligations that can be met by acquir-
mechanism would end up removing a large portion of market
ing certificates from a third party. Lawmakers thus opted for a
capacities (several GWs) and result in significant distortion.
decentralised mechanism as opposed to a single buyer system.
These principles lay the groundwork for a mechanism adapted
In a word, the French capacity mechanism preserves the struc-
to the specific characteristics of and issues faced by the French
ture of accountability energy market stakeholders are accus-
market.
tomed to and avoids having public authorities make decisions on
their behalf.
A market mechanism can achieve economic efficiency by allowing obligated parties to engage in trading to minimise the cost of
6
SUMMARY
***
These principles were applied in the decree in such a way as to
(i) Capacity is considered to contribute to reducing the shortfall
create a mechanism that allows market stakeholders to trade
risk when its availability is effective and attested;
capacity certificates so the security of supply target can be met
(ii) Commitments to make capacity available are proportionate to
at the least possible cost.
the benefits for the system, meaning they are targeted to short
periods when demand is highest;
Electricity suppliers' capacity obligations reflect the contribution of
(iii) Fulfilment of participants' commitments and obligations is
their customers to the shortfall risk, notably their consumption during
verified based on measured data and observed availability. Due to
the so-called “PP1” peak period and their temperature sensitivity.
the specific characteristics of variable energy sources, their effective capacity levels can be calculated using an alternative system
Capacity certificates are issued to capacity operators based on
based on a normative approach.
their contribution to reducing the shortfall risk. The certificates
reflect the availability of their capacities during the “PP2” peak
The mechanism proposed for France will thus allow consum-
period and the technical characteristics of their capacities (for
ers and suppliers to manage the risk represented by capacity
instance energy constraints).
obligations by leveraging their demand response potential
during peak periods. This means the capacity mechanism will
An effort was made to ensure that the mechanism would gen-
have a very different impact on highly temperature sensitive
erate precise signals (obligation and certification levels should
consumers that absolutely cannot adjust their consumption and
accurately translate contributions to increasing and reducing the
consumers that can shed load during peak periods.
shortfall risk) while also providing stability over time. Three decisions reflect how this balance is achieved:
***
For the mechanism to be economically efficient, the capacity
capacities and peak demand-side management registers) will
certificate “product” must be clearly defined, related transactions
also be made public.
costs must be low, and it must be possible to trade certificates
under good conditions.
The final pillar required for the capacity certificate market to function properly is competition, and this is undoubtedly the aspect
To this end, the framework governing the market's functioning was
that has generated the most concerns about the mechanism,
defined in such a way as to facilitate trading and to give stakehold-
both in France and at the European level. Special attention was
ers confidence in the capacity certificate product. The mechanism
paid to this issue. Through control and market monitoring proce-
parameters will be published four years before the delivery year
dures, the regulator will be able to detect any abuse or manipula-
and stabilised over the duration of each term, meaning trading can
tion by market stakeholders and track all trades. This transpar-
be carried out within a stable framework with players knowing that
ency measure is similar to the ones applied in the energy market,
the value of the product will not be modified because of interven-
notably at the European level with the REMIT and Transparency
tion from outside the market. RTE will keep a register to ensure that
regulations.
capacity certificates can be traced and therefore that the product
is credible.
It should be noted that an analysis taking into account the decentralised structure of the market and based on the net positions
Various measures will give capacity market stakeholders all infor-
of stakeholders gives a different picture of the real competi-
mation available about the security of supply outlook. Not only
tive landscape. The fact that alternative suppliers benefit from
can they consult the Adequacy Forecast Reports prepared by
the capacity certificates associated with ARENH rights goes a
RTE, but the data contained in two registers kept by RTE (certified
long way toward reducing market concentration by creating
7
upstream-downstream integration effects. The results will also
periods can generate direct financial gains through the
depend on the terms set by CRE and the Minister for transfers of
mechanism;
> The real impact on consumers will depend on the rates sup-
certificates associated with the ARENH mechanism.
pliers offer in a competitive environment: they will be able to
In response to market stakeholders’ requests to have a compre-
move away from regulated tariffs in setting rates for small con-
hensive view of the mechanism's impact, RTE provided estimates
sumers, and will take into account any capacity they operate,
in September 2013 of the financial consequences for some cat-
their commercial strategies, etc.
egories of consumer. Its simulations are included and expanded
upon in the present report and used to present analyses of the
The points discussed in this report must be further developed.
“first-round effects” of the implementation:
It will now be possible to conduct more comprehensive stud-
> The transfer to alternative suppliers of the capacity value asso-
ies, based on accurate models directly taking into account the
ciated with ARENH rights will significantly reduce implemen-
rules, to show the dynamic impact of the capacity mechanism on
tation costs for consumers. Costs will notably be very low for
investment and security of supply. These studies will be carried
electro-intensive users;
out within the framework outlined in the decree and serve as a
> Taking into account consumers' flexibility substantially modi-
basis for subsequent revisions of the mechanism.
fies the results: a consumer that sheds load during peak
***
The rules and functioning of the capacity mechanism must be evalu-
To comply with European expectations, RTE proposes in this report
ated from a European perspective. In theory, security of supply falls
a roadmap showing the steps to be taken to enable the explicit
within the purview of EU Member States' energy policies, but there
participation of foreign capacity in the mechanism. This two-phase
is in practice significant interplay between Member States’ policies
approach is compatible with the recommendations of the European
in the integrated market. This is why the European Commission has
Commission, which considers that implicit recognition of the con-
expressed reservations about the introduction of capacity mecha-
tribution of foreign capacity can be a temporary solution. RTE also
nisms in numerous Member States, underscoring the risk this poses
provides initial insight into how it will be possible to enable foreign
to the functioning of the internal market. The framework for analys-
capacity to participate explicitly in the French capacity mechanism:
ing public interventions to safeguard security of supply was recently
> Without harmonising security of supply criteria across Mem-
expanded to include the recommendations in the European Com-
ber States, but rather upholding the division of competences
mission’s Communication “Delivering the internal electricity market
defined in the Treaty of Lisbon;
and making the most of public intervention”.
An analysis of the French capacity mechanism based on the
European Commission’s guidelines shows that it complies with
EU law, meets the criteria of necessity and proportionality and is
compatible with recommendations on public intervention in the
area of security of supply.
8
> Without reserving interconnector capacity;
> Within volume limits reflecting the physical limitations of import
capacity during peak periods;
> Subject to the creation of a mechanism for cross-border certification or control;
> Subject to the signature of agreements to govern operational
management in crisis situations.
There is nonetheless one outstanding issue relating to the inclu-
These conditions imply significant regional coordination, so it
sion in the mechanism of cross-border capacity, which under the
makes sense to start with an interim phase. One idea would
terms of Decree 2012-1405 of 14 December 2012 is initially to
be to allow the explicit participation of foreign capacities in the
be taken into account implicitly, through a reduction of suppliers'
capacity mechanism subject to their inclusion in France's balanc-
obligations. Both the European Commission and the Agency for
ing mechanism. The length and scope of the phase could vary,
the Cooperation of Energy Regulators support the explicit inclu-
depending in part on the work conducted under the aegis of
sion of cross-border capacity in capacity mechanisms, but recog-
Member States, and a principle of reciprocity could be applied.
nise the difficulties this will entail.
Based on the roadmap proposed and the measures provided for
SUMMARY
in the decree, RTE is prepared to launch a ten-month consulta-
Transposing such a change into regulations would require
tion to find a concrete solution for allowing the explicit participa-
an amendment of the decree of December 2012. RTE is thus
tion of capacity situated outside France in the mechanism, in line
requesting that the Energy Minister specify the mandate for this
with the terms of the decree. The principles to be applied to the
next consultation phase when the draft rules are examined by the
consultation and related deadlines are set forth in the rules.
administration and Energy Regulatory Commission.
***
The rules: Choices proportional to objectives
will limit the cost to consumers
Time periods defined for the mechanism
Peak periods under the mechanism
The days constituting peak periods are not determined ahead
Delivery year
of time but rather indicated one day ahead by RTE. For each
The delivery year will correspond to a calendar year effective
peak day, the time slots considered are from 7am to 3pm and
the second year the mechanism is in place. This will notably
from 6pm to 8pm, or ten hours per day. The fact that RTE will
create consistency between the capacity mechanism and the
notify participants of peak periods a day ahead of time gives
existing calendar of the energy market and fit better with con-
them the visibility they requested during the consultation and
tractual practices in Europe to facilitate integration going forward.
ensures that they have a real incentive to keep peak demand
in check, since their obligations are reduced accordingly. Peak
In accordance with the terms of the decree, the first delivery year
days will in all cases fall within the [January-March; November-
will begin on 1 November 2016 and end on 31 December 2017,
December] period.
with the months of July and August 2017 excluded.
The rules provide for targeted and short peak periods:
> For obligations, the PP1 period corresponds to a period of between
The rules include specific provisions applicable to the first two
ten and 15 days, encouraging flexibility on the demand side;
delivery years:
> Specific dates for the first delivery year (from 1 November 2016
> For certification, between 10 and 25 PP2 days will be notified.
to 31 December 2017, excluding July and August);
This solution makes operators accountable for the availability of
> A shorter gap between the start of the mechanism term and
their capacities at times when security of supply is truly at risk.
the delivery year. The rules define the mechanism parameters
It also ensures consistency between contributions to reduc-
for these two years. Deadlines for certification requests have
ing the shortfall risk and the number of certificates allocated,
been modified accordingly.
including for capacities that are only available for short periods
such as peak generation and demand response capacities.
***
9
> The gradient applied to non-temperature sensitive consum-
Principles applied in calculating obligations
Suppliers' obligations are calculated based on the contribution of their
ers is nil. This category includes users connected to the pub-
customers to the shortfall risk, which, in the current market environ-
lic transmission grid and public distribution grid with average
ment in France, only applies to peak periods. Peak demand is thus rep-
annual power exceeding 175kW;
resentative of the risk generated, such that a consumer that does
> The gradient for profiled consumers corresponds to their
not consume power during peak periods has no capacity obligation.
profile, with a measure introduced to stabilise the evolution
of the overall gradient from one year to the next: the over-
Calculation of the obligation
all gradient for profiled consumers is extrapolated in a linear
Capacity obligations are calculated as follows:
manner from previous years, and a scaling factor is applied to
ObligationSupplier = securityF x ConsumpSupplier + Pcertifieddemandresponseactivated
+ GradientSupplier x (extremeT - ActualT)
bring the sum of the individual gradients back to this overall
[]
> Parameters published by RTE: F and
> Data measured and/or calculated:
security
extreme
gradient;
> The
T
gradient for remotely metered consumers is calcu-
lated for each supplier based on the sum of all consumption observed. This approach allows each supplier to be held
ConsumpSupplier, Pcertifieddemandresponseactivated, GradientSupplier, ActualT
responsible individually for the real needs of its customers.
Calculation of reference power by type of consumer
Obligation parameters
The calculation of reference power is segmented by type of con-
The parameters for calculating the obligation are determined
sumer: profiled, remotely metered, and reference power for the
four years ahead of time. This allows obligated parties to estimate
supply of losses.
the amount of their obligation and take any necessary demand
management actions based on their forecasts.
Each is calculated based on underlying consumption observed,
adjusting for the temperature sensitivity of obligated parties and
Security factor
the load reduction for certified demand response capacity acti-
The security factor reflects the margins required to cover residual
vated during PP1 hours.
contingencies, notably on the demand side (excluding temperature sensitivity), as well as the contribution of interconnections
Estimation of the gradient
to security of supply. For the first delivery year, RTE proposes a
To reflect the effective contribution of consumers to the shortfall
security factor of 0.93.
risk, gradients are established for each category of consumption
to prevent transfers between participants (from temperature-
Extreme temperature
sensitive to non-temperature-sensitive users, or from profiled to
Since the capacity mechanism is designed to be a sort of “insur-
remotely read users). RTE proposes that gradients for each obli-
ance policy”, the obligation is calculated as if one-in-ten-year
gated party and type of consumer be used , based on approxi-
cold conditions occurred every year. When the mechanism is first
mations that already exist and are not specific to the capacity
implemented, the extreme temperature will be a series speci-
mechanism:
fied in the rules, with an average value of close to -2.6°C.
1
***
Principles applied to certification
> Measuring effective capacity levels based on controls during
the deliver year;
Calculation of the capacity level
> Addressing,
through settlements, differences observed
between certified and effective capacity levels.
Generic certification principles
The certification method proposed in the rules involves:
> Certifying
operators;
10
capacity based on data provided by capacity
For controllable capacities, effective capacity levels are esta­
blished based on information gathered during the delivery year
in question and verified after the fact.
SUMMARY
Operators of intermittent capacities can choose between the
Setting the deadline for existing generation capac-
generic framework applicable to all capacities and one that
ities three years before the start of the delivery
neutralises the risks associated solely with the primary energy
year is crucial to give market stakeholders infor-
source, applying in this case the contribution factor calcu-
mation about the outlook for the system and for
lated for each type of generation. This factor reflects the cor-
the capacity market to generate economic signals
relation between contingencies associated with variability and
far enough ahead of time to allow enough capaci-
shortfall risk situations, in such a way that the certified capacity
ties to be developed to meet the security of supply
level reflects the technologies1 average contribution to reducing
criterion.
the shortfall risk . The availability of this option makes it possi2
ble for operators that want to hedge the variability of their capa­
The fact that planned capacities can request cer-
cities (notably by associating them with flexible capacities – for
tification closer to the start of the delivery period
instance storage or demand response) to reap the full benefits
makes it possible for all capacities to participate,
of such hedging.
notably demand response and other capacities that
1
Concretely, the sum
of the gradients of
profiled consumers
must correspond to the
temperature sensitivity
of profiled users taken
as a whole, no more and
no less. This segmentation
makes it possible to
envisage different
approaches for each
category of consumption.
2
The value of this factor will
depend (i) on the capacity
considered, (ii) on the
volume of variable capacity
already in the system, and,
more generally, (iii) on the
power system in which the
capacity is considered.
can be developed more quickly.
Certification procedures
Different certification procedures will apply to different types of
Capacity rebalancing
capacity:
Rebalancing ensures consistency between the market and the
>
>
Existing generation capacities must request certification three
physical system up until the end of the delivery period. With
years before the start of the delivery year;
the rebalancing procedure proposed by RTE, an operator whose
Planned generation capacities that will be connected to the
capacity level is affected by a contingency can submit a rebalanc-
grid can request certification once the first payment is made
ing request:
> At no cost up until the start of the delivery period;
> The rebalancing cost will then increase gradually over the
under the connection agreement, up until two months before
the start of the delivery period;
> Demand response capacities can be certified up until two
course of the delivery period, based on the number of PP2 day
notifications, to incentivise operators to submit their best esti-
months before the delivery period begins.
mates of the expected performance of their capacities.
***
This structure will, by its nature, give operators incentives to
The principle applied is that all certified capacity must be acti-
rebalance as quickly as possible, once they observe any discrep-
vated at least once a year. For verification to be efficient and pro-
ancy between effective capacity levels and the levels they have
portional, it must whenever possible be an extension of existing
certified.
measures, notably the balancing mechanism. Barriers to integration must be reduced: To this end, flexible aggregation rules will
A degree of flexibility has been introduced to limit the cost
be applied as soon as the mechanism is in place to allow for the
of rebalancing in the case of unforeseeable events affecting
creation of certification entities, with coherent verification meas-
capacities (generation or demand response). The procedure
ures applied at the same level of aggregation, notably for demand
applied in such instances (two zero-cost rebalancing “tickets”
response capacity.
issued to each capacity portfolio manager) is designed to preserve incentives to submit the best availability estimates ahead
of time.
In more specific terms:
> Under the generic verification system, controls focus on quantities injected for generation capacities and actual activation for
Verification of capacities
demand response capacities, relying on the procedures for veri-
Capacity is certified based on self-declared data submitted by
fying the activation of demand response capacities and on injec-
operators, so certification must necessarily be backed by effi-
tion data for each capacity;
cient data collection and verification measures.
11
> The audit-based verification procedure is used to confirm that
capacities have been activated at least once. The idea is to con-
data declared by operators and gathered reflect the real perfor-
duct random tests for each capacity, with no prior notice to the
mance of the capacities;
operator. Capacities cannot be tested more than three times
The activation test-based verification procedure complements
per delivery period.
>
market-based activation and is designed to guarantee that all
***
Principles of the imbalance settlement
An imbalance limit of 2 GW ensures that a switch from the market price to the administered price will only occur when secu-
Unit price of the settlement
rity of supply is at risk, and will not be based on the occurrence
To limit arbitrage possibilities and generate the right incentives,
of short-term risks.
the settlements of obligated parties and capacity portfolio
managers are calculated using the same unit price.
RTE is proposing a two-part settlement system:
> When security of supply is not at risk, the settlement price will
Inclusion of cross-border capacity
The rules call for the contribution of interconnections to be
accounted for as a whole. The security factor takes into account
be based exclusively on the market price. An incentive coef-
projected contributions during peak periods, reducing the obliga-
ficient will still be necessary to ensure that stakeholders have
tion of each supplier accordingly.
incentives to operate through the market rather than wait for
>
a settlement;
To leave time to discuss the roadmap presented in this report and
When security of supply is at risk, the imbalance settlement will
propose concrete solutions for the explicit participation of cross-
be based on an administered price. This price, which by defi-
border capacity, the rules stipulate that RTE will submit a report
nition defines the maximum value capacity can reach on the
on the explicit inclusion of cross-border capacity ten months
market, plays a central role in encouraging investment in new
after the rules are published, potentially proposing at that time
capacities. It is set based on the annualised cost of reference
changes to the regulatory framework. This provision complies
peak capacity and published four years before the delivery year
with the decree, article 20 of which calls for the system allow-
by the Energy Regulatory Commission.
ing the participation of cross-border capacity to evolve based on
reports prepared by RTE and CRE. This consultation will be con-
Indicator used to determine whether security
ducted under the terms of a mandate issued by the Minister.
of supply is at risk
At the end of the peak period, RTE calculates the overall imbalance observed, which corresponds to the algebraic difference
between total effective capacity and total effective obligations.
Analysis of the dynamic impact of the mechanism
The rules call for RTE to conduct studies on the dynamic impact
of the mechanism, in accordance with the principles set forth in
This overall imbalance reflects the physical tension between
this report. The results of these studies will be included in a report
effective obligation and capacity levels. The market is thus
on how France's interconnection with other European markets is
informed of any uncertainty arising on either side and capacity
to be taken into account going forward, and on ways to improve
adjustment measures can be taken. Calculating the overall imbal-
the functioning of the capacity mechanism. RTE will submit the
ance also prevents a form of market manipulation wherein opera-
results of its work to CRE and the Minister, and also share them
tors could certify too much (or too little) capacity to influence the
with market stakeholders.
market price.
It is also necessary to define a threshold value for the overall
imbalance, above which security of supply is considered to be at
risk. This value corresponds to the so-called imbalance limit.
12
SUMMARY
FOREWORD
French law 2010-1488 of 7 December 2010 reforming the
them within the context of previous discussions on security of
organisation of the electricity market calls for the creation
supply and capacity mechanisms.
of a capacity mechanism in France. Decree 2012-1405 of 14
December 2012 stipulates that RTE is to propose rules for the
This report is divided into ten chapters. Chapter 1 outlines the
capacity mechanism, specifying exactly how it will function.
justifications for the implementation of a mechanism focusing
This was the subject of RTE's submission to the Energy Regula-
on security of supply, based on an analysis of the theoretical
tory Commission and Energy Minister on 9 April 2014.
economic framework and observation of the actual functioning of energy markets. Chapter 2 describes how key choices
Originally referred to in the Poignant-Sido report of 2010, the
were made about the capacity mechanism design, while chap-
capacity mechanism is intended as a solution to the particu-
ter 3 discusses the provisions set forth in Decree 2012-1405
larly pronounced peak demand phenomenon observed in the
and the main decisions made in the capacity mechanism
French power system. It is seen as a way to modify consump-
rules to ensure that the mechanism effectively contributes
tion behaviours during peak periods (demand-based approach)
to security of supply. Chapters 4 through 6 describe the fun-
while also encouraging adequate investment in generation
damentals of the proposed mechanism including the main
and demand-side capacities (supply-based approach).
procedures for calculating capacity obligations, capacity certifications and settlements. The procedures proposed to ensure
It is being designed during a period of energy transition in
that the capacity market is transparent and that competition
France, a process that underscores the need for tools that
within it will be free and undistorted are presented in chapter
can allow new public policies to be implemented efficiently
7. Chapter 8 includes an assessment of the impact the capac-
so targets can be met at the lowest possible cost. The capac-
ity mechanism will have on different categories of consumer.
ity mechanism can act as a communication channel between
In chapter 9, readers will find an overview of the discussions
policy objectives and the market and allow the power system
held at the European level about the participation of foreign
to adapt to keep up with adequacy needs.
capacity in capacity mechanisms and a presentation of the
options selected in the rules, along with an outline of possi-
The present report accompanies the draft capacity mecha-
ble modifications. Chapter 10 provides data supporting the
nism rules RTE submitted to the Energy Minister and Energy
French capacity mechanism's compatibility with the provisions
Regulatory Commission, following the consultation organised
of European law.
in 2013. It introduces proposals made by RTE and situates
13
SUMMARY
1. WHY A CAPACITY MECHANISM IS NECESSARY.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
1.1  Theoretical evidence of imperfections in energy markets. ... .... .... .... .... ..... ... .... .... .... ..... ... ..... ... .... .... .... .... .... ... ... 18
1.1.1 
1.1.2 
1.1.3 
1.1.4 
Optimal functioning of energy markets within the theoretical framework of the “energy-only” market. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
Questioning the energy-only market’s ability to guarantee the optimal level of investment. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
Failures of the energy-only market in the presence of externalities.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
Imperfections of the energy market in terms of managing investment dynamics. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
1.2  Concrete consequences of energy market imperfections. ... .... ... ..... ... ..... .... .... .... .... .... .... .... .... .... .... ... .... .... .... .... 25
1.2.1  Assessment of security of supply risks. . ......... . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
1.2.2  Impact on capacity remuneration.. ................ . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
1.2.3  Existence of investment cycles........................ . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
1.3  Projected trends in demand over the coming years. ..... .... ... .... .... ..... ... .... .... ..... .... .... .... .... .... ... .... .... .... .... ... .... .... 32
1.3.1  The growing role played by electricity in achieving energy policy objectives.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
1.3.2  Growing need for flexibility in European power systems. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
1.4  Efforts to reform market structures in France. ... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... ... .... .... .... .... .... .... .... ... ... 34
1.4.1 
1.4.2 
1.4.3 
1.4.4 
Ongoing integration of energy markets....... . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
Participation of demand response in energy markets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
Reform of renewable support mechanisms. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
Implementation of the capacity mechanism.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38
1.5  Capacity mechanisms in Europe.. ......... ... .... .... .... ..... .... ... .... ..... ... .... ..... .... ... ..... ... .... .... .... ... .... .... .... ... .... .... .... .... .... . 41
1.6 Conclusions............................................... ..... .... .... ... .... .... .... .... .... ... .... .... .... ... .... .... .... .... .... ... ..... ... .... .... .... ... .... .... .... . 42
2. CHOOSING THE RIGHT CAPACITY MECHANISM FOR FRANCE. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44
2.1  Why a quantity-based market mechanism. .. .... .... .... .... .... ..... ... ..... ... .... .... .... ..... ... .... .... ... .... .... .... .... .... .... .... .... ... .. 44
2.2  Why a market-wide capacity mechanism. .. .... .... ... ..... .... ... ..... .... .... .... .... .... .... .... .... .... ... .... .... .... .... .... ... .... .... .... .... 46
2.2.1 
2.2.2 
2.2.3 
2.2.4 
2.2.5 
Provide guarantees in terms of security of supply.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46
Address market imperfections and avoid distortion. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47
Minimise the cost to consumers .. ................... . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51
Economic efficiency in the presence of investment cycles.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53
Suitability to France’s situation........................ . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54
2.3  Why a decentralised capacity mechanism . .... ... ..... .... .... .... .... .... .... .... .... .... .... .... .... .... .... ... .... .... .... .... ... .... .... .... .... 55
2.3.1  Compatibility with the philosophy of the European energy market.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56
2.3.2  Ability to address France’s specific challenges.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57
2.3.3  Timescales of the decentralised market and economic efficiency. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57
2.4 Conclusions................................................ .... .... .... .... ... .... .... .... ... ..... ... .... .... .... ... .... .... .... .... .... .... ... .... .... .... .... .... ... .... . 61
3. GUIDELINES FOR THE CAPACITY MECHANISM RULES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 62
3.1  Architectural principles set forth in laws and regulations. . ..... ... ..... ... .... ..... .... .... .... .... .... ... .... ..... .... .... .... .. ..... ... 62
3.1.1  Drafting of the capacity mechanism decree. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 62
3.1.2  Provisions laid down in the decree.. ................ . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 64
3.1.3  Regulatory framework provided for in the decree.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 67
3.2  Purpose of the capacity mechanism rules: Guarantee real contributions to security of supply. .... ... ..... ... . 69
3.2.1 
3.2.2 
3.2.3 
3.2.4 
3.2.5 
Nature of commitments by capacity operators (installed or available capacity). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 69
Duration of capacity commitments. . .............. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 70
Methods for calculating the obligation and certifying capacity.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 71
Reference data used to calculate obligations and certifications. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 72
Methods of valuing demand response......... . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 73
3.3 Conclusions................................................ .... .... .... .... ... .... .... .... .... .... ... .... .... .... ... .... .... .... .... .... .... ... .... .... .... .... .... ... .... . 74
14
SOMMAIRE
4.  CAPACITY OBLIGATION. . ............................................... . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 76
4.1  General provisions regarding the obligation. .. .... .... .... .... .... .... ..... .... .... .... .... .... .... ... ..... ... .... .... .... .... .... ... .... .... .... .. 76
4.1.1 
4.1.2 
4.1.3 
4.1.4 
Obligated parties................................................................... . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 76
Reference power................................................................... . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 76
Security factor. . ...................................................................... . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 79
Summary of obligation principles.................................... . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 80
4.2  Period for measuring suppliers’ obligation: The PP1 peak period. .. .... .... .... .... .... .... ..... .... .... .... .... .... .... ... ..... ... 81
4.2.1 
4.2.2 
4.2.3 
4.2.4 
4.2.5 
Definition of PP1 and contribution to the shortfall risk. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 82
Definition of PP1 and peak demand management.. ... . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 83
Notification of PP1 hours. . .................................................. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 84
Sensitivity of the obligation to the location in time of PP1. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 87
Provisions adopted in the rules on PP1.......................... . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 90
4.3  Delivery year............................................................ .... .... ... .... .... .... ... ..... ... .... .... .... .... .... ... .... .... .... .... .... ... .... .... .... ... ... 90
4.3.1 
4.3.2 
4.3.3 
4.3.4 
Overlapping year centred on a winter or calendar year. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 90
Impact of the choice of the delivery year on the functioning of the mechanism. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 91
Sensitivity of the capacity mechanism to the definition of the delivery year with regard to the security of supply objective. . . . . . . . . 91
Sensitivity of suppliers’ obligation to the choice of delivery year. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 91
4.4  Parameters of the capacity obligation............... ..... ... ..... .... .... .... ... ..... ... ..... .... .... .... ... .... .... .... .... ... .... .... .... .... .... ... .. 94
4.4.1  Determination of the obligation parameters (extreme temperature and security factor). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 94
4.4.2  Extreme temperature. . ......................................................... . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 96
4.4.3  Security factor. . ...................................................................... . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 98
4.5  Determination of the obligation........................ ..... ... .... .... ..... .... ... ..... ... .... .... .... .... .... ... .... .... .... ... .... .... .... .... .... .... . 100
4.5.1 
4.5.2 
4.5.3 
4.5.4 
4.5.5 
Perimeter of an obligated party........................................ . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100
Observed consumption...................................................... . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 101
Sensitivity of consumption to temperature.. ................. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 102
Taking into account certified demand response measures activated. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 114
Specific provisions for the compensation of losses on public transmission and distribution systems. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 117
4.6  Timetable for suppliers’ obligation. . ................... .... .... .... .... .... .... .... .... .... .... .... .... .... ... .... .... .... .... .... ... .... .... ... .... .... . 117
4.6.1  Before the delivery year.. ..................................................... . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 117
4.6.2  During the delivery year...................................................... . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 117
4.6.3  After the delivery year. . ........................................................ . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 118
5. CAPACITY CERTIFICATION......................................... . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 120
5.1  General provisions governing the certification of capacities. ..... ... .... .... .... ..... ... .... ..... .... .... .... .... ... .... .... .... .... .. 120
5.1.1 
5.1.2 
5.1.3 
5.1.4 
Players involved in capacity certification. . ...................... . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 120
Capacity level......................................................................... . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 121
PP2 peak period.................................................................... . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 126
Calculation of the capacity level....................................... . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 126
5.2  Period covered by capacity certification (PP2). ... .... .... ... .... ..... .... ... .... ..... .... .... .... .... ... .... .... .... .... .... .... .... ... .... .... 129
5.2.1 
5.2.2 
5.2.3 
5.2.4 
5.2.5 
5.2.6 
5.2.7 
Period during which the contribution in estimated.... . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 129
Consequences of the PP2 period defined on the distribution of certificates between technologies. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 131
Consequences of the PP2 period defined on the variability of certificate volumes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 132
Approach adopted in the rules.. ........................................ . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 133
Notification of PP2 hours. . .................................................. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 133
Sensitivity of effective capacity level to the location in time of PP2 hours.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 134
Provisions adopted in the rules on PP2.......................... . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 136
5.3  Calculation of the capacity level......................... .... .... .... .... .... .... .... .... .... .... .... .... .... ... .... .... .... .... ... .... .... .... ... .... ..... 137
5.3.1  Available power of capacity................................................ . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 137
5.3.2  Determination of the coefficient to reflect the technical constraints of capacity (K).. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 137
15
5.4  Certification requests.............................. .... .... ... ..... .... .... .... .... .... ... .... .... .... .... ... .... .... .... .... .... ... .... .... .... .... .... ... ..... .. 139
5.4.1 
5.4.2 
5.4.3 
5.4.4 
Definition of capacity......................................... . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 139
Certification deadlines........................................ . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 141
Withdrawals of capacities.. ................................. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 143
Certification fees.................................................. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 144
5.5 Rebalancing................................................ ..... .... .... .... ... .... .... .... .... .... ... .... ... .... .... ..... ... .... ... .... .... .... .... .... .... .... ... .... . 144
5.5.1  The rebalancing process.................................... . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 144
5.5.2  Financial consequences of rebalancing........ . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 145
5.6  Collection of data required to calculate effective capacity level..... .... ... ..... .... ... ..... .... .... .... .... .... ... ..... .... .... .... . 147
5.6.1 
5.6.2 
5.6.3 
5.6.4 
5.6.5 
Linking of certification entities with BM and NEBEF entities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 148
Collection of activated power data................ . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 148
Collection of activatable power data............. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 149
Collection of maximum energy data for PP2 days.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 149
Collection of weekly maximum energy data. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 149
5.7  Capacity verification................................. .... .... .... .... ... ..... .... .... .... .... ... .... .... .... .... .... ... .... .... ... .... ..... ... .... ... .... .... .... .. 149
5.7.1  Initial consistency check at the time of certification. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 150
5.7.2  Verification of certified intermittent capacities under the normative approach.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 150
5.7.3  Verification of certified capacity under the generic approach. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 150
6.THE CAPACITY MECHANISM SETTLEMENT SYSTEM. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 152
6.1  General principles of settlements......... .... .... .... ..... ... .... ..... .... .... .... .... .... .... .... .... ... .... .... .... .... .... ... .... .... .... ... .... .... .. 152
6.1.1  Capacity rebalancing by suppliers................... . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 152
6.1.2  Imbalance settlement at the capacity portfolio manager level. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 153
6.1.3  Overview of principles governing settlements. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 153
6.2  Key aspects of capacity mechanism settlements. ... .... .... .... .... .... .... .... .... .... .... .... ..... ... .... .... .... .... .... .... .... ... .... ... . 154
6.2.1  Security of supply target.................................... . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 154
6.2.2  Unit price of the settlement............................. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 154
6.2.3  Interplay between capacity rebalancing by suppliers and imbalance settlement at the capacity portfolio manager level. . . . . . . . . . . . 154
6.3  Settlements provided for in the rules... ..... .... .... ... .... ..... .... .... .... .... .... .... .... .... .... .... ... .... .... .... .... ... .... .... .... .... .... ... . 154
6.3.1  Interplay between capacity rebalancing by suppliers and the imbalance settlement at the capacity portfolio manager level.. . . . 154
6.3.2  Unit price for the settlement and the security of supply target.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 155
6.3.3  Definition of indicators for assessing threats to security of supply. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 156
6.4  Assessment of the impact of the provisions on settlements for market stakeholders. . .... .... .... .... .... .... .... .. 158
6.4.1  Framework for the assessment........................ . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 158
6.4.2  Principle of the study.......................................... . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 158
6.4.3  Results..................................................................... . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 159
7. MARKET FUNCTIONING: TRADING, TRANSPARENCY AND COMPETITION.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 162
7.1  Trading of capacity certificates................. .... ... .... ..... .... .... .... .... .... .... .... .... .... ... .... .... .... .... ... .... .... .... .... .... ... .... .... ... 163
7.1.1  Publication of mechanism parameters at the start of the term.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 163
7.1.2  Nature of the product and organisation of trading. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 163
7.1.3  Trading procedures. . ............................................ . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 164
7.2  Transparency of the mechanism........... .... .... .... .... .... .... .... ..... ... .... .... .... .... .... .... .... ... .... .... .... .... .... ... .... .... .... .... .... . 165
7.2.1  Publications relating to the registers............. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 165
7.2.2  Publications relating to the capacity obligation. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 167
7.2.3  Publications relating to the functioning of the capacity market. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 168
7.3  Competition in a decentralised capacity market. ... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... ... .... .... .... ... .... . 169
7.3.1  Competition and market power.. .................... . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 169
7.3.2  Competition under the capacity mechanism. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 170
7.3.3  Monitoring of the market’s functioning. . ....... . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 174
7.4 Conclusions.............................................. ..... ... .... .... .... .... .... .... .... ... .... .... .... .... .... ... .... ... .... .... .... .... .... ... .... .... .... .... .... 176
16
SOMMAIRE
8. CAPACITY MECHANISM IMPACT ASSESSMENTS.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 178
8.1  Challenges associated with detailed modelling of how capacity mechanisms function. .... ... .... .... .... ..... .... 178
8.1.1  Analysis of technical parameters...................................... . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 178
8.1.2  Assessment of the aggregate effects of the mechanism.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 179
8.2  Limitations of existing analyses of how the capacity mechanism functions
in an interconnected market. . ............................. .... .... .... .... .... .... .... .... ... .... .... .... .... .... .... .... ... .... .... .... .... .... ... .... .... . 180
8.2.1  Analysis of the report accompanying the European Commission guidelines on public interventions.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 180
8.2.2  Factors minimising the French mechanism’s impact on neighbouring countries. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 183
8.3  Detailed analysis of short-term effects............. .... ..... ... .... ..... .... .... ... ..... ... .... ..... .... ... .... ... .... .... .... .... .... .... .... ... .... 184
8.3.1  Hypotheses. . ........................................................................... . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 185
8.3.2  Quantitative assessment of cost to consumers........... . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 189
8.3.3  Impact on the CSPE.. ............................................................ . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 195
8.4  Plans to strengthen the impact assessment system.. ..... ... .... .... .... ..... ... .... .... ..... ... .... ..... ... .... .... .... .... .... .... .... ... . 196
8.4.1  A mechanism simulator made available to stakeholders. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 196
8.4.2  Expand the “first-round” impact assessment by factoring in small consumers. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 197
8.4.3  Include a study on the dynamic impact of the mechanism over the long term in the assessment. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 197
9. EUROPEAN INTEGRATION OF THE FRENCH CAPACITY MARKET.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 198
9.1  Interconnections’ contribution to security of supply in France. .. .... .... .... .... .... .... .... .... .... .... .... .... ..... ... .... ... .... 198
9.1.1  Integrating power systems improves security of supply. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 198
9.1.2  Recognition of the cross-border dimension in the French capacity market.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 199
9.2  Current status of cross-border participation in capacity mechanisms... .... ... .... .... ..... ... ..... .... .... .... .... .... .... .. 200
9.2.1  Cross-border participation in existing and planned capacity mechanisms.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 200
9.2.2  Decision to implicitly recognise foreign capacity in the French capacity mechanism.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 201
9.2.3  Towards an explicit cross-border participation in capacity mechanisms in Europe.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 202
9.3  A practical way forward for explicit cross-border participation. .. .... .... ..... ... .... .... ..... .... .... .... .... .... .... .... .... ... .. 205
9.3.1 
9.3.2 
9.3.3 
9.3.4 
9.3.5 
Key principles to design a solution for explicit cross-border participation.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 207
Relevant event to be considered to allow effective cross-border exchanges of capacity products.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 208
“No-go” solutions to implement explicit cross-border participation. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 209
Target solution for explicit cross-border participation in the French capacity market. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 210
Shaping a transitory solution............................................. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 211
10.COMPLIANCE WITH EUROPEAN PROVISIONS AND PRINCIPLES.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 212
10.1  The European legal framework governing State intervention to ensure security of supply. .. .... .... ... .... .. 212
10.1.1  Competence of Member States with regard to security of supply. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 212
10.1.2  Regulation of Member States’ competence through the provisions of the Treaty and secondary legislation. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 213
10.1.3  Legal forms of public intervention. . ............................... . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 215
10.2  Compliance with the principles of necessity and proportionality. ... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... 216
10.2.1  Principle of necessity. . ....................................................... . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 216
10.2.2  Principle of proportionality............................................. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 226
10.3 Conclusion........................................................... .... .... .... .... ... .... .... .... .... ... ..... ... .... .... .... ... .... .... .... .... .... ... .... ... ..... .. 229
BIBLIOGRAPHY.. ...................................................................... . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 232
ANNEXE 1: LIST OF PARTICIPANTS IN MAC CONSULTATION.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 234
ANNEXE 2: CONTRIBUTIONS TO THE STAKEHOLDER CONSULTATION. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 236
17
1.WHY A CAPACITY MECHANISM
IS NECESSARY
Electricity markets are undergoing major changes in many
a description of why the market’s theoretical ability to safeguard
European countries, including France. Market opening may have
security of supply over the long term is increasingly being called
helped optimise electricity flows in the short term, but there
into question (§ 1.1). Next, it explains that an observation of the
are growing concerns about the ability of mechanisms imple-
market’s functioning tends to support these doubts, and sug-
mented in the early 2000s to efficiently regulate investments
gests that closer monitoring of security of supply will be required
in generation and demand response capacities and safeguard
from 2016-2017 taking into account the specific characteristics
security of supply over the long term.
of France’s current power system, i.e. its temperature sensitivity
and the occurrence of periods of peak demand (§ 1.2). This ana-
Having a capacity mechanism in place will profoundly change
lysis is followed by a presentation of the public policies currently
the architecture of the electricity market by correcting the
being implemented in France and the European Union, and
shortcomings observed with the current system. The goals are
shows how the specific issues facing France could become even
to encourage investment in capacities that can be available
more pressing with the addition of a “flexibility” component
during peak demand periods and, in a broader sense, to lay the
(§ 1.3). The chapter also outlines the programme for overhauling
foundations for the energy transition by rewarding investments
the functioning of markets, of which the capacity obligation will
that are useful to the power system in proportion to their bene-
be one aspect (strengthening of cross-border interconnections,
fits to the community.
operations in the day-ahead, intraday and real-time markets),
and discusses the reforms being made to renewable support
RTE’s draft rules are part of a more comprehensive assessment
mechanisms (§ 1.4). The last section illustrates how the intro-
of the organisation of the deregulated power system. This chap-
duction of a capacity mechanism in France will be in keeping
ter outlines the justification for public intervention. It begins with
with a broader trend in Europe (§ 1.5).
1.1  Theoretical evidence of imperfections in energy markets
1.1.1  Optimal functioning of energy markets within
the theoretical framework of the “energy-only” market
between stakeholders and institutions: in other words, the European power market is a result of public intervention. These regulations are constantly being better coordinated between Mem-
The European power market is being created by integrating
ber States. Electricity markets in Europe thus operate based on
markets and networks. Since deregulation began with the first
standard market designs and are committed to gradually har-
electricity directive of 1996, individual Member States have
monising structures until a “target model” is achieved:
been organising their industry around common principles (liberalised system more than the vertical integration of existing
Safe, secure, sustainable and affordable energy contributing
markets) and including electricity in the free trade of goods
to European competitiveness remains a priority for Europe.
to encourage intra-European exchanges. Electricity prices are
Action at the EU level can and must bring added value to that
determined by supply and demand in a competitive market and
objective… […]The EU needs a fully functioning, interconnec-
will thus in theory optimise exchanges between countries and
ted and integrated internal energy market1.
allow consumers to choose the generators and suppliers that
have the most competitive prices.
The European Union needs an internal energy market that is
competitive, integrated and fluid, providing a solid backbone
1
[European Council, 2011]
18
Detailed regulations govern the functioning of the
for electricity and gas flowing where it is needed. To tackle
market, applying to all exchanges and relationships
Europe’s energy and climate challenges and to ensure
WHY A CAPACITY MECHANISM IS NECESSARY  / 1
affordable and secure energy supplies to households and
Most energy markets in Europe only remune-
businesses, the EU must ensure that the internal European
rate energy generated, since there is no specific
energy market is able to operate efficiently and flexibly2.
mechanism for assigning a value to capacities
that can be used to generate power when sup-
What are currently being harmonised are mechanisms for remu-
ply is tight (exceptions are Spain, Portugal, Italy,
nerating energy generated (MWh) over different timeframes
Greece and Ireland, which apply a form of capa-
(annual, day-ahead, intraday) and in different regions (recogni-
city remuneration). The underlying principle
tion of interconnections). These mechanisms are considered
is that electricity prices will increase if market
the cornerstone of the European energy market, though Mem-
stakeholders see an imminent capacity shor-
ber States have their own specific instruments in place as well,
tage, resulting in additional investment5.
for instance in the area of reserves set aside by transmission
system operators to operate the power system3.
The main characteristic of the energy-only model
is that it describes a balanced situation in which
Most provisions in the framework governing the construction of
a short-term approach to market functioning is
the European power market apply to energy trading between
compatible with the long-term financing needs
firms in a competitive market, and correspond to the theoretical
of each power plant. In particular, generators’ pro-
model of the energy-only market. In an energy-only market, all
fits exactly cover their fixed costs for each type of
generation capacity dispatched is remunerated at the marginal
generation capacity (base, semi-base and peak).
production cost of the mix. Free and undistorted competition
Indeed, in the energy-only model, each power
guarantees that generators’ prices reflect their real costs. The
plant generates profits on the market when the
energy price is the only economic signal needed: it ensures
energy price is higher than its variable cost: the
the optimal use of generation assets in the short term (since all
difference between this price and the variable
capacities compete, only the most competitive are used to meet
cost is called the inframarginal rent6. Equilibrium
demand), and also drives long-term investment (the prospects
is achieved since market stakeholders base invest-
for capacities to generate profits in the market lead rational
ment decisions on rents generated in the market:
players to invest in the most competitive technologies and retire
generation capacity is invested in or retired in res-
units that are no longer profitable, meaning the mix adjusts to
ponse to this economic signal.
demand in an optimal way):
In this theoretical model, the market price climbs
The electricity market has two coordination functions. First,
above the variable cost of peak generation capa-
in the short term, it ensures the efficient operation of com-
city7 only when supply is extremely tight, in other
petitors’ equipment. Second, it indicates scarcity of capacity
words during periods of load curtailment8. In this
in different technologies via a price signal to orient investors’
case, the inframarginal rent represents the diffe-
long-term decisions4.
rence between the marginal production cost of
the mix (i.e. the variable costs of the most expen-
In practice, the regulatory framework of the European energy
sive plant to run) and the energy price in load cur-
sector is designed to create the right conditions for an energy-
tailment situations. This price will in theory cor-
only market to function. Where day-ahead and intraday mar-
respond to consumers’ willingness to pay to avoid
kets are concerned, the harmonisation of exchanges is based
service interruption9, or their marginal propensity
on shared standards for products and timeframes structured
to pay, which is referred to as the cost of unserved
around power exchanges and system operators, with market
energy (or VoLL, Value of Lost Load).
2
[EC, 2012a]
3
Consistent with the
reserve requirements
and levels defined in the
Load Frequency Control
and Reserves Network
Code being adopted for
Europe.
4
[Finon, 2013]
5
[General Commission for
Strategy and Foresight,
(CGSP),2014] Capacity
mechanisms also exist
in many other European
countries, as discussed in
section 1.5 of this report.
Electricity markets in
Europe are nonetheless
still organised primarily
around the energy
market.
6
When the market price
is higher than the
marginal cost of the most
expensive plant to run,
the inframarginal rent
is considered a scarcity
rent.
7
Peak load plants are
dispatched last.
8
Load shedding involves
rationing supply to some
consumers to restore/
maintain the supplydemand balance.
9
For the market to
function perfectly, the
price must accurately
reflect consumers'
marginal willingness to
pay for electricity, which
is not technically feasible
in practice. What is given
here is an approximation
of a single value of the
cost of unserved energy.
10
The price duration curve
is the curve obtained by
arranging in decreasing
order prices per MWh of
electricity observed over
all hours of a year.
coupling allowing for ever greater integration of processes at
the European level. Financial products developed based on
The figure below illustrates the merit order of generation capa-
these underlyings allow participants to manage price risks over
city and the price duration curve for peak load hours in a situa-
the long term and base their investment decisions on their own
tion where long-term equilibrium is achieved10. The inframar-
forecasts and those of the market as a whole. The general sys-
ginal rent generated annually by peak generation plants (blue
tem governing the market’s functioning can be described as
area) perfectly covers their annualised fixed costs, along with a
follows:
portion of those of other capacities.
19
Figure 1 – Illustration of the merit order and price duration curve
for peak load hours in a perfect energy-only market
Price
(€/MWh)
Price
(€/MWh)
VoLL
Peak VC
Price duration curve
Semi-base VC
Base VC
Quantity
(GW)
Price
Optimal load shedding
(€/MWh)
8760
Price
(€/MWh)
VoLL
VoLL
Peak VC
Peak VC
Hours of
operation
Quantity
(GW)
Peak capacity
Hours of
operation
Load shedding
Annual peak
operation time
If the energy price does indeed reach the cost of unserved
stakeholders estimate at several tens of thousands of euros per
energy during periods when load curtailment is required, the
MWh. This central assumption seems fairly unrealistic, limiting
corresponding inframarginal rent will send a signal to the market
the scope and meaningfulness of the result.
about the optimal level of investment for society. This optimal
level represents a perfect trade-off between the collective cost
of load curtailment for society and the cost of investing in new
capacities.
The key result of the energy-only model – that dimensioning
1.1.2.1 Introducing a more realistic model of the energy
is optimised over the long term – is based on very significant
market
assumptions, among others that the market will function per-
A number of academic studies analyse the dynamics of invest-
fectly even in shortage situations, when available capacity
ments in power generation capacity in new energy markets.
cannot fully meet demand. During such periods, the energy
Many of these studies focus on the failures of existing markets
price should be able to rise to a very high level – that of the
and possible ways to fix them.
cost of unserved energy – which some countries and market
20
1.1.2 Questioning the energy-only market’s
ability to guarantee the optimal level of
investment
WHY A CAPACITY MECHANISM IS NECESSARY  / 1
The first limitation identified with the energy-only model has to
The actual functioning of power systems is also
do with the assumption that markets can manage shortage situa-
more complex than what the model presented
tions in an optimal manner. What is being challenged, in more
above assumes. If system operators reserve capa-
specific terms, is (i) how the value of lost load is defined during
city ahead of time for the system, energy prices
shortage situations, and (ii) whether prices are allowed to rise
can decline during peak periods. Indeed, some of
to the value of lost load. In the model presented in the previous
the capacity dispatched in these situations is remu-
section, the failure of prices to reach the value of lost load during
nerated in advance, when it is reserved, and that
peak periods creates a deficit for economic agents who will not be
revenue is not reflected in the marginal prices offe-
able to cover their fixed costs, at least in the short term.
red on markets or capacity mechanisms. This simply shows that no power system functions exactly
In economic literature, the term missing money is used to des-
according to the principles of the energy-only mar-
cribe this difference between fixed costs and the inframarginal
ket. The academic literature also notes that in other
rent (see box below). Various factors can cause this phenome-
contexts, operational measures system operators
non to occur.
may take to limit the impact of load curtailment
can obstruct price spikes12. Lastly, it is technically
First, regulations or practices may limit the inframarginal rents
impossible today to distribute shortages based on
of electricity providers during shortage periods. This is notably
consumers’ willingness to pay. Security of supply
the case when electricity prices are capped, a situation that has
can thus be analysed within the framework of the
been covered in detail in economic literature due to the wides-
theory of public goods (see § 1.1.3).
pread use of caps in electricity markets in the United States in
the 2000s, after the California crisis11. But similar effects can
The second limitation identified with the energy-
occur even when no price cap is applied, if particularly high
only model relates to the overly simple assumptions
prices are considered unacceptable. For instance, regulators are
adopted. Oversimplifications of the real situation
in charge of protecting consumers from excessive price spikes
(e.g. convexity of costs13, optimality of the price set-
since electricity is an essential good. Public authorities’ reac-
ting method14 or the failure to take into account the
tions to very high prices create an “implicit cap” above which
discretionary nature of investments15) necessarily
prices cannot rise.
limit the meaningfulness of the results.
The missing money concept
The term “missing money” usually refers to a situation where capacity is insufficiently remunerated due to market
imperfections. When there is missing money, it implies that capacity would legitimately earn more revenue if the market was functioning perfectly.
11
It should be noted that
the rules governing the
functioning of electricity
markets in Europe
also regulate price
formation through a price
floor/cap system (for
instance: –€500/MWh –
€3,000/MWh within the
NWE region).
12
See for example [Joskow,
2007]. This consideration
seems to apply mainly to
the context in the United
States. In France, such
measures would only be
taken once markets had
had the opportunity to
function.
13
It is assumed in the
model that each time
step is associated with an
independent merit order;
the model thus does
not take into account
the dynamic constraints
associated with
generation or demand
response capacities.
14
[Batlle, 2012]
15
Most capacities have
standard output, which
restricts investment
decisions.
16
Ill-adapted generation
mixes and even market
imperfections can
also translate into
extra money for some
capacities.
17
For this reason, RTE
opted not to focus its
analyses on the missing
money issue during the
2011 consultation on the
capacity mechanism.
However, even in a market that operates perfectly, it is possible, and sometimes legitimate, for capacity remuneration
not to cover long-term costs. Indeed, once capacity exceeds the optimal level (surplus capacity), the energy market
acts as a stabilising feedback loop by undercompensating energy supply.
Symmetrically, situations of under-capacity can lead to capacity earning more revenue than it would at equilibrium,
resulting in additional revenue that is referred to as “extra money”16. It is normal for market stakeholders to be “subjected” to such revenue swings insofar as they had sufficient visibility when making their investment decisions.
The term missing money must therefore be used with caution. Missing money caused by market imperfections is
indeed undesirable, but when capacity remuneration is lower because there is too much capacity, then the market
is merely self-regulating, as it is expected to do. In other words, even if it is proven that capacity is earning insufficient
remuneration, corrective measures are not necessarily justified17.
Hereinafter, the term missing money is used only to refer to situations where capacity earns insufficient revenue due
to market imperfections.
21
When more realistic assumptions about actors’ behaviours
are applied (asymmetry of information, copycatting, etc.), the
> By adding a margin to their selling prices, above and beyond
the variable cost of operating the assets.
conclusions about the energy-only market’s ability to regulate
investments efficiently are not the same. Taking the high varia-
In the first case, the profitability of generation assets is restored
bility of revenues in the energy-only market on the one hand
at the expense of security of supply; in the second, the optimal
together with market stakeholders’ risk aversion and the limited
structure of the mix is modified. In both cases, consumers end
financial tools available for hedging risks on the other, it seems
up paying for a market failure, and the structure of the gene-
that the price signals generated by the energy-only market can-
ration mix moves away from the theoretical ideal.
not efficiently drive investment.
Figure 2 below illustrates trends in the extremity of the merit
These considerations lead to two conclusions, which are pres-
order and price duration curve for peak load hours when the
ented and discussed in sections 1.1.3 and 1.1.4, respectively:
missing money issue is not addressed, resulting in a decrease
> Security of supply is a public good that will not be spontaneously delivered through the energy-only market model;
> Energy-only markets are subject to specific investment cycles
that jeopardise the achievement of a stable equilibrium.
in capacity offered. The limitation of profits is illustrated by the
existence of a price cap: this is a simple and general representation of what happens when there is missing money18. The
situation is then compared to the theoretical framework of the
perfect energy-only market. In this situation, inframarginal rents
1.1.3  Failures of the energy-only market in the
presence of externalities
are restored for all capacities dispatched thanks to an increase
in the frequency of load curtailment.
1.1.3.1 Consequences of market failures for
1.1.3.2  Analysis from the standpoint of public goods
investment
theory
A true representation of energy markets shows that it would
In theory, a perfect energy-only market will create a level of
be fairly unrealistic to assume that shortage situations will be
security of supply that corresponds to the value of lost load. This
managed perfectly by the market. This creates doubts about
value will vary depending on consumers, who are not all equally
whether prices could rise to the levels required for fixed costs to
sensitive to service interruption.
be exactly covered.
As discussed above, the idea that the market value of unserved
Nor would the impact be limited to peak capacities if a reve-
energy represents the real value of that energy is a very strong
nue shortfall occurred during peak periods. All units operating
assumption. There are in fact many technical and practical fac-
during these periods would be affected, including base-load and
tors that prevent the market from fairly valuing unserved energy.
semi base-load capacities, though the consequences would be
An instantaneous participation of demand in energy markets
proportionately greater for peak power plants. In this case the
during shortage situations is notably required for the market
missing money problem could remove incentives to invest in
value of unserved energy to be revealed. Efforts made in France
any type of capacity.
over the last three years to strengthen the regulatory framework
governing demand response, and the creation of a framework
In concrete terms, it is doubtful that market stakeholders sub-
for its participation in energy markets (NEBEF), are big steps in
ject to economic performance requirements will agree to keep
the right direction (see § 1.4 and chapter 10). However, the mar-
unprofitable assets in operation indefinitely. If they observe a
ket’s handling of shortage situations can only be analysed from
revenue deficit on generation assets remunerated at the mar-
a very long-term perspective.
ginal price, stakeholders are likely to adjust their investment or
selling strategies to integrate this risk:
> By decommissioning assets or underinvesting:
18
[Léautier, 2012]
“A wholesale price cap
simplifies the analysis,
while preserving
the main economic
insights.”
22
Security of supply is thus a public good: when it is guaranteed,
everyone benefits, but when this is not the case all network
when supply is reduced, inframarginal rents
users are affected, regardless of the value they place on it.
are restored to levels that allow fixed costs to
The availability of peak capacities creates positive exter-
be covered, which, in the model presented
nalities for security of supply with no financial benefits for
above, translates into more frequent shortage
operators of these capacities. This reduces investment
situations;
incentives: it is not in the interest of market stakeholders
WHYACAPACITYMECHANISMISNECESSARY / 1
Figure 2 – Effects of missing money problem caused by market imperfections
on the merit order and price duration curve in the energy market
Merit order
Price
(€/MWh)
VoLL
Price
(€/MWh)
Optimal load shedding
VoLL
Missing money problem:
Price decrease during load shedding
Price duration curve
Missing money, decline in inframarginal
rent due to price decrease during
load shedding
Price cap
Price cap
Inframarginal rent restored
through increase in load
shedding/decrease
in installed peak capacity
Increase in load
shedding/decrease
in installed peak
capacity
Peak VC
supply if the profit they generate is lower than the benefit
Functioning,
missing money
problem not
corrected
Hours of
operation
Quantity
(GW)
to invest in certain capacities that would benefit security of
Inframarginal rent,
optimal case
Inframarginal rent,
missing money
problem not
corrected
Peak VC
Peak capacity
Functioning,
optimal case
Load shedding
1.1.4 Imperfections of the energy market in terms
of managing investment dynamics
for society.
1.1.4.1 Theory of investment cycles in power systems
In economic theory, this justifies public authorities regulating
As discussed in § 1.1.2, a more accurate representation of mar-
the market’s operation by defining a collective preference –
ket stakeholders’ behaviours allows a more accurate representa-
since individual preferences regarding security of supply will not
tion of the dynamic functioning of deregulated power systems.
emerge – and ensuring that the target is met through a mecha-
Generally speaking, this challenges the idea that the market
nism that aligns individual incentives and investments with this
alone can optimise investments and shows that the long-term
preference for the common good.
equilibrium suggested by theoretical analysis is rarely found in a
more realistic, dynamic model.
Public authorities in France have set a security of supply
target corresponding to an annual loss of load expectation
In the real world, a number of factors must be incorporated
of three hours. Since this target is not internalised by the
into any model of investment dynamics: market stakeholders’
energy market, there is no reason for the level of security of
strategies and decision-making processes, the time requi-
supply spontaneously created by the market to match the
red to build new generation capacities, the irreversibility of
energy policy objective. This means that, if a decision is made
investments and their lifespan and uncertainty surrounding
to increase or decrease the security of supply target, energy
exogenous variables. More specifically, capacity investments
prices will not increase or decrease accordingly: there is no
and retirements are not spontaneous, but rather have their
communication channel between public policy targets and
own cyclical dynamics. These cycles are created by a sort of
market results.
viscosity when it comes to bringing new generation capacities
online or removing them from the market: investments are
Since the market on its own will fail to meet policy objectives, it
“triggered” (usually by several stakeholders at once) beyond
is necessary and justified for public authorities to intervene to
a certain level of projected profitability, and retirement deci-
ensure that the market meets public policy targets and does so
sions are made below a loss threshold, here again by various
at the lowest possible cost.
stakeholders at once. Real-life power systems thus oscillate
23
around the long-term equilibrium, which can also evolve
long (typically several years for decisions to be implemented,
depending on demand, the costs associated with different
investment lifespan of several decades) and those of energy
technologies, etc.
markets, the liquidity of which is limited except for timescales
close to real time. The lifespans and capital intensity of gene-
Similarly to other capital-intensive industries with highly
ration assets also limit the ability to constantly re-optimise the
variable demand (e.g. aluminium), power systems are subject
generation mix as fundamentals evolve. It is impossible for the
to investment cycles . This “boom and bust” phenomenon
structure of the mix to readapt.
19
is characterised by periodic waves of capacity investments
or retirements. Investment cycles result in an alternation
[E]xpectations need time to be updated to the new mar-
between phases of overcapacity and under-capacity on the
ket conditions, investments are delayed under uncertainty,
system, with the “first best case” equilibrium never being
and power plants need usually a long time to be construc-
achieved.
ted and to be brought online. Under these conditions, it
is to be expected that power markets experience business
At first, the industry may be short of capacity and prices will be
cycles, i.e. periods of huge investment rates followed by
high. This acts as a signal to investors, who start to add capa-
other periods with no investment activity. This might result
city. In the absence of a coordination device, however, they
in severe fluctuations of the reserve margin, and therefore
are in danger of over-reacting – too many investors read the
of power prices21.
high prices as a signal that their own investment will be profitable. Once the new capacity comes on stream, it will depress
These representations suggest that when the market functions
prices. This will be sufficient to halt most new investments,
naturally, decision-making will be amplified and concentrated22.
but the existing capacity is likely to stay in service. Scrapping
Investors will tend to overreact to price signals and may adopt
decisions are irreversible and will not be taken unless the
copycat behaviours that intensify investment waves23.
price falls sufficiently below the variable costs of staying in
operation20.
1.1.4.2  Consequences of the existence of investment
cycles
Investment cycles are intrinsic to power systems, owing to their
The existence of capacity investment and retirement cycles
specific characteristics, to how related markets function, and to
in energy-only markets is not a problem in and of itself, if
the processes capacity investment and retirement decisions
the security of supply target set by public authorities is met.
entail. The economic literature offers two very general expla-
However, a succession of cycles can result in wide swings
nations of why investments are cyclical: lead times for building
between overcapacity and under-capacity. This in turn has
capacity (time lag between investment decisions and availabi-
adverse consequences for security of supply and economic
lity of new capacity) and suboptimal levels of information and
efficiency.
coordination.
Phases of under-capacity can lead to excessive risk of load curThese two explanations are clearly verified in power
tailment, possibly driving security of supply down to particularly
19
[Ford, 1999 and 2002],
[De Vries, 2004], [Green,
2006], [Cepeda, 2011]
systems in energy-only markets since energy prices
low or even socially and politically unacceptable levels. Actual
are the main means of sending information and
under-capacity situations would also have harmful effects on
coordinating decisions. Cycles are notably amplified
the economy, as the cost of unserved energy could rise to very
20
[Green, 2006]
by the fact that energy prices alone do not seem
high levels.
21
[Olsina et al., 2006]
to accurately convey information to coordinate
investments, even when additional communication
Cycles increase the number of periods of investments and reti-
22
The recent wave of
investments in CCGT
plants in Europe,
described in section 1.2
of this report, illustrated
this phenomenon.
channels are created, such as the Adequacy Fore-
rements. All other things being equal, generation capacities
cast Report, which provides aggregated information
remain on the market for a shorter time than in an optimal situa-
about the supply-demand balance outlook (see
tion and investment needs are greater, driving up costs to final
§ 1.2.1).
consumers. There can thus be an economic benefit to regula-
23
[Stoft, 2002], [Knittel &
Robert, 2005]
This reflects the difference between the time
24
ting cycles.
constants of investments, which are particularly
WHY A CAPACITY MECHANISM IS NECESSARY  / 1
The theoretical model on which power market deregulation in France and Europe has traditionally been based is
that of the energy-only market. Initial analysis suggests that the model can optimise the functioning of generation
assets and perfectly regulate the investments needed to ensure adequacy over the long term. However, this result
is based on strong and unrealistic assumptions, chief among them that the market will efficiently manage shortage
situations and that price spikes will occur. Wider spread use of demand response to increase demand-side flexibility
could make the energy-only model more valid, but will not suffice, at least over the medium term, to resolve this
difficulty:
1. Even in an energy-only market that functions perfectly, security of supply is a public good, meaning that public
authorities should define a security of supply criterion;
2. There is no reason for the energy-only market to internalise this security of supply criterion: public authorities are
therefore justified in implementing a mechanism to ensure that the criterion will be met by rewarding stakeholders for their contribution to reducing the shortfall risk.
In sum, the capacity mechanism is part of an effort to correct an identified market failure by internalising positive
externalities affecting security of supply. It is totally legitimate from an economic theory standpoint.
If this market failure is not corrected, there is no reason why some capacities that are indispensable to the functioning of the power system will be made available during periods of peak demand. It is also possible that energy market prices will not efficiently coordinate market stakeholders’ decisions, leading to very intense investment cycles
that reduce overall economic efficiency and can result in a rapid succession of phases of overcapacity and periods
when security of supply is at risk.
1.2  Concrete consequences of energy market imperfections
The analyses above show that, on a theoretical level, the ability
instruments to efficiently regulate these cycles, enabling excess
of energy-only markets to efficiently guarantee security of sup-
capacity to be absorbed proportionately and then investments
ply is doubtful. This conclusion would nonetheless be insuffi-
to resume (§ 1.2.3).
cient if not backed by a factual analysis of the situation.
France already has the instruments required to measure security
1.2.1  Assessment of security of supply risks
of supply and conduct assessments prior to introducing correc-
1.2.1.1  Risks to security of supply
tive measures. These instruments meet the objectives set out
This is not the first time consistent and public efforts are being
in the European Commission guidelines published in November
made in France to monitor risks to security of supply. RTE was
2013 and analysed in chapter 10 of this report. They can also be
among the first transmission system operators (TSOs) in Europe
used to illustrate how safety margins are gradually decreasing,
to conduct such an analysis. This mission was entrusted to it by
as peak demand continues to increase (§ 1.2.1).
the law of 10 February 2000, which marked the beginning of the
deregulation of the French energy sector24. Its work is backed by
Such considerations must be weighed against the difficulties
a methodological approach and recognised expertise in supply-
many generators and demand-side operators are having in
demand balance simulations.
earning adequate remuneration. At a time when the economic fundamentals of the sector are changing profoundly, the
Adequacy forecasts are one of the crucial assessment tools that
energy-only market can no longer drive investment efficiently.
must be made available to public authorities when it comes to
Assumptions that new investments would follow the shutdown
security of supply. The European Commission has placed heavy
of existing plants, or that consumption will start to trend higher
emphasis on this necessity in recent months:
again, do not seem certain in the current context (§ 1.2.2).
Member States should carry out a full analysis of
Lastly, the existence of investment cycles has also been pro-
whether there is a lack of investment in gene-
ven. The capacity mechanism will give public authorities new
ration, and why. They should seek cross-border
24
This mission is
described in the decree
of 20 September 2006.
25
solutions to any problems they find before planning to inter-
is sourced. These factors vary widely from one country to the
vene. Any capacity mechanism needs to take into account
next. In France, the main risk stems from the existence of a peak
any impact the intervention will have on neighbouring Mem-
demand phenomenon.
ber States and on the internal energy market. Fragmentation
of the internal energy market must be avoided25.
Power demand is very temperature-sensitive in France. The adequacy studies conducted by RTE27 show that temperatures are
The framework for preparing adequacy reports within Mem-
the dominant variable for the French power system. As a result,
ber States was further strengthened with the European Com-
peak demand periods are observed in winter during cold spells,
mission’s publication in November 2013 of guidelines on
and the phenomenon has grown steadily more intense in the
public intervention in the electricity market26. These guidelines
past decades.
included a checklist of criteria considered relevant in assessing
France concentrates almost half of the total temperature-
capacity adequacy.
sensitive power demand in Europe, with some 2,400 MW of
The criteria and methodology RTE uses in its Adequacy Fore-
additional consumption per degree Celsius.
cast Reports are discussed in detail in chapter 10 of this report.
[…]
Analysis shows that the adequacy studies conducted in France
Temperature sensitivity has been rising steadily over the
meet the criteria established by the European Commission. And
past ten years. The winter gradient increased by more than
RTE goes beyond minimal compliance: its Adequacy Forecast
30% between the winter of 2001-2002 and the winter of
Reports are among the only reports that are made public and
2012-201328.
based on a Europe-wide and probabilistic model of the supplydemand balance. The conclusions of these reports can thus be
This phenomenon is all the more important in assessing supply-
cited to justify public intervention.
demand balance risks in France as peak demand is growing faster than power demand in general. In other words, keeping peak
1.2.1.2  Specific characteristics of peak demand in France
demand growth in check is a primary concern, especially while
Factors that can put security of supply at risk include climate
the energy transition is under way and electricity continues to
conditions, the structure of power demand and where energy
substitute other energy uses.
Figure 3 – Growth in peak demand in France since 200129
110,000
29
[RTE, 2012]
26
77,030
77,440
78,660
79,590
79,710
79,730
82,140
83,490
83,540
84,710
86,020
86,280
88,960
90,300
91,820
92,400
93,080
94,600
96,710
100,655
102,100
12/12/2001
12/13/2001
12/17/2001
12/09/2002
12/10/2002
01/07/2003
01/08/2003
01/09/2003
01/26/2005
02/28/2005
01/27/2006
12/17/2007
01/05/2009
01/06/2009
01/07/2009
02/11/2010
12/14/2010
12/15/2010
02/07/2012
02/08/2012
28
[RTE, 2013]
70,000
76,130
27
[RTE, 2012]
12/11/2001
26
[EC, 2013a]
12/10/2001
80,000
74,900
25
[EC, 2012]
90,000
11/15/2001
MW
100,000
Day
WHYACAPACITYMECHANISMISNECESSARY / 1
1.2.1.3 Analysis of the conclusions of the 2013
these simulations are then compared to the secu-
Adequacy Forecast Report update
rity of supply criterion set by public authorities,
Adequacy assessments are conducted in France by simulating
which corresponds to an average annual loss of
the operations of the power system over 8,760 hours a year for
load expectation of three hours30.
30
Decree of 20 September
2006.
31
[RTE, 2013]
the next five years, factoring in various technical parameters
such as the dynamic operating constraints of generation units.
The Adequacy Forecast Reports published since 2009 have
These are stochastic simulations based on a large number of
highlighted many different phenomena, including a wave of
supply and demand scenarios. They are used to identify the
investments in combined-cycle gas turbine plants, the effects
configurations of the supply-demand balance during shortfall
of the economic crisis and the upward trend in peak demand.
periods, i.e. situations when the level of supply modelled does
The most recent Adequacy Forecast Report update (2013) spe-
not cover forecast demand. The shortfall volumes yielded by
cifically emphasised the gradual but steady reduction of safety
Excerptsfromthe2013AdequacyForecastReportupdate
Under the “Baseline” demand scenario, and based on the information currently available about generation capacity over the
period considered in the report, the shortfall criterion defined in decree 2006-1170 of 20 September 2006 (annual loss of load
expectation of up to three hours) is not exceeded before or during 2018.
The less favourable economic outlook factored into the “Low” scenario would strengthen this conclusion. Conversely, a sharper
economic rebound, as called for in the “High” scenario, could cause the shortfall criterion to be exceeded in 2016.
Though the situation forecast in the “Baseline” scenario may seem comfortable, given the power available through imports, the
risk should nonetheless increase, particularly after 2015. As such, capacity margins above and beyond the criterion […] should
decrease by almost 6 GW over the next three years. […]
This analysis of margins also allows for […] an assessment of the potential impact of the shutdown of other fossil-fired facilities, for
instance combined-cycle gas turbine plants, which would result in an increase in the shortfall risk31.
Figure 4 – Margins and capacity shortfalls under different scenarios in the 2013 Adequacy Forecast Report update
8
7
5
4
4.5
4.8
3.2
GW
3
3.2
2
1.8
1
0.4
0
-1
-2
2014
2015
-2
2016
-1.3
-3.4
-3
3.6
1.9
4.2
2.2
0
0
2017
2018
-1.9
-2.3
-4
-5
-6.5
-6
-7
-7.2
-6.8
Margin
5.8
Capacity shortfall
6
-8
“Low” scenario with exchanges
“Stronger DSM” scenario with exchanges
“Baseline” scenario with exchanges
“Baseline” scenario without exchanges
“High” scenario with exchanges
27
margins vis-à-vis the security of supply criterion, and suggested
that margins would be eliminated in 2017. One potential
consequence is that security of supply would not be guaranteed in the event of an intense cold spell.
Security of supply must therefore be monitored in France.
This conclusion is all the more important considering that the
assessments conducted in 2013 already factored in a downward
revision of demand forecasts due to the ongoing effects of the
economic crisis in Europe and France. Sluggish demand eases
tension in the supply-demand balance, but will also overlap with
a significant reduction in generation capacity late in 2015, when
several fossil-fired plants will be decommissioned after new
environmental standards take effect. At the same time, some
generation capacities are facing economic difficulties, notably
combined-cycle gas turbine plants. The existence of risks thus
seems clear.
The conclusions of the Adequacy Forecast
Report are based on accurate analyses that meet
the criteria set forth in Directive 2005/89/EC and
expanded on by the European Commission in
November 2013. These analyses are the tool used
by RTE and public authorities in France to assess
the security of supply outlook.
Though the regulatory warning threshold is not
exceeded over the period under review, the 2013
Adequacy Forecast Report update points to a
gradual and steady decline in margins over the
period, and the disappearance thereof from 2017,
meaning that security of supply risks will indeed
increase in France and Europe.
If capacity retirements or demand growth exceed
the levels factored into the Adequacy Forecast
Report “Baseline” scenario, then security of supply would decline to a level that is unacceptable
with regard to the criterion defined by public
authorities.
There are factors that could change this perception over the
medium term:
> Demand could prove even weaker than anticipated, which
would improve the outlook;
> Some generation units that will be affected by new environ-
Public intervention to ensure security of supply must be based
mental regulations could make specific investments that
first and foremost on an assessment of the aggregate supply-
allow them to operate beyond 2015 under the new
demand balance, as outlined in the section above, and not on
standards: this would also make the situation less
concerns about generators’ remuneration. There can be many
worrisome;
reasons for remuneration to be lower for some units, as dis-
32
Within [General
Commission for
Strategy and Foresight,
(CGSP),2014], see the
contribution of Fabien
Roques, “European
electricity markets in
crisis: diagnosis and way
forward”.
33
[EC, 2012a]
34
[GDF Suez, 2013]
A general decrease
in the load factor of
thermal power plants
[…] is undoubtedly
endangering the
investments in new
conventional plants
which are urgently
needed by the power
system. Even more
worrying is the reality that
existing thermal power
plants, built in an open
market system without
support schemes (as
opposed to out-of-themarket RES) no longer
reach the expected
profitability and may
have to be prematurely
decommissioned due to
profitability concerns.
28
1.2.2  Impact on capacity remuneration
>
Existing units, notably combined-cycle gas turbine
cussed in the box in section 1.1.2, and it is not easy to identify
plants, could be decommissioned for economic
with certainty when the culprit is the theoretical missing money
reasons and definitively retired or mothballed,
problem and when other factors are responsible. Nonetheless,
which would darken the outlook.
the energy market’s ability to assign the proper value to generation, demand-side and storage capacities is a key consideration
The latter possibility is a crucial aspect of current
when analysing failures in the energy market. Legitimate ques-
assessments. Indeed, adequacy forecasts are based
tions are now being raised about whether this market model,
on information that is public, i.e. officially announced
developed in the 1980s and implemented in the 2000s, can
by generators. The update prepared in July 2013
adapt to the changing cost structure of generation and demand
therefore did not take into account any shutdowns
response32.
not included in the baseline scenario, as it was based
on public information available at the time. Given
1.2.2.1  Stakeholders’ positions
the unlikelihood that these units will become pro-
More and more European energy firms are concerned about the
fitable, decommissioning cannot be ruled out. This
functioning of the market. Responses to the European Commis-
could create a negative margin vis-à-vis the criterion
sion’s consultation on making the internal market work33 amply
if the shutdowns are not simultaneously offset by
demonstrated this34.
the creation of new generation or demand response
capacities. Regulating the structural adjustment of
Their positions were further strengthened in May 2013 when
the mix going forward is one objective of the capa-
eight energy utilities (GDF Suez, E.ON, Eni, RWE, Enel, Gasterra,
city mechanism.
Iberdrola and Gasnatural Fenosa) launched a “call to EU leaders
for a revitalised energy policy”, outlining the challenges firms in
WHY A CAPACITY MECHANISM IS NECESSARY  / 1
the power sector are facing. This initiative, which other energy
market do not allow operators to cover their total
companies with the same concerns have since joined, is now
fixed costs, and they are barely able to cover their
called the “Magritte Group’’. It has called for a Europe-wide capa-
fixed operating costs38. Some thus see capacity
city mechanism that would recognise the value of capacity as a
mechanisms as a means of ensuring that operators
safeguard.
can “cover their fixed costs”, since their results in the
market barely “cover variable costs”.
In concrete terms, European energy companies are experiencing a perfect storm, which is endangering security of supply
The problems currently seen with capacity remune-
and the transformation towards a low-carbon economy, as
ration are nonetheless probably of a different order,
well as undermining their capacity to attract capital35.
and are largely due to shocks external to the electricity market or inconsistencies between regulatory
More recently, Union française de l’électricité, the French power
tools39:
industry’s trade body, mentioned in its response to the public
> The economic crisis, combined with a failure to
consultation on energy and environmental State aid how diffi-
anticipate the impact of new energy efficiency
cult it had become for energy-only markets to internalise the
standards and the introduction of shale gas into
value associated with security of supply.
the global energy equation, have caused demand
for all energy sources to contract and reversed
These concerns are shared by public authorities in many Mem-
the merit order between gas- and coal-fired faci-
ber States, including France:
lities in Europe;
> The currently low price of CO
2
35
Press release: “Call of
eight leading energy
companies to EU leaders
for a revitalised energy
policy”, 21 May 2013.
36
[French Republic, 2013]
37
[RTE, 2013]
38
[General Commission for
Strategy and Foresight,
(CGSP),2014], IHS CERA
estimated in a recent
report that out of the
330 GW of thermal plants
in operation in EU-27
countries, almost 113 GW
(about 38%) are at risk
of closure within the
next three years in the
absence of electricity
market reforms.
39
[Keppler et al., 2013]
40
[Poignant-Sido, 2010]
emission certifi-
Wholesale electricity prices alone do not provide sufficient
cates has not offset this evolution of economic
remuneration to ensure the long-term future of existing
fundamentals;
peak generation capacities, or to trigger new investment in
> The development of renewable energies, driven by support
generation or demand response capacities. Some plans to
mechanisms outside the market, has driven energy market
build combined-cycle gas turbine plants in France have been
prices down and blurred investors’ perception of prices. These
scrapped (notably in Hornaing), and others are running into
support mechanisms have led to a massive development of
economic troubles .
generation capacities independently of the dynamics of the
36
electricity market. As a result, investments in generation capaDelays and cancellations of new capacity projects are tangible
cities are being shaped by two different dynamics: one that fol-
manifestations of these concerns, as are shutdowns and plan-
lows market signals, and one that follows regulatory incentives.
ned retirements of existing capacities for economic reasons:
In a word, generation capacity remuneration problems cannot
Elsewhere in Europe, economic and market conditions for
all be blamed on energy market imperfections.
combined-cycle gas turbine plants are similar to those observed in France. Some generators have already announced
As regards demand response capacity, concerns about whether
plant shutdowns, and other facilities could be mothballed.
there was sufficient economic space for it to develop underpin-
The Adequacy Forecast Report takes into account the shu-
ned the proposals made in the Poignant-Sido report to address
tdowns announced and assumes that no new capacities will
the shortcomings of the energy-only market40.
be commissioned outside France over the period considered
in the report37.
1.2.2.3  Incentives to invest in peak generation
capacities
1.2.2.2 Analysis of the situation
The current debate in Europe about the profitability of certain
Current discussions about the failures of the energy-only mar-
generation assets has a special resonance in France, due to the
ket often focus, in Europe, on the problem of the viability of
specific characteristics of its power sector, and notably the peak
combined-cycle gas turbine plants (and, in France, on the eco-
demand phenomenon described earlier.
nomic space created for demand response). Massive investments have been made in this type of facility in Europe in recent
Peak demand periods are not necessarily a problem if they
years. Today, different studies show that prices on the wholesale
reflect what the system needs physically to meet demand and
29
41
[Poignant-Sido, 2010]
if the resources used to meet that demand are eco-
[S]ome electricity markets running under competitive
42
[Arango & Larsen, 2011]
nomically proportionate to the collective benefits to
rules have experienced periods of excess of investments,
consumers. The phenomenon does, however, pose
and therefore over-capacity, such is the case of UK with a
some difficulties in terms of threats to the supply-
large entry of private investors relying on gas-fired power
demand balance and security of supply, the costs
plants. Others have already experienced long periods with-
incurred to meet demand and how effectively mar-
out new capacity additions that have ultimately led the
ket signals respond to these consumption needs.
market to under-capacity conditions. Such was the case of
43
[Olsina et al., 2006]
California during the electricity crisis in the summers 2000
Indeed, satisfying peak demand requires having enough gene-
and 200143.
ration and/or demand response capacities available to balance
supply and demand in real time. The energy market must in fact
Events in California convinced many that additional measures
send the right economic signals to encourage sufficient invest-
were required to ensure that sufficient investments were made
ment to ensure that these capacities will exist and be available.
in deregulated electricity markets in the United States.
In its current form, the electricity market has not been able to
Investment cycles have also occurred in other contexts. Below
create adequate incentives in such situations. This point was
are examples of investment cycle phenomena observed in dere-
notably made in the Poignant-Sido
41
report of 1 April 2010,
gulated energy markets.
which was based on the findings of a workgroup that brought
together all power sector stakeholders under the aegis of two
parliamentarians. The workgroup specifically studied trends in
Figure 5 – Trends in power system reserve margins
in Chile, Britain and Scandinavia (different scales)42
the structure of demand and peak demand in France, and the
report concluded that:
0.7
capacity] exclusively through the energy market are doomed
to fail since, though energy markets can in theory ensure that
peak capacity – and similarly demand response – is profitable,
they do not offer enough visibility. The timing and scale of price
Chile
Reserve Margin
Efforts to secure financing [for demand response and peak
Reserve Margin
0.6
0.5
0.4
Smoothed Value
0.3
spikes are too random and the risks are too high for investors.
0.2
1984
1988
1992
1996
2000
2004
2008
Peak demand is not unpredictable. Adequacy assessments
0.55
illustrate the risk posed to the supply-demand balance by cold
by 2017, due to the erosion of margins, the French power system would not be able to withstand a cold spell of the same
magnitude as that seen in 2012. Given these forecasts and the
fact that the peak demand phenomenon is predictable, it is crucial to ensure that sufficient generation or demand response
0.45
Smoothed Value
0.35
capacities are available to meet power demand when security
0.25
1988
of supply is at risk. If security of supply is to be guaranteed, then
0.35
Reserve Margin
1.2.3 Existence of investment cycles
1992
1996
2000
2004
2008
England and Wales
Reserve Margin
the required capacities must be effectively available during
these periods.
Nordpool
Reserve Margin
Reserve Margin
spells. RTE’s most recent Adequacy Forecast Report shows that
0.30
0.25
Smoothed Value
0.20
As discussed in § 1.1.4, the power sector has specific characteristics that are conducive to investment cycles. Such cycles
have been observed in numerous countries:
30
0.15
1988
1992
1996
2000
Year
2004
2008
WHY A CAPACITY MECHANISM IS NECESSARY  / 1
Figure 6 – New combined-cycle gas turbine capacity in Europe44
30
25
GW
20
15
10
5
0
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
Austria
Belgium
Bulgaria
Croatia
Cyprus
Czech Republic
Denmark
Finland
France
Germany
Greece
Hungary
Ireland
Italy
Latvia
Lithuania
Luxembourg
Netherlands
Norway
Poland
Portugal
Romania
Slovakia
Slovenia
Spain
Sweden
Switzerland
United Kingdom
The massive investments made in combined-cycle gas turbine
spite of the steep investments made to maintain the supply-
capacity in Europe between 2004 and 2012 can be conside-
demand balance.
red as characteristics of a phase of excess investment, though
subsequent developments moved things in a radically different
In other words, the phenomenon of alternating phases of
direction:
overcapacity and under-capacity appears to be playing out,
creating a risk that many plants will be decommissioned well
In the EU-27, some 12% of gas-fired capacity could be taken
before the end of their useful life, suddenly putting security of
off line within three years. These plants are nonetheless
supply at risk.
crucial to the equilibrium of the system, which will have
to accommodate increasing penetration of intermittent
The French capacity mechanism will help regulate the
and unpredictable renewable energy sources. At the same
transition from a situation of overcapacity to one in which
time, significant investments will have to be made to update
security of supply could be at risk. The analysis above is not
ageing infrastructure. Several large operators facing serious
based on a naïve approach to the market, postulating a perfect
financial trouble – who have seen their net debt double
functioning of the market where failures have been identified
in the past five years – will have a hard time meeting this
in theory or in practice, or on a dogmatic challenge to the mar-
challenge45.
ket’s ability to drive investment. On the contrary, the analysis
RTE conducted and submitted to public authorities focuses on
The phenomena described above have thus been observed in
the fact that security of supply risks are moderate for now, but
France and elsewhere in Europe, particularly after the recent
stresses the instability of this analysis and its significant sen-
wave of investments in combined-cycle gas turbine plants.
sitivity to parameters outside the French power sector. It also
These massive investments have led to a paradoxical situation:
emphasises the peak demand phenomenon in France, this
the combined effects of sluggish demand, generators’ failure
being the biggest challenge to address and the
to anticipate the impact of new environmental standards and
one on which public intervention should be based.
renewable support mechanisms have created a temporary
The capacity mechanism will need to look in detail
situation of excess capacity, but the opposite could happen
at the characteristics of this phenomenon and
suddenly if loss-making plants are retired simultaneously, in
offer solutions for managing it effectively.
44
Source: Platts
PowerVision
45
[CGSP, 2014]
31
The imperfections of the energy market described in academic literature can also be observed in real markets:
> Forward analyses of the security of supply situation in France show that margins will decrease and then be eliminated in the near future46;
> It appears that energy markets alone are not guaranteeing the profitability of capacity;
> The existence of investment cycles in power markets has been demonstrated in many cases and countries.
In sum, the failures of energy markets have been characterised and supporting evidence has been gathered from
actual operations. These failures raise questions about the ability of a market model first used in the 2000s to adapt
to the changing cost structure of generation and demand response capacities. They support the idea that more
must be done to guarantee security of supply and the proper economic functioning of electricity markets.
1.3  Projected trends in demand over the coming years
Above and beyond the energy market failures described above,
the challenges of achieving the Union’s decarbonisation target
the physical needs of power systems in France and Europe are
while also safeguarding security of energy supply.
also changing dramatically, and these changes could result in
additional market failures.
The energy sector produces the lion’s share of man-made
greenhouse gas emissions. Therefore, reducing greenhouse
To achieve the energy transition targets set by the European
gas emissions by 2050 by over 80% will put particular pres-
Union, the power system must be adapted to accommodate a
sure on energy systems49.
huge and growing quantity of renewable energies. This makes
it even more necessary to have flexible technologies – either in
The Energy Roadmap 2050 explores different ways to make the
the form of generation or demand response capacities – to gua-
energy transition happen and lists ten structural changes power
rantee that electricity supply and demand will balance.
systems will have to undergo under any decarbonisation scenario.
An analysis of these trajectories leads to two observations: first,
Among these unavoidable structural changes, two are worthy of
significant investments will have to be made in the power sec-
particular note: the increasing role to be played by electricity
tor, bearing in mind that the peak demand phenomenon could
and the increasing role of renewables in the energy mix.
continue due to the increasing role public authorities want
electricity to play to help meet their energy policy objectives
Electricity plays an increasing role.
(§ 1.3.1), and second, increasing renewable penetration could
All scenarios show electricity will have to play a much grea-
result in a need for more flexibility (§ 1.3.2).
ter role than now (almost doubling its share in final energy
demand to 36-39% in 2050) and will have to contribute to the
46
Given the time constants
involved in developing
new generation capacity
and adapting the power
system as a whole, 20172018 is the very near
future.
47
[EC, 2011a]
48
[EC, 2011b]
49
[EC, 2011b]
32
1.3.1  The growing role played by electricity
in achieving energy policy objectives
decarbonisation of transport and heating/cooling.
[…]
Final electricity demand increases even in the High energy
Europe is engaged in a far-reaching energy transi-
efficiency scenario. To achieve this, the power generation sys-
tion process. The European Council has set a target
tem would have to undergo structural change and achieve a
of reducing greenhouse gas emissions by 80 to 95%
significant level of decarbonisation already in 2030 (57-65%
from the 1990 level by 2050. The European Com-
in 2030 and 96-99% in 2050).
mission analysed the implications of this target in
its “roadmap for moving to a competitive low-car-
Renewables rise substantially
bon economy in 2050”47. Several industry-specific
The share of renewable energy rises substantially in all scena-
roadmaps have followed, notably the “Energy Road-
rios, achieving at least 55% in gross final energy consumption in
map 2050”48, in which the Commission examines
2050, up 45 percentage points from today’s level at around 10%.
WHYACAPACITYMECHANISMISNECESSARY / 1
[…]
low or zero marginal costs and as their penetra-
In 2030, all the decarbonisation scenarios suggest growing
tion in the system increases, in the wholesale
shares of renewables of around 30% in gross final energy
market spot prices could decrease and remain
consumption50.
low for longer time periods51.
Energy transition policies have direct consequences for the
In other words, a tool is needed to efficiently
functioning of energy markets and the security of supply tar-
guide the energy transition while safeguarding
get. However, these changes are not meant to be antithetical to
security of supply and ensuring that electricity mar-
security of supply or economic efficiency targets, as the Euro-
kets function properly.
50
[EC, 2011b]
51
[EC, 2011b]
52
The EU-ETS (EU
Emissions Trading
Scheme) is the European
market for trading carbon
emission permits.
53
Directive 2009/28/EC.
pean Commission points out in the Energy Roadmap 2050:
Policy objectives aimed at reducing Europe’s carbon footprint
There will be no compromise on safety and security for either
and diversifying its energy sources go beyond the integration
traditional or new energy sources. The EU must continue to
of the power sector into the EU-ETS52 mechanism, which in
strengthen the safety and security framework and lead inter-
theory must send the right signals for investing in technologies
national efforts in this field.
with lower greenhouse gas emissions. In accordance with the
[…]
“20-20-20” objectives set by the European Council in 2007 and
These create new challenges to power markets in the transi-
translated into the “Renewable Energies” directive53 of 2009, all
tion to a low-carbon system providing a high level of energy
Member States have identified trajectories for the penetration of
security and affordable electricity supplies. More than ever
renewable energies and implemented sector policies to support
should the full scale of the internal market be used.
them. These policies are very much a driving force in investment
[…]
dynamics within Member States today, as was discussed earlier.
One challenge is the need for flexible resources in the power
system (e.g. flexible generation, storage, demand manage-
Some efforts to reshape the electricity mix have focused on
ment) as the contribution of intermittent renewable genera-
other technologies. The president of the French Republic has
tion increases. The second is the impact on wholesale market
committed to reducing the share of nuclear power in the mix to
prices of this generation. Electricity from wind and solar has
50% by 2025, which should result in some existing plants being
Figure 7 – Trend in installed wind and solar power In France and targets for 2020
(Source: Data on grid connections taken from the Panorama des énergies
renouvelables 2013 prepared by RTE, SER, ERDF and ADEEF).
30,000
25,000
MW
20,000
15,000
10,000
  Wind power
connected (MW)
  Photovoltaic
power
connected,
cumulative
(MW)
5,000
0
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
…
2020*
* Estimated contribution of different technologies to the binding target
for 2020 set in the National Renewable Energy Action Plan
33
shut down before then. Germany’s Energiewende policy and
recent months have taken this shift into account, and the need
decision to phase out nuclear power are another example.
for greater flexibility is now recognised.
With public authorities directly involved in expanding or reducing
Wind and solar penetration rates in France are relatively low
the role of specific technologies, it seems the market will have
compared with some European countries like Germany, such
to regulate the adjustment of the rest of the electricity mix, or in
that the balancing mechanism suffices, for now, to ensure ade-
other words to drive a series of investments and retirements to
quate flexibility. Capacity needs still focus specifically on peak
readapt the mix to reflect energy policy changes without jeopardi-
demand, which is the biggest unknown for the French power
sing the government’s security of supply targets. The implemen-
system and should remain so in the years to come.
tation of a capacity mechanism will address this need by crea-
The Government has nonetheless set ambitious targets for the
ting more visibility and introducing a feedback loop with public
penetration of intermittent energy sources and, over time, the resul-
security of supply objectives into the market architecture.
ting change in the generation mix could create the need for more
flexibility. Bearing this in mind, the capacity mechanism rules must,
1.3.2  Growing need for flexibility in European
power systems
from the beginning, factor in the possibility that the fundamentals
of security of supply will evolve and ensure that adjustments can be
made to reflect a change in risk levels. This concern was taken into
The penetration of renewable energy sources like wind and solar
account during the drafting of the rules, which acknowledge the
power is increasing the level of intermittency in the generation
possibility that flexibility needs could change going forward.
mix. This does not pose any particular problems while penetration rates are low. Over the long term it will result in a need
for more flexible capacity to offset weather-driven variations in
renewable energy output. More flexibility will be required not
only of generation assets but also of demand response capacities and, more generally, all technologies that can modulate the
load curve, for instance storage.
What this is creating is a gradual shift from a need to have capacities that are available to a need to have capacities that are both
The energy transition represents a major challenge, and the energy market alone will not be
able to meet all of the policy objectives set. Introducing a mechanism that acts as a feedback
channel with the security of supply target should
help public policies efficiently drive investment
while also safeguarding security of supply. The
need for flexibility, which will only increase going
forward, must be integrated into the mechanism’s design.
available and flexible. Discussions held at the European level in
1.4  Efforts to reform market structures in France
The implementation of a capacity mechanism in France is
not a standalone initiative. In an effort to correct the imperfections of the energy market and meet the requirements of
the energy transition and safeguard security of supply, the
existing model is gradually being strengthened and added
to in order to close all gaps identified. Some of the changes
> The integration of electricity markets on all timescales and the
development of interconnections (§ 1.4.1);
> The integration of demand and demand response into markets (§1.4.2);
>
> The capacity mechanism (§1.4.4).
The overhaul of renewable energy support mechanisms (§1.4.3);
being made aim to improve how existing electricity markets
function.
The various mechanisms in question were inspired by seve-
European energy market integration requires the continued
ral proposals contained in the Poignant-Sido report54 and the
development of mechanisms for all timescales, and it must be
architecture described in the “target model” for the
ensured that physical infrastructure does not impede the inte-
European energy market, which notably call for:
gration process.
54
[Poignant-Sido, 2010]
34
1.4.1  Ongoing integration of energy markets
WHY A CAPACITY MECHANISM IS NECESSARY  / 1
1.4.1.1  Introduction of market mechanisms facilitating
per the provisions of the Electricity Balancing
internal energy market integration
Network Code.
55
Regulation 347/2013
on guidelines for energy
infrastructure.
for all timescales must be improved by introducing the same
1.4.1.2 Integrating the internal market
56
[EC, 2012a]
mechanisms and products across Europe.
through interconnection development
To improve how electricity markets function, trading conditions
Grid infrastructure must keep pace with internal
Adopted in 2009, the Third Energy Package called for the fur-
market integration through market mechanisms. In its most
ther construction of the internal market applying two comple-
recent ten-year plan for grid development in continental France,
mentary approaches: (i) the introduction of harmonised rules
submitted for consultation in November 2013, RTE included
for all of Europe, and (ii) further integration through pilot initia-
status reports on interconnection projects under consideration,
tives covering all timescales.
which could add 10 GW of exchange capacity between France
and neighbouring countries by 2025.
As a transmission system operator, RTE is particularly interested
in this work and is helping to build the internal electricity market
Of the projects being considered, five have been identified
applying these two approaches.
as Projects of Common Interest, as defined in Regulation
347/201355: the three interconnection projects between
RTE is notably involved in initiatives, many of them pilots, to
France and the British Isles, in the North Seas corridor: “IFA 2”,
deploy the “target” model over all timescales at the regional
the France-Alderney-Britain project and the planned intercon-
level. Two examples are CWE (Central-Western Europe) and NWE
nection between France and Ireland; and two projects in the
(North-Western Europe), which have enabled day-ahead price
North-South-West corridor of Europe: the Savoy-Piedmont
coupling on markets in these regions. Market participants can
project and the France-Spain interconnection project in the
now trade electricity from France to Finland and from Great Bri-
Gulf of Gascony. The fact that they have earned the Project of
tain to Germany. Market coupling helps optimise energy trading
Common Interest label underscores the key role these inter-
and the use of interconnections and is making markets more
connections will play in achieving the objectives of Europe’s
liquid as it expands.
energy policy, building the internal market, integrating
renewable energy and enhancing security of supply, as descri-
Where shorter timescales are concerned, the integration of
bed in Regulation 347/2013.
intraday markets in France, Germany, Austria and Switzerland
on 26 June 2013 was a first step towards the introduction of
To meet all of the investment needs outlined in the ten-year
implicit intraday cross-border capacity allocation. RTE is also
plan and the challenges raised by the energy transition in
playing an active role in the NWE intraday project. The intro-
France and Europe, annual transmission infrastructure invest-
duction of cross-border intraday trading is a priority for the
ments of around 1.5 billion euros are planned over the next
European Commission, since it will boost the liquidity and effi-
ten years.
ciency of the internal market.
To enable cross-border trading beyond the intraday period,
RTE is already participating in the creation of cross-border
balancing mechanisms. One example is BALIT (BALancing
Inter TSO), which allows transmission system operators RTE
and National Grid to exchange balancing energy (beyond
required margins). In this sense, BALIT creates more competition within the balancing mechanism by bringing new
participants into national mechanisms, increasing economic
efficiency. An extension of BALIT to the South-West Europe
Regional Initiative (France-Spain-Portugal) is being finalised,
RTE is taking an active part in initiatives to continue to build the internal market, improving how
it operates and the quality of signals sent to market stakeholders.
These initiatives involve creating European
market mechanisms covering all timescales, as
required by target models, and developing new
interconnection capacity.
Taken together, these efforts are contributing
to the construction of the internal market, as
recommended by the European Commission56.
proof that interest in this type of mechanism is widespread.
The mechanism is a precursor for the development of crossborder balancing energy trading at the European level, as
35
1.4.2  Participation of demand response
in energy markets
remunerated through the balancing mechanism since it was
To continue to build the internal market and meet the challenges
RTE has been promoting different experiments since 2007,
associated with the energy transition and security of supply,
under the aegis of CRE, to take better advantage of the demand
demand response must be allowed to play a bigger role in energy
side potential:
first created in 2003.
markets. Much progress has been made in this area in France,
> To encourage the aggregation of consumers’ potential to
which has taken a proactive approach to developing demand-
modulate the load curve, RTE introduced the concept of the
side management: as the result of a four-year programme, all
demand aggregator in 2007, and has since then been working
markets (energy, capacity, reserves and system services) will be
to remove technical barriers to aggregation;
open to demand response with effect from 1 July 2014.
> An experiment launched in 2007 allows distributed demand
response to participate in the balancing mechanism, thanks
The Commission has voiced concerns that Member States are
to the aggregation of residential demand (some representing
not sufficiently tapping the potential of the demand side, which
less than 1 kW).
it says could represent 60 GW of peak capacity (or 10% of total
A more recent experiment in Brittany aims to extend opportu-
peak demand in Europe).
nities to participate in the balancing mechanism to generation
The potential of the demand side in markets is currently
or consumption sites that are not injection sites for the public
underutilised. Consumers have traditionally been considered
transmission system: they can submit balancing offers repre-
passive users, rather than an influential part of the energy
senting up to 1 MW instead of 10 MW. These offers can be acti-
market. Changes in the supply side, particularly increases
vated to resolve certain grid congestion situations.
in “variable” wind or photovoltaic power generation, require
more flexibility in energy networks. Changes to consump-
Since 2008, it has also been possible for demand response to
tion patterns, coming from energy efficiency, local energy
enter into rapid and complementary reserves contracts, as
sources, and demand response solutions can provide such
per the provisions of article L.321-11 of the Energy Code. This
flexibility and will be crucial for effectively matching supply
article stipulates that RTE may enter into rapid and complemen-
with demand in the future .
tary reserves contracts with generators and suppliers that can
57
be activated on the balancing mechanism. These contracts are
The European Commission also expressed its attachment to the
entered into based on procedures that are “competitive, non-
participation of demand in energy markets, noting that Member
discriminatory and transparent”. RTE is also organising specific
States are required by Directive 2012/27/EU on Energy Effi-
tenders for demand response capacity that can be activated
ciency58 to allow demand-side participation in markets.
through the balancing mechanism.
In France, the Poignant-Sido report proposed a series of changes to
Lastly, specific mechanisms have been set up to allow the par-
allow demand to participate in all markets, over all timescales. These
ticipation of demand in short-term market mechanisms other
changes are being implemented in the French market to ensure
than the balancing mechanism (interruptibility contracts, speci-
that demand response can participate and that the European Com-
fic tenders for demand response capacity).
mission’s recommendations are complied with to the letter.
As regards ancillary services, the new regulatory framework in
The sections below describe briefly how the demand side can
effect since 1 January 2014 calls for a gradual increase in eligible
participate in the French market. A more detailed presentation
volumes starting on 1 July 2014.
can be found in chapter 10 of this report.
1.4.2.2  Participation of demand
57
[EC, 2013a]
58
[EC, 2013a]
36
1.4.2.1  Participation of demand in the balancing
in the energy market
mechanism and the provision of reserves and
Demand response can represent a new means of preserving
system services
the supply-demand balance over the short and long terms. Its
Some types of demand response (industrial firms
integration into the energy market therefore requires specific
connected to the public transmission system) have been
provisions to ensure that capacities can be effectively deployed
WHY A CAPACITY MECHANISM IS NECESSARY  / 1
over different timescales (day-ahead or intraday basis) with no
1.4.3  Reform of renewable support mechanisms
discrimination vis-à-vis generation capacity.
Renewable power generation technologies have witnessed
Demand response capacities can be remunerated “implicitly”,
significant growth over the past ten years thanks to support
through private optimisation of supply portfolios. This approach
mechanisms that offer substantial incentives. This was notably a
is widely used in Europe, to different extents. Explicit valuation
response to the binding renewable energy targets set by Europe,
requires going through the energy market and is only possible
where renewable energy sources are to represent 20% of gross
in a few countries (for instance the United States). This second
energy consumption by 2020. The EU’s objective is adapted to
option is now available in France thanks to the NEBEF mecha-
each Member State: in France, renewable energy sources are
nism (block exchange notification for demand response), ope-
to make up 23% of gross domestic energy consumption by
rational since 1 January 2014, which allows demand response
2020. Member States are free to create support mechanisms to
capacities to compete with generation capacities in the energy
ensure that objectives are met.
market.
Different kinds of support mechanisms are found in Europe.
The NEBEF mechanism implemented by RTE thus complements
Spain has for instance opted for a premium on top of the
the market architecture by introducing new ways to value
market price. However, a large majority of European countries
demand response. It allows demand-side operators to leverage
initially chose a price-based support mechanism – the feed-
the flexibility of consumption sites to take full advantage of
in tariff – that locks in purchase prices for renewable power
short-term optimisation opportunities, since a site that reduces
over long periods (10 to 15 years on average). The incentives
its consumption can benefit directly or through a demand-side
created by these mechanisms are very substantial, as gene-
operator from any differential between market prices and supply
rators receiving subsidies are protected not only from market
prices over the same period. This makes the load curve more
price risks but also from quantity risks, since all of the elec-
flexible, including when sites are on regulated tariffs or have
tricity they generate must be purchased and they benefit
entered into fixed-price supply contracts on the market.
from priority dispatch to the grid, in compliance with current
regulations.
By creating a level playing field for all stakeholders, these new
opportunities are also boosting competition within the energy
The architecture of feed-in tariffs has created economic distor-
market.
tions in markets, as evidenced by the periods of negative prices
seen in France and Germany (when prices are negative, genera-
In this regard, the introduction of the NEBEF mechanism by
tors are paid to inject electricity and consumers are remunera-
RTE should help meet the public policy objectives set in France
ted for consuming it). The underlying causes of negative prices
and Europe for reducing energy use. For instance, the NEBEF
are varied and concomitant. The markets in question have also
mechanism has made France a pioneer in implementing the
seen a structural decrease in electricity prices and base-load
provisions of article 15.8 of the Energy Efficiency Directive of
prices that have in some cases risen above peak-load prices.
25 October 2012.
Low electricity prices have led some operators to temporarily
take generation units offline, since prices failed to cover their
costs. Though these problems cannot be blamed exclusively
France is taking a proactive approach to developing demand response capacities: after four
years of efforts, all markets (energy, capacity,
reserves and ancillary services) will be open to
demand response by 1 July 2014. RTE’s leading
role in implementing these structural changes is
widely recognised.
on renewable support policies, there is no denying that support
Taken together, these actions are helping address
security of supply and energy transition challenges by making the load curve more flexible to
ensure that consumer needs will be met over all
timescales.
ber States’ energy policies must be properly designed. It also
mechanisms that are completely disconnected from power
market dynamics only exacerbate the failures already present in
a perfect energy-only market.
The European Commission reiterated recently that Memstressed that support mechanisms should be compatible with
electricity markets, and even suggested that feed-in tariffs could
be scrapped and replaced by instruments that are more like
market mechanisms:
37
59
[EC, 2013b]
Any support that is still necessary should there-
60
See chapter 4 of this
report.
and be limited to the minimum needed. In practice,
61
Proposals 16 and 17.
62
[French Department in
charge of Energy and
Climate (DGEC), 2013]
fore supplement market prices, not replace them,
this means phasing out feed in tariffs which shield
renewable energy producers from market price
signals and move towards feed in premiums and
other support instruments, such as quota obligations,
Guaranteed feed-in tariffs in France are currently
being reformed at the initiative of the Energy
Minister. The review of existing support mechanisms is still under way and should result in substantial modifications to the law, favouring instruments that are compatible with the creation of
the internal energy market.
which force producers to respond to market prices59.
While the European Commission was conducting its analysis,
France launched a broad consultation mid-December 2013 on
1.4.4 Implementation of the capacity mechanism
potential changes to support mechanisms, asking stakeholders
Introducing a capacity mechanism is a major part of France’s
to respond to a series of questions about the efficacy of the
effort to correct the structural shortcomings of the energy mar-
various mechanisms possible and the target models to be deve-
ket and safeguard security of supply, bearing in mind the ambi-
loped going forward. The purpose of this consultation is indeed
tious policies the energy transition involves.
to modify existing mechanisms to make them compatible with
The mechanism was first proposed in the Poignant-Sido report
the electricity market.
of 2010 as a way to complement existing energy market ins-
The President of the Republic also emphasised the need to
truments. The report proposed that the mechanism design be
make changes to the forms of support available to renewable
based on a capacity obligation for suppliers as well as a capacity
energy sources (RES). The goal is to promote their integration
market61.
into the power system and favour their development over the
long term, while ensuring a more efficient regulation of the
French law 2010-1488 of 7 December 2010 reforming the orga-
power system and optimising returns on collective invest-
nisation of the electricity market (NOME Act) incorporated these
ments in this area. Existing support mechanisms were crea-
proposals from the Poignant-Sido report in article 6, creating a
ted at a time when RES were just getting started (except for
capacity mechanism in continental metropolitan France.
conventional hydropower). They were appropriate for the
industry’s debut. But the situation has changed since, and the
1.4.4.1
mechanisms must now be improved upon .
security of supply
60
A market mechanism designed to safeguard
The term “capacity mechanism” usually refers to any comThe consultation closed at the end of February 2014.
plementary mechanism used in energy markets to ensure
Assessing the economic impact of the capacity mechanism
In compliance with article 20 of Decree 2012-1405, RTE will conduct a series of economic assessments that it will submit to
CRE. The decree stipulates that these assessments are to focus notably on “the integration of the capacity mechanism within
the European market”, its “interaction with the mechanisms in place in these countries”, and “improving the functioning of the
capacity mechanism”.
RTE’s studies are to include an assessment of the economic impact of various market models, including the energy-only market
and the French capacity mechanism. Economic efficiency will notably be measured based on each market model’s ability to
coordinate investors’ decisions, using a comparative approach. Simplified models – particularly of investment cycles – are documented in the academic literature and can be useful in illustrating the phenomena at work and magnitude of the stakes, both in
terms of economic efficiency and security of supply. Once the capacity mechanism rules have been published, the parameters
of the models can be aligned with those of the actual mechanism.
In addition to being submitted to CRE, these assessments will be made public to promote a broader understanding of the economic role the capacity mechanism will play in the design of the French and European electricity markets62.
38
WHY A CAPACITY MECHANISM IS NECESSARY  / 1
remuneration not based directly on energy generated. Howe-
security of supply in proportion to its coverage of
ver, this definition might be interpreted to mean that the ulti-
system needs.
mate goal of the mechanism is to provide additional revenue
for generators, or even to compensate existing plants for some
If this is achieved, then the mechanism will merely
stranded costs resulting from changes in market fundamentals
internalise in full – without going beyond that – the
or renewable support policies.
positive externality represented by an operator
63
Excerpt from [EC, 2013]
64
[General Commission for
Strategy and Foresight,
(CGSP), 2014]
making available capacity that can be effectively dispatched
A mechanism designed solely to ensure additional revenue for
when supply in the power system is tight. Such a mechanism
generation plants, irrespective of the actual level of security of
would be justified by economic theory and compatible with
supply, would be inefficient. Indeed, it could end up funding
market principles if properly designed.
excess capacity by artificially inflating investment incentives,
which would skew market fundamentals and incentivise players
In its report on the European power system of January 2014,
to try to secure rents (speculative investments). Conversely, if
the General Commission for Strategy and Economic Forecasting
additional remuneration is improperly calculated, the mecha-
notably alludes to the need to complement the electricity mar-
nism might not be able to safeguard security of supply. The
ket and assign a value to security of supply through an additio-
European Commission has expressed concerns about such
nal, dedicated mechanism:
issues :
63
The most important point may be that many recent market
In liberalised markets, investments are not guaranteed by
reforms involving the implementation of “capacity mecha-
the State. Only where there is a real threat to generation ade-
nisms” suggest that most governments consider security of
quacy and security of supply as a result of closure or mothbal-
supply to be essential to the economy, so much so that a spe-
ling does the financial viability of existing plant become a mat-
cific mechanism is required to safeguard it.
ter of public concern. It is very important that there should
[…]
not be state support to compensate operators for lost income
The current debate about capacity mechanisms focuses on
or bad investment decisions.
the fundamental problem that energy-only markets do not
[…]
create the right incentives for long-term investments and
One particular concern about market wide capacity mecha-
cannot guarantee that there will be sufficient reserve capa-
nisms is that they can over reward generation which was
city to preserve the equilibrium of the system under all cir-
already financially viable.
cumstances. More specifically, most governments have expli-
[…]
cit or implicit targets when it comes to the number of power
establishing the correct value for capacity payments is
outages they estimate consumers would willingly accept […]
difficult and open to accusations of political interference.
and today’s energy markets do not have a mechanism to gua-
Neither can it be assured that required capacity will be
rantee that the investments required to meet this dependabi-
delivered (particularly given regulatory uncertainty asso-
lity objective will be made64.
ciated with the setting of the payment) or alternatively that
excess capacity will not result from the scheme resulting in
1.4.4.2  A mechanism that encourages the investments
overcompensation.
the energy transition will require
[…]
As discussed above, the energy-only market is designed first
the chosen mechanism [should] ensure that identi-
and foremost to create an economically efficient system: it will
fied adequacy gap will be filled while avoiding risks of
not contribute to the achievement of governments’ sustainable
overcompensation.
development objectives. Consequently, the energy market
needs an additional instrument if it is to guide the energy transi-
To avoid this twofold threat of economic inefficiency and the
tion and stimulate the investments required to meet this energy
absence of real security of supply guarantees, the mechanism’s
policy goal.
design must focus not on providing additional revenue to generation plants but on safeguarding security of supply. In other
In its submission to the European Commission’s public consulta-
words, rather than a capacity remuneration mechanism, what
tion on the draft guidelines on environmental and energy State
is needed is a mechanism that rewards each contribution to
aid, Eurelectric emphasised the role capacity mechanisms can
39
play in meeting the challenges posed by the energy transition,
PRINCIPLE 1: SHIFTING THE FOCUS TO THE PHYSICAL
notably the need to accommodate a high level of renewable
NEEDS OF THE SYSTEM
generation on the power system:
For ENTSO-E, the decision to implement CRM in addition to
electricity markets should be preceded by a careful assess-
The implicit assumption of the guidelines is that ensu-
ment of the physical needs of the system. In particular, with
ring a competitive, sustainable and secure energy system
the advent of significant variable renewable generation, secu-
can be achieved primarily through an energy-only market
rity of supply consists of diverse challenges: long term ade-
model. EURELECTRIC considers that with moving towards
quacy, flexibility, voltage control, transient stability, etc. Those
a low-carbon energy system with a high level of variable
issues are much more complex and require thorough tech-
renewables penetration, a fully-fledged investigation into
nical analysis. It is only on the basis of such a diagnosis that
the need for developing a new market design will be crucial
possible solutions can be assessed.
to tackle the current challenges within the electricity systems related to generation adequacy and security of sup-
Only TSOs, in-conjunction with national regulators, can pre-
ply. The need for reviewing the market design has already
cisely forecast the nature of those future security challenges.
been recognised in some member states facing growing
European TSOs must therefore be part of all up­coming
generation adequacy problems in view of high level of RES
debates concerning CRMs and market design.
penetration and some cases, higher peak demand. There
is growing evidence that in some regions move towards
RTE applied these principles in all of its proposals and recom-
a market design based on markets for both energy and
mendations throughout the consultation on the French capa-
capacity might be needed.
city mechanism. Its positions on the capacity mechanism
are underpinned by a conviction that market design must be
A capacity mechanism can thus be an efficient tool for driving
shaped to serve consumers while reflecting the operational
the energy transition in that it guarantees the same rewards for
constraints and physical needs of the system. This focus on
the contributions of generation and demand response capaci-
building a market based on the real value of products traded,
ties, and for those of existing and new capacities.
rather than the specific demands of some stakeholders,
extends beyond the capacity mechanism: it is a general prin-
The justifications for choosing a market-wide capacity mecha-
ciple of market design.
nism for France are outlined in chapter 2 of this report.
Suffice it to say here that this type of mechanism sends economic signals to all market stakeholders and avoids locking in
economically inefficient generation plants that make no contribution to security of supply.
In this sense, the proposed capacity mechanism should limit
unnecessary investments in new generation capacities and
guarantee the fair remuneration of existing assets.
1.4.4.3 Taking into account the physical needs of the
power system
For a mechanism to generate signals that are proportionate to
security of supply and energy transition objectives, it must correspond exactly to what the energy system needs physically to
ensure security of supply. It must guarantee that sufficient quantities of the different characteristics required in a given situation
are present in sufficient quantity: capacity, flexibility,
65
[ENTSO-E, 2012]
40
etc. ENTSO-E, the European Network of Transmission System Operators, also promotes this idea65:
The French capacity mechanism is designed to
meet the security of supply targets set by public
authorities. In France’s case, this means compensating all capacity and measures that help
preserve the supply-demand balance during peak
periods, without guaranteeing remuneration irrespective of security of supply needs.
The mechanism must be strictly proportional to
security of supply considerations. These considerations may evolve over time, for instance if
the challenges raised by some renewable energy
sources become more significant. The proposals
made by RTE based on the consultation integrate
the fundamental building blocks to enable such
changes.
WHY A CAPACITY MECHANISM IS NECESSARY  / 1
1.5  Capacity mechanisms in Europe
France’s decision to create a capacity mechanism to ensure that
already made considerable progress in their plans,
the security of supply criterion is met is not an isolated initiative.
and should be organising their first capacity auc-
The number of European countries that have introduced or are
tions in 2014. The idea is still being considered in
planning capacity mechanisms is growing, reflecting the possi-
some Member States, and decisions could be made
bilities offered by Directive 2005/89/EC66. In some countries,
within the coming months. The map below, crea-
the decision was taken long ago (Spain, Sweden, Finland, Ireland
ted by ACER67, offers an overview of the capacity
and, to a lesser degree, Italy). Others (United Kingdom) have
mechanism situation across Europe.
Figure 8 – Map of capacity mechanisms in Europe (2013)
(Source: ACER)
Capacity market
Strategic reserve
Capacity payment
(since 2007)
Strategic reserve
(phase-out 2020)
66
Directive 2005/89/EC of
18/01/2006 concerning
measures to safeguard
security of electricity
supply and infrastructure
investment.
67
[ACER, 2013]
68
The prices of electric
power sold by producers
(…) may include the
components: a capacity
charge and a commodity
charge. [SEWRC, 2004].
[BG, 2011]
69
The work on introducing
a law for a capacity
mechanism, which
guarantees producers
a price for generating
backup electricity,
may start in the first
quarter [of 2014],
Marek Woszczyk, the
head of Urzad Regulacji
Energetyki, said in
Warsaw. Bloomberg,
07/10/2013.
70
See, for example, [BDEW,
2013]
Capacity market
Strategic reserve
Capacity payment
(since 1998)
Capacity payment
(capacity market
planned for 2014)
Capacity payment
(since 2011 –
currently suspended)
71
Discrepancies in reserve
volumes between
the countries reflect
structural differences in
market architectures and
reserve usage.
Capacity payment
(since 2006)
 No capacity mechanism
 Capacity mechanism proposed/under consideration
 Capacity mechanism operational
The additional information RTE gathered for the purposes of
some time, and two others (the United Kingdom and Belgium)
its own studies or collected via ENTSO-E shows that even more
are creating their own mechanisms.
countries have or plan to implement capacity mechanisms. For
instance, it appears that Bulgaria has a capacity remuneration
Moreover, capacity is not remunerated under the exact same
mechanism in place, and also uses one-off tenders . There is
terms in all countries, even in the absence of a clearly identi-
also evidence to suggest that capacity mechanisms are being
fied capacity mechanism. The reserves used by transmission
weighed in countries not included in this category on the ACER
system operators in Europe vary greatly from one country to
map, Poland being a case in point69.
the next, as do their remuneration procedures. For instance,
68
Germany does not have a capacity mechanism for now, though
These examples show the degree to which capacity mecha-
one is under consideration70. However, the operating reserve
nisms have become a reality in Europe. With this in mind, the
volumes German system operators have under contract are
potential impact of the creation of a capacity mechanism in
almost twice as high as in France71. There are other forms of
France must be put into perspective, as two neighbouring
reserves as well, such as Reserve Power Plants (ResKV), a type
countries (Italy and Spain) have had mechanisms in place for
of strategic reserve used to relieve congestion on the grid in
41
exchange for capacity remuneration. The new government in
place in Germany since November 2013 is weighing the issue,
and many proposals have been submitted. One came from
BDEW (Bundesverband der Energie und Wasserwirtschaft72,
the German association of energy and water industries), which
is suggesting a decentralised and voluntary market-wide
capacity mechanism. BDEW’s proposal is one of a handful of
options the German government is considering implementing
at the federal level.
The bottom line is that capacity mechanisms have become a
reality in the European energy landscape. Chapter 9 of this
report discusses the interconnection of the French capacity
mechanism with the systems implemented in neighbouring
Member States.
Many Member States already have or are introducing capacity mechanisms to address existing or
potential threats to security of supply. France's
initiative is thus not unique: on the contrary, it is
part of a broader trend to reform the architecture
of electricity markets in Europe. Because Member States have different reasons for
implementing capacity mechanisms, the mechanisms they create reflect specific national characteristics and are not all alike. One challenge when
such mechanisms are being introduced in Europe is
to ensure that they are compatible with the internal
electricity market nearing completion. Coordination between neighbouring Member States should
thus be sought. Just as it is taking an active part in
preparing the ENTSO-E Network Code and regional
initiatives overseen by regulators, RTE will make
every effort to help find solutions that make capacity
mechanisms compatible with the internal market.
1.6 Conclusions
The introduction of a capacity mechanism will profoundly
First, the hypotheses used in the theoretical analysis of energy-
change the design of the electricity market and address the
only markets are not realistic in terms of the expected behaviour
shortcomings of its current organisation. The goal is to ensure
of participants or the operating constraints created by the gene-
that investments are made in capacities that can be dispatched
ration and circulation properties of electricity.
during periods of peak demand and, more generally, in keeping
with energy transition objectives, to reward investments that
Second, security of supply is a public good and is not automa-
provide benefits to the power system proportionately to the
tically guaranteed by the market due to externalities: it benefits
benefits provided to society.
all once it has been produced, but when this is not the case all
network users are affected, regardless of the value they place on
In its current form, the European electricity market is based on
it. This reduces investment incentives as it is not in the interest
the theoretical model of the energy-only market with provisions
of market stakeholders to invest in some capacities that would
allowing stakeholders to trade energy in a market characterised
benefit security of supply, since the profits they would generate
by free and undistorted competition. The energy-only market
are lower than the benefit for society.
ensures that generation capacity dispatched is remunerated at
the marginal production cost of the mix. Prices formed on this
Lastly, a theoretical analysis of the energy-only market suggests
basis generate only one economic signal, which is considered
that a long-term equilibrium will be achieved based on a static
sufficient to optimise generation schedules in the short term
approach. This equilibrium is rarely achieved with a more realis-
and determine the optimal size of the mix for the long term,
tic dynamic approach. Cycles of investment in power capacity
including during shortage situations. Within this theoretical
are characterised by a sort of viscosity when it comes to adding
framework, security of supply is supposed to be guaranteed by
or retiring generation facilities. As these cycles alternate, succes-
the market, thanks to an economic signal that assigns a value
sive waves of overcapacity and under-capacity are observed, at
to capacity.
the expense of security of supply and the system’s economic
efficiency. A detailed look at the theoretical framework of the
72
[BDEW, 2013]
42
However, the academic literature identifies imper-
energy-only market raises questions about the market’s ability
fections that can be empirically observed in today’s
to effectively guarantee security of supply. This conclusion is
energy markets.
also supported by a factual analysis of the situation.
WHY A CAPACITY MECHANISM IS NECESSARY  / 1
France already has the instruments required to measure secu-
If the imperfections of the energy market are to be addressed
rity of supply. They can be used to conduct assessments before
and the requirements of the energy transition and security of
implementing public policies to correct shortcomings. These
supply met, a tool must be available to effectively encourage
include adequacy assessments like those found in RTE’s Ade-
investment and complement the signals generated by existing
quacy Forecast Reports. Such assessments have revealed the
mechanisms. It is with this in mind that France is currently imple-
existence of a peak demand phenomenon in the French power
menting a series of market instruments. These instruments are
system, and the fact that peak demand is growing faster than
intended to improve how electricity markets function, without
electricity demand as a whole. They have also shown that safety
being considered substitutes for one another. It is therefore
margins are gradually decreasing and will be eliminated in 2017.
crucial that they be coordinated. Key undertakings include ena-
Security of supply must therefore be carefully monitored in
bling the integration of electricity markets over all timescales,
France.
developing interconnections, allowing demand and demand
response to participate in markets, overhauling renewable sup-
These considerations must be weighed against the difficulties
port mechanisms and implementing a capacity mechanism.
many generators and demand-side operators are having in
earning adequate remuneration. At a time when the econo-
Taken as a whole, these efforts aim to make the existing energy
mic fundamentals of the sector are changing considerably, the
market more efficient and add the dimensions that are lacking. In
energy-only market can no longer drive investment efficiently.
this regard, a market mechanism focusing on security of supply
The existence of economic cycles is also corroborated by recent
must reward the contributions of generation and demand res-
trends in the generation mix.
ponse capacities to security of supply, i.e. the contributions these
capacities make when the equilibrium of the power system is at
Looking beyond the failures observed in energy markets, the
risk. The mechanism is not designed to provide additional reve-
physical needs of the European and French power systems are
nue to generators or demand-side operators irrespective of real
also changing dramatically, and this could exacerbate market
security of supply needs. In specifically seeking to address the
failures. If the ambitious objectives set by the European Union
challenge posed by peak demand, the French mechanism will
for the energy transition are to be met, the power system will
have to make every effort to integrate demand response, which
have to play a greater role: it will need to adapt and accommo-
can be an efficient way to ensure the system has all the capacity
date a huge and growing quantity of renewable energies. This
it needs. The creation of a capacity mechanism is thus perfectly
makes it all the more necessary to have flexible capacities, whe-
compatible with the policy of encouraging demand response.
ther supply- or demand-side resources, to guarantee that electricity supply and demand will be balanced.
Many Member States have introduced this type of mechanism.
France’s initiative is in keeping with this trend. However, analysis
An analysis of these trajectories leads to two observations: first,
of these mechanisms reveals that they are very heterogeneous
significant investment will have to be made in the power sec-
and incorporate the full spectrum of possible solutions in terms
tor, bearing in mind that the peak demand phenomenon could
of market design.
continue due to the increasing role public authorities want electricity to play to help meet their energy policy objectives, and
The next chapter focuses on the different options available
second, increasing renewable penetration could result in a need
when implementing capacity mechanisms and the specific
for even more flexibility.
choices made by public authorities in France.
43
2.CHOOSING THE RIGHT CAPACITY
MECHANISM FOR FRANCE
In adopting a capacity mechanism to ensure security of sup-
different types of public intervention possible in its report on
ply, public authorities can choose between different market
capacity mechanisms and the internal market73. The options
designs, and their decisions are shaped in large part by the
considered for the French capacity mechanism are repre-
country’s specific context. The Agency for the Cooperation
sented in the taxonomy below:
of Energy Regulators (ACER) proposed a classification of the
Figure 9 – Taxonomy of capacity mechanisms
Capacity mechanism
Quantity-based
Targeted mechanism
One-off
tenders
Strategic
reserve
Price-based
Market-wide mechanism
Capacity
obligation
Capacity
auction
Decentralised
Centralised
Capacity
payment
The architecture for the French capacity mechanism was defi-
The capacity mechanism that emerged from this process is
ned in several stages: the general principles were laid out in the
adapted to France’s situation and the specific challenges it is
NOME Act of December 2010, after which the overall organi-
intended to address. The design corresponds to a mechanism
sation of the mechanism was set forth in the implementation
that is market- and quantity-based, market-wide (applying to
decree of December 2012, drawing in part from
all capacity) and decentralised. These three defining characte-
the recommendations in RTE’s report to the Energy
ristics are discussed in sections 2.1, 2.2 and 2.3 of this chapter,
Minister of October of 201174.
respectively.
73
[ACER, 2013]
74
[RTE, 2011]
75
See Chapter 1 of this
report.
2.1  Why a quantity-based market mechanism
76
Pollution standards are
an example.
When failures have been identified in a market
economic actors to change their behaviour. Other than in the
providing a public good, public authorities are jus-
case of regulatory measures (the thermal regulation of 2012,
tified in taking measures to correct them75. This
energy labelling, new energy standards), public intervention
public intervention can take the form of regulatory
involves introducing one of two types of economic instrument:
measures76 or economic instruments that lead
price-based regulations or quantity-based regulations77. Public
77
Intermediate forms
also exist, for instance
a quantity target with a
price condition.
44
CHOOSING THE RIGHT CAPACITY MECHANISM FOR FRANCE  / 2
intervention is managed differently with these two options.
authorities determine the purchase price, often
Price-based regulation involves using instruments to set a
working with an asymmetry of information. As ACER
price, but volumes then depend on private decisions. With
notes:
quantity-based regulations, instruments are used to define
quantities but prices are determined by the market (market-
It is difficult to determine the right payment level
based approach). Academic literature abounds with analyses
and to determine the effect of the payments;
of this aspect of public intervention.
the mechanism provides no guarantee against
extreme spikes. This is probably why Capacity
Many examples exist of choices that have been made between
Payments are often combined with price caps in
price- and quantity-based regulation in the energy sector,
the wholesale markets in order to avoid extreme
and more specifically within the context of the energy tran-
prices. An important drawback is that Capacity
sition. Renewable support policies have been widely exami-
Payments are not well targeted; it is not clear
ned: some countries opted for price-based regulation in the
what consumers pay for and what they get in
form of guaranteed purchase prices, while others introduced
return80.
quantity-based instruments such as RES quotas in the United
States [Renewable Portfolio Standard]. The CO2 emissions
It was due to these considerations that the capa-
trading scheme is another recent example of quantity-based
city payment solution was ruled out, and French
regulation.
lawmakers opted to implement a mechanism
based on quantities and a market price. This deci-
This distinction between price- and quantity-based regulations
sion was consistent with the recommendations of
is equally important when it comes to security of supply. Price-
the Poignant-Sido report:
78
A capacity payment is a
fixed price paid to a class
of economic agents for
capacity that is available.
ACER uses the following
definition: “Capacity
Payments represent
a fixed price paid to
generators/consumers
for available capacity. The
amount is determined
by an independent body.
The quantity supplied
is then independently
determined by the
actions of market
participants.”
79
[Weitzman, 1974]
“Quantities are better
signals for situations
demanding a high degree
of coordination.”
80
[ACER, 2013]
81
[Poignant-Sido, 2010]
based regulation is already used through capacity payments78.
And capacity markets are a form of quantity-based regulation.
Proposal 16: Plan the introduction of a capacity market in
As such, the first choice that had to be made in designing the
France81.
French capacity mechanism was between price- and quantity-based regulation.
This preference for a quantity-based mechanism over a capacity
payment scheme has since been supported in the European
During the consultation of 2011, several market stakeholders
Commission guidelines, which expressed serious concerns
expressed a preference for capacity payments, citing this
about the use of capacity payments:
type of mechanism’s benefits in terms of simplicity and security for investors. They also noted that capacity payments
Establishing the correct value for capacity payments is
were used in other European Union Member States (Spain,
difficult and open to accusations of political interference.
Italy, Ireland, etc.).
Neither can it be assured that required capacity will be
delivered (particularly given regulatory uncertainty asso-
Price-based mechanisms nonetheless present several draw-
ciated with the setting of the payment) or alternatively that
backs that have been described in theoretical terms79, and the
excess capacity will not result from the scheme resulting in
practical consequences of which were beginning to become
overcompensation.
visible in Europe at the time. Difficulties in determining an
[…]
appropriate guaranteed purchase price for some types of
Mechanisms based on capacity payments do not ensure that
renewable energy led to erratic development trends, inclu-
the identified adequacy gap is filled and create significant
ding a surge of investments in photovoltaic power in France
risks of overcompensation.
late in 2010. Demand was also declining during this period,
underscoring the possibility that capacity payment mecha-
Recent trends in Europe make the decision to implement a
nisms could subsidise overcapacity providing no value to
market mechanism in France seem all the more relevant: for
consumers.
instance, Italy and Spain are both moving away from capacity
payments and towards a quantity-based mechanism.
The fact is that price-based mechanisms offer few levers on
the service provided since everything depends on how well
45
2.2  Why a market-wide capacity mechanism
Once the decision in favour of quantity-based regulation was
much the same effect as the tenders already allowed
confirmed, a choice had to be made about the scope of the
through the Multi-Year Investment Plan.
mechanism. Indeed, capacity mechanisms differ depending on
whether all or only part of generation and demand response
Public authorities took this recommendation into account and
capacities are eligible to participate. This was one of the key
adopted it in Decree 2012-1405 of 14 December 2012:
criteria ACER used to classify capacity mechanisms in its taxonomy82: it drew a distinction between targeted mechanisms and
All capacity suppliers, or persons mandated by them, are to
market-wide mechanisms (applying to all capacity).
present, for each delivery year, a certification request for their
capacities before a deadline set based on the technical cha-
Targeted mechanisms apply to a specific and limited amount
racteristics of the capacities or, for new capacities, the status
of generation capacity. The two main types of targeted mecha-
of the project.
nisms are strategic reserves and one-off tenders. With strategic reserves, capacities are “set aside” and dispatched only in
The choice to implement a market-wide mechanism was made
situations where load curtailment would otherwise be required
based on five key objectives: provide real guarantees in terms
(§ 2.2.2.2). One-off tenders offer a solution for situations where
of security of supply (§ 2.2.1), address market imperfections
capacity shortages appear possible (§ 2.2.2.3). Market-wide
and avoid distortion (§ 2.2.2), minimise the cost to consumers
mechanisms apply to all supply- and demand-side capacities
(§ 2.2.3), ensure the mechanism’s economic efficiency in the
that already exist or are planned (new capacities).
presence of investment cycles (§ 2.2.4) and adopt a mechanism
that reflects France’s specific situation (§ 2.2.5).
In the Staff Working Document on adequacy accompanying
its Communication of 5 November 2013 on State intervention
in electricity markets83, the European Commission seems to
lean in favour of targeted capacity mechanisms. It is therefore
2.2.1  Provide guarantees in terms of security of
supply
important to consider this option, especially as, since markets
The main reason for adopting a market-wide mechanism is that
were deregulated, the legal framework in France has allowed
availability commitments must be secured for all capacities to
the State to react to perceived threats to security of supply by
guarantee that security of supply is truly enhanced for consu-
organising targeted auctions, as part of the Multi-Year Invest-
mers. This is because security of supply is a public good that
ment Plan (programmation pluriannuelle des investissements)
cannot be ensured by specific capacities individually.
instituted by the law of 10 February 2000.
When electricity supply is tight, all capacities contribute to mee-
82
[ACER, 2013]
83
[EC, 2013a]
84
[RTE, 2011]
46
The appropriate scope for the French capacity mechanism was
ting all demand, and there is no reason why only some should
further discussed in 2011 based on the provisions of the NOME
be rewarded. On the contrary, because it is impossible to identify
Act, which anticipated a market-wide capacity mechanism. In
the power plants that contribute specifically to security of sup-
the conclusions of its report published in 2011, RTE supported
ply, there is no technical justification for a mechanism that does
the inclusion of all capacities in the mechanism84:
not reward all capacities.
For the mechanism to provide a real guarantee
The approach taken with the French capacity mechanism –
in terms of security of supply, it is crucial that all
equal consideration is given to the contributions of all capa-
capacities participate in it and that suppliers make
cities to security of supply, taking into account their specific
availability commitments for all of their capacities.
characteristics and availability commitments – thus provides
If some capacities are excluded, then the scheme
the best guarantee to consumers in terms of security of
would not deliver much more than is currently
supply.
possible, and this could create legitimate concerns
about the need for the mechanism. A mechanism
that only covered new capacities would have
CHOOSINGTHERIGHTCAPACITYMECHANISMFORFRANCE / 2
2.2.2 Address market imperfections and avoid
distortion
mechanism functions85 using the example from
To enhance security of supply, a capacity mechanism must
It can be noted that the capacity mechanism cre-
address the energy market imperfections discussed in chapter 1.
ates the same price duration curve as the perfect
Not all mechanisms have the same economic impact, making it
energy-only market except during load curtailment.
important to identify those that can correct these imperfections
A market-wide mechanism associated with a mar-
without creating distortions. Below is an analysis of market-wide
ket price can, if well designed, address the imperfections of the
capacity mechanisms, strategic reserve schemes and one-off ten-
energy market without distorting prices.
chapter 1.
85
A price cap is applied to
represent the market's
imperfections (see
section 2.2.2).
86
[ACER, 2013]
dering procedures.
2.2.2.2 Economic impact of a strategic reserve
2.2.2.1 Economic impact of market-wide capacity
mechanism
mechanisms
Market-wide capacity mechanisms involve systematically rewar-
2.2.2.2.1  Defi nition of a strategic reserve 
ding all contributions to security of supply, though the reward
Strategic reserve mechanisms involve pulling some capacities
may be equal to zero. The mechanisms function all the time,
out of the electricity market and “reserving” them to be dispat-
and when demand representing total capacity needs is mat-
ched only in situations where load curtailment would otherwise
ched against supply representing all capacities, it creates a mar-
be required. In such extreme situations, the energy generated
ket price that reflects the scarcity of the resource. This type of
by reserved capacities is sold on the energy market at a prede-
mechanism can be implemented within the different types of
fined dispatch price, usually corresponding to the price cap on
architecture discussed in § 2.3.
the energy market.
Market-wide capacity mechanisms create opportunities
ACER uses the following definition86:
to earn additional revenue for all capacities, based on their
contribution to security of supply. This revenue is added to
Strategic Reserve
the inframarginal rent operators earn on the energy market
In a Strategic Reserve scheme, some generation capa-
and makes up for the missing money resulting from imperfec-
city is set aside to ensure security of supply in exceptio-
tions in the energy market. The figure below shows how the
nal circumstances, which can be signaled by prices in
Figure 10 – Illustration of the merit order and price duration curve for a market-wide
capacity mechanism versus a perfect energy-only market
Price
(€/MWh)
VoLL
Merit order
Optimal load shedding
Price
(€/MWh)
VoLL
Missing money problem:
Price decrease during load shedding
Price cap
No additional load shedding,
peak capacity maintained
Peak VC
Price cap
Price duration curve
Functioning,
optimal case
Missing money, decline in inframarginal
rent due to price decrease during
load shedding
Inframarginal rent,
optimal case
Functioning with
market mechanism
applying to all
capacities
No additional load shedding,
price duration curve maintained.
Insufficient rent on the energy market,
offset by capacity price applied to
all capacities
Inframarginal
rent with market
mechanism applying
to all capacities
Peak VC
Quantity
(GW)
Peak capacity
Hours of
operation
Optimal load shedding
47
87
In this case, price signals
in the energy market
with a strategic reserve
mechanism in place are
similar to those seen in
an energy-only system
when capacity is too low
and shortfalls too high.
the day-ahead, intra-day or balancing markets
2.2.2.2.2  Assessment of the impact of a strategic
increasing above a certain threshold level. An
reserve mechanism
independent body, for example the Transmission
Strategic reserve mechanisms, especially their parameters and
System Operator (“TSO”), determines the amount
characteristics, must be perfectly defined to correct market
of capacity to be set aside to achieve the desired
imperfections and resolve the missing money problem. In par-
degree of adequacy and dispatches it whenever
ticular, the key parameters used for defining reserves and the
88
Strategic reserves are
remunerated in the
energy market in a
rather specific way,
since the reserves are
always dispatched at
a predefined price,
usually corresponding
to the energy price
cap. The remuneration
thus always represents
an inframarginal rent
reflecting the differential
between the variable cost
of the strategic reserves
and the price cap.
due. The capacity to be set-aside is procured and
situations in which they are dispatched (reserve quantities, dis-
the payments to this capacity determined through
patch conditions, dispatch price or price offered for reserves on
a (typically year-ahead) tender and the costs are
the market) have a major influence on the mechanism’s ability
borne by the network users.
to restore balance.
In other words, this is a targeted capacity remunera-
The goal in setting these parameters must be to correct market
tion tool designed to guarantee adequacy in volume
imperfections, not to minimise costs to consumers. For instance,
terms, i.e. that load curtailment levels are optimal.
if the missing money problem is not resolved, capacity will conti-
However, for a long-term equilibrium to be achie-
nue to be withdrawn from the market and the strategic reserve
ved, the mechanism must not only restore the opti-
alone will not be able to guarantee security of supply over the
mal level of load curtailment by securing a certain
long term, except if it gradually absorbs all capacities in the mar-
quantity of reserves, but also allow the capacity that
ket. This would create what the academic literature refers to as
remains in the market to cover its fixed costs and thus make up
a slippery slope89.
for the missing money.
This analysis suggests that three conditions must be met for a
A strategic reserve mechanism can thus only function pro-
strategic reserve mechanism to be able to resolve the missing
perly under the strict condition that it has enough influence
money problem for all capacities and keep load curtailment at
over energy prices to correct the missing money problem. An
the optimal level:
example of the effects a perfectly designed strategic reserve
> Required
It should be noted that the price duration curve under the well-
reserve volumes must be calculated based
on the optimal energy mix and desired level of load
mechanism would produce is presented in figure 11 below.
>
shedding;
Dispatching and remuneration procedures must ensure the
designed strategic reserve mechanism is identical to the one in
remuneration of strategic reserves while also preserving
the market at equilibrium with missing money in § 1.1.3.1. On
investment incentives in the energy-only market;
the other hand, the energy price is higher when reserves are dispatched than in the perfect energy-only market.
> The mechanism and operator overseeing it must be credible for the mechanism to function properly and interact
with the energy-only market, which becomes all-impor-
The missing money for capacities still in the market (not set
tant when moving from a theoretical framework to the real
aside under the strategic reserve mechanism) is offset in theory
market.
by prices being maintained at the price cap while reserved capacity is in use. Inframarginal rents thus cover fixed costs. Incen-
Empirical observation shows that these mechanisms are often
tives to invest or remain in the market are the same as in the
implemented to avoid retiring old and polluting power plants90.
perfect energy-only market .
In addition to potentially jeopardising the environmental targets
87
of Europe’s energy policy, this underscores how tricky it can be to
48
For capacities included in the strategic reserve, revenue earned
find a virtuous system for selecting capacities for inclusion in the
on the energy market88 is complemented by a fixed component,
strategic reserve. It also raises concerns about the terms under
typically funded by a tariff surcharge paid by final consumers
which unprofitable, private assets are procured by public enti-
(e.g. found on their bills, in addition to charges for energy). This
ties: Are they taken over temporarily, and allowed to return to the
surcharge is usually fairly low in relation to MWh consumed,
market once economic conditions so permit (in which case the
since it is only intended to cover the share of fixed costs borne
mechanism would serve to protect operators from price risks)?
by reserved capacity not covered by revenue earned in the
If they are taken over permanently, issues could arise when the
energy market.
capacities are new and have a lifespan of several decades.
CHOOSINGTHERIGHTCAPACITYMECHANISMFORFRANCE / 2
The European Commission also lists a series of precautions to
2.2.2.3 Economic impact of a capacity
be taken in designing strategic reserve mechanisms91:
auction mechanism
89
[Finon & Roques, 2013].
See [Stoft, 2002] and
[De Vries, 2004] on the
theoretical functioning of
strategic reserves.
[It] is important that [Strategic Reserves] be properly imple-
2.2.2.3.1  Defi nition of capacity auction 
mented. Union rules on public procurement must be res-
schemes 
pected and help ensure that there is no overcompensation.
Capacity auctions are a class of capacity mecha-
Where strategic reserves are used to keep prices low, this
nism under which total capacity needs are determi-
may result in high emissions from inefficient old plants and
ned several years in advance and auctions are orga-
discourage the development and deployment of new and
nised if additional capacity is needed. The European
more efficient technologies, including storage and demand
Commission refers to this type of scheme as tende-
side response. With market coupling and the introduction of
ring procedures92. The mechanism does not apply
cross-border intraday trading such a failure would happen
to all capacities93 and tenders are only organised
within a common price mechanism and spill over across
occasionally94.
90
“Old units can be
purchased and kept
available.” [De Vries,
2004]
“[strategic reserve]
provides for keeping
old units operational,
because they can be sold
or leased to the system
operator.” [De Vries, 2007]
“The TSO can take over
old units that the owners
have decided to close.”
[Finon & Pignon, 2008]
borders. It is therefore not only not cost-effective but risks
seriously distorting the internal market. This problem can
2.2.2.3.2  Assessment of a capacity auction 
be avoided when strategic reserves are clearly used only in
mechanism 
the event of the failure of the (short run) wholesale market
One-off capacity auctions can offer public autho-
to match supply and demand. This requires objective and
rities a practical way to intervene quickly to safe-
transparent criteria as to when strategic reserves can be
guard security of supply. In the European Commis-
deployed.
sion’s words:
A well-designed strategic reserve mechanism can correct mar-
A tendering procedure has the advantage
ket imperfections. The functioning of this type of mechanism
of being relatively easy to organise and will
nonetheless distorts energy prices, since offsetting the mis-
ensure that investors actually construct the
sing money results in more frequent price spikes in the energy
capacity tendered, and then participate in
market.
the market as normal. New capacity which
91
[EC, 2013]
92
[EC, 2013a]
93
“Tendering procedure
is normally less
distortionary and easier
to implement than
market wide capacity
mechanisms.” [EC, 2013a]
94
“Properly implemented,
tendering constitutes a
one off intervention on
the market.” [EC, 2013a]
Figure 11 – Illustration of the merit order and price duration curve under a perfectly
designed strategic reserve mechanism versus a perfect energy-only market
Price
(€/MWh)
VoLL
Merit order
Optimal load shedding
VoLL
Missing money problem:
Price decrease during load shedding
Price cap
Price cap
Price duration curve
Price
(€/MWh)
Decrease in installed
peak capacity –
strategic reserve
deployed at price cap
Missing money, decline in inframarginal
rent due to price decrease during
load shedding
Inframarginal rent restored
through decrease in installed peak
capacity/strategic reserve deployed
at price cap
Functioning,
optimal case
Inframarginal rent,
optimal case
Functioning with
strategic reserve
Inframarginal rent
with strategic
reserve
Peak VC
Peak VC
Hours of
operation
Quantity
(GW)
Peak capacity
Reserves
Optimal load shedding
49
benefits from the tender continues to participate on the
The Commission addresses this concern about preventing
market. Consequently, it is important that the tender not
distortion when selecting capacities eligible to participate in
be designed in such a way as to distort normal market ope-
mechanisms in its recommendations on the neutrality of capa-
ration or production decisions or to distort future invest-
city mechanisms between existing and new capacities97:
ment decisions .
95
In certain situations, it can be more cost-effective to retrofit
Special tendering procedures are thus fundamentally desig-
or retain existing generation capacity, which would other­
ned to resolve temporary and clearly identified physical issues.
wise shut down, to keep it operational. This can also help
France already has a similar instrument through its Multi-Year
potentially to avoid the lock-in effects of constructing new
Investment Plan. It allows public authorities to translate their
(fossil fuel) generation capacity.
energy policy objectives through actions targeting the energy
mix. The existence of this instrument is not being called into
Therefore, capacity mechanisms open to capacity retention
question with the implementation of the capacity mechanism.
as well as new investments, without discrimination between
the two categories ensure cost-effectiveness and minimise
Tendering procedures are fall-back measures and thus not
distortion.
an appropriate solution to the structural imperfections of the
The approach adopted by public authorities in France aims spe-
market.
cifically to avoid distortion by giving equal consideration to all
Firstly, they do not structurally modify the economics of elec-
capacities, be they new, older or refurbished.
tricity markets, and do not place a specific value on security of
supply. And the missing money problem revealed by econo-
Lastly, it should be noted that if special tenders are organised
mic theory affects all capacities in the same way96. Therefore,
too frequently, investors could begin to wait for the tenders,
in an imperfect market where a missing money phenomenon
which would be counterproductive:
reduces investment incentives, the creation of new capacities
subsidised by a special tendering procedure would only add to
[T]here is still a risk of distorting investment signals
the profitability problem for all capacities.
by encouraging a ‘wait for the tender to be launched’
approach on the part of investors to secure additional
Secondly, all capacities contribute to security of supply from a
revenue. In the context of the current transition of the
technical standpoint. The only valid justification for a targeted
electricity system, and in some Member States, the deci-
capacity mechanism would thus have to be economic, for ins-
sion to shut down nuclear capacity, well designed and
tance a missing money problem that is particularly significant
one off tenders could have a role to play. However, only
for some plants. In this case the mechanism would be a sort of
if the connection between the tender requirements and
specific subsidy granted to certain capacities simply because
the system transition is clear, is it likely that investors
they are not profitable. This would run totally counter to the
would consider a commitment not to repeatedly launch
philosophy of an integrated energy market in which investors
more tenders, in order to be credible. Where a tender is
assume the risk associated with their investments and make
implemented to correct for regulatory failures it is likely to
decisions about investing in or retiring capacities based on their
undermine confidence in the willingness of public bodies
revenue forecasts.
to correct such failures, thereby exacerbating the underlying problems98.
A mechanism that only targets some capacities necessarily
95
[EC, 2013a]
96
See section 2.1.2 of this
report
97
[EC, 2013a]
98
[EC, 2013a]
50
creates distortion. This is particularly visible with
Because the tenders would be organised only occasionally and
selective mechanisms targeting new capacities. In
closely administered, this scheme will automatically be less
situations where there are facilities in the market
effective in supporting the energy transition. Relying on this
that are operational and have in some cases only
type of mechanism to drive changes in the energy mix would
been in service for a few years but could be retired,
be tantamount to admitting the failure of the role of markets
introducing a mechanism that subsidises new capa-
for investments, and would transfer investment risk from private
cities exclusively would not seem to make economic
companies to consumers.
sense and could cause considerable distortion.
CHOOSING THE RIGHT CAPACITY MECHANISM FOR FRANCE  / 2
This logic is not borne out by a careful analysis of the mechaAssessments of the economic impact of different
classes of capacity mechanism lead to the following conclusions
nisms’ financial impact on different market stakeholders. In fact,
> Market-wide capacity mechanisms address mar-
energy market imperfections, strategic reserves do not cost final
ket imperfections without distorting energy prices;
> Targeted mechanisms such as strategic reserves
address market imperfections but distort energy
prices;
> Targeted mechanisms such as one-off tende-
ring procedures do not address market imperfections and result in discrimination for the
capacities targeted.
This analysis suggests that targeted mechanisms such as capacity auction schemes can
be considered fall-back solutions that do not
address the structural challenges that have led
France to introduce a capacity mechanism. This
type of mechanism will therefore not be considered in the remainder of this report.
this analysis shows that, with two perfectly designed mechanisms that exactly offset the missing money resulting from
consumers less than market-wide capacity mechanisms.
A strategic reserve mechanism that is consistent with economic
theory is based on a system in which generators are compensated in two ways for missing money:
> For capacities included in the strategic reserve, fixed costs are
covered through two remuneration systems:
• In the energy market, capacities earn a specific rent every time
they are dispatched. This rent corresponds to the difference
between the dispatch price for reserves and their variable cost;
• This rent is then complemented by a fixed remuneration of
the capacities reserved, which is financed by final consumers;
> For capacity that remains in the market, revenue increases since
the price cap is reached more often on the energy market.
2.2.3  Minimise the cost to consumers
Electricity users are therefore called upon to offset the missing
Targeted capacity mechanisms are often presented as a way to
money at two levels. They pay a tariff surcharge to complement
minimise the cost to consumers, since only a limited quantity
the revenue earned by reserved capacities. In the meantime,
of capacity is rewarded99. The European Commission mentions
prices in the energy market reach the price cap more often than
this characteristic
100
:
in the energy-only market, not only during load curtailment but
also when the reserves are dispatched. In other words, strate-
One particular concern about market wide capacity mecha-
gic reserves result in direct costs, through the remuneration of
nisms is that they can over reward generation which was
capacities reserved, as well as an indirect cost reflected in more
already financially viable.
frequent price spikes in the energy market.
However, an analysis of strategic reserves in operation shows
With a market-wide capacity mechanism, the mis-
that they do not cost consumers less than market-wide capa-
sing money resulting from market imperfections
city mechanisms. This issue of cost was a key consideration in
is offset exclusively through the capacity price paid
the design of the French capacity mechanism, which includes a
by final consumers. Unlike with strategic reserves,
number of provisions to ensure that the cost of the mechanism
consumers benefit from a lower and more stable
is strictly proportional to its objectives.
energy price, equal to the market price in a perfect
energy-only market101. They nonetheless participate
2.2.3.1  Comparison of costs entailed by strategic
in a more direct way, through the capacity price,
reserves and market-wide capacity mechanisms
which is supposed to offset the missing money in full,
On first analysis, it may seem logical that a market-wide capacity
whereas the strategic reserve only offsets part of it.
mechanism should cost final consumers more than a strategic reserve, since it covers more capacity. With the former, the
Figure 12 compares the economic results of capa-
cost of capacity for final consumers represents rewards for the
city in three situations: the original situation, with
contributions of all capacities to security of supply, while with
missing money that is not offset; and situations
the latter the tariff surcharge only aims to complement the infra-
where adjustments are made through a market-
marginal rent for the capacities reserved.
wide mechanism or a well-designed strategic
99
Targeted capacity
mechanisms can
nonetheless entail
hidden costs, for instance
in energy prices, making
it difficult to evaluate
them based solely on
face value cost.
100
[EC, 2013a]
101
Except during load
shedding, if we assume
that the market
imperfection that led to
the implementation of
the capacity obligation is
representative of a price
cap below the cost of
unserved energy.
51
Figure 12 – Comparison of economic results of capacity in an energy-only market with missing
money, a market-wide capacity mechanism and a strategic reserve mechanism
Fixed costs
(€/MWh)
Energy-only market
with missing money
System with strategic
reserve
1. Capacity price
Coverage of fixed costs
Missing money
System with market
mechanism applying
to all capacities
2. SR surcharge
1. More frequent
price spikes
 Revenue from
energy market
 
Revenue
from specific
mechanisms
Capacity in the market
Capacity in the market
Capacity in the market
SR
reserve mechanism. It is not possible to assess the impact of
2.2.3.2  Provisions to limit the cost of the French
capacity mechanisms on consumers solely by comparing the
capacity mechanism
direct financial effects of these mechanisms, i.e. the surcharge
Though it is market-wide, the French capacity mechanism also
on tariffs for strategic reserves and capacity prices, shown in
includes specific provisions intended to limit its cost.
orange. The fact that energy price caps are reached more often
with the strategic reserve mechanism must also be taken into
Firstly, though the French capacity mechanism applies to all
account. A thorough comparison confirms that if both mecha-
capacity, its application is market-based and not through a capa-
nisms offset the missing money, they will have the same cost
city payment. The decision to base the mechanism on a market
impact on consumers.
price ensures that contributions to security of supply are fairly
compensated. Though all capacities are rewarded, no value is
assigned to overcapacity, and the price corresponds to the bare
A comparative theoretical analysis based on
market-wide capacity mechanisms and strategic reserves shows that they are equivalent in
terms of cost. Both mechanisms restore security
of supply to the same level as the perfect energyonly market and offset the missing money resulting from market imperfections. In both cases,
final consumers are called upon to ensure the
coverage of fixed costs and the existence of
investment incentives.
While the cost to final consumers is the same, financing does not flow through the same channels:
> With market-wide capacity mechanisms, the
minimum required to safeguard security of supply.
Secondly, the fact that the specific economic situations of different types of capacities are taken into account – incumbent
nuclear and facilities benefiting from purchase obligations –
limits the mechanism’s total financial impact:
> Incumbent
nuclear: The Regulated Access to Historical
Nuclear Electricity scheme (Accès Régulé à l’Électricité
Nucléaire Historique – ARENH) established by the NOME
Act102 allows all suppliers to set rates for their customers
under the same economic conditions as the incumbent
value of security of supply is reflected exclusively through the capacity market;
operator. The ARENH price “is representative of the econo-
> With strategic reserves, some of this value is
power plants”103 in question, based on an addition of costs,
rewarded through capacity financing and some
through higher energy prices.
mic conditions under which electricity is generated at the
including capacity costs104. The capacity mechanism will not
modify the cost to suppliers of accessing incumbent nuclear
generation, and alternative suppliers will be able to cover a
52
CHOOSING THE RIGHT CAPACITY MECHANISM FOR FRANCE  / 2
large share of their capacity obligation without paying more
a fundamental level, coordination is achieved
than in the current situation. In this regard, the capacity
because market stakeholders can work with the
mechanism will reveal the capacity price integrated into the
same volume forecasts.
ARENH price;
> Facilities benefiting from purchase obligations (wind, photo-
With centralised mechanisms, quantitative forecasts
voltaic and cogeneration): The capacity value of these facili-
are generated administratively. Under decentralised
ties is transferred to consumers through a reduction of their
mechanisms like capacity obligations, total capacity
contribution to public service charges105. The mandatory pur-
demand is calculated by aggregating the anticipa-
chase price thus already includes capacity remuneration for
tions of market stakeholders, factoring smoothing
the technologies in question.
effects and the level of coverage required into the
method for calculating the obligation. Stakeholders’
Nuclear power plants and facilities benefiting from feed-in
decisions are therefore based on quantities, which
tariffs (wind, photovoltaic and cogeneration) already include a
prevents overreactions to price signals and copycat
capacity component in their prices since their revenue is regu-
behaviours.
lated in order to promote competition in the French electricity
market and renewable development. The capacity mechanism
In phases of under-capacity, investments are limited
will reveal the value of this capacity component without crea-
by total capacity demand. Even if the capacity price
ting additional costs for suppliers to meet their obligation, and
is very high, it will only compensate the amount of
thus without adding to the cost to final consumers.
capacity that corresponds to total demand. New
capacity in excess of the amount needed to meet
real needs will not find a buyer. Cyclical effects are
2.2.4  Economic efficiency in the presence
of investment cycles
lessened.
Economic theory suggests that investment cycles will occur in
Market-wide capacity mechanisms thus send
industries characterised by leads time before new facilities are
signals about prices and quantities that help coordi-
commissioned and low degrees of information and decision-
nate capacity investment and retirement decisions.
making coordination (§ 1.2.3). These are characteristics of the
Their stabilising role reduces the intensity of invest-
electricity sector. The long-term equilibrium predicted by static
ment cycles.
analysis is rarely achieved: capacity investment and retirement
decisions do not produce immediate effects, but instead follow
2.2.4.2  Investment cycles under a strategic
their own dynamic, resulting in cycles. This dynamic component
reserve mechanism
has consequences both for security of supply and the economic
Strategic reserve mechanisms help guarantee
efficiency of the power system as a whole.
capacity adequacy by influencing both the energy
market price and the amount of capacity available
The economic literature examines how these cycles can be sha-
when supply is tight, thanks to capacity reserves.
ped by market architectures and by mechanisms adopted to
102
Law 2010-1488 of 7
December 2010 on the
New Organisation of the
Electricity Market
103
Law 2010-1488, Article 1
104
Decree 2011-466 of 28
April 2011 setting out the
rules governing access
to historical nuclear
energy, Article 1, V: “The
product transferred
includes the generation
capacity certificate, as
defined in article 4-2 of
the aforementioned law
of 10 February 2000,
corresponding to its
profile.”
105
Law 2013-312 of 15 April
2013 on preparing for the
transition to a low-energy
system and including a
range of provisions for
water pricing and wind
power, Article 7 sexies:
“Buyers of renewable or
cogenerated electricity
(subject to Purchase
Obligations) generated
in France assume the
responsibilities of
the producer of that
electricity for delivering
the corresponding
capacity certificates.”
“The value of the capacity
certificates acquired
within the framework of
the contracts [Purchase
Obligation] is deducted
from the public service
charges calculated for
the buyer.”
106
[De Vries, 2004] shows
that a capacity obligation
type mechanism is
better able to dampen
investment cycles. [Stoft,
2002] finds a similar
result with a strategic
reserve type mechanism.
ensure adequacy. Capacity mechanisms allow stakeholders to
A strategic reserve mechanism will address the pro-
coordinate their capacity investment and retirement decisions.
blems encountered in the energy-only market by
In particular, the investment cycle phenomenon that is intrinsic
dynamically adjusting the size of strategic reserves. Any reduc-
to the energy-only market can be monitored and mitigated, at
tion or increase in reserve volumes will impact the outlook for
least in part, when capacity mechanisms are in place
106
.
capacity remuneration, notably shaping decisions about pulling
older facilities out of the market, as they can earn complemen-
2.2.4.1  Impact of a market-wide capacity mechanism on
tary revenue by participating in the reserves and thus delay their
investment cycles
shutdown.
A market-wide capacity mechanism is a tool for quantitybased regulation that creates the right incentives for capacity
If security of supply is at risk, the mechanism operator will
investment and retirement decisions. Though the price signal
increase the reserves. This impacts market stakeholders’ deci-
is the channel through which information is transmitted, at
sions at two levels. First, the retirement of existing capacities can
53
be delayed if they become part of the reserve. Second, the with­
A primary objective of the mechanism is to give consumers incen-
drawal of capacities from the market will drive up the energy
tives to make the structure of their consumption more virtuous,
price, stimulating investment and causing the shutdown of
notably to reduce peak demand in winter, as was discussed in
capacities in the market to be delayed. In the absence of a quan-
chapter 1. Such incentives only make sense if they apply to all
tity-based mechanism to prevent overinvestment, stakeholders
consumers, proportionately to their consumption. By the same
will continue to invest heavily and mimic others’ behaviour, as is
token, the capacities included must suffice to meet all demand.
seen in the energy-only market.
This matching of obligations for all consumption with the partiIn situations of overcapacity, the mechanism operator will scale
cipation of all capacities in the mechanism makes the most eco-
back the reserves and have no influence on the formation of
nomic sense and creates the right incentives. It allows demand
the energy price. The strategic reserve mechanism will not limit
response and targeted demand reduction actions to participate
copycat behaviours though.
in the mechanism in the same way, either implicitly or explicitly107, making the mechanism technology neutral108.
In sum, a strategic reserve mechanism only partially addresses
the issue of the lack of coordination of capacity investment and
2.2.5.2  Strategic reserve planning with a key low-
retirement decisions. It therefore has only a limited ability to
probability, high-impact variable
dampen the investment cycles found in the energy-only mar-
Addressing France’s structural security of supply challenges
ket, and will not fully correct the structural failures of the market.
with a strategic reserve mechanism would require placing in the
reserve a disproportionate quantity of capacity relative to the
amount that would remain in the energy market.
107
With a market-wide
capacity mechanism, a
consumer that reduces
its peak consumption
by 10 MW also reduces
its obligation by 10 MW,
which is equivalent, for
the consumer, to its
10 MW of load reduction
being rewarded through
certification.
With a mechanism
targeting only 10% of
capacities, a 10 MW
reduction in peak
consumption reduces the
consumer's obligation
by 1 MW, which is no
longer equivalent to
having 10 MW of certified
demand response
participate in the capacity
mechanism.
108
The different ways in
which demand response
can participate in
the French capacity
mechanism are discussed
in detail in part 3.
109
“A planner first calculates
the optimal volume of
generation capacity,
then decides the reserve
volume and calculates
the optimal dispatch
price. The reverse is
also possible: given a
certain reserve dispatch
price, the optimal
reserve volume can be
calculated.” [De Vries,
2004]
54
Any form of capacity mechanism will
allow for a better coordination of capacity investment and retirement decisions than the energy-only market,
and will therefore dampen investment
cycles. Market-wide capacity mechanisms appear more efficient than
strategic reserves, particularly when
it comes to preventing situations of
overcapacity.
Indeed, designing a strategic reserve requires establishing a
number of parameters, particularly rules for when reserves are
dispatched and the size of reserves needed to address specific security of supply considerations. If the strategic reserve is
designed to offset the missing money, then these parameters
are interlinked. Additional revenue earned by capacities outside
the reserve will depend on the likelihood that the reserves will
be dispatched, which in turn depends on the size of the reserve
and the dispatch price109.
2.2.5  Suitability to France’s situation
However, little information can be found in the economic literature about the sizing of reserve volumes, with most studies
A decision was made in favour of a market-wide
citing assessments by the bodies in charge of strategic reserves.
capacity mechanism because it addresses the speci-
In practice, reserve volumes depend in large part on security of
fic challenges facing the French power system. Two
supply needs. For instance, if security of supply would be threa-
factors support this assertion: this type of mecha-
tened by the shutdown of a certain number of plants, then the
nism enables the participation of the demand side,
size of the strategic reserve will be calculated in such a way as to
and the size of the strategic reserve required would
ensure that they remain in the system.
be problematic in France.
Bearing this in mind, a strategic reserve in France would have
2.2.5.1  Enabling participation of the demand
to be large enough to guarantee security of supply during win-
side
ter cold spells. However, whereas with a conventional adequacy
One of the main reasons France is implementing a capa-
assessment it would suffice to calculate the total capacity requi-
city mechanism is to address the problem posed by
red to avert the risk, with a strategic reserve, a distinction must
peak demand in winter, when all supply- and demand-
also be made between the capacity that is “in” and “out of” the
side capacities contribute to security of supply.
market, i.e. the capacity that must be included in the reserve to
remain economically viable.
CHOOSING THE RIGHT CAPACITY MECHANISM FOR FRANCE  / 2
The most critical risk in France – typically a one-in-ten-year cold
To summarise, meeting peak demand in France
spell requiring around 30 hours of load shedding – is a low-proba-
with a strategic reserve would require:
bility, high-impact variable. The likelihood that the capacity needed
> Either a very large strategic reserve, far bigger
to cover this risk would be dispatched is low, meaning it would not
than the volume that would be required in other
necessarily be economically viable if it earned revenue solely by
contexts: Since the reserves would be dispatched
generating energy. It can therefore be considered that if a strategic
at the price cap on the energy market, the upper
reserve was used in France, it would have to be large enough to
portion of the price duration curve would be
meet the additional demand recorded during cold spells.
significantly distorted;
> Or a structurally oversized generation mix to ensure
An initial order-of-magnitude assessment of the required reserves
that it could meet peak demand while also produ-
can be based on a brief analysis of winter demand peaks in past
cing energy at competitive prices for exports (peak
years. In 2008, which is used here as the benchmark (no signifi-
demand met with base-load generation).
cant cold spell), the highest level of demand recorded was just over
83 GW. In 2012, when a major cold spell occurred, peak demand
It seems that both options could result in significant
exceeded 101 GW. Without considering structural changes in
distortions in energy markets, both in France and
demand110, we see that 18 GW of capacity had to be available111 to
Europe.
meet demand in 2012, capacity that was not used in 2008 .
112
Interconnections between the French power system and the
rest of Europe create opportunities for capacity in France to earn
revenue above and beyond its use to meet domestic demand. A
strategic reserve of 18 GW would therefore undoubtedly be disproportionate. However, the capacity that it would be economically justifiable to use to meet peak and extreme peak demand
carries high variable costs. It is therefore unlikely that export
A strategic reserve mechanism would
not be adapted to France’s specific
situation. The reserve size required
to meet demand during cold spells
would be problematic, and marketwide capacity mechanisms seem to
offer a more efficient way to promote
demand-side participation.
110
This is an acceptable
hypothesis for calculating
orders of magnitude,
especially as the two
dates were relatively
close and that the
economic environment
was not driving a
significant increase in
demand.
111
Taking account of
contingencies potentially
affecting capacities and
constraints that could
decrease their availability
would require adding a
safety margin.
112
With no cold spell in the
winter of 2013-2014,
peak demand did not
climb above 85GW,
illustrating how it is
possible for peak demand
to remain relatively low
throughout the winter.
113
[ACER, 2013]
prices would be competitive.
2.3  Why a decentralised capacity mechanism
It is possible to adopt different types of models with market-
Contracted capacity should be available according to the
wide capacity mechanisms. The third key characteristic of the
terms of the contract113.
French mechanism relates to its decentralised nature.
The French capacity mechanism is a capacity obligation, which
While the mechanism does indeed involve quantity-based regu-
is mainly a system for allocating costs, making market stakehol-
lation, the law stipulates that each supplier will have to secure
ders accountable and organising trading:
enough capacity certificates to cover the consumption of its
own customers during peak periods. This is different from the
A Capacity Obligation scheme is a decentralised scheme
single buyer model, an alternative market model that ACER des-
where obligations are imposed on large consumers and on
cribes as follows:
load serving entities (“LSE”, further referred to as “suppliers”),
to contract a certain level of capacity linked to their self-
A Capacity Auction scheme is a centralised scheme in which
assessed future (e.g. three years ahead) consumption or sup-
the total required capacity is set (several years) in advance of
ply obligations, respectively. The capacity to be contracted is
supply and procured through an auction by an independent
typically higher, by a reserve margin determined by an inde-
body. The price is set by the forward auction and paid to all
pendent body, than the level of expected future consumption
participants who are successful in the auction. The costs
or supply obligations. The obligated parties can fulfil their
are charged to the suppliers who charge end consumers.
obligation through ownership of plants, contracting with
55
generators/consumers and/or buying tradable capacity certi-
needs, decide how they will cover them, and are financially res-
ficates (issued to capacity providers). Contracted generators/
ponsible for imbalances between their actual needs and cove-
consumers are required to make the contracted capacity
rage. Because the architectures of energy and capacity markets
available to the market in periods of shortages, defined admi-
are similar, the roles and responsibilities of different participants
nistratively or by market prices rising above a threshold level.
in the power system are consistent. At a time when the Euro-
Failure to do so may result in penalties. A (secondary) market
pean Commission is expressing concerns about the adoption
for capacity certificates may be established, to promote the
of capacity mechanisms in Europe, this conceptual proximity to
efficient exchange of these certificates between generators/
the “target model” for Europe is a very important consideration.
consumers providing capacity and the obligated parties or
between obligated parties114.
The alternative to a mechanism with negotiable certificates is the
single buyer model. Models of this type can notably be found in
This decision to adopt a decentralised model for the capacity
North America, in systems where the energy market is also cen-
obligation is a distinctive characteristic of the French mecha-
tralised. The United Kingdom has also announced the creation
nism, allowing all suppliers and consumers to be held directly
of a mechanism inspired by this philosophy115. With this type of
accountable, above and beyond financing their capacity obliga-
system, public authorities, not market stakeholders, evaluate
tion. Parties subject to capacity obligations are responsible for
aggregate needs. This makes sense intellectually, since security
anticipating their capacity needs, securing enough capacity cer-
of supply is a public good and transaction costs are lower than
tificates to cover these needs, and making choices about redu-
with a decentralised model. However, there are consequences
cing consumption within their portfolios during peak periods.
in terms of how responsibilities are distributed, and the system
They are also financially liable for any positive or negative imba-
explicitly involves capacity development planning.
lances between their level of coverage and actual needs.
The debate about the two approaches is informative but
There are three main justifications for adopting this model: it
inconclusive, the main criterion being whether the market or
is compatible with the internal electricity market, it is adapted
a planner can estimate future needs more accurately. Without
to France’s specific situation, notably in terms of the economic
claiming to settle a controversy that may continue amongst
virtues of the incentives created to reduce peak demand, and
researchers and practitioners for many years to come, some
lastly the timescales associated with decentralised markets
conclusions can be drawn:
make them economically efficient.
> The single buyer model reduces the risk incurred by investors by eliminating uncertainty associated with finding buyers
2.3.1  Compatibility with the philosophy of the
European energy market
The system proposed for France is a certificate market. It draws
(the single buyer is responsible for acquiring all capacities and
then passing costs through), whereas no risk is transferred
from market stakeholders to the community with a bona fide
decentralised model;
from a classic economic theory model: to correct the market
> The single buyer model requires an ex-ante calculation of
failures described in chapter 1, property rights are created for
the medium-term capacity target (the target is a parameter
capacity as a “product”. Public authorities determine parameters
exogenous to the functioning of the mechanism), whereas in
to ensure that their targets will be met. Market stakeholders are
the decentralised model stakeholders are responsible for this
then free to engage in trading within the framework of these
(the capacity target is an endogenous parameter that varies as
parameters. The assumption that the market will drive optimal
the mechanism functions);
allocation is preserved and taken into account: public authorities do not estimate needs in lieu of market stakeholders.
> The single buyer model exposes the community to the risk
that demand forecasts will become self-fulfilling prophecies, whereas the decentralised model exposes it to the risk
This choice is in keeping with the founding prin-
that the market will not function properly if stakeholders are
ciples of the internal European energy market and
unable to accurately assess their capacity needs.
intended solely to expand the range of market
114
[ACER, 2013]
115
[DECC, 2013]
56
products offered. The principle that market stake-
There is probably no definitive answer to these questions, as
holders should be accountable for their respective
they must also be considered in the light of how the system
portfolios is upheld in that they assess their future
functions as a whole. For this reason, RTE recommended in
CHOOSING THE RIGHT CAPACITY MECHANISM FOR FRANCE  / 2
2011 that a simple adjustment be made, without completely
These different factors support the assertion that
overhauling the structure of accountability, to avert the risk of
the main virtue of the decentralised mechanism
self-fulfilling prophecies:
relates to allocation, i.e. its ability to send the right
signals to different market stakeholders affected by
In an architecture in which all capacity is contracted n years
the peak demand phenomenon and to encourage
ahead of time, the capacity obligation can be likened to a
them to take action to hedge the resulting risks at
number of MW the community of suppliers must “place”.
the least possible cost. Because demand trends do
Once the total obligation is set, any measures suppliers could
not become an exogenous factor as would be the
take to reduce power consumption among their customers
case with a single buyer model, the system should
will have no impact on the total capacity contracted116.
enable, once demand-side management actions
116
[RTE, 2011]
117
This would be even
more feasible if several
decentralised capacity
mechanisms are in place;
see for instance [BDEW,
2013]. Cross-border
considerations are
addressed in chapter 9 of
this report.
118
[EC, 2013a]
have been taken, a cost allocation that is fair, proTwo years later, it appears that the reserves that had been iden-
portionate, and reflective of the real responsibilities of each
tified in 2011 when evaluating a centralised capacity mecha-
obligated party when it comes to security of supply. This aspect
nism for France have increased. Based on trends in the structure
of the mechanism is in line with the European Commission’s
and level of demand, total capacity in the French power system
recommendations118:
would more readily require an adjustment than a major structural increase.
Electricity consumers benefiting from the increased security
of supply should bear the associated cost
Lastly, choosing a model for the capacity mechanism that is
[…]
in keeping with the founding principles of the internal energy
The most effective way of passing costs to the beneficiaries
market will also create opportunities to envisage cross-border
of enhanced security of supply will normally be through their
functioning going forward117.
electricity suppliers
[…]
2.3.2  Ability to address France’s specific challenges
In practice this will normally be a function of their consumption at peak load, which requires that customer profiles are
A decentralised system does not offer many benefits if obliga-
accurate and detailed. This also allows suppliers to pass on
ted parties are passive with regard to their obligations. The main
costs to the appropriate consumption groups. Consumers,
advantage of a decentralised system – or a system without a
and in particular industry, who are able to manage their
fixed capacity target – is that suppliers can cover (hedge) their
demand flexibly should therefore end up paying less towards
obligation by buying certificates or making physical adjustments
the capacity mechanism.
on the demand side. This creates a good feedback loop for the
capacity price and prevents it from rising above the capacity
value of demand response.
2.3.3  Timescales of the decentralised market and
economic efficiency
This incentive is logical given the role suppliers play in the current
The economic crisis of 2008 caused demand growth to slow
market architecture: they are in direct contact with consumers
considerably and showed that centralised capacity planning can
and therefore have exclusive insight into their behaviours and
carry a cost for society. If an auction had been organised in 2008
consumption patterns. Suppliers can influence consumption
for the years 2011 and 2012, capacity needs would have been
structures through their offers and rates. Their involvement in
considerably overestimated and excess capacity would have
this regard is a key aspect of the French mechanism’s efficiency.
been subsidised.
The resulting model also enables the key to security of supply
A decentralised market model does not reduce this risk (as
in France – keeping peak demand in check – to be targeted.
explained in chapter 1, market stakeholders as a whole probably
In keeping with the objectives outlined in § 2.2.5.1, demand
failed to anticipate the effects the crisis would have on demand
response is given its rightful place in the mechanism, as it is
or the impact renewable support mechanisms would have on
rewarded wherever there is economic space for it. In this sense,
market prices), but it does not transfer the cost to society either.
the French capacity mechanism effectively promotes demand
In addition, it allows stakeholders with more accurate forecasts
response and lays the groundwork for the energy transition.
to avoid assuming the related cost.
57
119
[EC, 2013a]
In sum, it is important for a mechanism designed to
decree also stipulates that safeguard measures can be taken in
regulate capacity levels to be able to adapt to changes
such cases, but not if the projected imbalance is moderate, which
in the economic environment and demand. Decen-
should be the situation in the French power system over the next
tralised mechanisms appear to be more adaptable, since market
few years. The role demand response can play in balancing capa-
stakeholders trade continuously for several years before the deli-
city must therefore be considered.
very year and up until the last minute. Conversely, centralised capacity mechanisms function only briefly several years ahead of time.
In general, it takes less time to develop demand response than
new generation capacities. With combined-cycle gas turbine
This adaptability of decentralised capacity mechanisms is one
plants, for instance, about five years elapse between the invest-
of the characteristics the European Commission has identified
ment decision and the start of industrial operations, whereas
as a potential way to minimise the cost to consumers, notably
demand response capacities can be developed more quickly
by allowing trading on the secondary market:
since less investment is required. This shorter lead time offers
real flexibility when it comes to meeting capacity needs.
Likewise obligations on suppliers relying on decentralised markets should limit the compensation to capacity to fill the iden-
The main benefit of this finer timescale is precisely that operators in
tified gap to the minimum necessary. Capacity markets also
the capacity market can leverage all means of managing the sup-
facilitate secondary trading, which helps to reduces costs .
ply-demand balance at their disposal up until the deliver year, par-
119
ticularly demand-side options. This choice is therefore in line with
Some centralised capacity mechanisms, such as those in use in
the related objectives: give demand response its rightful place in
North America, have introduced the possibility of subsequent reba-
the mechanism and keep costs low by avoiding reserving too much
lancing as a palliative measure. This does not change the fact that
capacity ahead of time, regardless of how much is needed.
most capacity is “contracted” three or four years ahead of time.
The choice is also consistent with the management of the
Allowing progressive rebalancing does not make sense if the time
supply-demand balance through the cone of uncertainty. The
constants associated with developing new capacities are incom-
farther the date considered from the delivery year, the greater
patible. For instance, if the system is “short” several gigawatts of
the uncertainty about how the supply-demand balance will
capacity two years before delivery, there would not be time to
evolve. Various risks appear over different timeframes, both on
build enough generation capacities to fill the anticipated gap. The
the demand side (economic growth, temperatures) and on the
Figure 13 – The finer timescales of decentralised market
architectures reduce the margins required
Centralised
mechanism
Risk to be covered
Cone of
uncertainty
Decentralised
mechanism
A-4
A-3
A-1
A
Best estimate of capacity need calculated in a given year
Capacity need estimated four years ahead with centralised mechanism
Capacities invested in each year with decentralised mechanism
58
CHOOSINGTHERIGHTCAPACITYMECHANISMFORFRANCE / 2
Illustration:Modeloftheeconomiceffi
ciencymadepossible
bythetimescaleofadecentralisedcapacitymechanism
A simplified model can be used to measure the impact of the timescales of centralised and decentralised markets.
Assumptions:
Scenarios were generated for four consecutive years factoring in contingencies on the demand and supply sides. Modelled
with independent standard normal distributions, these unknowns are defined each year based on a standard deviation in GW.
New investments can potentially be planned based on these variables, to bring the overall system back to equilibrium, within a
maximum volume corresponding to the new capacity that can be added. Parameters were selected in such a way as to represent credible orders of magnitude for the situation in France. The goal is to not to calculate a specific value but rather a simple
estimate of the benefits of the finer timescale.
Structural
trend in demand
Structural
trend in demand
Structural
trend in demand
1
1
1
1
1
1
GW
Standard deviation
capacity need
Y-3
Y-2
Changes in
generation mix
Changes in
generation mix
1
1
GW
New capacity
resources
Y-3
Y-3
Y-1
Y-2
Demand
variable
0,5
Y
Changes in
Availability
generation mix generation mix
1
Y-1
1
Y
Demand
response
Demand
response
Demand
response
Demand
response
2
2
2
2
Y-2
Y-1
Peak period
GW
Standard deviation
capacity need
Figure 14 – Simplified assumptions used to model variables
Y
Using these scenarios with a Monte Carlo method enables a comparison of the margins required to ensure that the security of
supply criterion will be met with two approaches:
> A centralised mechanism is in place and the capacity needed to meet the security criterion is defined four years ahead of time;
> A decentralised mechanism is in place and participants in the capacity market can make use of all available resources, notably
shorter-term options.
This simplified model is an imperfect representation of centralised and decentralised mechanisms, as the timescales of real
mechanisms – both centralised and decentralised – are often finer than what is represented here. Nonetheless, it does take into
account that timescales are more flexible with decentralised mechanisms. Outcomes are not considered in terms of absolute
value but rather in terms of the differential between the two classes of mechanism, making the results more significant.
Continuation l
59
Continuation j
Results
The study shows that the option to leverage short-term resources in the decentralised mechanism reduces the margins necessary four years in advance by about 2 GW compared with the centralised mechanism. This outcome should be viewed in the light
of initial volume assumptions based on orders of magnitude for the French power system.
With a decentralised mechanism, when actual results correspond to the low capacity needs forecast for a given year, there will
be little (or no) reason to activate short-term resources. Conversely, under the centralised mechanism, additional margins will
have been created four years ahead of time to guarantee coverage in an extreme scenario, resulting in overcapacity. The study
thus shows that the centralised mechanism will create 2 GW of excess capacity every third year on average.
When conditions in the extreme scenario materialise, the margins created under the centralised mechanism will cover the
volumes required in these specific circumstances. Under the decentralised mechanism, short-term measures will be necessary
to achieve the same level of security, resulting in additional transaction costs. But in the end, the same amounts will be invested,
in one case because coverage is ensured through margins four years ahead of time, and in the other because shorter-term
measures are introduced over time.
When investments are indeed required for security of supply purposes, the amount of capacity available to the system is the
same under centralised and decentralised mechanisms. On the other hand, when the level of actual demand corresponds to the
lowest forecasts, the centralised capacity mechanism leads to excess capacity that is costly for consumers.
While the study shows that unneeded capacity is avoided by the decentralised mechanism in all scenarios on average, this model
is especially beneficial in scenarios where margins created to guarantee coverage four years ahead of time prove unnecessary.
supply side (trends in the generation mix, power plant availabi-
In practice, some centralised capacity mechanisms that have
lity, water availability, etc.). Different resources also become avai-
finer timescales: in particular, when capacity needs are eva-
lable over different timeframes to manage these risks.
luated four years ahead of time, they can be divided into longterm investments (generation capacities) and shorter-term
The approaches listed above can be summarised as follows:
>
investments, for instance in demand response. However, this
One approach involves estimating, four years ahead of time,
results in more rigidity, with decisions about the respective
the capacity needed to cover the entire cone of uncertainty.
weighting of different timeframes made ahead of time at an
Creating sufficient margins four years in advance allows secu-
administrative level.
rity targets to be met. This is usually the approach taken with
so-called centralised capacity mechanisms.
> A second approach makes it possible for stakeholders to
Lastly, the option value offered by short-term measures reduces
excess capacity in the system and therefore the total cost to
estimate capacity needs over the entire four years preceding
participants, while also better dividing the cost of risks between
the delivery year and to adjust their investments accordingly.
them. A perfectly predictable consumer will benefit from signi-
They can make use of all resources at their disposal, particu-
ficantly lower costs through the reduction in margins, and will
larly shorter-term solutions like demand response. This type of
not pay the costs associated with short-term measures. This
dynamic approach, which offers a degree of flexibility in invest-
allows for a better individualisation of costs and creates the
ment choices, is possible with decentralised market models.
kind of accountability called for in the European Commission’s
recommendations120:
This analysis confirms that decentralised mechanisms can do
more than centralised ones to prevent overcapacity, and thus
The costs of capacity mechanisms should be allocated to
reduce the cost to consumers. Participants in the capacity market
consumers in proportion to their contribution to demand
will do what is necessary to cover capacity needs for a
120
[EC, 2013a]
60
given year by adjusting their investments at the pace
that best suits them.
during periods of scarcity or system stress.
CHOOSING THE RIGHT CAPACITY MECHANISM FOR FRANCE  / 2
2.4 Conclusions
The French capacity mechanism is a capacity obligation under-
mean taking a significant share of capacities out of the market,
pinned by three key principles: it is a market mechanism (mar-
creating distortions.
ket-based) that applies to all capacity (market-wide) and operates in a decentralised manner. These principles make the
The French capacity mechanism will function in a decentralised
mechanism adapted to the French system’s specific characte-
manner, applying market design principles similar to those of
ristics and challenges.
the energy market. Obligated parties in the capacity market
must anticipate the needs of their customers and cover these
A market mechanism was chosen because it creates economic
needs, and are financially liable in the event of imbalances. This
efficiency, allowing obligated parties to engage in trading to
decentralised model preserves the structure of accountability
minimise the cost of their capacity obligation. This choice was
of energy markets in terms of investments and prevents having
supported by the observation that price-based regulations are
public authorities make decisions in the place of market stake-
inefficient; the price-based mechanisms adopted in Europe are
holders. On the other hand, transaction costs are higher with
currently being reformed, notably capacity payments in Spain,
this model.
Italy and Ireland and guaranteed purchase prices intended to
encourage the development of certain technologies in France.
The benefits of a decentralised model in terms of making participants accountable is reflected in its economic efficiency
The decision to adopt a market-wide capacity mechanism is
and cost allocation. A supplier that can accurately anticipate
directly correlated to these objectives. For the mechanism to
the needs of its customers, and potentially influence their
truly guarantee security of supply, all capacities must partici-
consumption, will gain even more from the mechanism. In sum,
pate. This matching of obligations for all consumption against
this market design is particularly suited to the challenge of redu-
the participation of all capacities in the mechanism makes eco-
cing peak demand, and also allows obligated parties to choose
nomic sense and creates the right incentives for the demand
between a variety of levers.
side to participate.
The model enables a dynamic approach to consumption trends,
There are also economic justifications for this choice. The desire
leveraging the expertise of suppliers that interact most directly
to find structural solutions to the imperfections of the energy
with consumers. Not only does it avoid the introduction of a fixed
market ruled out targeted “safety net” capacity mechanisms
capacity target that could create incentives to consume more, it
like one-off tenders as an option. Strategic reserves are ano-
also provides more flexibility since needs can be reassessed over
ther type of targeted mechanism that can indeed address the
time. In a situation like 2008, a decentralised mechanism would
failures of the energy market if the parameters of the mecha-
typically prevent about 2 GW of overinvestment.
nism are perfectly defined, but analysis shows that, even in this
case, the mechanism does not cost less than a market-wide
Lastly, though a decentralised market model requires the crea-
capacity mechanism. Moreover, strategic reserves appear to be
tion of mechanisms to authorise transactions between stake-
less efficient than market-wide mechanisms in the presence of
holders, going forward, these mechanisms can also facilitate a
investment cycles. Lastly, the size of the strategic reserve that
regional or even European approach, just as the standardisation
would be required in France, factoring in the low-probability,
of negotiable products and trading conditions served as a basis
high-impact variable represented by winter cold spells, would
for the integration of European energy markets.
61
3.GUIDELINES FOR THE CAPACITY
MECHANISM RULES
The market mechanisms implemented in Europe are showing
These principles were laid down in the decree of December
evidence of failure in several areas, as discussed in chapter 1 of
2012, and must now be put into practice. This is the purpose
this report. These imperfections are raising questions about the
of the draft rules published by RTE on 9 April 2014. The step at
energy-only market’s ability to guarantee security of supply on
hand is all-important since it involves defining the specific pro-
its own. Public intervention is justified, especially as the funda-
cedures that will determine in large part how the mechanism
mentals of the power system are being turned on their head by
functions.
the ambitious energy transition policies introduced by Member
States in Europe and by peak demand growth in France.
This chapter begins with a review of the legislative and regulatory frameworks governing the capacity mechanism and from
Different types of capacity mechanism design are possible.
which the architectural principles applied were drawn (§ 3.1). It
Chapter 2 of this report presented the justifications for the
then describes the fundamental orientations RTE proposes in
model chosen for the French capacity mechanism: it is a mar-
the draft capacity mechanism rules to ensure that it will effecti-
ket mechanism (market-based) with quantity-based regulation,
vely reward capacities for their contribution to security of supply
applicable to all capacities (market-wide) and functioning in a
(§ 3.2).
decentralised manner.
3.1  Architectural principles set forth in laws and regulations
Article 6 of French Law 2010-1488 of 7 December 2010 on the
3.1.1  Drafting of the capacity mechanism decree
new organisation of the electricity market (NOME Act) calls for
the creation of a capacity mechanism in France:
While preparing the decree on the capacity mechanism, the
Energy Minister entrusted RTE with the preparation of a report
Each supplier contributes, in accordance with the demand
suggesting principles for the mechanism’s organisation and
characteristics of its customers, in terms of power and energy,
functioning, in accordance with the provisions of article 6 of the
to the security of electricity supply in continental France.
NOME Act. This report was prepared on the basis of a consul-
Every electricity supplier must provide direct or indirect gua-
tation with market stakeholders and submitted to the Energy
rantees of demand response or electricity generation capa-
Minister on 1 October 2011. It notably proposed that all genera-
city that can be called upon to balance supply and demand in
tion and demand response capacities participate in the mecha-
continental France, particularly during periods when demand
nism, that capacities be rewarded solely in exchange for effective
is highest among all consumers.
commitments, and that a decentralised market architecture be
implemented, based on principles similar to those of the energy
The law defines some key characteristics of the French capacity
market, meaning market stakeholders would be accountable for
mechanism. It is based on an obligation assigned to suppliers to hold
their contributions to security of supply. This is, in principle, the
sufficient capacity certificates to satisfy the demand of
121
The provisions of article
6 of the NOME Act are
codified in articles L.
335-1 to L.335-8 of the
Energy Code. Article L.
335-6 establishes that
the terms of application
shall be defined in a
62
model described in chapter 2 of the present document.
their customers, notably during peak periods, and on
the possibility for obligated parties to acquire certifi-
The report contained detailed proposals that were the subject of
cates from third parties: therefore, from the outset, this
a second consultation, conducted by the French administration
is a market in which certificates can be traded. The law
as part of the decree drafting process provided for in the law. This
calls for this mechanism’s exact mode of functioning to
consultation opened in November 2011 and closed in March
be defined in a Council of State decree121.
2012. Proposals contained in the initial report were debated,
GUIDELINES FOR THE CAPACITY MECHANISM RULES  / 3
clarified or amended. For instance, a “safety net” mechanism
On the other hand, the Government did not adopt
was introduced for situations of “exceptional risk” to security of
the Energy Regulatory Commission’s proposal to
supply122. All issues discussed in the rest of this document (form
eliminate the transitional safety net mechanism
of the obligation, certification methods, nature of settlement,
and the tendering mechanism for the delivery year
mechanism transparency, regulation of dominant operator’s
including the 2015-2016 winter. This has no impact
market power, recognition of cross-border interconnections, etc.)
on the draft rules published on 9 April 2014: these
were addressed, often in great detail, during these discussions.
proposals did not relate to the general organisation
or functioning of the capacity mechanism that RTE
decree of the Council of
State.
122
System wherein the
minister can organise a
tender to secure enough
capacity to face an
exceptional risk.
123
[CRE, 2012]
124
[CRE, 2012]
The Government sought the opinions of the Energy Regula-
was to describe in the rules, but to provisions for
tory Commission and Competition Authority while preparing
which RTE is not expected to make proposals.
125
[CRE, 2012]
Government to make changes to the draft decree, the defini-
The Energy Regulatory Commission also considers
tive version of which was published in December 2012 (not all
that some features of the proposed mechanism can
126
[Competition Authority,
2012a]
changes are mentioned in this report). These opinions were also
“mitigate or manage the risk125“ that the mecha-
taken into account while the mechanism rules were being draf-
nism will have an unfavourable impact on competition. It notes
ted in 2013.
that, as part of its market monitoring activities, it will ensure that
the decree. Their opinions, issued in the spring of 2012, led the
the capacity mechanism does not restrict competition. The pro3.1.1.1  Energy Regulatory Commission deliberation
In its deliberation of 29 March 2012
123
, the Energy Regulatory
visions designed to prevent manipulation in the capacity market
are discussed in chapter 7 of this report.
Commission supported public authorities in terms of the market
design selected for the capacity mechanism, issuing a favourable
Lastly, the Energy Regulatory Commission notes that the impli-
opinion on the draft decree, subject to certain modifications.
cit recognition of interconnections in the calculation of suppliers’
capacity obligation is an appropriate solution for the short term,
The Energy Regulatory Commission approved the choice of
but that coordination should be organised at the European level,
a decentralised market mechanism the parameters of which
or at least at the regional level, to allow for the explicit participation
would reflect suppliers’ contributions to the shortfall risk, the
of foreign capacity in reducing the shortfall risk. Chapter 9 of this
decision to reward the contributions of capacities to safeguar-
report discusses the participation of foreign capacity in detail.
ding security of supply, and the option to hold market participants accountable.
3.1.1.2  Opinion of the Competition Authority
In its opinion published on 12 April 2012126, France’s Competi-
Its observations were accompanied by proposed amendments
tion Authority expressed some concerns about the draft decree
to improve how the mechanism would function, notably by
based on its competitive assessment of the provisions submit-
strengthening the provisions designed to make market stake-
ted to it by the Government.
holders accountable, but did not question the overall equilibrium
of the choices the Government proposed. Several amendments
The Competition Authority initially questioned whether it was
made to the draft decree regarding the functioning of the capa-
necessary to introduce a capacity mechanism in France and said
city market reflected CRE’s recommendations:
it regretted that the Government had not conducted an impact
assessment. On this point, chapters 1 and 8 of this report include
CRE proposes to include in the draft decree a provision
a discussion of the justifications for public intervention and consi-
allowing capacity rebalancing by suppliers, prior to verification
derations for assessing the consequences and economic impact
that they have met their obligation.
of the mechanism described in the capacity mechanism rules.
Thus, in response to the Competition Authority’s concerns, the
Imbalance settlement for capacity portfolio managers will be
justification for public intervention has been clarified.
key to the mechanism’s efficiency.
The Competition Authority’s reservations do not call into
The concept of a reference capacity price should be intro-
question the fundamental choices in favour of a market-wide
duced in the draft decree: its method of calculation will be
capacity mechanism and decentralised architecture. Instead,
determined by CRE124.
they focus on the risks associated with the mechanism’s
63
transparency and complexity, and the concern that these could
measures relating to the functioning of the market, particularly
distort competition and create barriers for new entrants to the
transaction volumes and prices.
electricity market. These will be valuable considerations in terms
of defining specific rules for the mechanism’s functioning and
Details of RTE’s proposals regarding the explicit participation
ensuring that market monitoring is efficient once the mecha-
of foreign capacity in the capacity mechanism can be found in
nism is operational.
chapter 9.
Having expressed its reservations and in the aim of making
the capacity mechanism more competitive, the Competi-
3.1.2  Provisions laid down in the decree
tion Authority stressed to the Government the importance
After consulting with power system stakeholders and inde-
of taking into account competition-related risks and impacts
pendent administrative authorities, the Government published
at every stage of the mechanism design process and during
Decree 2012-1405 of 14 December 2012 relative to the contri-
implementation. It made several recommendations on the
bution of suppliers to security of electricity supply and to the crea-
proposals in the decree:
tion of a capacity obligation mechanism in the electricity sector in
>
> Require accounting separation between EDF’s generation
the Official Journal of the French Republic on 18 December 2012.
Require that EDF inform CRE of all capacity transfer prices;
and supply activities;
> Require that availability forecasts submitted for genera>
>
It establishes the general organisational structure of the French
capacity mechanism and is based on the principle, discussed in
chapter 2 of this report, of a decentralised, market-wide capacity
tors’ facilities be based on the historical availability of those
mechanism that makes all stakeholders accountable for their
facilities;
contributions to security of supply. Suppliers must cover their
Factor in the contribution of interconnections to mitigating
obligation based on effective consumption of their customers
the shortfall risk through a public auction of the correspon-
and can acquire capacity certificates from operators. A decen-
ding capacity certificates, allocating the proceeds to contri-
tralised market model was chosen to hold stakeholders accoun-
butions to public service charges;
table, and suppliers are thus induced to engage in trading to
Envisage a legislative amendment applying to entities that
cover their obligations as accurately as possible. Capacities are
buy directly on wholesale markets to ensure that all rele-
certified in exchange for operators committing to make them
vant participants are subject to the capacity obligation;
available. Lastly, all participants have financial incentives to meet
> Plan to avoid issuing certificates to facilities that benefit
their commitments.
from purchase obligations insofar as the feed-in tariffs at
which electricity is purchased from these facilities already
Chapters 1 and 2 of the decree stipulate that suppliers’ capacity
cover their costs in full;
obligations and capacity operators’ certifications are calculated,
> Do not have alternative suppliers assume the cost of the
transitional tendering mechanism.
respectively, based on assessments of their contributions to
the shortfall risk or reducing it. These provisions are consistent
with the goal of implementing a capacity mechanism that truly
The draft decree was amended to take some of the Compe-
enhances security of supply.
tition Authority’s recommendations into account. Moreover,
in preparing the draft rules for the mechanism, RTE took the
This has significant consequences for the architecture of the
competitive landscape described by the Authority into consi-
mechanism: suppliers’ obligations are calculated on the basis of
deration: the mechanism introduced in France is, in this regard,
the contribution of their customers to the shortfall risk; it is the
a closely regulated and monitored market mechanism. Special
structure of the shortfall risk that determines how certificates
care was taken to ensure that stakeholders have access to all
are allocated to capacities, taking into account their technical
relevant information and to facilitate monitoring and control
characteristics.
by the Energy Regulatory Commission. Along these lines, the
64
rules include provisions to ensure that the parameters of the
The decree notably defines how suppliers’ obligations are to be
mechanism are visible and stable, transparency measures
determined (§ 3.1.2.1), the principles applied in certifying capa-
relating to the physical underlyings of the mechanism and
city (§ 3.1.2.2) and how the trading of capacity certificates will be
the forecast security of supply situation, and transparency
organised (§ 3.1.2.3).
GUIDELINESFORTHECAPACITYMECHANISMRULES / 3
3.1.2.1 Capacity obligation assigned to suppliers
At the end of the delivery year, RTE calculates, for each capacity
For each delivery year, suppliers are required to hold capacity
portfolio manager, the difference between the sum of certified
certificates corresponding to the effective consumption of their
capacity levels within its portfolio, reflecting the self-assessment-
customers (including transmission and distribution system ope-
based commitments of capacity operators, and effective capa-
rators, for their losses) in order to meet the security of supply
city levels. The capacity portfolio manager is financially liable for
objective mentioned in Article L.335-2 of the Energy Code.
the amount of the settlement imbalance thus calculated.
The decree lays down the principles governing capacity certifi-
During a capacity mechanism term, and prior to the delivery
cate trading between obligated parties. It calls for the setting of
year, capacity operators can make upward or downward reba-
a deadline for trading capacity certificates (transfer deadline),
lancings to reflect changes in the projected availability of their
after which capacity certificates can no longer be traded, along
capacities.
with a settlement deadline, by which time each supplier must
settle the amount corresponding to the imbalance between
3.1.2.3 Functioning of the capacity mechanism
its capacity obligation and the amount of capacity certificates
The Energy Regulatory Commission monitors the functioning of
it holds.
the capacity certificate market to ensure that the signals sent to
market stakeholders are meaningful and support the objective
3.1.2.2 Certification of generation and demand
of safeguarding security of supply.
response capacities
Capacity operators commit to a certain level of capacity (certi-
To facilitate trading and the monitoring of the market, the
fied capacity level) and are issued the corresponding amount of
decree includes several provisions relating to the mechanism’s
capacity certificates. Capacity operators are affiliated with capa-
transparency, and notably specifies that RTE is to create and
city portfolio managers.
maintain three registers for each delivery year:
Figure 15 – General organisation of the mechanism (timeline)
…
Peak
periods
…
4 years
SDB
(supply-demand
balance) study
Capacity certification
and rebalancing
Certification deadlines
Publications by RTE
Transparency
and publication
of parameters for
mechanism
term
Start of term
(opening of
registers for
the year
in question)
Phase 1
Setting of parameters
(estimated capacity certificate requirements)
Certificate trading
(self-supply, bilateral contracts)
Transfer
deadline
Rebalancing
Data collection
and capacity verification
by system operators
Calculation
by system
operators
of suppliers’
reference
power
Settlement,
CPMs
Effective
capacity
notification
Settlement,
suppliers
Supplier
obligation
notification
Certificate trading
(Organised market sessions)
Phase 2
Phase 3
Phase 4
Y-4 à Y-1
Delivery year
Post-notification
65
> The certified capacities register, a public
>
document, lis-
The capacity mechanism term begins when the obligation and
ting all certified capacities connected to the transmission or
certification parameters are published, which is also when the
distribution systems. RTE describes all characteristics of the
certified capacities and capacity certificates registers are crea-
capacities, the amount of power certified, and the capacities’
ted for the delivery year. RTE simultaneously publishes its initial
projected availability (updated);
estimate of the capacity certificates required for all suppliers’
T
he capacity certificates register, not made public, which
obligations to be met. This estimate factors in an evaluation of
records in a secure manner all transactions involving the
the contribution of interconnections to reducing the shortfall
issuance, transfer or destruction of capacity certificates;
risk (see chapter 9).
> T he peak demand-side management register.
Capacity operators can at this point request to have their capaciA capacity mechanism term is a multi-year scheme that starts
ties certified, in exchange for which they will receive capacity cer-
four years before the delivery year and ends two years after the
tificates. Capacities that can be developed very quickly, such as
delivery year. The general timeline of the mechanism is pres-
demand response capacities, can be certified up until the start of
ented in Figure 15.
the delivery period. Operators can make adjustments to the data
submitted with capacity certification requests until the end of the
delivery period thanks to a flexible rebalancing process.
Figure 16 – Regulatory framework provided for in the decree
RULES
Approval Scheme
 Approved by Minister
on a proposal from RTE
after consulting CRE
  Approved by CRE
 Approved by CRE
on a proposal from RTE
 Defined by CRE
after consulting RTE
 Decision made
by Minister on a
proposal from CRE
(considered accepted
if not contested within
three months)
 
Approved by
Minister on a
proposal from CRE
 Defined by CRE
Provisions defining
delivery years and peak
periods
Provisions relating
to the obligation:
> Calculation of reference
power;
> Calculation of
obligation;
> Unit power for capacity
certificate and capacity
certificate recovery
Provisions relating
to certification:
> Certification method
and verifications;
> Adaptation procedures
for capacity with
reduced contributions
to supply;
> Rebalancing of
capacity operators
and settlement for
rebalancing.
CONTRACTS
OTHER TEXTS
Certification contract Calculation method for actual demand
within small and large consumer subcategory
DSO-Operator contract CPM/RTE contract DSO/TSO exchange
agreements for
calculating reference
power
DSO/TSO exchange
agreements for
certification
DSO/TSO/operators
on procedures
and deadlines for
sending information
and organising
information flows
Calculation method for actual demand
within subcategory buying for losses
Procedures and amount of incurred expenses
recovered by grid system operators for calculating
and sending obligation-related data
Calculation method for unit price
of “supplier” settlement
Procedures for redistributing account balances
Amounts and recovery procedures
for obligation-related expenses
Procedures for keeping registers
Calculation method and allocation schedule
for ARENH certificates
Calculation method for certificates linked
to transfer tariffs
Calculation method for reference price
Format and schedule for provisions relating
to overall certificate levels
Procedures for gathering data on transactions
66
GUIDELINES FOR THE CAPACITY MECHANISM RULES  / 3
Once the first capacity certificates have been issued, suppliers
To give an overall view of the mechanism and make it easier to
can begin to cover their obligations, based on their own fore-
understand, in July 2013 RTE proposed a major simplification,
casts and risk hedging strategies, by acquiring capacity certifi-
offering to analyse the mechanism as a whole, without taking
cates from operators or securing capacity certificates for their
into account the numerous channels of approval mentioned
own capacities. Capacity certificates can be traded until the
in the decree (see figure 16). This approach also means that
transfer deadline, which is after the delivery year.
the proposals subject to approval by the Energy Minister and
those subject to approval by the Energy Regulatory Commis-
During the delivery year, data relating to the operation of capa-
sion are being submitted together. By default, each article
cities is gathered and verified, particularly information about
of the RTE proposal is a proposal for a provision of the rules,
actual availability during the peak period associated with
i.e. the text that must be approved by the Minister. [CRE] is
certification (PP2 period). Consumers’ actual demand is also
mentioned in the body of the title when articles are proposed
measured.
for inclusion in the provisions to be approved by CRE. No distinction is made between these provisions in the rest of this
At the end of the delivery period, effective capacity levels are
report.
calculated for all capacities, based on data collected during
the delivery year. Effective capacity levels are then aggrega-
RTE drafted its proposal after a stakeholder consultation. It is not
ted for capacity portfolios. This aggregate is compared with
proposed as a regulatory act: the provisions it contains can be
the sum of the certified capacity levels of capacity portfolio
modified at the initiative of the Minister or CRE in the course of
managers. If an imbalance is found, the capacity portfolio
the regulatory decision-making process, which will include ano-
manager must pay an imbalance settlement corresponding
ther stakeholder consultation. In this area, the process under
to that difference.
way in France is similar to what is being done at the European
scale between ENTSO-E, ACER and the European Commission
A supplier’s obligation is calculated based on observed
regarding the preparation of network codes.
consumption and the obligation parameters defined before the
term begins. Each supplier is informed of its obligation before
3.1.3.1  Consultation of market stakeholders organised
the transfer deadline. Once this deadline has passed, the diffe-
by RTE
rence between a supplier’s obligation and the amount of certi-
RTE organised a consultation through the Transmission System
ficates held in its account in the capacity certificates register is
Users’ Committee (Comité des clients Utilisateurs du Réseau de
calculated, and the supplier is notified of any imbalance. It must
Transport d’Électricité – CURTE), which brings together all stake-
pay any resulting imbalance settlement.
holders in the French electricity market (generators, suppliers,
traders, demand-side operators and power exchanges), consu-
3.1.3  Regulatory framework provided for in the
decree
mer groups, and distribution system operators. The CURTE’s
work is open to representatives of the Energy Regulatory Commission and the French administration, and to interested third
The next step in implementing the decree involves defining the
parties (academics for instance). A workgroup focusing speci-
rules, contracts and conventions that will allow the capacity
fically on the capacity mechanism, hosted by the CURTE’s Mar-
mechanism to function properly. As with any market mecha-
ket Access Commission, consolidated all of the work carried out
nism, it should be possible for these aspects to be adapted more
during the consultation period.
quickly, since they do not call into question the general principles of the mechanism.
Thanks to the diversity and commitment of the participants
involved, all aspects of the mechanism were analysed. Electri-
The decree stipulates that the capacity mechanism rules are
city market stakeholders took advantage of the consultation to
to be approved by the Energy Minister, based on proposals
present their positions on the different building blocks of the
submitted by RTE, after the Energy Regulatory Commission
draft capacity mechanism rules. Participants worked together at
has issued an opinion. It also calls for the drafting of various
an intense pace (22 working meetings, 76 written contributions,
conventions and contracts that will complement the capacity
52 in-session presentations, one simulation tool made available
mechanism rules, subject to approval by the Energy Regula-
to participants).
tory Commission.
67
The consultation was organised in two phases (see figure 17).
to stakeholders in terms of forecasting if the relative stability of
The first (January to July 2013) was devoted to preparing a draft
the mechanism’s functioning was guaranteed, notably through
of the capacity mechanism rules. These draft rules were the
the introduction of normative provisions.
subject of a public consultation that opened on 11 September
2013 and continued for six weeks. More than 500 comments
RTE considers that the amendments to the draft rules pro-
were received, detailed responses to which are included in an
posed based on the consultation of September 2013 make the
appendix to the draft rules.
mechanism more transparent and predictable, and strike a good
balance between constraints of different types.
The second phase (September to December) provided an
opportunity for stakeholders to propose changes and for RTE
RTE would like to thank all participants for their quality contri-
to propose amendments to the draft rules. The goal during this
butions, which made the consultation a forum for rich and
phase was to strike the right balance between the desire to hold
constructive debate and generated concrete proposals for the
market stakeholders accountable and create real and proportio-
implementation of the capacity mechanism, in keeping with the
nate incentives – which requires a clarification and individualisa-
provisions of the decree.
tion of the provisions suggested in the rules – and the benefits
Figure 17: Consultation timeline
Q1 - 2013
Jan
Feb
Q2 - 2013
Mar
Apr
May
Q3 - 2013
June
Preparation of draft rules
(parameters, general outline, specification)
July
Aug
Q4 - 2013
Sep
Oct
Dec
Draft
rules
…
Submission
to CRE and
Minister
Consultation
on draft
rules
MAC mtg 10/04
General progress
report and
coordination
of efforts
Nov
2014
Finalisation
of rules
MAC mtg 11/07
Overview of
consultation
work
Rules
Review
by CRE
MAC mtg 18/12
Progress report
post feedback
CRE
opinion
Approval
process
Ministerial
approval
68
GUIDELINES FOR THE CAPACITY MECHANISM RULES  / 3
3.2  Purpose of the capacity mechanism rules: Guarantee real
contributions to security of supply
Chapters 1 and 2 of this report discussed the central role the
These approaches have very different consequences both for
mechanism must play in correcting how the energy market
the nature of the mechanism and the level of security of supply,
functions and safeguarding security of supply.
and the impact on market stakeholders will not be the same.
The decree clarified the provisions of the NOME Act and suppor-
Capacity operators can be asked to make commitments for ins-
ted the principle of a decentralised, market-wide mechanism,
talled capacities to ensure the physical existence of the capa-
and the mechanism rules outline the key ideas and parameters
cities, in exchange for capacity remuneration. But there is no
that will determine in large part how the mechanism functions.
guarantee that the capacities remunerated will be effectively
For RTE, it was essential that these choices take into account the
available when needed to safeguard security of supply, particu-
importance of safeguarding security of supply and keeping the
larly during peak demand periods. In theory, it can be assumed
mechanism proportionate to its purpose. Oftentimes the debate
that the energy market will naturally create incentives for ope-
centred on finding a balance between the need to individualise
rators to make their capacities available during peak periods.
the provisions of the rules on the one hand and the benefits of
However, insofar as the capacity obligation mechanism involves,
stabilising some parameters, to reduce uncertainty for market
from the consumer’s perspective, taking out insurance that
stakeholders, on the other.
power will be supplied even when supply is tight, it seems logical
that the cost incurred by the final consumer should bring with
Five key definitions are a particularly good reflection of these
it an extra guarantee that power will be supplied: the mecha-
objectives, and they are presented in the sections below: (1)
nism must therefore make capacity remuneration conditional
the nature of capacity commitments, (2) the periods during
upon operators effectively making capacities available, instead
which capacities are committed, (3) the parameters for cal-
of rewarding them merely because the capacities exist.
culating capacity obligations and certifying capacities, (4) the
reference data used to calculate obligations and certify capa-
Mechanisms based on installed capacities can also make secu-
cities, and (5) the methods for assigning a value to demand
ring capacity remuneration a priority over contributing to secu-
response.
rity of supply, since they are explicitly geared to creating a favourable environment for investment and avoiding revenue deficit
3.2.1  Nature of commitments by capacity
operators (installed or available capacity)
situations.
Lastly, mechanisms based on installed capacities can create
During the consultations of 2011 and 2013, the nature of the
entry barriers for demand response. Stakeholders will seek to
commitments made by capacity operators was a key point of
cover their needs by focusing on creating new capacities for the
discussions with market stakeholders. The two approaches that
long term, on the basis of forecasts in which demand may be
emerged involved commitments based on installed capacities
fixed at a set value. This approach to covering long-term needs
and commitments based on the availability of generation or
prevents the participation of capacities that can be developed
demand response capacities.
with shorter time constants, such as demand response.
Mechanisms based on installed capacities aim to ensure that
In sum, a mechanism that rewards installed capacities is not
sufficient generation or demand response capacities exist to
consistent with the end-goals of the capacity mechanism. In
cover the shortfall risk, without considering whether these capa-
particular, the commitments that result in capacity certifica-
cities will effectively be available when security of supply is at
tion do not reflect the real physical needs of the power system,
risk. Conversely, mechanisms based on commitments to make
and in this sense such mechanisms do not serve the primary
capacity available aim to guarantee that enough capacities will
purpose of contributing to security of supply.
effectively be available to cover the shortfall risk during peak
demand periods.
On the other hand, a mechanism that rewards commitments to
make capacity available has several advantages.
69
127
All shortfall situations
considered, see figure 19.
First, it is designed to guarantee that the capacities
The shortfall risk clearly corresponds to a risk of exceptionally
needed to avert shortfalls are effectively available
high demand, i.e. the risk of an intense cold spell.
when security of supply is at risk; it therefore applies
to all capacities that are available when needed by the system.
During the consultation, two approaches were presented for
The mechanism provides a form of insurance when it comes to
determining the period over which operators must commit their
security of supply: capacities are rewarded through the mecha-
capacities to cover the shortfall risk:
nism for being available when security of supply is at risk, or in
> The first called for capacities to be committed for the entire
other words as a direct result of their effective contribution to
period during which shortfalls could occur (“winter period”,
security of supply. Commitments to make capacities available
from 1 November to 31 March). In this case, the commitment
are the trade-off for the remuneration of all capacities.
period is defined based on a calendar variable. Each month is
weighted based on the shortfall probability associated with it.
Second, this type of mechanism allows demand response to
> The second called for capacity commitments to target the
participate in the exact same way as generation capacities: the
periods during which demand is highest. The commitment
functioning of the mechanism thus allows competition between
period is in this case based on a demand variable.
the two types of capacities.
The illustration below (figure 19) provides a graphical representation of the two approaches. The chart of the left represents the
month-by-month breakdown of the shortfall risk with a maxi-
RTE’s draft rules support a mechanism that
rewards capacities based on effective availability,
in line with the security of supply objective and
the founding principles of the mechanism (participation of demand response, recognition of all
capacities).
mum in January (commitment period defined based on calendar variable). The chart on the right represents the breakdown
of shortfall risks based on consumption levels. It illustrates the
approach wherein capacity commitment periods are based on
a demand variable.
To ensure that the capacity mechanism focuses on contribu-
3.2.2 Duration of capacity commitments
tions to reducing the shortfall risk, RTE proposes the adoption
Chapter 1 of this report described how temperature sensitivity
of the approach that bases capacity commitment periods on a
is the key characteristic of the French power system and how
demand variable, given the direct and decisive impact demand
peak demand has been growing steadily (§ 1.2). Bearing this in
levels have on the shortfall risk.
mind, the adequacy assessments conducted by RTE show that
the impact of temperatures on demand is the main risk for the
Indeed, probabilistic adequacy studies show that the shortfall risk
French power system and that situations of exceptional demand
increases with demand. In each shortfall scenario, shortfall hours
determine the contours of the shortfall landscape
127
.
correspond systematically to hours when demand is highest.
Figure 18 – Illustration of the shortfall landscape comparing supply and demand simulations
Demand
Supply
Shortfall
90
GW
70
50
30
70
Shortfall
landscape
GUIDELINESFORTHECAPACITYMECHANISMRULES / 3
Figure 19 – illustration des deux approches permettant d’apprécier le risque de défaillance
(Source : RTE, GT du 02/04)
Shortfall landscape
Time-based approach to describing
shortfall landscape
Demand-based approach to
describing shortfall landscape
25%
60%
20%
40%
Proba(C) = t
10%
20%
Proba(t) = C
5%
 Non-shortfall situations
 Shortfall situations
Shortfall landscape Probshortage(t)
The following observations are worthy of note:
The 50 hours during which demand is highest include 100%
3G
W
73
-7
75 5
-7
77 7
-7
79 9
-8
81 1
-8
83 3
-8
85 5
-8
87 7
-8
89 9
-9
91 1
-9
93 3
-9
95 5
-9
97 7
99 99
10 101
1
> 1 -10
03 3
GW
<7
e
Ma
y
Jun
Ap
ril
r
er
No
ve
m
be
De
r
ce
m
be
r
Jan
ua
ry
Fe
br
ua
ry
Ma
rc
h
be
to
b
Oc
pt
em
Jul
Se
Au
gu
y
0%
st
0%
>
15%
Shortfall landscape : Probshortage(C)
3.2.3 Methods for calculating the obligation and
certifying capacity
of the shortfall hours in two thirds of the situations in which
>
shortfalls occur, and, in the most unfavourable scenario, just
Articles 3 and 10 of the decree stipulate, respectively, that
under 40% of shortfall hours;
methods must be determined for calculating the obligation of
Beyond the 150/200 hours when demand is highest, 100%
capacity suppliers and certifying and verifying capacities. The
of the shortfall hours are included in 90% of the situations
decree states that these methods must focus on meeting the
with shortfalls, and these 150/200 hours of highest demand
security of supply objective in a proportionate manner.
include at least 80% of shortfalls in all cases.
3.2.3.1 Parameters for determining the method of
In reality, the calendar variable is merely a realisation of the
calculating the capacity obligation
demand variable: the shortfall probability is at its highest in
With the architecture selected for the capacity mechanism, sup-
January simply because this is the month during which the pro-
pliers’ contributions to the shortfall risk are translated into a spe-
bability of an intense cold spell is greatest.
cific capacity obligation for each supplier.
Moreover, basing commitment periods on times when the
A suppliers’ capacity obligation is calculated based on its refe-
shortfall risk is greatest makes the periods more targeted, mea-
rence power – reflecting its consumption during peak periods –
ning the capacity mechanism will not have any effects outside
and on various parameters that are the same for all suppliers,
the periods during which it is truly needed.
including a security factor that notably reflects the margins
required to cover residual risks (excluding temperature risks).
RTE’s draft capacity mechanism rules therefore
recommend that capacity commitments be defined based on a demand approach – targeting socalled PP2 periods – since this approach is relevant in evaluating the shortfall risk and prevents
the capacity mechanism from producing effects
when it is not needed.
These parameters are unrelated to the physical determinants of
suppliers’ contributions to the shortfall risk (temperature sensitivity, flexibility, etc.). To ensure that suppliers’ capacity obligations
are proportionate and allow the security of supply target to be
met, these parameters must be defined in the capacity mechanism rules in such a way as to reflect the physical contribution
of each supplier to the shortfall risk as accurately as possible.
71
The parameters defined in the rules for calculating capacity obligations must allow the real
contribution of each supplier to the shortfall risk
to be reflected. It was with this principle in mind
that the capacity obligation parameters were
set, to ensure that two consumers with the same
contribution to the shortfall risk are assigned the
same capacity obligation. The parameters for
calculating capacity obligations are discussed in
more detail in chapter 4 of this report.
3.2.4  Reference data used to calculate obligations
and certifications
The preceding sections stressed the amount of care taken in
defining the principles and methodologies to be applied in estimating the effective contributions of all market stakeholders to
the shortfall risk for each mechanism parameter proposed in the
rules. One important principle relates to the type of data used to
determine the reference power of suppliers in order to calculate
their capacity obligation and to determine the available power
of capacities to calculate their amount of certificates.
3.2.3.2  Parameters for certifying capacity
Generation and demand response capacities effectively contri-
Regarding suppliers’ obligations, the reference power used to
bute to reducing the shortfall risk by being available when secu-
calculate the capacity obligation reflects their contribution to
rity of supply is at risk, and therefore during cold spells. Their
the shortfall risk (§ 3.2.3.1). The decree stipulates that reference
actual contribution to reducing the shortfall risk also depends
power is calculated based on observed demand. The consump-
on the number of hours during which they can be dispatched
tion recorded for the delivery year should therefore be conside-
within these periods.
red the reference for calculating reference power.
With the architecture selected for the capacity mechanism, a
Regarding capacity certification, it is easy to define the available
capacity’s contribution to reducing the shortfall risk is translated
power of a capacity during shortfall hours for years when short-
into an amount of capacity certificates specific to each capacity
falls occur: it suffices to measure the capacity’s active use during
and issued to the operator of that capacity.
those hours. However, shortfalls do not occur in most years. The
question thus relates to the most meaningful way to measure
The amount of capacity certificates issued is calculated based on
a capacity’s effective contribution to security of supply during
the available power declared for the capacity – or in other words
years without shortfall situations.
the capacity that can be dispatched during peak periods – and on
certification parameters that are the same for all capacity operators.
Several means of measuring available power are possible, and
These parameters take the form of coefficients so as to reflect the
they are summarised within the two approaches below:
impact of a capacity’s technical constraints on its effective contribution to reducing the shortfall risk, such as energy constraints
(daily and weekly) and controllability constraints. The certification
parameters defined in the rules must reflect the real impact of
technical constraints on a capacity’s contribution to reducing the
shortfall risk to ensure that the amount of certificates issued to the
capacity accurately reflects its impact on security of supply.
> T he
first considers that the level of availability obser-
ved during the delivery year must be used as the basis for
verifying an operator’s effective contribution to security of
supply. This approach involves individualising capacity levels;
it is consistent with the goal of holding market stakeholders
accountable and recognising capacities’ effective contributions to reducing the shortfall risk. For instance, two operators with the same type of capacity can have different rates
of effective availability, and this has a direct influence on their
Certification parameters must be defined in the
rules in such a way as to reflect the real impact
of a capacity’s constraints on its contribution
to reducing the shortfall risk, and therefore its
contribution to security of supply. It was with
this principle in mind that the certification parameters were set, to ensure that two capacities
making the same contribution to reducing the
shortfall risk are issued the same amount of certificates. Certification parameters are discussed
in more detail in chapter 5 of this report.
contribution to reducing the shortfall risk. This approach is
also consistent with the choice made about the calculation of
reference power to determine the amount of suppliers’ capacity obligations;
> T he second approach involves using normative values in the
certification process. By definition, these normative values
do not fit with actual results. With a normative approach,
the contribution of some capacities is set to values that do
not match observed reality. In this regard, it strays from the
objective of making market stakeholders accountable and
72
GUIDELINES FOR THE CAPACITY MECHANISM RULES  / 3
ensuring that capacity levels defined do indeed correspond to
The architecture of the mechanism encourages the partici-
contributions to reducing the shortfall risk. However, certain
pation of demand response by providing two ways for it to be
stakeholders consider that this approach must be used due to
rewarded: it can be recognised “implicitly”, via a reduction in a
the intermittent nature of some capacities, given the exoge-
supplier’s capacity obligation, or “explicitly”, if demand response
nous nature of the risks to which those capacities are exposed
capacity is certified and issued capacity certificates.
(availability of the primary resource).
Demand response is rewarded implicitly when peak demand
RTE proposes that priority be given to methods
and parameters that incorporate the values
observed during the delivery year. This approach
allows as much information as possible about the
state of the system to be taken into account and
to identify the real contribution of each market
stakeholder to security of supply.
In the interest of finding a balance between the
needs for individualisation and stability, RTE
introduced an additional provision for the certification of intermittent capacity: the overall
scheme is similar to the one for controllable
capacity, with the risk relating to the primary
source accounted for on the basis of self-assessments with observed availability measured.
The rules include an optionality principle, leaving
it up to capacity operators to choose between
this scheme and one that includes normative
values and neutralises the risks associated with
the primary energy source. A coefficient is in this
case applied to ensure that the certified capacity
level reflects the technologies’ average contribution to reducing the shortfall risk.
This approach addresses the expectations
expressed during the consultation while allowing
operators that are capable of hedging the variability of their capacity (notably by backing it up
with flexible capacity such as demand response)
to fully benefit from this coverage.
management actions are taken directly by suppliers to reduce
their customers’ consumption during peak periods. Insofar
as the capacity obligation is calculated based on customers’
consumption during peak periods, these demand-side management efforts immediately reduce the capacity obligation of the
supplier in question.
Demand response is explicitly rewarded when it participates
in the certification process. In this case the demand response
capacity is awarded an amount of certificates that reflects its
contribution to reducing the shortfall risk, based on methodologies and parameters similar to those used for generation capacities. Demand response capacities that are activated either
directly by a consumer or through an aggregator can thus participate directly in the capacity market in the same was as generation capacities.
The capacity mechanism rules call for adjustments to be
made for load reductions when certified demand response
capacity is activated, to prevent it from being counted twice,
both implicitly and explicitly, as this would result in the
amount of capacity physically available being insufficient to
cover the shortfall risk. The decree also lays down the principle that there should be no discrimination between reductions in capacity obligations and the certification of demand
response capacity.
3.2.5  Methods of valuing demand response
To comply with this non-discrimination principle and ensure
The French capacity mechanism was designed to address the
that demand response effectively contributes to security of sup-
issue of peak demand growth, or in other words as a means
ply, the methods used to estimate the contribution of demand
of modifying consumption behaviours during peak periods
response and the related periods both for reductions in the obli-
(demand-based approach) and encouraging sufficient invest-
gation and capacity certification must be consistent. RTE pro-
ment by complementing the price signals generated by energy
poses that the following principles be applied:
markets (supply-based approach). The capacity mechanism
> C ertification: Demand response capacities must commit to
must be able to stimulate investments that promote the eco-
be available during the period considered to calculate the
nomic management of peak demand, meaning it must allow
amount of capacity certificates (PP2) to be certified;
demand response to play its rightful role in ensuring capacity
> O bligation: For demand response to result in a reduction of
adequacy in the system. As such, the participation of demand
a supplier’s capacity obligation, it must be activated during
should not be seen as a mere feature of the capacity mecha-
the period considered to calculate the capacity obligation
nism’s design but rather as one of the main reasons for its
(PP1).
implementation.
73
Figure 20 – Valuing demand response through the capacity mechanism
Certified demand response
Non-certified demand response
Must be available during the period for which generation capacity is committed to be available – PP2
Must be activated during the reference period
for calculating the obligation – PP1
Ten-year results for extreme peak demand response activated one in ten years.
Demand response available during every PP2
period but activated only during one PP2 period
Demand response activated during every PP1 period,
i.e. during ten PP1 periods.
The provisions proposed by RTE relative to the definition of methods of calculating capacity obligations and capacity certifications ensure that there is no discrimination between the two ways of rewarding demand response
capacities and therefore that these capacities effectively contribute to security of supply.
These proposals are discussed in detail in chapters 4 and 5 of this report.
3.3 Conclusions
Article 6 of the NOME Act calls for the creation of a capacity
amount of capacity certificates corresponding to the observed
obligation mechanism and for the principles underpinning the
consumption of each consumer, while transmission and distri-
functioning of this capacity obligation mechanism to be laid
bution system operators must hold an amount equivalent to
down in a Council of State decree128.
their estimated losses, to meet the security of supply objective;
operators of generation and demand response capacities are
The publication in the Official Journal of the decree relative to
required to enter into certification contracts with RTE for their
the contribution of suppliers to security of electricity supply and
capacities, through which they commit to a specific capacity
the creation of a capacity obligation mechanism in the electri-
level. The decree also specifies how the obligations assigned to
city sector followed a consultation with power system stake-
suppliers are to be determined, lists the principles to be applied
holders organised by public authorities, taking into account
in certifying operators’ capacities, and describes how capacity
RTE’s proposals for the implementation of a capacity obligation
certificate trading is to be organised.
mechanism. France’s Energy Regulatory Commission and Competition Authority were also consulted by the Government and
The decree stipulates that the capacity mechanism rules are to be
asked to issue opinions on the draft decree.
approved by the Energy Minister, based on proposals by RTE and
after the Energy Regulatory Commission has issued its opinion. In
128
The provisions of article
6 of the NOME Act are
codified in articles L.
335-1 to L.335-8 of the
Energy Code. Article L.
335-6 establishes that
the terms of application
shall be defined in a
decree of the Council of
State.
74
The decree is based on three pillars: the concept of
preparing the draft rules, RTE organised a consultation with mar-
shortfall risk, the obligation for suppliers to hold capa-
ket stakeholders in 2013, the goal of which was to draft capacity
city certificates, and the obligation for capacity opera-
mechanism rules that would (i) comply with the provisions of the
tors to certify their capacities through contracts.
decree, (ii) translate into practice the priority of recognising real
contributions to security of supply, and (iii) balance the need to
According to the provisions of the decree, suppliers
individualise the provisions of the rules with the need to ensure a
are obligated to hold, for each delivery year, an
degree of stability in the mechanism’s functioning.
GUIDELINES FOR THE CAPACITY MECHANISM RULES  / 3
Five key choices are particularly illustrative of how the three
> T aking
principles were taken into account:
> A mechanism based on available capacity is consistent with
bution of each market stakeholder to security of supply to
the proposal to adopt a market-wide capacity mechanism and
be recognised. Small imbalances between the data submit-
ensure that capacities are rewarded based on their real contri-
ted and actual results lead to a mere adjustment. To ensure
bution to security of supply;
a balance between this need for individualisation and market
> U sing a demand-based approach to define the capacity com-
stakeholders’ request for stability and predictability, a norma-
mitment period – i.e. securing commitments for the periods
when demand is highest – is a way to ensure that the capacity
mechanism’s effects target the needs of the power system
>
into account realised values for consumption and
capacity availability during the delivery year allows the contri-
tive approach can also be taken in calculating capacity levels
>
for intermittent capacity;
T he methods used to calculate capacity obligations and certify
when security of supply is threatened;
capacity must be defined in such a way as to guarantee non-dis-
T he parameters used for calculating suppliers’ capacity obliga-
crimination between the implicit and explicit valuation of demand
tion – such as the security factor – and the amount of certifi-
response. To ensure that demand response capacities effectively
cates issued for capacity – for instance technical constraints
contribute to security of supply, capacities that are certified must
impacting the capacity’s contribution to reducing the shortfall
be subjected to the same availability commitments as generation
risk – must be set in such a way as to reflect as accurately as
capacities during the period considered (PP2), and demand-side
possible the real contribution of suppliers to the shortfall risk
management measures factored into the reduction of suppliers’
and the real contribution of capacities to reducing the short-
obligations must be effectively activated during the period consi-
fall risk;
dered for the calculation of the obligation (PP1).
75
4.  CAPACITY OBLIGATION
This chapter discusses the provisions concerning the calcula-
RTE’s proposal regarding the definition of the PP1 period during
tion of the obligation for obligated parties. It begins with a review
which the capacity obligation is calculated (§ 4.2), the definition
of the general provisions governing the capacity obligation, i.e.
of the delivery year (§ 4.3) and the parameters for calculating
the identification of parties subject to the obligation, the defi-
the capacity obligation (§ 4.4). The last sections of the chapter
nition of reference power and observed consumption, and the
present the exact formula used to determine the capacity obli-
time periods and methods applied in calculating the obligation
gation (§ 4.5) and the obligation timetable for suppliers during a
(§ 4.1). Details are then provided about the options selected in
capacity mechanism term (§ 4.6).
4.1  General provisions regarding the obligation
In accordance with article L. 335-1 of the Energy Code, capa-
capacity obligation, not just suppliers. The following are defined
city obligation refers to the obligation for any obligated party to
as obligated parties under the rules:
contribute to security of electricity supply by having valid capacity certificates for each delivery year.
> S uppliers, as parties that purchase electricity for sale to end
consumers or system operators (for their losses) and have an
administrative permit;
The decree stipulates that the amount of a supplier’s obligation
“is calculated based on the reference power of its customers
and a security factor taking account of the shortfall risk.”
> E nd consumers not supplied, for all or part of their consumption, by a supplier;
> S ystem operators, for their losses, when they are not supplied
by a supplier.
4.1.1  Obligated parties
The obligation capacity created by the NOME Act of 7 Decem-
4.1.2  Reference power
ber 2010 applied to electricity suppliers. Taking into account the
The decree stipulates that the reference power of an electricity
recommendations made while the decree was being drafted, the
consumer “reflects its contribution to the shortfall risk during
range of market stakeholders subject to the capacity obligation
the delivery year in question.” System operators calculate and
was expanded by the Brottes Act of 15 April 2013 (article 15):
communicate to RTE the reference power of the end consumers connected to their systems, per supplier.
“End consumers and system operators, for their losses, that,
for all or part of their consumption, are not supplied by a
To reflect differences in the treatment of consumers depending
supplier, contribute, in accordance with the characteristics
on whether they are remote-read, profiled or buying for losses,
of this consumption, in power and in energy, in mainland
reference power is broken down into three categories: profiled
France, to electricity supply security. For the application of
reference power, remote read reference power and reference
this chapter, they are subject to the provisions applicable to
power for the supply of losses.
suppliers.”
For each type of consumer, the calculation method is based on
This change was intended to ensure that all consumers would
be subject to the capacity obligation, and that the obligations
calculated would be consistent with national consumption.
For the application of these provisions, the rules use the term
“obligated party” to refer to any market stakeholder subject to a
76
the following principles:
> Inclusion of consumption observed during the peak period
(PP1 period defined below);
> Adjustment for the temperature sensitivity of consumption;
> A djustment for certified demand response capacities activated during the PP1 period.
CAPACITY OBLIGATION  / 4
4.1.2.1  PP1 peak period
the regulatory framework governing the market
The PP1 peak period is the reference period for determining
(NEBEF) or the balancing mechanism, i.e. that they
the obligation of each obligated party. It comprises the hours
qualify under the rules in effect.
129
Decree 2012-1405,
Article 1.
during which consumption is measured to calculate reference
power and, ultimately, to determine the amount of the capacity
A reference base is used to calculate the observed consump-
obligation.
tion associated with each obligated party for the calculation
of its reference power: the perimeter of the obligated party.
The PP1 period is defined in such a way as to meet the following
This perimeter makes it possible to identify a site’s affilia-
two objectives:
tion with a party for the calculation of the obligation, and
>
P
P1 hours must be the best metric for reflecting, in the obliga-
addresses cases where sites are associated with multiple
tion of an obligated party, the real contribution of the consu-
obligated parties.
mers within its perimeter to the shortfall risk;
> It must be possible for peak demand management to be
4.1.2.3  Taking into account the temperature
rewarded through a reduction in the obligation, in accordance
sensitivity of consumption
with the objectives outlined in chapter 1 of this report and the
The temperature sensitivity of consumption is defined as the
goal of fully integrating peak demand management into the
established link, below a certain temperature, between elec-
mechanism.
tricity consumption and temperature. It represents the rapid
response of consumption to a variation in temperature and is
4.1.2.2  Observed consumption
therefore to be distinguished from the cyclical/seasonal com-
The decree of December 2012 stipulates that “reference
ponent of the consumption curve.
power is calculated based on the observed consumption of
each consumer”129. The obligation is thus not determined on
Consumption in France has been growing steadily more sensi-
the basis of predefined standards but rather on measured
tive to temperatures in the past ten years, and this is a defining
data, in order to allocate to each consumer its real contribu-
characteristic of the French power system. RTE estimates that
tion to the shortfall risk. This would be incompatible with a
the winter gradient at 7pm increased by 35% between the win-
model in which a party’s obligation would represent a portion
ter of 2001-2002 and the winter of 2011-2012. This increase
of the total obligation determined separately. In the French
is largely responsible for the peak demand growth discussed in
system, observed consumption during PP1 hours constitutes
section 1.2 of this report.
the basis for calculating the capacity obligation of each obligated party.
For the capacity mechanism to achieve its security of supply
objective, the sum of the temperature sensitivities considered in
The basic data used to calculate the observed consumption
the mechanism must correspond to the temperature sensitivity
of a consumer are taken from the metering and information
observed in France as a whole during the delivery year.
systems of the operators of public systems to which the sites
are connected directly or indirectly. This principle is in keeping
4.1.2.3.1  Characterisation of temperature sensitivity
with the regulatory framework governing the energy industry as
The link between power and temperature is considered to be
a whole, but could create difficulties when it comes to profiled
linear. This hypothesis is confirmed by the shape of the scatter
consumers since their load curve is not measured but rather
plot obtained when we represent a temperature on the X-axis
estimated based on normative profiles. Pending the deploy-
and the corresponding consumption of the group of sites stu-
ment of new metering systems enabling more dynamic assign-
died on the Y-axis.
ment of energy flows, the provisions adopted in the rules are
based on the existing systems, particularly the profiling system
We observe that below a threshold temperature, the variation
that enables a load curve to be reconstituted for each site equip-
in demand is proportional to the variation in temperature. In
ped with a meter indicating readings. The provisions authorising
practice, the gradient is the slope of the scatter plot. Above the
the explicit valuation of demand response through the capacity
threshold temperature, demand is not affected by the tempera-
market (see chapter 5) allow this difficulty to be circumvented by
ture variation.
utilising demand-side operators’ facilities to certify their demand
response potential, provided that these facilities comply with
77
Figure 21 – Illustration of the heating gradient in France
(Source: ERDF, WG of 19/02/13)
100
90
Daily average power (GW)
80
70
60
50
 2012
40
 1996
Heating
gradient
30
20
‐10
-5
0
5
10
15
20
25
30
Actual temperature (°C)
Figure 22 – Illustration of threshold temperature
(Source: ERDF, WG of 09/07/13)
90
7pm points in year
of delivery RT8
ERDF data
Measured ERDF power [GW]
80
70
60
Threshold
temperature =
15°C
50
Gradient
40
30
-5
0
5
10
15
Actual national temperature [°C]
78
20
25
CAPACITY OBLIGATION  / 4
Little is seen of the “overheating” gradient for very cold tempe-
mechanism is thus similar to an insurance mechanism
ratures; it is therefore not taken into account.
providing coverage against an extreme situation with
the level of risk referred to in the security criterion defi-
4.1.2.3.2  Determinants of temperature sensitivity
ned by public authorities. The capacity mechanism
Temperature sensitivity is characterised by 48 half-hourly gra-
thus enables expected income from capacities to
dients for a given year, smoothed temperatures and a thres-
be stabilised, by spreading out over each year reve-
hold temperature. The following concepts are used in the rules.
nue that would otherwise be concentrated in a cold
130
Article L.335-2 of
the Energy Code
131
Concept discussed in
detail in chapter 5 of
this report.
spell with a probability of occurrence of once every ten years.
Smoothed temperature
The temperatures used in the capacity mechanism correspond to
4.1.2.4  Adjustment for power reduced by activating
variables derived from the raw temperature measured on various
certified demand response capacity
weather stations. It is necessary to construct a temperature herei-
Adjustments are made to reflect the load reduced through the
nafter referred to as the “smoothed temperature” – and not to
activation of certified capacity to prevent demand response
take raw temperatures – in order to constitute an effective expla-
from being double counted. Indeed, as discussed in § 3.2.5,
natory variable of consumption. This temperature is in particular
demand response can be valued either through a reduction of
smoothed to take into account the thermal inertia of buildings.
the capacity obligation or directly through the issue of capacity
certificates. It is important to ensure that the same load reduc-
Threshold temperature
tion is not counted twice, as this would distort competition
The threshold temperature corresponds to the temperature
between stakeholders and result in a physical volume of capa-
below which a variation in temperature is considered to lead to
city that is insufficient to meet the security of supply criterion.
a variation in consumption. It basically refers to the temperature
below which heating is switched on.
The provision adopted in the rules for adjusting for load reductions through the activation of certified capacity involves adding
Gradient
the load reductions in question to observed consumption.
The link between power and smoothed temperature, considered for a delivery year, is reflected by a temperature sensitivity
4.1.3  Security factor
gradient (the slope of the curve) that is constant for a given year.
4.1.3.1  Provisions of the decree
The link between power and temperature is not uniform over a
The security factor is intended to meet the requirements set by the
day. Forty-eight half-hourly gradients are therefore defined for
law and decree whereby suppliers’ capacity obligation “encourages
each half hour of the day.
compliance in the medium term with the required level of electricity supply security130”, in accordance with the general principle of
4.1.2.3.3  Extreme temperature
making stakeholders accountable for the risks they generate.
In order to reflect the contribution of a consumer to the shortfall risk due to its temperature sensitivity, the obligation must be
The decree stipulates that the security factor “[takes] account of
calculated based not on the consumption observed during the
the shortfall risk” and that “the effect [of interconnections of the
delivery year but on an estimate of this consumption during a
French electricity market with other European markets] is incor-
severe cold spell corresponding to the risk against which the sys-
porated in the determination of the security factor”.
tem is trying to protect itself (one-in-ten-year cold conditions).
The security factor applies to all obligated parties, making it a
For this purpose, the use of an extreme temperature was pro-
“mutualising” parameter. It only integrates those determinants
posed during the consultation and is adopted in the rules, thus
of security of supply that are not taken into account through
enabling translation to a cold spell.
other means. Roughly speaking, as regards obligations, reference power already reflects consumers’ contributions to the
In concrete terms, consumption levels observed are translated to
shortfall risk, and similarly, on the certification side, certified
those estimated at this extreme temperature. It is as if the cold spell
capacity131 reflects the contribution of capacity to reducing the
defined by this extreme temperature, corresponding to one-in-
shortfall risk. The security factor included in the rules is thus
ten-year cold conditions, actually occurred each year. The capacity
exclusively meant to reflect:
79
132
The quantity of
certificates needed
to meet the security
of supply criterion is
determined based on the
reference mix described
in section 4.4.3.
> The contribution of interconnections to security of supply;
> The margins necessary to cover residuals risks,
The total sum of the obligations must correspond to the volume
of certificates of the reference mix (1,000 MW) for the obligation
to provide an incentive for compliance with the security crite-
particularly on demand (other than tempera-
rion. It is therefore possible to determine the security factor that
ture sensitivity risk).
enables compliance with this criterion, and thus the obligation
of suppliers S1 and S2.
The principles applied in determining the security factor, including methodology issues, are described in § 4.4.3. These prin-
Case 1
Case 2
Case 3
Case 4
security
1,43
1,11
1,00
0,77
Obligation S1 (MW)
571
444
400
308
late that any change in this value must be specifically approved
Obligation S2 (MW)
429
556
600
692
by the Minister.
Total obligation (MW)
1,000
1,000
1,000
1,000
ciples and the procedures for changing the security factor are
described in the capacity mechanism rules. The initial numerical
value of the security factor is indicated in the rules, which stipu-
F
4.1.3.2  Sensitivity of the security factor to the choice of
It can therefore be seen that the choice of the two parameters
the extreme temperature
of the obligation, the extreme temperature and the security fac-
The determination of the extreme temperature and that of the
tor, has major redistributive effects between temperature sensi-
security factor are linked. It is thus possible to define several
tive and non-temperature sensitive consumers.
pairs of values [extT;securityF] that produce the same overall
level of certificates necessary for compliance with the security
of supply criterion132, though the breakdowns between stakeholders are not the same.
The simplified example below illustrates how the choice of the
extreme temperature influences the security factor. It is based
on the following hypotheses:
> The volume of certificates allocated to the reference mix is
1,000 MW;
> All French consumers are divided between two suppliers,
The option chosen in the rules is to make stakeholders accountable for the risks they generate.
The temperature sensitivity risk is entirely taken
into account by the “extreme temperature” parameter. It would have been possible to increase
the security factor to integrate a portion of the
French power system’s temperature sensitivity,
but this would have meant assigning a portion of
the climate contingency to all obligated parties
even though different consumers’ contributions
to this risk vary greatly.
S1 and S2, the latter being temperature sensitive and the
>
>
former not;
The customer portfolio of S1 is not temperature sensitive and
4.1.4  Summary of obligation principles
power demand among its customers on PP1 is 400 MW;
4.1.4.1 Formulae
The customer portfolio of S2 is temperature sensitive with a
In compliance with the provisions of the decree and in the light
gradient estimated at 100 MW/°C. Power demand among its
of the abovementioned considerations, it is proposed that the
customers on PP1 is 400 MW.
formulae for calculating the obligation be expressed in the following form.
Four cases are considered with different extreme temperatures:
0°C, -2°C, -3°C and -6°C. It is then possible to calculate for each
An obligated party’s obligation is calculated based on its refe-
of these cases the reference power for S1 and S2 and the cor-
rence power and the security factor.
responding total for France.
Oblig,OP,DY = RefP,DY,OP x SF,DY
Case 1
Case 2
Case 3
Case 4
0
-2
-3
-6
RefP S1 (MW)
400
400
400
400
RefP S2 (MW)
300
500
600
900
RefP France (MW)
700
900
1,000
1,300
T (°C)
ext
80
> Oblig,OP,DY is the obligation of the obligated party OP for
delivery year DY;
> RefP,DYL,OP is the reference power of the obligated party
OP for delivery year DY;
> S F,DY is the security factor for delivery year DY.
CAPACITY OBLIGATION  / 4
Reference power is calculated at the level of individual obligated
year DY, adjusted for certified demand response capacity
parties:
activated;
> B ased on observed consumption, minus the load reduced by
>
Ext
activating certified demand response capacities within a peri-
> SFT, AL[t] is the smoothed France temperature in half-hourly
meter during the PP1 peak period,
>
T[t] is the extreme temperature, in half-hourly step t, in
delivery year DY;
A
djusting for the temperature sensitivity of consumption,
step t, in delivery year DY;
> nbPP1Hours,DY is the number of PP1 peak period hours in
expressed through a gradient, in order to extrapolate obser-
delivery year DY.
ved consumption to consumption at the extreme temperature (close to -2.6°C, corresponding to one-in-ten-year cold
4.1.4.2 Chronological summary of the obligation process
conditions).
For the first two delivery years, the rules adopt specific provirefP,DY OP =
sions making it possible to take into account:
1
> A specific first delivery year (from 30 November 2016 to
2 x nbPP1Hours,DY
[AdjustedConsumpOP,DY[t] + GradientOP,DY[t]
x
t PP1 x ( T[t] – SFT,AL[t])]
Ext
∑
31 December 2017 with July and August excluded) enabling
transition to a delivery year matching the calendar year;
> A shorter period between the start of the term and the deli-
E
very year. The rules directly incorporate the mechanism paraIf ∑t PP1 ObservedConsumpOP,DY[t] = 0 then refP, DY, OP is set at 0.
meters for these two years.
E
> Gradient
OP,DY
[t] is the gradient of the obligated party OP in
half-hourly step t in delivery year DY;
> AdjustedConsump
OP,DY
Once the system is established, i.e. as of the third delivery year,
[t] is the observed consumption
the chronology of the obligation process under the capacity
of the obligated party OP, in half-hourly step t in delivery
01
/0
01
1D
Y-4
/0
01
1D
Y-3
/0
01
1D
Y-2
DY
/0
1D
Y-2
01
31
/0
/0
1
3
01
/1
01
31
/1
/1
1
PP1
Publication
of parameters
–extT,
Secu Fact
Publication
of overall
obligation
level
mechanism will be as follows:
PP1
DELIVERY
PERIOD
2
15
2D
/1
Y+
2
Obligation
notification
20
2D
/1
Y+
2
Transfer
deadline
15
2D
/0
Y+
2
Imbalance
notification
date
2D
Y+
3
Collection
deadline
DELIVERY YEAR
Publication
of overall
obligation
level
Publication
of overall
obligation
level
Publication
of overall
obligation
level
4.2  Period for measuring suppliers’ obligation:
The PP1 peak period
As explained above, the PP1 period is defined in such a way as to
Consequently, the provision adopted in the rules corresponds to
meet the following two objectives:
a targeted PP1 period that is limited in volume and focuses on
>
>
C
reate the best metric to reflect, through reference power, a
the hours when actual consumption is highest. This PP1 period
consumer’s contribution to the shortfall risk;
is part of a delivery year corresponding, with the exception of
E ncourage the activation of peak demand management mea-
the first year, to a calendar year (01/01/YY to 31/12/YY). The
sures, rewarded by a reduction of the obligation, to contribute
considerations underpinning the provision concerning the deli-
to the reduction of peak demand.
very year are described in § 4.3.
81
4.2.1 Definition of PP1 and contribution
to the shortfall risk
or decrease by 50% depending on whether only hours of high
Given the high level of temperature sensitivity in
To uphold the provision of the decree concerning accountabi-
France, the shortfall risk is currently concentrated
lity in proportion to the shortfall risk, the PP1 period must target
on the hours of highest demand. The synchrony
the hours of highest consumption for a volume representing
between an individual’s consumption and overall consump-
all hours during which shortfall has a significant probability of
tion in France therefore heavily influences its contribution to
occurring.
133
For certified demand
response capacity, this
dimension is taken into
account, in certification
terms, through the Kd
and Kw coefficients
(see section 5.3.2).
consumption or all hours are taken into account.
the shortfall risk. A consumer that does not consume during
hours of high consumption does not contribute to the short-
With a “long” PP1 (potentially the whole weighted winter), hours
fall risk; its reference power should therefore be nil.
of low consumption would be used to estimate a consumer’s
contribution to the shortfall risk. Consequently, the obligation of
This principle was borne in mind when choosing between long
a consumer that does not consume during the hours of highest
periods, which enable the obligation level to be stabilised but
consumption might not be nil, even though its contribution
result in the obligation being pooled among consumers, and
to the shortfall risk is nil. The rules proposed by RTE make this
short periods, which target more precisely the periods during
impossible.
which the shortfall risk is highest and thus enable differentiation
4.2.1.2 Impact of the duration of PP1 on the value
between consumers’ contributions to the shortfall risk.
allocated to a peak demand management measure
4.2.1.1 Illustration of the impact of the definition of PP1
A consumer’s obligation must reflect its consumption during
on the reference power of a consumer
the hours when demand is highest. Moreover, in accordance
The definition of the PP1 hours may heavily affect the reference
with the provision of the decree relating to non-discrimination
power of individual consumers, particularly non-temperature
between certified demand response and reductions in the obli-
sensitive ones. In the illustration in figure 23, consumer A (a
gation through load reductions, all peak demand management
typical consumer contributing considerably to peak demand)
measures must be rewarded in proportion to their contribu-
and consumer B (a typical consumer moderating its consump-
tion to reducing the shortfall risk. Choosing a short PP1 period
tion during demand peaks) see their reference power increase
is more in keeping with this principle since it avoids diluting
Puissance de référence B
Puissance de référence A
the value of peak demand management measures, which can
contribute substantially to reducing the shortfall risk.
Figure 23 – Demand in France is at its
highest between H4 and H6
To be accounted for through a reduction in the obligation, peak
demand management measures must be taken during PP1. The
Demand
peak
PP1 volume thus determines the activation potential required.
500
100,000
For peak demand management measures to be valued propor-
400
80,000
300
60,000
200
40,000
100
20,000
Consumption of
a few customers (MW)
0
0
H1
H2
 Customer A
H3
 Customer B
H4
H5
H6
France consumption (MW)
120,000
600
tionately to the shortfall risk avoided, the scope of the activation
potential must reflect the shortfall landscape133.
In figure 24, the red curve represents the obligation reduction
obtained for a peak demand management measure activated
for 50 hours as a function of the duration of PP1. The blue curve
represents the contribution to the reduction of the shortfall risk
France consumption
as a function of the number of hours demand response capacity
is activated.
PP1 hours
82
H1 to 6
H4 to 6
Reference power A
200
300
Reference power B
200
100
Thus, activation over a period of 50 hours contributes approximately 88% to reducing the shortfall risk compared with demand
response with no activation limit. If PP1 is very short, for example
less than 50 hours, the peak demand management measure’s
CAPACITY OBLIGATION / 4
Figure 24 – Peak demand management measure and contribution to reducing the shortfall risk
Reduction of shortfall risk
100%
80%
60%
Contribution
to reducing
the shortfall risk
40%
Reduction
of obligation
for peak
demand-side
management
activated
for 50h
20%
0%
1
51
101
151
201
251
301
351
401
Number of hours of activation / Duration of PP1
200
effect will be entirely taken into account in the reduction of the
risk the obligation represents for them: activating
obligation. If PP1 is long, a much smaller share of the measure’s
demand response capacity or other peak demand
effect will be counted in the reduction of the obligation even
management measures. The mechanism proposed
though its contribution to reducing the shortfall risk is the same.
thus ensures that the economic incentives offered
100
200
300
H1 à 6
H4 à 6
Heures dans PP1
to market stakeholders correspond to the physical
The definition of the PP1 period must therefore be consistent
needs associated with security of supply, the goal
with the blue curve so that the impact of a peak demand mana-
being to approach the economic optimum.
134
These studies and their
results are presented in
sections 4.2.4 (for France
as a whole) and 4.3.4
(individual obligations) of
this report.
gement measure on the reduction of the obligation reflects
its contribution to reducing the shortfall risk, following two
This choice should be considered in the light of other valid
principles:
considerations for defining the PP1 period. During the consulta-
> It must be based on the hours of highest consumption, indicative of shortfall risk periods;
> It
must be based on a volume of approximately 100 to
150 hours.
tion RTE organised in 2013, some suppliers supported the idea
of a long PP1 period, saying it would stabilise the obligation for
stakeholders by neutralising the uncertainty associated with the
location in time of PP1 hours. RTE conducted studies134 to estimate the sensitivity of the obligation to the effective distribution of PP1 hours: these studies showed that the sensitivity was
As defined in the rules, the PP1 period:
non-significant.
> Targets periods of high consumption;
> Covers a time period that is consistent with the
Most importantly, the alternative scenario involving a long PP1
typical duration of shortfall episodes, enabling
peak load reductions to be rewarded in proportion to their contribution to reducing the shortfall risk.
period would make the signification of the obligation and incentives to reduce peak demand less representative. The less PP1
corresponds to real cold spells, the weaker the incentive to
reduce loads at the right time. With a long PP1 period (all winter,
weighted by shortfall probabilities), the economic incentive for
4.2.2 Definition of PP1 and peak demand
management
suppliers to initiate demand management measures with their
customers is greatly diluted. An action to reduce peak demand
would have to be repeated every day in winter to produce the
Basing PP1 on the hours when observed consumption is
same reduction in the obligation: the effort required to reduce
highest is also a means of encouraging active peak demand
the obligation by reducing loads during peak periods would be
management. It gives suppliers a real solution for managing the
disproportionate to the real needs of the system, and this would
83
135
Indeed, since demand
reduction efforts are
not factored into
the load curve (no
localised decrease in
consumption), the
possibility of efforts
being rewarded is diluted
in proportion to the
consumer's share of
profiled consumption (in
the short term, through
the alignment coefficient
used in the BRE
process which ensures
consistency at each time
step of the overall profile
consumption result) or its
share of consumers with
this profile (longer term,
through an updating of
the profile).
136
Block Exchange
Notification of Demand
Response. See report on
the explicit valuation of
demand response on the
wholesale market on the
RTE website.
make no economic sense with regard to the chal-
on demand that these hours would no longer be included in
lenges the French power system is currently facing.
actual peak hours. This phenomenon could prevent demandside management measures from reducing the parties’ obli-
There is also a chance that the timing of demand-
gation, in which case the mechanism’s impact would be dis-
side management measures would not correspond
proportionate to its objective;
to peak load periods. For instance, consumers would
> P redictability of PP1: A very large number of participants in
be incentivised to reduce consumption during
the consultation asked to have information about potential
months with the highest shortfall probability –
peak periods in advance, in order to activate the measures at
notably January – and to consume during other
their disposal with greater certainty. This point is of particular
months. In February of 2012, such a system would
concern to suppliers because the entire cost of the obligation
typically not have created any incentive for consu-
will be concentrated on PP1 hours.
mers/suppliers to reduce consumption at the peak
time. The system might even have knock-on effects,
encouraging some consumers to stop in January
and then resume consumption early in February.
To address these difficulties, RTE proposes that the
PP1 days that will be used to calculate suppliers’
obligations be notified one day ahead of time.
The benefits associated with a short PP1 period targeting actual peaks in demand are not as great for
4.2.3.2 Effect of notification on the selection of
profiled consumers, due to the limitations intrinsic
the hours of highest consumption
to a profiling system that does not allow consu-
The ideal signal should enable the selection solely of the hours
mers’ specific contributions to peak demand to
of highest consumption. However, it is by nature not possible
be identified with accuracy135. Ultimately, the only way for the
to predict the corresponding hours with any certainty: the issue
value created for the system to be accurately measured would
is exactly the same for market stakeholders as for the system
be either to replace the profiling scheme with one allowing
operator.
the individual treatment of each consumer (not planned as
of today, even after smart meters are rolled out) or to create
Given the link between consumption and temperature, pre-
profiles for suppliers based on their offerings. In the meantime,
dicting that demand on any particular day will be among the
as indicated above, the direct valuation of the load reduction
highest of the winter comes down to predicting that that day
potential of these consumers in calculating capacity sup-
will be one of the coldest of the winter. It would require visibi-
ply (certification of demand response capacity) provides the
lity on general temperature trends over a long period, whereas
most benefits to the consumers in question. In this sense, the
short-term weather forecasts are not currently usable beyond
explicit valuation of demand response on the capacity mar-
ten days. Climate scenarios, particularly those used in supply/
ket complements the new valuation opportunities created by
demand balance studies, do indeed provide visibility on the
the NEBEF136 rules, which allow load reductions to be valued
temperature distribution at a given hour of the day and the year,
at sites independently of the technological limitations of the
but it is not possible to deduce the temperature of a given hour
meters used there, based on information provided by demand-
based on past values.
side operators.
4.2.3  Notification of PP1 hours
4.2.3.1 Principles
On first analysis, targeting real peak periods on the power system
would require defining PP1 at the end of the delivery year, based
Notification of PP1 hours with a reduced volume
requires managing the stock of hours to be notified. Consequently, the hours notified might not
correspond exclusively to the hours of highest
consumption during the delivery year as observed
after the fact.
on the hours of highest demand observed during the winter.
This solution would nonetheless create two types of difficulty:
>
84
RTE conducted studies on a notification of PP1 hours based on
“Peak shift”: Demand-side management measures taken by
hour or day type criteria, to establish whether notification would
obligated parties during the hours expected to be the hours
decrease the performance in terms of targeting the hours of
“of highest consumption” could have such a powerful impact
highest consumption. The studies confirm that targeting will
CAPACITY OBLIGATION / 4
IllustrationoftheconsequencesofthechoiceofPP1foraconsumercapableofreducing
itsconsumptionby50%over15days
For purposes of simplification, it is assumed that the consumer is non-temperature sensitive and that its consumption is constant
(equal to C) over the year in order to illustrate only the consequences of the choice of PP1. The consumer’s reference power thus
corresponds to its average consumption over PP1.
reference
P = Consumptionaverage on PP1 = C – Load reductionPP1
The impact of PP1 on the consumer’s reference power therefore corresponds to the taking into account of load reductions as
a function of PP1.
With a targeted PP1, the load reduction is considered in its entirety and consistently with its contribution to reducing the shortfall
risk:
Load reductiontargetedPP1 =
NB activationload reduction
NB PP1 days
P
reference , targetedPP1
x Volumeload reduction = 50%.C
= 50%.C
With a long PP1, to provide maximum benefit to the consumer through a reduction of its obligation, the load reduction must be
positioned on the month corresponding to the highest weighting. In this illustration and in line with a weighting proposed in the
consultation, this month is January, with a weighting of 70%.
Load reduction long PP1 = Weightjanuary x
NB activationload reduction
NB working days
x Volumeload reduction
= 70% x 15 x 50%.C = 21%.C
25
P
reference ,long PP1
= 79%.C
This example illustrates the importance of the choice of the PP1 period for rewarding demand management actions through a
reduction of the obligation. The value assigned to demand response is reduced by more than half with a long PP1 period even
though its contribution to reducing the shortfall risk is virtually equivalent to that of a resource without constraints.
The example also illustrates the impact of a long PP1 period in terms of potential contradictions between incentives in the
energy market and the capacity mechanism. Thus for a delivery year such as 2012 with a cold spell in February, if the consumer
focuses demand response on the hours of the cold spell, this would only be reflected in its capacity obligation in proportion to
the weighting of February (20% in the weighting presented in the consultation), resulting in an even lower benefit (6%.C).
85
Analysis of the performance of the signal
Table 1 – Days criterion – Performance in notifying the 100 hours of highest demand.
Nb of Days notified*
10
15
20
25
30
35
40
45
50
Av. Nb Peak Days notified
9.22
13.58
17.44
20.5
22.62
24.18
25.3
26.16
26.68
Min. Nb Peak Days notified
6
9
12
14
16
19
20
20
20
Max. Nb Peak Days notified
10
15
20
25
28
31
33
36
39
63.98%
79.20%
87.92%
91.34%
93.10%
95.38%
96.40%
97.64%
98.34%
Average score
* “Peak Day”: Day containing at least one hour of the 100 hours of highest demand
% of the 100 hours of highest demand
among the hours notified
Figure 25 – Distribution of the results of the table above
Table 1 shows that to expect to identify 90% of the
100%
100 hours of highest consumption, it is necessary to
notify between 20 and 25 days (approximately 350
75%
hours). It is important to underline that with a stock of
15 days, in 25% of cases, the signal only enables iden-
50%
tification of at most 70% of the 100 hours of highest
consumption (min. at 25%).
25%
This volume is consistent with the distribution of the
0%
10
15
20
25
30
35
40
45
100 hours of highest consumption for each winter – on
50
average over 20 days between November and March.
Number of days notified in winter
Figure 26 – Number of days containing the days of highest demand each winter
(Source: Power consumption records – RTE Customer website)
50
50 H
Ave = 12 d
100 H
Ave = 20 d
150 H
200 H
Ave = 26 d
Ave = 32 d
250 H
Ave = 38 d
300 H
Ave = 42 d
40
30
20
19
1996
1997
1998
2099
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
11
19
1996
1997
1998
2099
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
11
19
1996
1997
1998
2099
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
11
19
1996
1997
1998
2099
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
11
0
19
1996
1997
1998
2099
20 00
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
11
10
19
1996
1997
1998
2099
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
11
Number of days
60
Winter
If all the PP1 hours correspond exactly to the notified hours, the period notified must be reduced, in line with the definition of
PP1. In this sense, a period of 10 to 15 days (100 to 150 hours) is consistent with the volume necessary to estimate the contribution to the shortfall risk (see § 4.2.1).
The results of the above study on the signal, summarised in Table 1, show that a signal that covers such a period enables
identification of between 60% and 80% of the 100 hours of highest consumption. However, PP1 does not then solely consist of the hours of highest demand. Of the days notified, on average one day out of 10 or two days out of 15 (for a signal
of 10 notified days or 15 notified days respectively) do not contain any of the 100 hours of highest demand in the winter.
The study showed it is possible that up to 40% of the notified days will contain none of the 100 hours of highest demand
(with 15 days notified).
86
CAPACITY OBLIGATION / 4
not be perfect, illustrate the impact of the number of days noti-
It is therefore necessary for the choice of PP1 to incorporate
fied on the signal’s accuracy, and show that a PP1 period of
elements allowing the variability of the obligation volume to be
10-15 days will cover most of the hours of highest consumption.
smoothed, and in particular to:
> Remove periods of “interruption”, i.e. periods when demand is
4.2.3.3 Effect of PP1 notification on the obligation level
not representative of normal behaviour (weekends, bank holi-
“Transposing” actual consumption to an extreme temperature is
days and Christmas holidays);
a way to translate the key critical risk facing the power system
> Include periods when temperatures are cold, limiting the
uncertainty linked to errors in the modelling of the climatic
and the level of tension against which it seeks to protect itself.
correction;
In figure 27, the climatic correction translates actual consump-
> Include PP1 days (defined time slot) rather than independent
tion (yellow curve @realisedT) into consumption at the extreme
hours in order to stabilise intraday variations in consumption.
temperature, which serves as the reference for calculating the
obligation (blue curve @extT). In terms of temperature sensiti-
Lastly, notification of PP1 days prevents a very high concentra-
vity, the choice of the PP1 period, i.e. the choice of the points of
tion of PP1 hours over a short period and thus tends to smooth
the blue curve, has no effect on the volume ultimately obtained.
the distribution of the days notified over the winter period. Using
a signal to designate PP1 days thus helps to stabilise reference
However, though the extrapolation of temperature sensitive
power.
consumption to the extreme temperature allows the weather contingency to be isolated, we also observe a variation
in non-temperature sensitive consumption during the winter
(see figure 28). Increased use of lighting when days get shorter
4.2.4 Sensitivity of the obligation to the location in
time of PP1
explains the bell-shaped variation centred on January (the dip is
Variations in non-temperature sensitive consumption over the
due to the Christmas holidays).
winter result in a slight variation in reference power depending
on the “location” of the PP1 hours selected. During the consul-
This change in non-temperature sensitive consumption during
tation, some suppliers cited this influence to request that the
the winter leads to a variation in the reference power according
PP1 period be extended, in order to stabilise the obligation. As
to the “location” of the hours of highest demand during the
indicated above, RTE conducted specific studies on this issue to
winter. Thus, a winter in which the hours of highest demand are
quantify the uncertainty associated with the location in time of
in January will show a higher reference power than a winter in
PP1 days. These studies established that the location in time of
which the hours of highest demand are at the end of February.
PP1 days has little influence on the amount of the obligation.
Figure 27 – Illustration of climatic correction on an ErDF profiled portfolio
(Source: ERDF, WG of 09/07/13)
90
80
Power [GW]
70
60
@TE
Clim. Corr.
TR TE
50
40
30
@TR
20
10
0
November
December
January
February
March
87
Figure 28 – Illustration of variations in temperature sensitive and non-temperature
sensitive demand in the year 2011-2012 (data: RTE – 2012 Electrical Energy Statistics)
Average daily power (GW)
100
80
60
  Consumption
excl. heating
40
 Demand
response
 Heating
 Air conditioning
Sept.
Aug.
July
June
May
April
March
Feb.
Jan.
Dec.
Nov.
Oct.
Sept.
20
It should be noted that the hours of highest consumption do
4.2.4.1 Estimation of the sensitivity of reference power
not occur in a random or uniform way over the winter period
based on actual consumption
as a whole. For instance, the ten days of highest consumption
The sensitivity of the France reference power to the selection of
have never all fallen in November or in March. The December
PP1 days, factoring in the effect of PP1 day notification, was eva-
to February period contains on average 96% of the ten days
luated over several years. For this purpose, consumption levels
of highest consumption and at least 60% of these ten days.
transposed to the extreme temperature were calculated for
The uncertainty resulting from the location in time of the PP1
each eligible day, applying the methods described in the rules,
days does not therefore correspond to the min-max variation
over the six years from 2006 to 2011.
between the peak in January and the dip at the end of March.
For each delivery year, the 100 France consumption scenarios
The studies carried out seek to estimate (i) the level of variability
for the year in question, drawn from the 100 Météo France
of the France obligation linked to the location in time of PP1,
climate scenarios representative of the existing climate, were
and (ii) the benefit of possible PP1 milestones in the last and first
divided into two sets of 50 scenarios: the first (the calibration
months, March and November.
set) was used to determine the parameters of the signal and
Table 2 – Distribution of the ten days of highest consumption since 1996
(Data: RTE Customer website – Power consumption records since 1996)
88
Month
Average
Standard deviation
Min.
Max.
November
2%
5%
0%
20%
December
22%
24%
0%
70%
January
52%
26%
0%
90%
February
21%
24%
0%
100%
March
2%
10%
0%
40%
CAPACITY OBLIGATION / 4
Figure 29 – Variability of reference power incorporating
the effect of PP1 day notification
the second (the test set) to obtain a distribution of notified
days. This methodology using sets of calibration and test sceobtain unbiased results (neither overestimated nor underes-
Standard deviation (MW)
timated). The test set yields 50 distribution scenarios for PP1
days that are consistent with the provisions adopted in the
rules.
The distribution scenarios and consumptions at extreme temperatures for each delivery year enable 50 reference power values
to be obtained, thus giving a good estimator of the variability of
reference power incorporating the notification.
1400
1.4%
1200
1.2%
1000
1.0%
800
0.8%
600
0.6%
400
0.4%
200
0.2%
0
0
2006
Two lessons can be drawn from this study, based on the distribu-
2007
2008
2009
2010
Standard deviation as % of refP
narios that are consistent yet different makes it possible to
2011 Average
    Jan. – March & Nov. – Dec. with PP1 notification (MW)
Jan. – March & Nov. – Dec. with PP1 notification (%)
tion of the selected PP1 days over the delivery period:
> The average variability over these six years is low, with a standard deviation of 500 MW, or a variability of less than 0.6% of
the France reference power;
RTE carried out a study based on actual consumption and
> For each delivery year, the standard deviation is between
Météo France climate scenarios comparing the sensitivity of
400 and 600 MW.
reference power to the location in time of the PP1 hours with
(1) a milestone of five days at most introduced in March and
4.2.4.2 Estimation of the benefits of milestones in
November and (2) only the period [January; February; Decem-
March and November for the PP1 peak period
ber] taken into account. The sensitivity obtained in both cases
During the consultation, certain stakeholders proposed
was then compared with that obtained with no milestone, which
methods of limiting the effect of the variation in non-tempera-
served as a benchmark (basis 100).
ture sensitive consumption by limiting the number of PP1 days
in the months of March and November or even using only the
This analysis shows that a limitation of the number of PP1 days
months of January, February and December as the period for
in March and November has no significant effect on the variabi-
selecting PP1 days.
lity of reference power. Consequently, these methods were not
adopted in the mechanism rules.
Figure 30 – Impact of PP1 milestones on the variability of reference power
Relative sensitivity of refP.
(basis 100: standard deviation of
refP without milestone)
160
140
120
100
80
60
40
20
0
2006
2007
2008
2009
2010
 Jan. to March & Nov. and Dec. with max. 5 d in March and Nov.
2011
Average
 Jan and Feb. & Dec.
89
To summarise, the two studies conducted confirm that the
RTE proposes that PP1 days be notified on D-1 at 10:30am.
methods adopted in the rules on the PP1 peak period lead to
The need for a notification time prior to fixing on the spot mar-
a reference power, for France, with a low degree of sensitivity
ket became apparent during the consultation, as this allows
to the actual climate in the delivery year: the average standard
suppliers to activate peak demand management measures to
deviation is 500 MW, a value well below the 2 GW threshold
reduce their obligation and adjust their energy coverage accor-
adopted as the maximum imbalance for settlements. Additional
dingly. Choosing the latest possible time makes it possible to
studies focusing on the supplier level support these results, and
refine the demand forecast used for the notification and there-
can be found in § 4.3.4.
fore to target days of high consumption more accurately.
4.2.5  Provisions adopted in the rules on PP1
The demand criterion used for activating a PP1 signal will be based on:
> S tatistical
distributions of possible consumptions at this
A series of major expectations regarding PP1 were expressed in
period of the year, produced by RTE on the basis of Météo
the course of the consultation:
France temperature series and medium-term weather fore-
>
>
The hours notified must correspond to the hours when natio-
casts. These distributions are used to define consumption
nal demand is actually highest;
thresholds beyond which a signal is sent;
The hours notified are the PP1 hours (signal creating a
commitment);
> T he day-ahead national demand forecast drawn up by RTE on
the basis of Météo France short-term temperature forecasts.
> The volume of PP1 corresponds to a reduced number of hours
(50 to 200 hours).
The PP1 peak period defined in the rules thus enables the national demand peak to be targeted as closely as possible, with a pro-
Based on the results of the study on the signal discussed above,
vision included to provide greater stability for obligated parties.
these requirements are incompatible. It is therefore necessary
to ease certain constraints when defining the PP1 period:
> T he volume of PP1 is not fixed but varies between a lower
and upper limit. The definition of these limits was considered based on the performance of the signal obtained and
in compliance with the principle of non-discrimination
between reductions of the obligation and certified demand
>
response;
The notification of PP1 is based on a consumption criterion.
PP1 hours will therefore be hours of high consumption. Howe­
ver, as the volume of PP1 is regulated and kept targeted, the
PP1 hours will not necessarily systematically be the hours of
1. The PP1 period corresponds to the time
slots [07:00; 15:00[ and [18:00; 20:00[ (i.e. ten
hours per day) on days notified by RTE.
2. T
he days notified are not selected before the
delivery period. However, they will always be
working days in the months between November and March, minus the period corresponding to the Christmas school holidays.
3. P
P1 days are notified on D-1 at 10:30am.
Notification is based on a demand criterion.
4. T
he number of PP1 days notified varies
between 10 and 15.
highest consumption of the delivery year.
4.3  Delivery year
90
4.3.1  Overlapping year centred on a winter or
calendar year
covers the peak periods of the winter of 2016-2017”) but does
The decree stipulates that the delivery year is “a twelve-month
The consultation highlighted two possible ways of defining the
period, not necessarily coinciding with the calendar year, that
delivery year: a delivery year centred on a winter (overlapping two
includes a PP1 peak period and a PP2 peak period”.
calendar years) or a delivery year corresponding to a calendar year.
The decree indicates that the first delivery year is to include the
The key arguments made to support either of the two options
winter of 2016-2017 (“The first delivery year begins in 2016 and
were based on:
not specify anything for the following years.
CAPACITY OBLIGATION / 4
> “Physical” factors associated with the actual management of the
year; the transfer deadline is closely correlated to the deadline for
power system, supporting a delivery year overlapping two years;
gathering definitive consumption data (final consumption data
> “Contractual” factors relating to how the capacity mechanism
for December of year Y are not known until October Y+2).
would fit into the existing contractual system (energy market
and ARENH mechanism), supporting a delivery year corres-
The choice of a calendar year including two peak periods
ponding to a calendar year.
(January to March and November-December) thus makes it
more difficult to send a signal on peak periods, as RTE only has
The issue of compliance with the European framework was also
detailed information on the system at a seasonal scale.
addressed during the consultation: the definition of a “capacity certificate” product with identical periods would facilitate
4.3.3 Sensitivity of the capacity mechanism to
the definition of the delivery year with regard to
the security of supply objective
exchanges of this product between countries.
All of the topics discussed during the consultation and presented in this section show that, in practice, provisions such as
Aligning the delivery year with the calendar year leads to two dis-
the notification of PP1 days reduce the impact on suppliers of
tinct types of risks because of structural changes in consump-
the definition of the delivery year. RTE therefore proposes that
tion and the capacity mix.
the mechanism operate according to the calendar year, which
should facilitate its integration with existing contractual prac-
In terms of consumption, choosing a calendar year leads to
tices and then with Europe going forward.
variability in the overall level of obligation due to the structural
growth in demand over a year (up to 2%). Nearly a year goes
by between the two winter segments of a calendar year. This
4.3.2 Impact of the choice of the delivery year on
the functioning of the mechanism
demand trend is structural and the climatic correction applied
does not compensate for the difference between the two refe-
A delivery year that corresponds to the calendar year will make
rence power levels. Thus, depending on the location of the
the post-delivery year trading period longer than with a staggered
PP1 hours, the reference power obtained will correspond to an
Figure 31 – Location of the 200 hours of highest demand of each delivery year
with a calendar year and overlapping year
Consumption (GW)
Calendar year
Overlapping year
100
100
90
90
80
80
70
70
60
60
50
50
40
40
30
30
6 7 8 9 0 1 2 3 4 5 6 7 8 9 0 1 2 3 4
99 99 99 99 00 00 00 00 00 00 00 00 00 00 01 01 01 01 01
.1 .1 .1 .1 .2 .2 .2 .2 .2 .2 .2 .2 .2 .2 .2 .2 .2 .2 .2
jan jan jan jan jan jan jan jan jan jan jan jan jan jan jan jan jan jan jan
1996
1997
1998
1999
2000
2001
2002
2003
2004
6 7 8 9 0 1 2 3 4 5 6 7 8 9 0 1 2 3 4
99 99 99 99 00 00 00 00 00 00 00 00 00 00 01 01 01 01 01
.1 .1 .1 .1 .2 .2 .2 .2 .2 .2 .2 .2 .2 .2 .2 .2 .2 .2 .2
jan jan jan jan jan jan jan jan jan jan jan jan jan jan jan jan jan jan jan
2005
2006
2007
2008
2009
2010
2011
2012
91
Figure 32 – Relative uncertainty linked to the choice of
the delivery year on France reference power
existing climate. For each scenario, PP1 hours were chosen
based on provisions of the draft rules (time slots and eligible
0.7
600
0.6
500
0.5
400
0.4
300
0.3
200
0.2
100
0.1
0
0.0
2006
2007
2008
2009
2010
Standard deviation as % of refP
Standard deviation (MW)
days, volume between ten and 15 days, notification based on a
700
demand criterion).
The analysis shows first of all that the “France” reference power
has a low degree of sensitivity to the distribution of the PP1
hours, whatever the option chosen for the delivery year: the
standard deviation is around 400 to 500 MW, or approximately
0.5% of the “France” reference power. This is in line with the
results presented above.
2011 Average
 Winter year – Absolute deviation (MW)
 Calendar year – Absolute deviation (MW)
Secondly, it can be seen that the choice of a calendar year
 Winter year – Relative deviation (%)
 Calendar year – Relative deviation (%)
slightly increases average uncertainty about the overall level of
obligation due to the location of the PP1 hours in time, for all the
Figure 33 – Relative uncertainty linked to the choice of the
delivery year on the reference power of the main BRPs
years studied apart from 2008. The average standard deviation
is 490 MW (0.55% of the average “France” reference power) with
Standard deviation as % of refP
a calendar year compared with 450 MW (0.5% of the average
“France” reference power) with a staggered year.
5%
4%
3%
4.3.4 Sensitivity of suppliers’ obligation to
the choice of delivery year
2%
Current commercial practices, at least in the large consumers
market, are organised around annual contractual periods begin-
1%
ning on 1 January of each year of the contracts. This can result in
a significant change in the customer portfolio of a given supplier
0%
Main BRPs
 Winter year
on 1 January. The actual distribution of the PP1 hours between
 Calendar year
the periods before and after 1 January therefore plays a decisive
role as regards the amount of a supplier’s obligation.
average of these two levels, weighted by the distribution of the
To estimate the sensitivity of the reference power of the main
PP1 hours between the first and second periods.
suppliers to the option chosen for the delivery year, RTE conducted a study using the same methodology as above but this time
To illustrate this point, the consumption curves from 1996
at the supplier level.
to 2012 are shown with, in colour, the 200 hours of highest
consumption for a calendar year and for a staggered year.
Figure 33 summarises the results obtained for the main Balance
Responsible Parties (BRPs) (reference power of more than
92
Choosing a calendar year leads to the selection of 200 hours
800 MW). It represents, for the six years considered, the average
corresponding to consumptions that underestimate the winter
variability of the obligation of each BRP in proportion to its refe-
peak. This effect is particularly visible in 2008 (consumption in
rence power, depending on whether the delivery year is centred
purple).
on a winter or corresponds to a calendar year.
RTE conducted an analysis to evaluate the sensitivity of the
The analysis shows that the standard deviation is less than 4%
“France” reference power to the type of delivery year chosen.
for all the main suppliers, and even below 2% for all except one.
One hundred PP1 hour distribution scenarios were considered,
Comparing this with the initial simulation results presented in the
obtained from 100 France consumption scenarios drawn from
interim report of September 2013, we can note that the variabi-
the 100 Météo France climate scenarios representative of the
lity of the reference power of the main suppliers is considerably
CAPACITY OBLIGATION / 4
lower. This reflects the notification of PP1 days, which results in
> Aligning delivery years with calendar years: this
the days being distributed over the delivery period and, ultima-
solution leads to a slightly higher variability of the
tely, to a regulation of the weight of the early winter (November
overall level of obligation but is very effective in
and December)137. Consequently, the variability of reference
terms of stabilisation.
power due to the change in portfolios on 1 January is smoothed.
The second approach consists in transferring resHowever, variability in the obligation is still greater for several sup-
ponsibility for managing this risk to suppliers, which
pliers with a staggered year than with a calendar year (average dif-
can if necessary cover it with initiatives outside the
ference in variability of more than 1 to 2 percentage points), espe-
capacity mechanism. Suppliers could implement
cially as their contractual practice is centred on a calendar year.
various solutions to manage and cover this risk:
137
In the studies conducted
by RTE on historical data,
November and December
account on average for
40% of PP1 days with
a standard deviation
of around 10%. These
values are very stable
from one delivery year
to the next.
> Contracts with consumers: one practical way would be to
Taking this observation as a starting point, several approaches
make contract durations match the delivery years of the capa-
are possible.
city mechanism;
> Hedging instruments: the risk stemming from the location
The first consists in introducing parameters in the capacity
of PP1 hours essentially corresponds to the distribution of
mechanism rules to reduce the sensitivity of suppliers’ obliga-
reference power between suppliers, as the total reference
tion to the location of the PP1 hours, either by:
power is affected only to a small degree. In theory, suppliers
>
Stipulating a breakdown of PP1 hours between the periods
are therefore justified in entering into hedging arrangements
before and after 1 January: this option necessarily diminishes
amongst themselves to protect themselves against this. The
the quality of the signal. Based on the same number of days,
cost of hedging this risk should theoretically be low, apart
hours with lower demand would be selected than with a sys-
from interface costs, since the overall risk is low and one of
tem with no predefined distribution. Insofar as peaks would
distribution. Such hedging products do not currently exist and
be less accurately targeted, issues relating to the valuation of
would therefore have to be created;
non-certified demand response and the increase in the tem-
> Trading of certificates during the delivery period or beyond:
perature sensitivity modelling error would be exacerbated. To
again, the choice of the delivery year essentially creates a risk
address these problems, an increase in the number of PP1
relating to the distribution of reference power between sup-
days would enable the hours of highest consumption to be
pliers. The decree allows for transfers of capacity certificates
better targeted, despite the predefined distribution, but would
during the delivery year and even after obligated parties have
also dilute the value of peak demand response;
been notified of their obligation. Consequently, it is possible
Figure 34 – Relative uncertainty associated with choice of delivery year on residual obligation
of the main BRPs considering an allocation of ARENH rights in proportion to PP1 days
Standard deviation as % of refP
5
4
3
2
1
0
Main BRPs
 Winter year
 Calendar year
93
for suppliers to adjust their coverage based on the actual loca-
have been allocated. In the model used, ARENH certificates are
tion in time of PP1 hours by trading certificates.
allocated in proportion to the number of PP1 hours and ARENH
rights for the year N and N+1.
During the consultation, many suppliers also stressed that the
methodology that will be used to allocate the capacity cer-
With the method of allocating ARENH certificates adopted for
tificates associated with ARENH rights was not known when
this study, the variability of the residual obligation of all the main
the draft rules were submitted for consultation. The allocation
suppliers apart from one is lower with a staggered year than with
method chosen for ARENH certificates can have conside-
a calendar year.
rable effects on the variability of suppliers’ reference power.
Basically, if the amount of ARENH certificates allocated to
These results therefore show that the option chosen for allo-
suppliers changes symmetrically with their reference power
cating the capacity certificates associated with ARENH rights
depending on the distribution of PP1 days, then suppliers are
can limit the impact of the location of the PP1 hours linked to
exposed only on the residual consumption volume excluding
the change in customer portfolios on 1 January. Thus, depen-
ARENH.
ding on the methods chosen for the ARENH, the option of an
overlapping year for the capacity mechanism could be adop-
To estimate the possible effects of the allocation of ARENH certi-
ted without necessarily requiring a re-adaptation of current
ficates, the same sensitivity analysis was carried out considering
commercial practices in the energy industry based on calen-
the residual obligation of suppliers once the ARENH certificates
dar years.
Provision adopted in the rules for the delivery year
The studies conducted on the choice of the year do not identify one type of delivery year that stands out clearly
in terms of stability alone. The sensitivity of the obligation to the choice of the delivery year is relatively low both
for France and at supplier level, notably because notification distributes the days over the whole delivery period.
These studies are all the less conclusive because the methods of allocating capacity certificates to ARENH rights
are not known and can greatly affect the variability of suppliers’ obligations.
The debate about the type of delivery year to be selected is actually about a choice between two approaches: one
based on the physical management of the system, which favours a staggered year centred on a winter, and one
based on contracts, which favours a calendar year since this is usually the basis for contracts in the energy market.
The rules propose a delivery year matching the calendar year, starting with the second year the mechanism is in
place. This is the preferred choice of alternative suppliers and industrial consumers, since it will allow the capacity
mechanism to align with existing contractual practices in the energy market.
At a time when the European Commission is asking Member States to align their approaches to capacity questions
with the broader framework of the European energy market, the choice of a calendar year should also facilitate
subsequent integration at the European level, based on existing contractual practices.
In keeping with the provisions of the decree and to facilitate the transition to the calendar year targeted, the first
delivery year will begin on 1 November 2016 and end on 31 December 2017, with July and August 2017 excluded.
4.4  Parameters of the capacity obligation
4.4.1  Determination of the obligation parameters
(extreme temperature and security factor)
operator publishes forecasts relating to the overall level of
capacity certificates enabling the capacity obligation of all suppliers to be met.” This publication is based on a supply-demand
4.4.1.1 Timing of the publication of obligation parameters
balance study conducted for the delivery year.
Article 18 of the decree stipulates that “during the four-year
94
period preceding each delivery year, and at least once a year
The rules include a provision that corresponds to the use of this
for each delivery year, the public electricity transmission system
adequacy study to determine the possible need for an updating
CAPACITY OBLIGATION  / 4
of the obligation parameters (extreme temperature and security factor) and of the tables used for capacity certification (see
Figure 35 – Illustration of how
the reference mix is determined
§ 5.3.2).
Any updates to these parameters must be approved by the
Forecast situation
Energy Minister. Indeed, in the absence of specific references
Shortfall
expectation
Xh/year
Contribution of
interconnections
in the decree to changes made to provisions in the rules, the
Shortfall
expectation
3h/year
principle of parallel powers gives the authority responsible for
enacting an act the power to amend or abolish it. In this ins-
Existing capacities
tance, insofar as the Minister approves “all provisions relating
to capacity certification” and “all provisions relating to capacity
Reference
mix
Capacities under
construction
obligation, and in particular to the method of calculating reference power and determining suppliers’ obligations”, it must
approve any modification of these parameters.
At the start of a capacity mechanism term, the mechanism para-
Additional
power
Margin
(if E > criterion)
(if E < criterion)
meters are published together with the first forecast of the overall
level of certificates. Forecasts of the overall level of certificates are
thus calculated with the same methods and parameters as those
ultimately used for calculating the obligations of obligated parties.
matches the supply security criterion defined by
public authorities
139
, without exceeding it (this
The provision adopted in the rules corresponds to the choice of
would lead to overcapacity that would be costly
stable parameters throughout a term (intra-term stability). Para-
for consumers) or coming in below it (this would
meters may vary from one term to another (inter-term change)
reduce the level of security, at the expense of the
to reflect how the power system evolves and its dynamics over
community).
several years.
This reference mix is used to estimate the overall
138
Article L-335.2
139
The same method is used
here as in the studies in
the Adequacy Forecast
Report. For further
details, see page 35
of the 2013 Adequacy
Forecast Report update
and pages 82-83 of the
2012 Adequacy Forecast
Report.
Defining the mechanism parameters in advance gives suppliers the
level of obligation corresponding to the volume of
visibility they need to incorporate the impact of the amount of their
certificates that must be held by the community of
obligation into their contracts with customers, meet their obligation
suppliers for the security criterion to be met. The overall level
and possibly implement demand management measures.
of obligation corresponds exactly to the volume of certificates
allocated to the reference mix.
This system allows compliance with the provisions of the Energy
Code138 stipulating that suppliers must act in advance:
3 h criterion met <=> CertificatesOverall Level =
∑ Certificates allocated
Reference Mix
“The obligations imposed on suppliers are determined in such
This approach ensures the necessary coherence between certi-
a way as to encourage compliance in the medium term with
fication and obligation: when public authorities’ security of sup-
the level of security of supply.”
ply criterion is met, the overall level of certificates (and there-
“Capacity certificates are required sufficiently in advance.”
fore the mix underlying it) exactly matches the sum of suppliers’
obligations.
4.4.1.2  Determination of the reference mix taking the
supply security criterion into account
The amount of certificates allocated to the reference mix is cal-
The obligation parameters are determined based on a supply-
culated by certifying that mix in accordance with the capacity
demand balance study for the delivery year.
mechanism rules for the term in question, i.e. taking into account
any updates to the certification parameters. Consequently, the
Through this study, a reference mix is determined that corres-
certification of the reference mix incorporates all changes in the
ponds to the anticipated mix to or from which capacities will be
power system in its measurement of the contribution of capaci-
added or subtracted to obtain a shortfall duration that exactly
ties to reducing the shortfall risk.
95
4.4.1.3 Determination of the obligation parameters
> E nsure that the overall obligation volume corresponds exactly
(extreme temperature and security factor)
to the volume of certificates of the reference mix, enabling
Certifying the reference mix makes it possible to determine
compliance with the supply security criterion;
the total amount of certificates necessary for the supply
> D etermine the pair of values [
T
ext security
F] that assigns the tem-
security criterion to be met. The parameters of the obligation
perature sensitivity risk to temperature sensitive consumers
(extreme temperature and security factor) are defined in such
without transferring it to non-temperature sensitive consu-
a way as to:
mers (see § 4.1.3.2).
Figure 36 – Illustration of the relationship between the overall
level of certificates and the obligation parameters
Reference mix
enabling security of
supply criterion
to be met
France
supply and
demand
assumptions
Volume of
certificates
required to
meet criterion
Probabilistic
supply-demand
balance study
Europe
supply and
demand
assumptions
Update
based on
changes
in system
Extreme temp.
(> France consumption
at extreme temp.)
These two objectives are met thanks to supply-demand balance
Simulations were carried out to determine the extreme tempe-
studies conducted by RTE. The process involves two stages:
rature that meets these requirements. A marginal approach was
>
F irst, determining the individual contribution to the shortfall risk
adopted to allow for the estimation of specific individual para-
which leads to the determination of the extreme temperature;
meters without disrupting the system as a whole. This is impor-
>
140
The power system
is transposed to
“3 hours” with the same
methodology as that used
to determine the reference
mix (see figure 37).
141
A “perfect resource”
corresponds to a
fictional capacity that is
perfectly available with
no technical constraint.
It serves as a touchstone
for the mechanism
because each MW from
a perfect resource
is allocated 1 MW of
capacity certificates.
142
Considering this demand
in France alone would
naturally lead to a perfect
resource need of 1 MW
for 1 MW of consumption.
96
Capacity
certification
parameters
Security
factor
S
econd, ensuring via the security factor that the
tant because the phenomena studied intrinsically depend on
mechanism is sufficiently complete to meet the
the system in which they play out: a consumer’s contribution to
security of supply criterion.
the shortfall risk is directly linked to the form of the shortfall and
therefore to the underlying system as a whole. This approach
4.4.2  Extreme temperature
4.4.2.1 Determination of the extreme
thus complies with the letter and spirit of the capacity mechanism decree, which assigns to each consumer its contribution
to the shortfall risk.
temperature
As indicated above, the extreme temperature must be
The approach used can be described as follows:
defined in such a way as to avoid assigning part of the
> T he initial situation corresponds to the projected state of the
temperature sensitivity risk to non-temperature sen-
interconnected French power system, with security of supply
sitive consumers via the security factor. Making tem-
set at the criterion defined by public authorities;
perature sensitive consumers responsible in this way,
> S tarting from this situation, various consumption profiles are
without pooling, gives them a considerable incentive
added marginally, causing security of supply to deviate from
to keep their consumption in check and supports the
the criterion defined by public authorities140;
peak demand management objective. This assignment of responsibility must therefore be ensured.
> “Perfect resources”
141
are then added until security of supply
is restored to the criterion defined by public authorities.
CAPACITY OBLIGATION / 4
Figure 37 – Illustration of the marginal approach
to determining the contribution of a consumption
profile to the shortfall risk
This approach allows the following results to be obtained:
>
The need in terms of perfect resources necessary with
consumption that is constant over the year and perfectly nontemperature sensitive, taking account of the interconnection
of the French system142, is estimated;
Value of adequacy
criterion = K0 (3h)
> The addition of a purely temperature sensitive consumer
Addition of specific
consumption profile
1
(perfect linearity of behaviour, no non-temperature sensitive
consumption and therefore no consumption at temperatures
above 15°C) then allows the calculation of the extreme temperature taking account of interconnections. The addition of
Addition of X MW from
a perfect resource
Value of adequacy
criterion = K1
such a consumer with a gradient of 100 MW/°C reveals a perfect resource need that corresponds to its consumption for a
2
temperature of -2.6°C in the interconnected French system.
By iteration, we
determine X such that
K2 = K0 (back to 3h)
The marginal approach is an effective way to separate the contriValue of adequacy
criterion = K2
butions to the shortfall risk of non-temperature sensitive and
temperature sensitive users’ consumptions and to reflect them,
without transfer, in the parameters of the capacity obligation.
4.4.2.2 Illustration of the extreme temperature with
regard to the weather contingency to which the system
extreme temperature, a result of supply-demand balance simu-
is subject
lations, with the climate data representative of all possible situa-
To take into account temperature variations within a day, the
tions in the current climate.
provisions adopted in the rules correspond to the choice of
a daily extreme temperature series in half-hourly steps. The
A study was conducted on the basis of Météo France climate
extreme temperature therefore takes the form of a vector with
data currently in force, consisting of 100 temperature series
20 values corresponding to the extreme temperatures of the
representative of the current climate. Figure 38 corresponds to
20 half-hourly steps of the PP1 range. The half-hourly transla-
temperatures constructed with the methodology described in
tion of the extreme temperature adopted in the rules links the
the rules.
Figure 38 – Illustration of the extreme temperature with regard to the weather contingency
Smoothed temperature (°C)
0
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
-1
-2
-3
-4
-5
-6
08/02/12
1/20
1/10
1/5
97
Hourly extreme temperatures corresponding to a given level of
At supplier level, this comes down to making suppliers’ level of
risk (1-in-20 chance, 1-in-10 chance and 1-in-5 chance) were
obligation insensitive to the actual occurrence of the weather
determined from these data. They correspond, for each hourly
contingency and transposing observed consumption to the
step, to the quantile with the lowest temperatures of each series.
extreme temperature representative of the temperature sensi-
Thus the temperature with a 1-in-10 chance corresponds to
tivity risk.
the 10th percentile of the minimum values of each series, and
the temperature with a 1-in-20 chance corresponds to the 5th
percentile of the minimum temperatures.
4.4.3  Security factor
4.4.3.1  Taking interconnections into account in the
Figure 38 represents the extreme temperatures obtained with
security factor
the three abovementioned levels of risks and the coldest day of
The law stipulates that the obligation takes into account the
the cold spell in February 2012.
interconnection of the French market with the other European
markets. The decree specifies that the security factor takes
account of the contribution of interconnections. Concretely,
The above studies show that the reference
extreme temperature that is meaningful for
determining the capacity obligation is representative of one-in-ten-year cold conditions.
“implicit” recognition of the contribution leads to a reduction of
suppliers’ obligation in proportion to the contribution of interconnections to security of supply.
The methodology applied to take the contribution of intercon-
Given the importance of temperature risk in the French power
nections to security of supply in France into account is drawn
system, its statistical distribution and its time constant of
from that used by RTE for adequacy studies (Adequacy Forecast
approximately one week (see figure 39), the three hours of
Reports): the role of interconnections is taken into account in
expected shortfall in the French power system translate into a
supply-demand balance studies through detailed modelling of
shortfall that appears on average for 30 hours every ten years,
the whole of Western Europe.
when an exceptional cold spell occurs. The mechanism thereThe contribution of interconnections is thus accounted for
fore aims to act as if a severe cold spell occurred each year.
“implicitly”, through decisions about the size of the reference
Figure 39 – Cold spells in France – From 1947 to 2012
(Source: Météo France)
Minimum value of temperature indicator (°C)
-12
12 to 19 January
1966
30 January to
7 February 1954
3 to 17 January
1985
7 to 13 February
1986
-10
23 to 28
December 1962
8 to 23 January
1987
-8
1 to 27 February
1956
22 to 31 January
1947
5 to 14 February
1991
19 to 24 February
1948
-6
7 to 11 January
1967
12 January to
6 February 1963
26 December 1996
to 8 January 1997
23 December 1970
to 6 January 1971
-4
1 to 13 February
2012
-2
4 to 8 March 1971
14 to 24 December
1963
16 to 21 January
1957
14 au 24 December
2001
6 to 13 January
2003
10 to 17 January
1960
0
0
5
10
15
20
Duration (number of days)
25
30
The diameter of the spheres symbolises the overall intensity of cold spells, the biggest spheres corresponding to the most severe.
98
35
CAPACITY OBLIGATION  / 4
Figure 40 – European modelling of supply-demand balance studies
Extensive modelling of
the whole of Western Europe
Consumption
Stochastic simulation
(1,000 years simulated)
Stock management
Interconnections
Hourly optimisation
Availability
of generation
Renewable
energies
Reference mix
Hydropower
mix in France. Basically, if the contribution of interconnections
The reference generation mix, consisting of existing
is nil, all of the power necessary to meet the supply security cri-
capacities and projects under way, adding or remo-
terion must be located in France; conversely, if interconnections
ving “perfect” resources to allow the three-hour loss
can contribute, less capacity is required in France.
of load expectation used as the adequacy criterion to
been met, was certified using the hypotheses for the
The contribution of interconnections depends on two factors:
>
> T he
T he sizing of physical interconnection and its availability;
availability of margins in neighbouring countries, i.e.
capacity available beyond what is needed to meet demand in
neighbouring countries.
modelling of the mix and the outputs of the model:
> O n the basis of availability during the 200 hours
143
If the study was
conducted for France
alone, the quantity of
additional power required
to meet the criterion
would be much higher.
This quantity represents
the contribution of
interconnections.
of highest demand for thermal units and demand
response;
> O n the basis of generation during shortfalls in the model outputs for hydropower units.
Indeed, if no margins are available in neighbouring countries,
physical interconnections may be available without any electri-
For 2017, the total volume of certificates enabling the criterion
city being imported. The availability of foreign capacity depends
obtained to be met is thus estimated at 93 GW. This represents
on factors external to France.
the overall level of certificates that covers the risk represented
via the reference extreme temperature. This volume of certifi-
4.4.3.2  Determination of the security factor
cates already includes the contribution of interconnections
The security factor is determined several years in advance and
because foreign countries are explicitly modelled in the study143.
ensures that the obligation level corresponds to the security of
supply criterion defined by public authorities.
Based on the 100 demand series (1 series = 8,760 hourly average power values) that serve as input for the model, and cor-
It is set at the start of a capacity mechanism term on the basis of a
respond to the 100 climate series provided by Météo France,
supply-demand balance study and is stable throughout the term.
an average reference power for France can be estimated. For
each series, the 100 hours of highest consumption are extra-
To estimate the value of the security factor, an analysis was car-
polated to the extreme temperature, and then the average of
ried out on the basis of the study of the year 2017 in the 2012
these 100 extrapolated values is calculated. A reference power is
Adequacy Forecast Report. Figure 41 illustrates the principle for
thus obtained for each series. The average of the 100 reference
determining the factor based on this study. This approach was
powers calculated gives an estimate of the France reference
presented as part of the consultation in June 2013.
power. It is estimated at 99.7 GW in this study.
99
If the three-hour criterion is met, the total obligation must be
of the reference mix. The security factor is thus deduced from
equal to the volume of certificates of the reference mix. The
the overall level of certificates and the France reference power:
security factor ensures consistency between the reference
∑ Certificates =
power and the volume of certificates enabling the three-hour
criterion to be met, transferring to the obligation side the contri-
secu
F x refP(extT)
referencemix
=> secuF = 93/99,7 = 0,93
bution of interconnections taken into account in the certification
Figure 41 – The taking into account of interconnections and determination of the security factor
x secuF = 0.93
ns
ectio t
n
conn
Inter to accou
in
taken
Overall
level of
certificates
ref
P_France
(FR
consumptio
at ref T°)
(enables
criterion
to be met)
F
security
Overall
level of
certificates
Sum of
capacity
obligations
93 GW
93 GW
99.7 GW
P_France
ref
99.7 GW
93 GW
aken
nce t
mitte
t
Inter o accoun
int
4.5 Determination of the obligation
As discussed above, a supplier’s obligation is given by the fol-
> AdjustedConsump
lowing formula:
Oblig,DY,OP = refP,DY,OP x SF,DY
>
>
>
OP,DY
[t] is the observed consumption of the
obligated party OP, in half-hourly step t in delivery year DY,
>
adjusting for the demand response capacity activated;
T [t] is the extreme temperature, in half-hourly step t, for
Ext
delivery year DY;
Oblig,DY,OP is the obligation of the obligated party OP for
delivery year DY
> SFTt, DY[t] is the smoothed and thresholded France temperature in half-hourly step t in delivery year DY;
refP,DY,OP is the reference power of the obligated party OP
for delivery year DY
> nbHoursPP1,DY is the number of hours of the PP1 peak
period for delivery year DY.
SF,DY is the security factor for delivery year DY
The next section describes in detail how each of these terms,
refP,DY,OP =
1
2 x nbHoursPP1,DY
[AdjustedConsumpOP,DY[t] + GradientOP,DY[t]
x
t PP1 x ( T [t] – SFTt,DY[t])]
Ext
∑
E
thus offers a very specific reading guide for the rules.
4.5.1 Perimeter of an obligated party
Si ∑t PP1 ObservedConsump.OP,DY[t] = 0 alors refP, DY, OP est mise
4.5.1.1 Definition of the perimeter of an obligated
à 0.
party
E
> Gradient
OP,DY
[t] is the gradient of the obligated party OP in
half-hourly step t in delivery year DY;
100
which are used to determine the obligation, is evaluated, and
Determining the obligation of an obligated party requires identifying the consumption covered by this obligated party. For this
CAPACITY OBLIGATION  / 4
purpose, the concept of the perimeter of an obligated party has
the attestation, the two parties to the system having opposing
been introduced in the rules.
interests: the supplier could seek to minimise its perimeter to
reduce its obligation; conversely, a consumer that does not have
The perimeter of an obligated party is the reference used to
an attestation would find itself bearing the financial burden of
calculate its reference power. In practice, this perimeter is divi-
the capacity obligation.
ded into sub-perimeters per system operator, grouping the sites
connected to their systems. Procedures for exchanging infor-
4.5.1.3  Role of public electricity distribution system
mation about and tracking these sub-perimeters are defined in
operators (DSOs)
agreements between distribution system operators and RTE.
DSOs communicate to RTE the reference power for each obligated party on their system, i.e.:
The perimeter of an obligated party is not linked to a delivery
> T he reference power of end consumers connected to their
year. It has an initial form that evolves in accordance with
system per obligated party (supplier and end consumer not
changes in the customer portfolio.
supplied for all or part of its consumption by a supplier) together with the data and parameters used;
The perimeter of an obligated party (Perimeter OP(h, m, DY))
> T he reference power, for their losses, per obligated party (sup-
consists of all the sites for which the obligated party bears the
plier or system operator for its losses not supplied for all or
capacity obligation (in whole or in part) in hour h of month m in
part of its consumption by a supplier) together with the data
delivery year DY.
and parameters used.
Each system operator is responsible for monitoring the sub-
The reference power per obligated party communicated by each
perimeter of the obligated parties for which it must calculate
DSO is calculated in accordance with the provisions of the rules.
the reference power.
This information must be communicated within the deadlines
4.5.1.2  Determination of the consumption site-
stipulated in the rules and the exchange agreement between
obligated party link
TSO and DSO for the calculation of the obligation.
Consumption levels per obligated party are reconstituted by
allocating the observed consumption of a given consumer
between (a) the supplier(s) for the share they supply and (b) the
consumer itself for the share not sourced from a supplier.
4.5.2  Observed consumption
4.5.2.1 Data used
The basic data used to calculate the observed consumption of a
For sites with only one contract, changes occur in the perimeter
consumer are obtained from the metering and information sys-
with the effective dates of the single contract. The consumer that
tems of the operators of the public systems to which the sites
holds only one contract and its supplier do not have to take any
are connected directly or indirectly.
special steps to be included in the perimeter of an obligated party.
4.5.2.2 Observed consumption for profiled consumers
For sites not bound by a single contract, a consumer is added
For profiled consumption, load curves are established in accor-
to the perimeter of an obligated party based on an attestation
dance with the methods defined by the BRP/BM rules in force.
filed jointly by the obligated party and the site. If no attestation
is filed to include a site within a supplier’s perimeter, it is consi-
In this respect, the observed consumption data used in the capa-
dered that the site is not supplied by a supplier. In this case it
city mechanism correspond to the Recotemp final consumption
is directly subject to the capacity obligation and integrated into
data (aligned and standardised load curve adjusted for activa-
the perimeter of the obligated consumer (or one is created, if
tion of NEBEF), i.e. to the load curve considered to have been
the consumer did not register as an obligated party).
consumed on the basis of meter readings, adjusted for load
reductions.
The rules therefore adopt a declarative method for the monitoring of perimeters, to avoid complex and intrusive monitoring
This load curve, established according to the methods defined
of all the contractual links between a consumer and its sup-
in the BRP/BM rules and the experimental rules for rewarding
plier or suppliers. This method enables intrinsic verification of
demand response on energy markets in force at the beginning
101
of the delivery year, is definitive, unlike the load curves estima-
The temperature considered corresponds to the national tem-
ted to calculate imbalances, which are not based on actually
perature index calculated for France. It is calculated on the basis
measured power levels.
of the Météo France “basket” of 32 weather stations.
4.5.2.3 Taking into account Site BRP NEBs
The temperatures used correspond to variables derived from the
raw temperature measured at various weather stations. Indeed,
4.5.2.3.1 Affiliation with an obligated party
it is is necessary to take into account the inertia of consumption
From a contractual standpoint, the NEB BRP-Site is similar to a
with respect to temperature variations. This is accomplished by a
supply contract between the supplier affiliated with the BRP that
“smoothing” of temperatures aimed at delaying and attenuating
issued it and the consumer at the site to which it applies.
temperature variation ranges in order to constitute an effective
explanatory variable of consumption.
The NEB BRP-Site can also be seen as a self-supply vehicle for a
consumer, outside the “conventional” supply contract.
A list of the chosen weather stations, the associated weightings
and the smoothing parameters for calculation of the index are
Given the ambiguous nature of the NEB BRP-Site, RTE has
indicated in part IV of Appendix F-M3 of chapter F of section 2
included a flexible proposal in the rules:
relating to the Balance Responsible Party system. Appendix 2 of
> The NEB BRP-Site is affiliated, by default, with the supplier that
the rules describes the method of smoothing and constructing
issued it;
the smoothed France temperature.
that so requests (the request form must be signed by the sup-
This smoothed temperature is not used by RTE in its work (Ade-
plier and consumer).
quacy Forecast Report – climatic corrections). However, the dif-
> The NEB BRP-Site may be assigned to an obligated consumer
ferences associated with the temperature variable options used
A request form is attached to the mechanism rules, and
are minimal.
the rules governing NEBs will evolve to ensure that suppliers to all NEB BRP-Sites are identified when notice is
4.5.3.2  Threshold temperature
given to RTE.
The threshold temperature is that indicated in part III of Appendix F-M3 of chapter F of section 2 relating to the Balance Res-
4.5.2.3.2 Taking the NEB BRP-Site into account
ponsible Party system, namely 15°C at present. The same logic
in calculating the obligation
is applied as in the above section.
Once the NEB BRP-Site is affiliated with an obligated party, the
NEB is included in the obligated party’s adjusted consumption,
4.5.3.3 Gradient
but not in the series used for the calculation of its gradient.
4.5.3.3.1  Estimation of the France gradient and
In other words, with this provision, NEB BRP-Sites are considered
gradient per major category of consumption
to be non-temperature sensitive.
4.5.3.3.1.1  Method of estimating the gradient
4.5.3  Sensitivity of consumption to temperature
4.5.3.1 Smoothed temperature
This section presents the method of estimating the gradient adopted on a national level and for each major category of consumption
(all profiled consumers and all remotely metered consumers).
The process used to construct the smoothed temperature and
choose the threshold temperature adopted in the rules was the
4.5.3.3.1.1.1  General description of the method
same as that used to factor the weather contingency into the
An estimation of the gradient by a linear regression of the power
profiling system.
over the temperature cannot be satisfactory because of the seasonal nature of consumption; this needs to be dispensed with
This choice presents the advantage of using an existing process
before evaluating the temperature sensitive share.
that is known to market stakeholders and consistent with current processes, particularly the profiling system.
The methodology adopted in the rules leads to the determination of half-hourly gradients valid for a delivery year:
102
CAPACITY OBLIGATION  / 4
> T he
gradient is calculated by the “difference regression”
nationwide level in France
with respect to the temperature deviation from one week to
The method proposed in the draft rules and adop-
the next. This method avoids the difficulty associated with
ted in the rules for determining load curves in
estimating the seasonal change in consumption that is not
France, for profiled and remotely metered PDS
representative of the temperature sensitivity of consumption;
consumers, is simple and transparent; it is not based
> T he data used pertain to consumption during the delivery
>
4.5.3.3.1.2  Performance of the method at
method, i.e. a linear affine regression on the power deviation
on obscure black box modelling, and all data used
year with the exception of bank holidays and the period cor-
are public. In this sense, the method chosen for the
responding to the winter holidays together with the period
capacity mechanism puts all stakeholders on an
either side of them (basically from 01/01 to 12/01 and from
equal footing.
14/12 to 31/12 of the delivery year)
144
144
A long period must be
chosen – not just PP1
hours – to ensure that
the gradient obtained is
sufficiently statistically
valid.
145
A temperature delta
calculated as follows
is used:
;
T he temperatures are aligned with a threshold temperature
During the consultation, however, some stakeholders questio-
beyond which consumption becomes temperature sensitive.
ned the performance of this method, notably with regard to two
For this reason, power differences corresponding to nil tempe-
aspects:
rature differences are omitted . The gradient is therefore cal145
culated de facto on the cold part of the delivery year.
> T he simplicity of the method was said to be liable to lead to
results not representative of physical reality;
> C onsequently, the evolution of the gradients from one year to
The singleness and additivity of the method are major assets
the next was said to be unstable.
for the mechanism. Applied on a set of consistent data
with scaling to consumption in France, it ensures additivity
RTE carried out a series of studies on the basis of actual
between the various estimated temperature sensitivities and
consumption from 2006 to 2012. Based on these analyses,
the equality of the sum obtained with the temperature sen-
questions about the method of determining the France gradient
sitivity for France.
were not taken into account.
Moreover, because consumption data from the delivery year is
4.5.3.3.1.2.1  Representativeness of the results obtained
for France
used, the values obtained correspond exactly to real temperature sensitivity.
The provisions adopted in the rules concerning the selection of
the pairs of values [consumption; temperature] used to calcu-
4.5.3.3.1.1.2  Calculation of the power difference
late the gradient lead, for each half-hourly step, to scatter plots
The power variation is calculated for the same half hour on two
consisting of at least 180 points. From a statistical point of view,
days, one week apart. The weekly variation in seasonality due to
the representativeness of the gradients obtained is real.
lighting in particular is negligible.
A study was conducted to estimate the sensitivity of the method
4.5.3.3.1.1.3  Calculation of the temperature difference
to the observed data used. For this purpose, 1,000 simulations
As for the power variation, the temperature variation is calculated
were carried out during which points used to determine the gra-
for the same half hour on the same two days one week apart.
dients for a same year and same half-hourly step were randomly
removed. Two different quantities of removals were considered:
In accordance with the description of the behaviour of demand
20 points and 100 points, or approximately 10% and 50% of the
and the temperature sensitivity effect, each temperature is
total number of points used for the calculation.
compared with the threshold temperature in order to use only
the portion that genuinely explains the power difference in the
The results of this study show that:
calculation of the difference. For example, the variation in power
> T he average of the gradients obtained is very stable: the devia-
between a half hour at 22°C and a half hour one week later at
tion of the average gradient from the initial gradient calcula-
17°C is not explained by this difference of 5°C (heating is not
ted with all the points is 0.05% with 20 points removed and
switched on at such temperatures); each temperature is thus
aligned with the threshold temperature, in this case 15°C (min.
>
0.2% with 100 points removed;
T he variability of the gradients obtained is low: the standard
function(threshold temperature; actual temperature)), resulting
deviation is 20 MW, or 1% of the gradient, with 20 points remo-
in a temperature difference of 0°C.
ved, and 65 MW, or 3% of the gradient, with 100 points removed.
103
Figure 42 – Illustration of the calculation of power differences
(Source: ERDF, WG of 09/07/13)
Variations compared to previous week
+
+
-
+
+
+
-
-
+
-
+
-
+
-
+
-
-
-
+
-
+
110
60
50
∆ power > 0
∆ power < 0
90
40
80
30
70
20
60
10
France synchronous series
Winter of 2011-2012
- - Wednesday at 7pm
{02/11 ; 9/11; … 08/02 ; 15/02; …}
50
November
December
January
0
February
March
Figure 43 – Illustration of the calculation of temperature differences
(Source: ERDF, WG of 09/07/13)
CASE 1
CASE 2
CASE 3
17
Smoothed temperature [°C]
15
Threshold temp.
28 March 2012
Δ
Δ
13
04 April 2012
11
Δ
9
min(dT ; tT) = dT
min(d-7T ; tT) = d-7T
min(dT ; tT) = dT
min(d-7T ; tT) = tT
Δ1 = dT – d-7T
Δ3 (<0) = dT – tT
21 March 2012
104
23:00:00
22:00:00
21:00:00
20:00:00
19:00:00
18:00:00
17:00:00
16:00:00
15:00:00
14:00:00
13:00:00
12:00:00
11:00:00
10:00:00
09:00:00
08:00:00
07:00:00
06:00:00
05:00:00
04:00:00
03:00:00
02:00:00
01:00:00
00:00:00
7
Power difference [GW]
France synchronous series [GW]
100
CAPACITY OBLIGATION / 4
The chosen method therefore has a very low degree of sensitivity to the observed data used and accurately reflects the
Figure 44 – Evolution of the average gradient on the
PP time slots obtained with the method in the rules
France temperature sensitivity for the year considered.
2,200
of history to determine the gradient as opposed to a multi-year
history said to guarantee greater stability.
The chosen option of determining the France gradient on the
basis of one year is consistent with the more complex modelling
used by RTE. While RTE uses a five-year history to align its forecasting models, this history is used to determine the threshold temperatures and the smoothing coefficients (optimisation under
France gradient (MW/°C)
Lastly, some stakeholders questioned the use of a single year
2,100
2,000
1,900
1,800
1,700
1,600
1,500
1,400
2007
2008
2009
2010
2011
constraints); gradients are determined for each year independently
(the model requires such freedom). This approach is very similar to
that adopted for the capacity mechanism: the threshold temperature and smoothed temperature are determined beforehand; the
out to identify the causes of this change, particularly whe-
gradients are calculated on the basis of actual data for the year.
ther it was a reflection of a physical change in consumption
or the method itself. These analyses identified as the expla-
The option of calculating the gradient on the basis of a single
natory factor the distribution of EJP (peak day demand res-
delivery year does not constitute a factor of instability for the
ponse) days over the winter, which introduces an unknown
mechanism. On the contrary, it is in line with existing processes
factor in the evolution of the gradient if load reduction
and enables consistency in the terms used in the handling of
volumes are not taken into account in calculating the gra-
temperature sensitivity in general (threshold temperature,
dient. If EJP was certified, consumption would be adjusted to
smoothing and gradient, which must be taken as a whole).
reflect the EJP activated. In any event, the deformation of the
Furthermore, this choice reinforces the dynamic aspect of the
scatter plot due to EJP only affects the incumbent operator;
mechanism with a gradient that reflects the temperature sensi-
the evolution of the gradient excluding EJP, which affects all
tivity of the year in question and makes it possible to take into
suppliers, is stable.
account actions implemented by stakeholders without being
bogged down by the inertia of past gradients.
The evolution in the France gradient obtained with the method
in the rules accurately reflects physical demand trends.
4.5.3.3.1.2.2 Variability of the results obtained for France
In response to the feedback received on the method of deter-
4.5.3.3.2  Provisions adopted on the temperature 
mining the gradients, studies were conducted on historical data,
sensitivity of consumers
focusing this time on the evolution of the gradient from one
year to the next.
4.5.3.3.2.1 Guiding principles for choosing the method
of estimating temperature sensitivity
The illustration opposite shows the evolution of the average
In parallel with the debate between precision and stability, many
gradient on the half-hourly time slots chosen for PP1 from the
stakeholders stressed the need to meet the following three
winter of 2006-07 to the winter of 2011-12.
requirements:
(i) The calculation of the obligation must accurately reflect the
Several points can be drawn from this analysis:
> First, the average growth in France temperature sensitivity
contribution to the shortfall risk, no more and no less;
(ii) Non-temperature sensitive consumers must in no case be
obtained with the method in the rules is in line with that found
penalised by possible uncertainties associated with the calcu-
in documents published by RTE (Adequacy Forecast Report
lation of gradients;
and Electrical Energy Statistics);
(iii) Remotely metered consumers must not be penalised by
> Second, a “rebound” can be observed between the gradients
uncertainties associated with the profiling system.
for 2009, 2010 and 2011. Additional analyses were carried
105
These requirements aim to prevent full pooling, which would
gradient. The total profiled customer gradient applied for year
completely dilute the objective of making market stakehol-
DY therefore corresponds to the value of this linear extrapola-
ders responsible for their temperature sensitivity. The rules
tion. This provision presents the advantage of stabilising the
consequently incorporated a segmentation of the methods
evolution of the profiled gradient from one year to the next146.
adopted for each major category of consumption, taking
However, it causes a delay in taking into account changes in the
into account not only the process of determining consump-
level and form of the temperature sensitivity trend among pro-
tion (profiled or remotely metered) but also the physical para-
filed consumers, which could change radically with the deploy-
meters of this consumption (for example by distinguishing
ment of smart meters and the switching of profiled consumers
between TSO losses, which are temperature sensitive, and
to remote metering. This provision is not adopted for remotely
consumers connected to this network that are not tempera-
metered consumers.
ture sensitive).
4.5.3.3.2.3  Choice of method at the consumer level:
4.5.3.3.2.2  Method adopted for overall sizing of
Redistributive issues
temperature sensitivity per major category of
At an individual level, the gradient assigned to suppliers must in
consumption
theory reflect the real gradient of consumption in their custo-
The studies based on past data presented above show that the
mer portfolio in order to meet the objective of assigning obliga-
method of estimating the overall gradient by statistical regres-
tions in proportion to suppliers’ contributions to the shortfall risk
sion on the basis of actually measured data enables the gra-
and to enable them to benefit from any initiatives to manage
dients for France or per major category of consumption to be
their temperature sensitivity.
estimated with satisfactory accuracy and stability.
With this in mind, it could seem preferable to adopt an indiviRTE proposes to adopt this generic method to determine the
dualised approach across the perimeter of a supplier based on
gradients corresponding to each major category of consump-
the characteristics of its customers’ consumption. Indeed, a
tion as a whole. The additivity of the method ensures that the
normative approach would automatically lead to the pooling of
sum of the gradients of the various categories of consumption
any temperature sensitivity management initiatives over all the
corresponds exactly to the France gradient. Consequently, a
consumers in the class.
combination of this method with segmentation per major category of consumption makes it possible (i) to target the real level
However, this approach presents some limitations:
of temperature sensitivity in France and therefore to support
> The flow reconciliation systems used on profiled sites are still
the mechanism’s security of supply objective, and (ii) to prevent
currently governed by a normative approach that cannot
transfers of temperature sensitivity between major categories of
be avoided with existing metering systems (ending profiling
consumption, which would be contrary to the principles outli-
would require the use of load curve data from sophisticated
ned in the preceding section.
meters);
> A n individualised approach could raise fresh questions about
Also based on this proposal, it is considered in the rules that
the assumed linearity of the power-temperature relationship.
the gradient is nil for certain categories of consumers owing
The numerical result obtained with the raw method may not
to a very low or statistically disputable temperature sensiti-
have any statistical or physical reality, particularly for “small”
vity. This concerns all consumers connected to the public
perimeters or for customers with “special” consumption
transmission system and consumers connected to the public
behaviours.
distribution systems identified as non-temperature sensitive
by the distribution system operators.
On the other hand, a normative approach intrinsically leads to
complexity, at several levels.
Following strong requests from suppliers of profi146
The basis on which the
gradients chosen for
the years DY and DY-1
are determined is 66%
shared (the estimated
gradients for years DY-1
and DY-2).
106
led customers, smoothing was introduced in the
First, it involves defining a distribution key to assign to each
calculation of the overall gradient of profiled cus-
consumer a share of the temperature sensitivity of its class.
tomers: the rules adopt a linear extrapolation based
Defining this distribution key is a delicate matter (share of subs-
on the gradients obtained for the years DY-1, DY-2
cribed power in relation to the sum of the subscribed power in
and DY-3 via the generic method of estimating the
the class, the ratio for annual average power or during PP1, etc.).
CAPACITY OBLIGATION  / 4
In addition, when the distribution key is defined has an effect on
solely on the basis of their forecast (no external
the precision and predictability of the gradients obtained:
parameters) and thus to benefit from the actions
> If the distribution key is determined before the delivery period,
the sum of gradients obtained will inevitably diverge from
they take to manage the temperature sensitivity
of their customers.
the actual overall gradient. This approach must be ruled out
>
because it jeopardises the mechanism’s security of supply
4.5.3.3.3  Method adopted according to
objective;
the type of consumption
147
The scaling factor is
applied to a larger
base, for example all
profiled consumers or
all remotely metered
consumers. Efforts by
these consumers to
reduce their temperature
sensitivity are therefore
pooled.
If the distribution key is determined at the end of the delivery period, the sum of the gradients can be normalised to
4.5.3.3.3.1  Scope of application and volume
bring it into line with the real gradient. In this case, however,
of associated gradients
a supplier’s gradient does not depend solely on consumption
It is possible to identify four categories of consumption that dif-
within its perimeter but is also affected by the consumption
fer in how their load curves are constructed and their underlying
of other suppliers. A supplier that can accurately predict the
physical nature:
consumption of its customers will not be able to accurately
predict its obligation.
The method chosen to determine the sensitivity of consump-
> P TS remotely metered consumption;
> P DS remotely metered consumption;
> P rofiled consumption;
> L osses (PDS and PTS).
tion to temperature on an individual level has effects only in
terms of redistribution of the gradient between stakeholders
In the consultation organised by RTE, information was communi-
(between individualisation and pooling) and not in terms
cated concerning the orders of magnitude of the various tempe-
of sizing of the overall gradient. Thus, the choice between a
rature sensitivities per type of consumption, giving an indication
method based on individualised actual consumption and a
of the stakes for these categories in terms of gradient volumes.
normative approach with a mutualising scaling factor
147
comes
down to choosing how the overall gradient will be redistributed
This information makes it possible to identify the main catego-
between stakeholders (consumers and suppliers). This choice
ries showing temperature sensitivity in order to adopt a rational
considerably impacts the incentives for stakeholders to manage
and proportionate approach. 85% of the temperature sensitivity
their temperature sensitivity.
of consumption on the ERDF grid is accounted for by profiled
consumers, 11% by losses from the ERDF grid and only 4% by
However, several market stakeholders (particularly suppliers of
remotely metered consumers.
profiled sites) expressed a desire to have more visibility on the
values of the gradients that will apply to their customers for a
It also makes it possible to identify the scope of the redistribu-
given delivery year.
tive effects that can result from the choice of an individualised
approach based on actual consumption as opposed to a pooling
To meet the demands of various stakeholders, a compromise
normative approach for PDS remotely metered consumption; it
must be found between the stability of the gradient (which
is therefore a matter of deciding how to distribute this tempera-
leads to pooling) and the principle of individualisation (which
ture sensitivity, which for the winter of 2011/12 is estimated at
provides incentives, exposing suppliers to the accuracy of
74 MW/°C for customers connected to the ERDF grid.
their forecasts).
Applying the principle of non-transfer of temperature senWhen the mechanism is first introduced, RTE proposes to adopt
sitivity (from temperature sensitive consumers to non-tem-
the following approaches:
perature sensitive consumers and from profiled consumers
>
>
F or profiled consumers, an approach based on the gradients
to remotely metered consumers), the redistribution of the
of the profiles used in the BRP/BM rules. This option was
gradients is partitioned per category of consumption. This
requested by the suppliers of profiled sites, in order to have
involves applying the principle of consistency of the sum of
better visibility;
the individual gradients with the France gradient but for each
F or remotely metered consumers, an individualised approach
category taken separately: concretely, the sum of the gradients
per supplier perimeter. This option enables suppliers to esti-
of profiled consumers must correspond to the temperature
mate the temperature sensitivity of their customer portfolio
sensitivity of profiled consumers as a whole, no more and no
107
Figure 45 – Orders of magnitude of temperature sensitivity per category of consumption
(Source: ERDF, WG of 09/07/13)
Other networks
= 169 MW/°C
Losses
= 201 MW/°C
Load curve
= 74 MW/°C
Profiled
consumers
= 1,567 MW/°C
- 5.0
0.0
5.0
ERDF total
- 10.0
10.0
= 1,842 MW/°C
ERDF
temperature sensitivity
less. This segmentation makes it possible to envisage different
Figures 46 and 47 do not show any link between powers and
approaches for each category of consumption.
temperatures and illustrate the hypothesis of non-temperature
sensitivity of customers connected to the PTS.
4.5.3.3.3.2 PTS remotely metered consumption
To complement the numerical data indicated above, various
In addition, application of a linear regression of the power at 7pm
illustrations are presented below concerning the link between
over the temperature gives a slope equal to -0.18 MW/°C. This
power and temperatures for customers connected to the PTS.
gradient has no statistical or physical validity. Application of the
Figure 46 – Daily energy consumed by direct PTS customers according to average daily temperature, in 2012
250,000
Daily energy (MWh)
200,000
150,000
100,000
50,000
0
-5
0
5
10
15
Average daily temperature (°C)
108
20
25
30
CAPACITY OBLIGATION / 4
Figure 47 –Trend in temperature at hourly time step
from 1 to 13 December 2012
10,000
10
9,000
8
8,000
MW
6,000
4
5,000
2
4,000
°C
6
7,000
0
3,000
-2
2,000
12
Temperature (°C)
/1
3/
20
12
Power
consumed (MW)
12
2/
20
12
/1
12
1/
20
12
12
/1
0/
20
12
20
9/
/1
12
12
/0
12
8/
20
12
12
/0
7/
20
12
20
6/
/0
12
12
/0
12
/0
5/
20
12
20
12
20
4/
/0
12
20
3/
/0
12
20
2/
/0
12
1/
/0
12
12
-6
12
0
12
1,000
-4
Mostly tertiary type activities
(hotels400
and restaurants,
public administrations, etc.)
Mostly agricultural or industrial
type activities (manufacturing,
automobile industry, etc.)
-10
-5
0
5
10
-10
-5
5
10
Temp. difference (°C)
Non-temperature sensitive load curves
Power difference (MW)
Temperature sensitive load curves
Power difference (MW)
Temp. difference (°C)
Figure 48 – Illustration of the temperature sensitivity of remotely metered consumers
(Source: ERDF, WG of 09/07)
109
method in such a case (i.e. redistribution of the -0.18 MW/°C) is
An initial classification based on the “APE” code (main activity
of no benefit in terms of accurately allocating the temperature
code) in the NAF listing was proposed during the consulta-
sensitivity of consumers.
tion. This classification was not adopted for different types of
reasons:
The provision adopted in the rules therefore corresponds to
the choice of a nil gradient for PTS customers. Their reference
power will be equal to the average power consumed during PP1
> Legal reasons: based on common practices, it could be considered discriminatory148;
> Technical
reasons: this classification appears disputable
hours at the actual temperature, adjusting for certified demand
because temperature sensitive and non-temperature sensi-
response activated.
tive consumption may be covered by the same activity code.
4.5.3.3.3.3 PDS remotely metered consumption
Taking this analysis into account, ERDF proposed a new classifica-
The system to which consumers are connected is not an entirely
tion based on a technical criterion: average annual power. Concre-
appropriate boundary in terms of temperature sensitivity: some
tely, PDS remotely metered consumers with average annual
consumers connected to a distribution system are temperature
power of 175 kW or less are considered temperature sensitive.
sensitive while others are not and in fact have a similar profile to
Figure 49 represents the average gradient in %/C over three past
certain sites connected to the PTS.
years for sets of consumers grouped together by average power.
The main difficulty here relates to the determination
148
Council of State decision
of 22 October 2012 on
the tariff order of 13
August 2009.
of an appropriate classification to distinguish tem-
For each year we can see a relationship between the average
perature sensitive from non-temperature sensitive
power of the group and the relative gradient of the class. The
consumers.
groups of sites with lower power levels are more temperature
sensitive (gradient significantly greater than 0) while the largest
sites are not temperature sensitive (gradient not significantly
different from 0).
Figure 49 – Illustration of customers’ temperature
sensitivity based on average power
(Source: ERDF, contribution submitted to
the Concerte site on 22/01/2014) The next step is to determine, for the capacity mechanism, a
threshold group beyond which consumers are no longer considered to be temperature sensitive; this comes down to determining a criterion corresponding to an average power, in this case
4
Consumers
considered highly
temperature
sensitive
Relative gradient in %/°C
3
the average power of this threshold group.
RT7
RT8
RT9
When the mechanism starts functioning, it is proposed that the
average threshold power be set at 175 kW; this parameter will be
revisable, like the other parameters of the capacity mechanism.
Consumers
considered
non-temperature
sensitive
2
Incorporating this criterion, RTE proposes to adopt the following
(gradient not significantly
different from zero)
approach:
> For non-temperature sensitive remotely metered customers
1
connected to the PDS, the treatment is the same as for PTS
remotely metered consumers: the gradient is set at 0;
0
> For
Threshold group
corresponding to an
P of 175 kW
average
-1
0
10
20
30
40
# of group of averageP
(503 load curves per group)
temperature sensitive remotely metered customers
connected to the PDS, the generic method is applied, per supplier perimeter, on the load curve corresponding to the sum
50
60
of the load curves of remotely metered customers connected
to the PDS that are considered to be temperature sensitive.
This provision provides an answer to the intrinsic limitations of
the generic method (physical non-representativeness of the
110
CAPACITY OBLIGATION  / 4
gradients obtained for small portfolios or atypical consumers)
1.1 and 1.8% in 50% of cases. Setting the gradients of consumers
by considering only temperature sensitive consumers.
considered to be non-temperature sensitive to zero therefore
helps to stabilise the gradient obtained for small portfolios.
Illustrations 50 and 51 represent the gradients obtained for
1,000 random samples with increasingly large populations (ran-
This provision adopted for customers considered to be non-tempe-
ging from 1 to 1,000 individuals) selected (1) among all remotely
rature sensitive is in line with the system proposed in the consulta-
metered customers and (2) only among customers considered
tion. It is a simplification measure, in view of the persisting difference
temperature sensitive.
between the regulation framework applicable to top segments of
the customer portfolio (remote metering and contracts) and bot-
We observe in case (1) that the average gradient obtained varies
tom segments (profiling and regulated tariffs). By tending towards
greatly according to the selection sample. Thus, for a sample of
standardisation of the gradient set at 0 for non-temperature sensi-
51 individuals, the gradient obtained is negative in more than 25%
tive (industrial in practice) consumers, this provision ensures com-
of cases. Conversely, in case (2), for the same sample size, the gra-
pliance with the principle that a consumer that does not consume
dient is positive in more than 99% of cases and is even between
on PP1 days has a zero obligation, in all cases.
Average gradient per load curve in kW/°C
Figure 50 – Random sampling among all remotely metered customers
(Source: ERDF, contribution submitted to Concerte site on 22/01/2014)
4
2
0
-2
-4
1 31
71 111
161
211
261
311
51
361
411
461
511
561
611
661
711
761
811
861
911
961
661
711
761
811
861
911
961
Number of aggregated load curves
Average gradient per load curve in kW/°C
Figure 51 – Random sampling among temperature sensitive customers
(Source: ERDF, contribution submitted to Concerte site on 22/01/2014)
4
2
0
-2
-4
1 31
51
71 111
161
211
261
311
361
411
461
511
561
611
Number of aggregated load curves
111
4.5.3.3.3.4  Profiled consumption
Two approaches were presented during the consultation to estimate the temperature sensitivity of profiled consumers:
> The first approach corresponds to the application of the
GradientsPS[h] = GProfil,S[h] x LCestim,S(M+14)[h] x PGADY[h]
> GradientsP [h]: gradient of profiled site expressed in MW/°C;
> G [h]: gradient corresponding to the sub-profile of the site
S
Profil,S
in the half-hourly step h of PP1 days expressed in %/°C. A list
method described in section 4.5.3.3.1 on the basis of defini-
of the applicable profiles is given in appendix F-M1 of the BRP/
tive profiled consumption. The method is therefore based on
BM rules in force at the beginning of the delivery year;
(but does not duplicate) the existing profiling process, with
which stakeholders are familiar, and which enables a load
curve per consumer to be obtained. As it is perfectly addi-
> L C
estim,S
(M+14): load curve of the site in the half-hourly step
h of PP1 days;
> P GA
DY
[h]: profiled gradient alignment coefficient.
tive, the calculation can be made on the profiled perimeter
of each obligated party, the hypothesis of linearity being
This alignment coefficient is determined after the delivery period
intrinsically validated for profiled consumption, by standar-
to ensure matching between the sum of the gradients of profi-
dised construction;
led sites and the total gradient for profiled consumers calculated
> The
second approach corresponds to the creation of new
by applying the method described in section 4.5.3.3.1 on final
consumption profiles based on those described in the BRP/BM
profiled consumption as a whole, adjusting for certified demand
rules with adjustment of the coefficients of the sub-profiles at
response activated, and smoothed via a linear extrapolation over
normal temperature which are extrapolated to extreme tempe-
the three years DY-1, DY-2 and DY-3 (see § 4.5.3.3.2.2).
rature. Temperature sensitivity is thus evaluated per sub-profile,
starting from the gradient calculated for all profiled customers,
4.5.3.3.3.5  Alignment coefficient and obligation
based on series preceding the delivery year. This method requires
Concerns were raised during the consultation about the volati-
new alignment coefficients calculated for each half hour (Cprofi-
lity of the obligation level, especially for profiled consumption,
led). These alignment coefficients are determined at each time
because of the alignment coefficient149.
step, using aligned profiled consumption as the reference, on the
delivery year, for all profiled sites extrapolated to the extreme tem-
The argument made directly projected the volatility of the align-
perature determined by applying the method described in sec-
ment coefficient onto the volatility of the obligation. According to
tion 4.5.3.3.1. This alignment covers both the energy alignment
this reasoning, if major discrepancies and volatility exist between
necessary to ensure the consistency of profiled consumptions
profiled and real consumption over peak periods, these discrepan-
with the total profiled consumption and an alignment correspon-
cies and volatility should be reflected in the level of the obligation. It
ding to an updating of the gradients previously determined, to
was suggested that the figure could be as high as several GW.
reflect changes in temperature sensitivity.
RTE and ERDF carried out joint and comparative analyses in
Figure 52
(Source: EDF, WG of 07/06)
2013 of the results produced by these two methods. These analyses showed that the methods lead to similar results at the supplier level and identical results for profiled customers.
Several stakeholders expressed their preference for the use
of gradients for sub-profiles defined in advance even if this
meant using new alignment coefficients, so that the sum of
From 2009 to 2012, on the ten days of highest demand per
winter (8am - 8pm time slot):
The alignment coefficient varies between 1.03 and 1.08
depending on the year
The coefficient is very volatile within the ten days of highest demand
>
>
the gradients would be in line with the gradient for profiled
consumers as a whole. The rules adopt a methodology of this
type, it being understood that the obligation calculated on all
profiled customers with this method is identical.
149
The alignment coefficient
as defined in Section 2,
chapter C of the BRE-BM
rules.
112
The rules therefore adopt a method that involves
estimating the gradient of a profiled consumer in
two stages:
Average alignment
coefficient
Daily volatility of
coefficient
2009
2010
2011
2012
1.08
1.04
1.03
1.04
1.04 to
1.10
0.97 to
1.11
1.02 to
1.05
1.00 to
1.06
A 1% variation in the alignment coefficient at peak ≈ a deviation of 0.6 GW.
CAPACITY OBLIGATION  / 4
Figure 53 – Variability of the alignment coefficient for a same reference power
1,04
Alignment coefficient
1,03
1,02
1,01
1,00
0,99
0,98
S1
S2
S3
S4
S5
S6
S7
S8
S9 S10 S11 S12 S13 S14 S15 S16 S17 S18 S19 S20 S21 S22
Distribution of PP1 hours (56GW)
This link between the variability of the alignment coefficient and
the determination of the observed consumption
the variability of the obligation does not seem to be borne out.
of losses. These provisions are being defined by
The alignment coefficient does not lead to any variability in France
CRE and are unknown on the date of submission
consumption. On the contrary, for each half-hourly step, it ensures
of the rules.
consistency between the sum of the profiled consumption obtained from the modelling and actual profiled consumption.
However, as losses are proportional to withdrawal
150
The orders of magnitude
presented in section
4.5.3.3 indicate a
temperature sensitivity
for ERDF losses of
around 200 MW/°C, or
about 10% of the overall
temperature sensitivity
for France.
and withdrawal is generally temperature sensitive,
RTE therefore conducted a study to test the hypothesis that a
the volume of losses is temperature sensitive. This
correlation exists between the value of the alignment coefficient
temperature sensitivity of losses also accounts for a significant
and the value of reference power. For this purpose, the align-
proportion of the France temperature sensitivity150 and cannot
ment coefficients for M+12 were retrieved for the delivery year.
therefore be overlooked. A method must thus be defined for esti-
In parallel with this, the reference power of profiled consump-
mating this sensitivity. The generic method described in § 4.5.3.3
tion was calculated by applying the provisions adopted in the
is suitable for estimating the temperature sensitivity of the losses
rules and using the distributions of PP1 days corresponding to
of each system operator.
the France consumption scenarios resulting from the Météo
France climate scenarios representative of the current climate.
In the same way as for the other categories of consumption,
questions arise concerning the redistribution of this tem-
Figure 53 shows that, for a same profiled reference power
perature sensitivity between the various stakeholders. This
value (56 GW), the average alignment coefficient on PP1 varies
is because covering the losses of each system operator can
between 1.00 and 1.03 (each column represents the alignment
involve several tens of suppliers and the system operator itself
coefficient associated with a distribution of PP1 hours).
for all or part of its losses.
The variability of the alignment coefficient is not therefore a
This question is dealt with generically in the next section. Indeed,
significant indicator of the variability of the capacity obligation.
the distribution of the gradient of losses between the various
suppliers and system operator is very similar to the situation of
4.5.3.3.3.6 Losses
a site where power comes from several suppliers and potentially
The methods for determining the temperature sensitivity of
also from the consumer directly.
losses must be compatible with the provisions adopted for
113
4.5.3.3.3.7  Distribution of the temperature sensitivity
The last step involves defining the singleness of such a supplier
of consumption between various suppliers
at each time step. The existence of several such suppliers does
Defining the rules that will determine how the capacity
not appear compatible with the fulfilment of this responsibility.
mechanism functions requires putting generic market design
At the least, it would require explicit coordination, failing which
concepts into practice, including in extremely complex situa-
the actions of one supplier would thwart those of others. Howe-
tions. This is the case with consumption sites that get power
ver, the legal analyses conducted by RTE and the feedback
from several suppliers. The framework outlined in this section
gathered from participants in the consultation did not allow this
can also be transposed to the compensation of system losses
singleness to be decided upon. By default, the rules include a
or to the obligation of consumers that buy directly on markets.
specific procedure for cases where there are several such suppliers for a given time step: it involves going through the BRP
How the temperature sensitivity of consumption is distributed
(Balance Responsible Party) to distribute the consumption and
between various suppliers needs to be considered in the light of
temperature sensitivity of a site between several suppliers.
the type of commitment made by a supplier vis-à-vis a consumer. In general terms, a distinction can be made between two
types of supply:
> A supplier can commit to supply a block of energy. In this
>
4.5.4  Taking into account certified demand
response measures activated
case, it is committed to supplying a defined volume of energy
In keeping with the choices made in France about market archi-
regardless of external conditions, particularly the actual
tecture since the Poignant-Sido workgroup of 2010, the capa-
temperature;
city mechanism calls for demand response to be able to parti-
A supplier can commit to cover the actual consumption of the
cipate directly in the capacity market as supply, i.e. to directly
site. In the context of the capacity mechanism, this supplier
secure capacity certificates through the certification process.
has therefore made a commitment to cover the consumption
Putting this principle into practices requires specific procedures
of the site at extreme temperature. This commitment may
to ensure that demand response capacity is not rewarded twice,
also entail coverage of the differences between injection and
once through a reduction of the obligation and once through
withdrawal at the site.
the certificates issued. On this point, the decree stipulates that
“the observed consumption of a customer that has contributed
On this basis, we can consider that the supply of a block of
to the constitution of a demand response certification entity is
energy does not take away a share of the temperature sensi-
adjusted to reflect load reductions, in accordance with the capa-
tivity of the site, unlike a commitment by a supplier to cover
city mechanism rules”.
actual consumption. Concretely, the rules therefore consider
site NEBs to be non-temperature sensitive.
As a result, for each PP1 peak hour, the observed consumption of a consumer that has committed to a demand response
There then arises the question of the existence for any site of
capacity that is certified and activated must be revised upward
a supplier committed to covering actual consumption (residual
by the amount of certified demand response capacity activa-
of energy blocks supplied by other means) and the singleness
ted to calculate the obligation. This requires assigning an acti-
of this supplier. The concept of a supplier undertaking to cover
vated demand response amount to each consumer, based on
a site’s actual consumption is incorporated in the rules via the
individual measurements (ideally) or by applying distribution
affiliation of sites with the perimeter of one or more obligated
keys over a volume of attested load reduction attributed to the
. The absence of such a supplier does not constitute
demand response capacity certified as a whole. The capacity
an obstacle in the final analysis: it corresponds de facto to the
mechanism rules proposed by RTE describe the methodology
consumer choosing to cover its own consumption, including
for calculating a supplier’s obligation taking into account the
at extreme temperature. In this case the rules provide for the
certified demand response activated. They do not, however,
recognition of obligated consumers’ affiliation either
address financial flows between stakeholders (supplier, consu-
based on the declaration of the consumer or on the
mer and any demand-side operator involved).
parties
151
The rules therefore
distinguish between the
concepts of a “portfolio
obligated party” and
an “obligated party for
declared supply”.
114
151
absence of affiliation with the perimeter of a supplier. In this case, the consumer is responsible for the
4.5.4.1  Non-temperature sensitive consumers
temperature sensitivity of its consumption.
The principle discussed above does not imply that a supplier must know which certified demand response capacity is
CAPACITY OBLIGATION  / 4
activated within its perimeter. It needs only to know the sum of
activated. This could create competition problems
the certified demand response capacity activated, or simply the
that have been addressed in recent years, resulting
amount of observed consumption adjusted for certified demand
in the introduction of a regulated model between
response activated, to determine its obligation. This is compa-
demand-side operators and suppliers. These issues
tible with the changes made to the regulatory framework for
do not relate specifically to the capacity market but
demand response, i.e. the introduction into the technical rules
more generally to the relationship between inde-
for rewarding demand response a segregation between inde-
pendent demand-side operators and suppliers; they
pendent demand-side operators and the suppliers of sites that
are also being addressed in the work being done on the imple-
activate demand response. This new regulation model, based on
mentation of the provisions stipulated by article L. 271-1 of the
the Competition Authority opinions of 26 July 2012 and 20 July
Energy Code.
152
Block Exchange
Notification of Demand
Response. See report on
the explicit valuation of
demand response on the
wholesale market on the
RTE website.
2013 and validated by the Energy Regulatory Commission in
its deliberations of 31 January 2013 and 28 November 2013,
The alternative to having the financial impact of the explicit
. If
valuation of demand response being addressed bilaterally and
demand response is accurately evaluated, then the supplier will
through contracts would be to impose a regulated payment
be in the exact same situation (in terms of its obligation) as if its
on the sites in question, which could be incorporated into
customers had not reduced load. The supplier’s obligation the-
the payment currently being defined in application of article
refore does not depend on the amount of certified demand
L. 271-1 of the Energy Code. In this case, the supplier would
response capacity activated.
not need to know the exact consumption per site adjusted for
is described in detail in RTE’s report on the NEBEF rules
152
load reductions. It would invoice customers on the basis of
On the other hand, putting these regulatory principles into
consumption measured (without taking into account demand
practice becomes challenging when it comes to passing on the
response). The “surplus” obligation resulting from the activa-
cost of the obligation to the supplier’s customers. To invoice to
tion of certified demand response is covered by the demand-
its customers the obligation amount resulting from the certi-
side operator. A change corresponding to an extension of
fied demand response activated, the supplier must either have
article L. 271-1 of the Energy Code to capacity would enable
access to the sites concerned and corresponding demand res-
energy and capacity to be treated in the same way and could
ponse volumes or have available from the system operator not
therefore be promoted.
the measured consumption but the measured consumption
adjusted for load reductions. Otherwise, the supplier has no
In any event, by the time the capacity mechanism is in effect,
other choice than to distribute the obligation resulting from
answers will have to have been found to the legal ques-
demand response among all its customers. This can create a
tions currently being examined to ensure that the supplier
windfall effect for the consumer that reduces its consumption:
is able to assign to consumers their share of the obligation
its obligation corresponds to its actual consumption (since the
or to obtain the corresponding payment from the consumer
amount of the obligation corresponding to demand response
with­in a regulated system.
is distributed between all consumers) but its load reduction is
also rewarded. For example, if its consumption is nil following
4.5.4.2  Temperature sensitive consumers
the demand reduction, it is not subject to any obligation and
For temperature sensitive consumers, the supplier’s gradient
it also receives remuneration corresponding to the amount of
is evaluated based on observed consumption adjusted for
the load reduction (through capacity certificates). However, the
certified demand response activated (it is on this scatter plot
same consumer reducing demand simply in order to reduce the
that the linear regression is applied). As a result, the fact that
amount of its obligation will not benefit from this remuneration:
demand response capacity is activated within its perimeter will
it will merely have a nil obligation. Thus, the decree’s principle of
have no impact on the analysis of the supplier’s temperature
non-discrimination between a reduction in the amount of the
sensitivity.
capacity obligation due to load reduction and the certification
of demand response capacity is not upheld.
On the other hand, it is very difficult to comply with the principle of non-discrimination between reductions in the obliga-
For the supplier to be able to pass through the cost of the obli-
tion and certified demand response activated, since the linear
gation accurately, it would have to have access to consump-
regression is applied to the entire delivery period, not just the
tion data per site adjusted for the demand response capacity
peak period.
115
Illustrationofpossibletreatmentsofdemandresponse
The following textbook case illustrates this phenomenon.
The hypotheses are as follows:
> We consider a temperature sensitive portfolio with a perfectly linear temperature dependency at temperatures below 15°C
with a gradient of 1 MW/°C;
> The PP1 hours correspond to hours at a temperature of 0°C;
> The extreme temperature is set at -5°C.
Case 2: Below 5°C, temperature sensitive demand
response with a gradient of 0.5 MW/°C is systematically triggered.
The temperature/consumption chart used to estimate
the gradient is as follows.
The temperature/consumption chart used to estimate
the gradient is as follows.
30
30
25
25
20
20
15
15
Power (MW)
Power (MW)
Case 1: Below 5°C, 5 MW of demand response
(non-temperature sensitive) is systematically
triggered.
10
5
5
0
0
-5
-5
-10
-15
-10
-5
0
5
10
15
20
25
Temperature (°C)
Power with no demand response
Estimated gradient
-10
-10
-5
0
5
10
15
Power with no demand response
25
Estimated gradient
Power with demand response activated
Reference power applied
Reference power applied
Non temperature-sensitive demand response activated
Non temperature-sensitive demand response activated
Observed consumption during PP1 is equal to 15 MW
(green dot). The application of the gradient yields a reference power of 18.75 MW (purple diamond) whereas the
consumer consumes 20 MW when the temperature is -5°C
(pink diamond).
20
Temperature (°C)
Power with demand response activated
The estimated gradient using the proposed method is
0.75 MW/°C (dotted orange line).
116
10
The estimated gradient using the proposed method is
0.75 MW (dotted orange line).
Observed consumption during PP1 is equal to 17.5 MW
(green dot). The application of the gradient yields a reference power of 21.25 MW (purple diamond) whereas the
consumers consumes 20 MW when the temperature is -5°C
(pink diamond).
CAPACITY OBLIGATION  / 4
It is easier to visualise this difference in treatment with a compari-
a temperature sensitivity corresponding to the difference in gra-
son of demand response capacity that is activated during all PP1
dient between the two situations presented above. However, if
hours, but is not certified, and the same demand response capa-
we carry out a linear regression on the demand response, the
city that is certified and activated in the same way. In one case, it
demand response volume obtained does not match the diffe-
is possible to calculate a difference in obligation generated by the
rence in obligation.
“implicit” demand response, and in the other, it is possible (according to precise methods to be described) to calculate the volume
Before this approach was implemented, a decision would have
of certified demand response factoring in the temperature sensiti-
to be made about the method of determining the volume on
vity of the demand response (by carrying out a linear regression on
the basis of which the demand-side operator must compensate
the load reductions possible during PP2 peak hours). Two different
the supplier.
values are obtained: for highly temperature sensitive demand response, certification is preferable; for demand response that is not
temperature sensitive (but applicable to temperature sensitive customers), implicit demand response may be preferable (see illustration of how demand response can be treated below).
4.5.5  Specific provisions for the compensation
of losses on public transmission and distribution
systems
The methodology for calculating the obligation corresponding
A regulated approach (extension of article 14 of the Brottes
to compensation for losses on public transmission and distri-
Act to the capacity aspect) may raise a difficulty in identifying
bution systems must be consistent with the methods used to
the volume to which the regulated payment should be applied.
determine the observed consumption associated with the com-
Addressing this difficulty would, strictly speaking, require
pensation for losses, which are to be proposed by CRE.
knowing how the supplier invoices the capacity. It can be assumed that the supplier invoices its customers applying the linear
The approach proposed in the rules corresponds to a near-exact
regression formula on the consumptions actually measured (a
transposition of the methods and systems used for other types
simplifying hypothesis which comes down to saying that the
of consumption.
supplier passes on to customers the exact portion of the capacity obligation generated by their consumption). In this case,
It involves a treatment of energy blocks supplied to compensate
the supplier recovers a certain obligation volume from its cus-
losses on the PTS and PDS similar to that of declared supply (Site
tomers. The overall volume notified to it by RTE results from
NEB) on the one hand, and on the other an affiliation with a peri-
the application of linear regression on the observed consump-
meter of the residual obligation created by differences between
tions adjusted for load reductions. The resulting difference in
the volume of losses observed during PP1 and the sum of the
obligation could be assigned to the demand-side operator.
energy blocks supplied. This obligation may be borne either by a
Ultimately, this comes down to assigning to demand response
supplier or by the system operator.
4.6  Timetable for suppliers’ obligation
4.6.1  Before the delivery year
simultaneously with the capacity obligation parameters. They
In the course of a capacity mechanism term, two events occur in
will subsequently be published annually, no later than the first
the period preceding the delivery year:
of January of each year.
> Publication of the obligation parameters. They are published
no later than 1 January, four years before the delivery year;
> Publication of RTE’s forecast for the total capacity certificates
4.6.2  During the delivery year
required for all suppliers to meet their capacity obligation, in
As indicated above, the delivery year DY adopted in the rules
keeping with the provisions of paragraph I of article 18 of the
begins on 1 January of year DY and ends of 31 December of year
decree. The first forecast for a delivery year will be published
DY.
117
153
Article L-321-16.
Within this delivery year, there is a delivery period
for a given delivery year is set at 15 December of year DY+2,
that corresponds to a formalisation of the “winter”
in compliance with the provisions of the decree. Consequently,
period, this being the period during which the shortfall risk
the provision of the decree imposes a collection deadline of
is concentrated and the PP1 days can be selected. The peak
15 February DY+3 at the latest.
period corresponds to the periods from 1 January to 31 March
and from 1 November to 31 December of year DY.
It is then proposed that the deadline for notification of the settlement relating to capacity rebalancing by obligated parties be
4.6.3  After the delivery year
set at 20 December of year DY+2.
4.6.3.1  Provisions included in the decree
Collecting and distributing the settlement is a two-stage pro-
Several provisions of the decree specify the organisation of the
cess, beginning with the collection of the settlement owed by
different steps to be taken after the delivery year. They can be
obligated parties followed by the payment of amounts owed
applied directly.
to obligated parties within the limit of the amounts collected.
Consequently, a deadline has been added for the collection
Notification of the obligation: “At least fifteen days before the
of the settlement owed by obligated parties, and it is set at
deadline for transferring capacity certificates, the public electri-
15 January of year DY+3, after which RTE pays any amounts due
city transmission system operator informs each supplier of the
to obligated parties.
amount of its capacity obligation.”
4.6.3.3  Incorporation of the public offering
Transfer deadline: “The deadline for transferring capacity cer-
The Energy Code includes an obligation for suppliers to orga-
tificates, beyond which transfers of capacity certificates are no
nise public offerings to sell any certificates held in excess of their
longer possible.”
obligation153.
Collection deadline: “The deadline for the collection of capacity
In response to requests made by several stakeholders, the rules
certificates, or the date by which each supplier must hold the
adopt a set of provisions to facilitate the implementation of this
amount of capacity certificates corresponding to its obligation;
obligation for suppliers:
it is set no later than two months after the transfer deadline.”
> T he
concept of suppliers’ surplus certificates is directly
incorporated in the rules, and corresponds to the diffeNotification of imbalances to obligated parties and of the
rence between an amount of certificates and an obligation
amount of settlements relating to capacity rebalancing by
amount;
obligated parties: “No later than fifteen days after the transfer
> S uppliers will be notified of surpluses when they are informed
deadline, it [RTE] informs each supplier of its imbalance and the
of their level of obligation. The volume of certificates held on
settlement corresponding to its capacity rebalancing.”
the date of notification of the level of their obligation will be
considered for this purpose. The surplus amount will be upda-
4.6.3.2  Methods adopted in the rules
ted following each change in the number of certificates held;
The first milestone after the end of the delivery year is the noti-
suppliers can find information regarding their surplus directly
fication of the obligation. The provision adopted in the rules
in the register;
corresponds to a notification of the obligation no later than
> S uppliers will thus be able to organise public offerings to meet
1 December of year DY+2. This milestone is set based on the
their obligation between the time they are notified of their
time required for the recovery of the observed consumption
obligation and the transfer deadline;
data, particularly for profiled consumption.
> T he procedures adopted for the capacity certificates register
will allow interfacing with any organised trading platforms. It
118
Starting from the date by which RTE is to have informed obligated
will thus be simpler to organise public offerings working from
parties of the amount of their obligation, the transfer deadline
the register and through trading platforms.
CAPACITY OBLIGATION  / 4
119
5. CAPACITY CERTIFICATION
Supply in the capacity market is constituted by capacity certi-
level (§ 5.1). Details are then provided about the options selec-
ficates issued by RTE and allocated to operators of generation
ted in RTE’s proposal: definition of the PP2 period during which
and demand response capacity that contribute to security of
the capacity level is determined (§ 5.2), the methods used to cal-
supply. This chapter discusses capacity certification, i.e. the pro-
culate availability factoring in the technical constraints of capa-
cess by which each operator is allocated an amount of certifi-
cities (§ 5.3), practical implementation of certification, particu-
cates proportionate to the benefits provided to the power sys-
larly timetables (§ 5.4), and the principles of rebalancing (§ 5.5).
tem in terms of reducing the shortfall risk.
In the interest of transparency for all involved, the certification
process is based on extensive data collection (§ 5.6). To comply
The chapter begins with a review of the general provisions
with regulations, the certification process also includes consis-
governing certification, particularly the identification of stakhol-
tency checks, some aspects of which are described at the end
ders affected, how their capacity level is determined, and the
of the chapter.
time periods and methods applied in calculating this capacity
5.1  General provisions governing the certification of capacities
The certification process involves allocating to each capacity
The rules provide detailed definitions of capacity operators and
the amount of certificates that corresponds to its contribution
categorise them according to the nature of their capacities
to reducing the shortfall risk.
(generation or demand response).
A capacity’s contribution to reducing the shortfall risk depends
5.1.1.1.1 Operator of generation capacity
on its specific characteristics, the power system in which it ope-
A generation capacity operator can be:
rates and the security of supply criterion set by public authori-
> E ither
the holder of the Transmission Network Access
ties. Certification parameters must therefore be chosen in such
Contract (CART), the Distribution System Access Contract
a way as to reflect a capacity’s contribution to reducing the
(CARD) or the calculation service contract for an injection
shortfall risk as accurately as possible. The general provisions are
site;
the framework within which the certification process unfolds.
> O r a legal entity with a mandate from the holder of the Transmission Network Access Contract (CART), the Distribution
System Access Contract (CARD) or the calculation service
5.1.1  Players involved in capacity certification
contract for an injection site.
Operators of generation and demand response capacity are affected by the certification aspect of the capacity mechanism. They can
5.1.1.1.2 Operator of demand response capacity
either act as their own capacity portfolio manager, a role created by
The operator of demand response capacity, whether operated
the decree, or designate a capacity portfolio manager that will bear
directly by a consumer or indirectly through an aggregator, can be:
the financial responsibility for imbalances within their portfolios.
> E ither the holder of a Network Access Contract, a calculation
service contract, a single contract or a regulated tariff contract
5.1.1.1 Operator
154
The decree also
stipulates (II, article 8)
that certification request
documentation is to be
presented to the operator
of the system to which
the unit is connected.
120
for extraction sites;
Under article 321-16 of the Energy Code, opera-
> Or a legal entity with a mandate from the holder of the
tors must file a certification request with the public
Network Access Contract, calculation service contract, the
transmission system operator for any generation or
single contract or regulated tariff contract for the extraction
demand response capacity connected to the public
site or for each extraction site constituting the demand res-
transmission system or public distribution system
Participation is thus mandatory for all capacity.
154
.
ponse capacity.
CAPACITY CERTIFICATION   / 5
5.1.1.2 Capacity portfolio manager
advance (from three to four years before the deli-
Similarly to the balance responsible entity system in place in
very period for existing generation capacity) and
the energy market, the decree introduced the role of the capa-
the effective capacity level is measured after the
city portfolio manager to spread capacity availability risks when
delivery period, imbalances may be observed. Two
determining the effective capacity level.
approaches can be taken to measuring imbalances:
155
Decree 2012-1405,
Article 1.
> T he approach based on actual capacity involves an indivi-
The capacity portfolio manager is the legal entity financially
dualisation of the imbalance between the certified capacity
responsible for the imbalances of the capacity operators in its
level (on the basis of which capacity certificates were issued)
portfolio. It pays the penalty charged to operators as laid out in
and the effective capacity level: the initial certification may be
article L. 335-3 of the Energy Code. Operators can act as their
based on self-assessed data (operators have the most infor-
own capacity portfolio manager or enter into contracts with
mation about expected availability);
capacity portfolio managers. Capacity portfolio manager status
is acquired by signing a contract with RTE.
> T he
normative approach involves pooling imbalances
between certified capacity levels and effective capacity levels:
in this case initial certifications may be based on normative
values (typically per technology) associated with real-time
5.1.2  Capacity level
minimum commitments.
5.1.2.1  Certified capacity level and effective capacity level
However, the decree specifies that operators are to indicate
5.1.2.1.1  Overview of the provisions of the decree
in their certification requests “the forecast availability of their
The decree establishes a certification process based on a certified
capacity during the PP2 period”. Hence the regulations explicitly
capacity level followed by verification of the effective capacity level.
provide for a mechanism that will hold capacity portfolio managers responsible for imbalances between their commitment to
The certified capacity level […] reflects the contribution of the
a level of certified capacity and their effective capacity level. This
capacity to reducing the shortfall risk during the delivery year.
provision is compatible with the philosophy of the approach
based on actual capacity. A generic approach based on the indi-
The effective capacity level reflects, for a given delivery year,
vidualisation of imbalances has therefore been adopted.
the real contribution of the capacity to reducing the shortfall risk
for a given delivery year155.
This approach presents several advantages.
These two concepts are inseparable.
Firstly, with an approach based on self-assessed rather than normative data, the certified capacity level of an operator is not
5.1.2.1.2  Two approaches: actual capacity or
limited by the performances of other operators. A normative
normative basis
approach would penalise the most efficient operators in a given
The real level of security of supply depends on the effective avai-
sector and benefit the least efficient ones. With an individua-
lability of capacity when supply is tight. As capacity is certified in
lised approach, each operator can reap the full benefits of any
Figure 53 – Relationship between certified capacity level and effective capacity level
(Source: RTE, Market Access Committee meeting of 11/07/2013)
Starting 3-4 years before delivery year
Certified capacity level
Calculated based on forecasts
Delivery
year
Année
de livraison
Effective capacity level
Calculated based on effectively available power
121
improvement in its own performances. It creates a powerful sys-
was merely to remunerate existing assets by offsetting some
tem of accountability. Operators decide on the projected avai-
stranded costs, but, as indicated in chapter 1 of this report, such
lability of their capacity. To avoid distortion and strategic beha-
is not the purpose of the mechanism introduced in France.
viour, they must be held accountable for differences between
actual and forecast availability.
Secondly, the approach should lead to virtuous behaviour,
notably by creating a closer link between the physical state
of the system and the information conveyed by the capacity
The generic approach adopted involves certifying
capacity based on availability forecasts submitted
by operators and calculating a settlement after the
fact to reflect the level of effective capacity measured based on availability during the PP2 period.
mechanism. And maintaining this link through to the last rebalancing gate should pave the way for a dynamic management
of capacity adequacy. For instance, is operators anticipate that
5.1.2.1.3  Intermittent capacities
they will make a lesser contribution to reducing the shortfall
The applicability of the generic approach described above (cer-
risk (technical problem, exceptional maintenance or decision
tification based on self-assessments, restatement post verifica-
to close a unit), they have an incentive to rebalance, and the
tion) to intermittent or non-controllable capacities was discussed
resulting decline in the level of capacity certified can trigger the
extensively during the consultation. Some participants noted
creation of new capacity and peak demand management mea-
that the intermittent nature of some capacities would necessarily
sures. This feedback loop appears to be an important factor
require the application of a normative approach, since the availa-
in the stability of the mechanism, creating a restoring force
bility of these capacities depends exclusively on external parame-
that binds the two sides of the supply-demand balance. It
ters156. They also stressed the impact this volatility would have on
is particularly important for capacity that can be
all stakeholders and on the quality of the signal conveyed by the
deployed rapidly, especially demand response
mechanism. Since a large share of intermittent capacity benefits
and other peak demand management actions.
from purchase obligations, the law already provides for a specific
Not taking into account short-term resources would
system to be created for these capacities (to be proposed by CRE).
156
A parallel can be
drawn with climatic
correction used on
the obligation side to
ensure that obligated
parties’ obligations
are not affected by
weather contingencies.
If weather contingencies
are neutralised
in calculating the
obligation, they should
also be neutralised
in the certification
process. However, the
restatement carried
out to calculate the
obligation does not
include all external risks,
but specifically weather
contingencies. The aim
is to compare the actual
situation to a situation
representative of the
risk against which the
system is seeking to
protect itself, i.e. a cold
spell. This is why it is
proposed in the draft
rules that a correction be
made for temperature
sensitive capacities (not
intermittent sources, but
some demand response
for example) so that the
capacity level allocated
to them is consistent
with their contribution
in a “one-in-ten-year
cold conditions” type
situation.
122
mutualise capacity risks with the cost being borne
by the whole community (in practice, it would mean
Based on these considerations, the possibility was included in
increasing the security factor for all consumers).
the rules for an operator of intermittent capacities to opt for an
alternative certification system. Under this alternative system,
A third advantage of this approach is its simplicity:
certificates are allocated to operators based on normative coef-
the number of capacity certificates allocated to a
ficients, rather than on their self-assessments with subsequent
resource depends directly on the attested availa-
adjustments following the verification of effective capacity
bility and technical characteristics of the resource
levels. This gives operators options with regard to the treatment
during the PP2 peak period. This “self-assessment
of the risk associated with the primary source.
+ verification” system circumvents the problem of
defining normative coefficients that are often chal-
Two concerns should nonetheless be mentioned in considering
lenged by the operators that claim to do be more
this system:
efficient. Indeed, a normative approach requires
> Technical studies conducted by RTE (presented in this chapter)
determining capacity certificate allocation values
did not support the assertion that the application of the generic
ahead of time and generates significant distortion,
system to intermittent capacities would jeopardise the quality
particularly in terms of the bases for calculating refe-
of the capacity mechanism signal: as of today, the main risks
rences for allocation values.
for the level of certified capacity, and thus for signals relating to
capacity, are those that could affect nuclear capacity;
Lastly, this approach reduces the risk of “phantom
> This approach could prevent the full use of all resources through
capacity” appearing because real availability is taken
the capacity mechanism, notably demand response resources.
into account. It ensures that capacity that is not available during the peak period will not be rewarded
5.1.2.1.3.1  Structure and volume of intermittent risks
through the capacity mechanism. Of course this
To assess the impact of the certification of intermittent capa-
system would not be appropriate if the objective
cities using an approach based on accurate availability data,
CAPACITYCERTIFICATION / 5
Figure 54 –Standard deviation of effective capacity level for wind and run-of-river power
18%
400
16%
400
16%
350
14%
350
14%
300
12%
300
12%
250
10%
250
10%
200
8%
200
8%
150
6%
150
6%
100
4%
100
4%
50
2%
50
2%
0
0%
0
0%
2008
2009
2010
2011
Standard deviation (MW)
450
2008
2009
2010
2011
Standard deviation (%)
Run-of-river (standard deviation in MW and %)
18%
Standard deviation (%)
Standard deviation (MW)
Wind (standard deviation in MW and %)
450
    Without
milestones (MW)
    Milestones
5 days (MW)
Without
milestones (%)
Milestones
5 days (%)
RTE conducted technical studies on the structure and volume
> The risk may however be more significant for one technology:
of the risks to which intermittent capacities are subject. The
the standard deviation can represent up to 17% of the effective
goal was to estimate the impact the certification method used
capacity level for wind power and 7% for run-of-river power.
for intermittent capacities has on the “stability” of the capacity
These results show that the variability of wind and run-of-river
mechanism.
power in past years was low in relation to the power sector,
These studies are based on actual production between 2008
especially compared with nuclear capacity (standard deviation
and 2011 and the results quantify the variability of wind and
of about 1,000 MW). The volatility of capacity supply mainly
run-of-river power generation risks. The charts below show the
corresponds to risks relating to nuclear power generation.
results in terms of the variability of capacity levels with days
selected over the entire delivery period or with milestones limi-
Looking ahead, forecasts were drawn up for 2016-17 to estimate
ting the number of days in March and November to five.
the variability of wind and photovoltaic power generation. The
variability of intermittent renewable energy sources remains
Two conclusions can be drawn from these studies:
>
limited in 2016-17 with a standard deviation of approximately
Variability is limited within a given year (approximately 300 MW
150 MW for PV and 500 MW for onshore wind. Variability is thus
for wind power and 200 MW for run-of-river power);
still lower than for nuclear power.
Figure 55 – Comparison of the breakdown of annual wind and run-of-river power production
Run-of-river (distribution of annual generation in TWh)
Annual generation (TWh)
Wind (distribution of annual generation in TWh)
30
46
28
44
26
42
24
40
22
38
20
36
18
34
16
32
123
Another study was conducted based on probabilistic simula-
Secondly, the normative approach does not allow all
tions to complement the analysis of the structure of intermittent
resources available to the capacity mechanism to be utilised,
risks, focusing notably on the breakdown between intra-annual
particularly the addition of new capacity as the delivery year
risks, which are sensitive to the location in time of PP2 days, and
approaches. Risks relating to water conditions can typically be
inter-annual risks, which are sensitive to risk realisation during
detected between year Y-3 and the delivery period. In this case,
the delivery year. Within this context, the variability of annual
the procedures stipulated in the decree and implemented in the
production in these segments was studied for a large number of
rules (rebalancing by the operators in question) must allow this
scenarios assuming no changes in the fleet.
information to be communicated to the market (for example a
rise in prices following a reduction of the expected actual avai-
Two observations can be made:
> Inter-annual variability in wind power generation is low: the
main risk is intra-annual;
> Inter-annual variability of hydropower generation is high: this
lability of certain resources) to create economic space for new
capacity (typically demand response on dates close to the delivery year). These resources cannot be utilised with a normative
approach.
is due to differences in water conditions between years. The
intra-year risk, however, is lower. Based on projections for
Thirdly, the option of applying a normative approach to inter-
2016-17, the total variability of run-of-river hydropower is
mittent capacities raises the issue of the equal treatment
estimated at around 600 MW.
of all capacity. This is an especially important consideration
because stakeholders have underlined the fact that all types of
Differences between the characterisation of the intermittence
capacity, controllable or not, is subject to external risks.
of run-of-river hydro and wind power generation have distinct
consequences for the signal conveyed to the market and the
system:
> A wind capacity operator has no new information about the forecast production of its capacity when the delivery period begins;
> A run-of-river capacity operator has more reliable information
about its forecast production when the delivery period begins.
Choosing whether to treat the risk associated with water
conditions for run-of-river hydro generation, which can be
predicted before the start of the delivery period, through an
approach based on actual results or a normative approach,
means choosing whether the real state of security of supply
in the delivery year in question is targeted or not.
5.1.2.1.3.2  Impact of a normative approach
Making a separate treatment of intermittent capacities possible
is not without consequences for the mechanism.
The first question it raises is whether normative certification should be an option for all capacities. With
157
If capacity level is
determined over a
relatively long period
(around ten years),
without no specific
treatment, a capacity
that is closed could be
assigned a capacity level
for ten years, though
it would admittedly
diminish each year over
the period.
124
no adjustments made to reflect observed availability,
a purely normative approach results in certificates
being allocated to capacities irrespective of their
actual contribution to reducing the shortfall risk.
A normative approach leading to a total absence of
imbalances, regardless of the actual availability of the
capacity, could induce undesirable windfall effects157.
This approach heavily penalises demand response.
The rules make it possible for the operator of noncontrollable capacity (wind, photovoltaic, run-ofriver hydro power) to choose between one of the
two following systems when certifying capacity:
> T he generic system (certification based on self-
assessed data with subsequent restatement
based on verified availability) applicable to controllable capacity;
> An alternative system (certification based on
normative coefficients calculated for each
technology, neutralising the risk associated
with the primary source).
This option addresses the expectations expressed
during the consultation and incentivises operators to forge strategies to hedge variability risks
(particularly by adding flexible capacity such as
demand response). It thus allows a distinction to
be made between external risks associated with
the primary source and those that are within the
operator’s “control”.
The coefficients used with the normative system
are based on adequacy studies and reflect the
average contributions of these technologies to
reducing the shortfall risk.
This ability to choose between the two approaches
is modelled after the renewable energy support
schemes adopted in some European countries,
which give operators an option between participating in the market or a de-risked system (Germany and Spain are examples).
CAPACITY CERTIFICATION   / 5
5.1.2.1.4  Unforeseeable risks
of less than 100 MW158, to be issued rebalancing tic-
Some generators indicated during the consultation that they did
kets. This new system will make operations in the
not want the evaluation of their effective capacity level measu-
power system even more transparent.
red after the availability verification to take into account unfore-
158
In this regard, the
provision goes beyond
the principles of EU
Regulation 543/2013.
seeable risks that affect availability in real time. These include all
5.1.2.2 Certification based on self-assessed
events that are beyond the control of the operator and result in
data with verification of availability
temporary unavailability (equipment failures, etc.).
Under the generic approach, the principles outlined above
involve basing the number of capacity certificates allocated to a
Accounting for unforeseeable risks presents the same type of
resource to the self-assessed data provided by the operator. All
difficulties as those outlined above. It is indeed not easy to esta-
capacity is certified based on its specific characteristics. Certified
blish a rule ahead of time for distinguishing between risks that
capacity levels are based in part on the estimated availability of
are unforeseeable (and thus acceptable) and foreseeable (consi-
the capacity during the PP2 period, per the terms of the decree:
dered “abnormal”). An incentive system similar to that used for
“The certified capacity level […] takes into account in particular
imbalance settlements in energy markets, assigning to each
the estimated availability of the capacity during the PP2 peak
stakeholder the cost of the rebalancing the system requires,
period of the delivery year” (article 1).
should provide an adequate response to these issues and avoid
introducing a rule for identifying the nature of risks that would
All self-assessed data submitted is then compared with the
inevitably be complex.
effective capacity level measured during PP2 in the delivery
year. The effective capacity level is calculated using the same
Because they can rebalance before the delivery period (see
method as the certified capacity level. The difference between
chapter 6), operators are able to adjust their certified capa-
the two is the basis for the imbalance settlement subsequently
city levels to take the realisation of unforeseeable risks into
calculated.
account: they can revise their capacity levels downward during
periods or years when numerous unforeseeable risks occur, or
Consistency between certified and effective capacity levels is
upward if few unforeseeable risks materialise. The rules also
thus guaranteed. Because the same method is applied in cal-
include various provisions to attenuate the effect of such
culating certified capacity levels and effective capacity levels,
occurrences:
certification parameters are set at the start of the mechanism
>
T he difference between certified and effective capacity levels
term and maintained throughout. Only data that can cause the
is evaluated at the capacity portfolio manager level, making it
capacity level to change are reported by operators. They have
possible to spread risks;
the information necessary to anticipate the amount of certifi-
> Availability commitments are made for the whole PP2 period,
cates they will receive to match their effective capacity level.
so risks can be spread over time.
The certified capacity level is thus based on the operator’s foreSome stakeholders said that while such measures may be
cast of its effective capacity level. The proposed method thus
necessary, they are not sufficient to ensure fair competition
mirrors the system in place in the energy market: operators
in the capacity market, particularly with respect to stakehol-
submit data based on their own calculations and imbalances are
ders with large perimeters. A specific provision was therefore
determined based on actual results.
included in the rules to limit the application of rebalancing costs
if unforeseeable risks affect generation or demand response
capacity.
The system adopted in this provision (two zero-cost rebalancing
“tickets”) is designed to maintain the incentive for stakeholders
to submit their best availability forecasts ahead of time (tickets
Rebalancing plays a central role in the mechanism: operators can rebalance at any time,
including during the delivery year, to adjust their
certified capacity level as they obtain more specific information about the availability of their
resources during the mechanism term.
valid only for two days after the unforeseeable event is reported and for a volume proportional to the impact of the event
on certified capacity). Operators will therefore have to report all
The deadline for initial certification is at least three years before
unforeseeable risks affecting their resources, including capacity
the delivery year for existing generation capacity (the decree of
125
Figure 56 – Organisation of the certification process
PP2
Rebalancing is flexible and possible even during delivery year
Rebalancing
Difference
Initial
certified
capacity level
(Initial
availability)
Certified
capacity
level after
rebalancing
Effective
capacity level
(Availability
after
rebalancing)
(Actual
availability)
December 2012 specifies that a deadline must be set for opera-
measure its availability during the actual shortfall hours. PP2
tors to submit certification requests). They are not expected to
must therefore include these hours. However, the capacity
submit firm and final assessments of the projected availability
mechanism is intended to provide insurance by rewarding capa-
of their capacity, since rebalancing is possible. Rebalancing cor-
city that contributes to security of supply even in years with no
responds in a way to a “re-certification” of capacity, reflecting
shortfall situations. As a result, the PP2 period must be defined in
adjustments to operators’ forecasts based on new information
such a way as to provide the best estimate of a capacity’s contri-
about their capacity. The cost of the rebalancing, which is added
bution to reducing the shortfall risk when no shortfall occurs.
to the cost of the certificates required for rebalancing by the
capacity portfolio manager, reflects the cost to the community
of disclosing the new information. The cost is zero before the
5.1.4 Calculation of the capacity level
delivery year starts and rises progressively thereafter, with the
Different methods of calculating the capacity level were pro-
cost of imbalances, during the delivery year.
posed during the consultation, notably focusing on the algorithm used. These proposals were combined into a formula cen-
5.1.3 PP2 peak period
tred around:
The decree specifies that the “peak period” refers to “the hours
> Available power during PP2
> A coefficient enabling technical constraints to be taken into
of a delivery year during which the shortfall risk is greatest, par-
account (definition and calculation presented in § 5.1.4.2).
ticularly those during which national demand is highest”. The
peak period used in the capacity certification and verification
5.1.4.1 Available power
methods is called the PP2 period.
The principle applied in calculating available power must be that
a capacity that is not available during the peak period does not
At the time of certification, the certified capacity level must reflect
contribute to reducing the shortfall risk and will therefore not be
the capacity’s contribution to reducing the shortfall risk, meaning
allocated any capacity certificates.
it must take into account projected availability during the PP2
peak period. The real-time measurement of effective capacity
In the rules, available power is defined as the power that can be
availability must therefore focus on this same PP2 period.
made available during PP2. Generation capacity that does not
produce energy but could do so, or demand response capacity
126
In a year with shortfall situations, the best way to assess each
that is not activated but could be, is considered to be available
capacity’s contribution to reducing the shortfall risk is to
during the period in question.
CAPACITYCERTIFICATION / 5
5.1.4.2 Technical constraints
least when the mechanism is first implemented. All other pro-
Capacity can be subject to technical constraints (other than
visions considered would inevitably have led to the creation of
availability) that affects its contribution to reducing the shortfall
different products, adding another layer of complexity.
risk. Examples include:
> Energy constraints;
> Constraints linked to controllability/intermittence;
> Dynamic constraints.
5.1.4.2.2  Controllability / intermittence
5.1.4.2.2.1 Methods based on certification procedure
adopted
How these constraints are factored in when calculating certi-
A capacity’s controllability or intermittence is first taken into
fication levels depends on the weighting assigned to them in
account through the approach adopted for certification.
determining the capacity’s contribution to reducing the shortfall risk. They must therefore be measured and verified.
If certification is based on actual results, then the operator will specify the variability of its capacity in its certified capacity level decla-
5.1.4.2.1  Energy constraints
ration and ultimately receive the amount of certificates correspon-
The key risk the capacity mechanism must address is a cold spell
ding to its real contribution (producible energy during PP2).
with a particular time structure that could range from several
hours to several days in a row.
With a normative approach to certification, this principle does not
apply. According to regulations, the normative approach must reflect
On a theoretical level, the certification process must take into
the average contribution of capacities to reducing the shortfall risk.
account technical constraints such as daily energy constraints
(number of hours per day during which the capacity can be being
5.1.4.2.2.2 Normative certification and contribution to
activated at maximum power), weekly energy constraints (num-
reducing the shortfall risk (capacity credit)
ber of consecutive days of a week during which the capacity can
Adding intermittent generation capacity to a power system
run) and seasonal energy constraints (number of days per year
does not reduce the shortfall risk in proportion to past average
during which the capacity can operate).
producible power values. To estimate this contribution to security of supply, a contribution coefficient (CC) must be applied to
Seasonal constraints are less of a concern if the capacity can be
translate these technologies’ average contribution to reducing
activated for two weeks in a row. On the other hand, capacity that
the shortfall risk.
can only be activated one day a week makes a real contribution
to reducing the shortfall risk but it is limited, regardless of its seasonal availability. In the interest of simplicity, the seasonal energy
constraint is not taken into account in the rules for the first
year of the mechanism but can be integrated into a later version.
Figure 57 – Illustration of capacity credit based
on installed wind power in Great Britain
(Source: IEEE Power Energy Society)
Following the publication in September 2013 of the report
Peak
accompanying the draft rules, which included a chart illustrating
30%
how daily constraints were taken into account, some stakehol25%
that could be activated ten hours per day to contribute to security
of supply and the mechanism’s efficiency.
This “activatable capacity” factor neutralises differences
between generation and demand response capacity by basing
the issuance of certificates on contributions to security of supply. The entire shortfall landscape is taken into account in
estimating each capacity’s contribution. This provision is in
keeping with the decree, which requires that only one “capacity
Capacity credit
ders questioned whether it was necessary to only have capacity
20%
15%
ELCC / LOLE
10%
ELCC / LOLP
(90%)
5%
ELCC / LOLP
(95%)
0%
ELCC / LOLP
(97%)
0
10
20
30
Installed wind capacity
certificate product” be adopted. It will thus facilitate trading, at
127
Value of adequacy
criterion = K0 (3h)
Addition of 100 MW
of a specific resource
1
2
Value of adequacy
criterion = K1
Addition of X MW
of a perfect resource
Value of adequacy
criterion = K2
By iteration, we determine X such that K1 =K2
The specific resource is allocated X certificates for 100 MW
The value of this coefficient depends (i) on the capacity consi-
> S ufficiently short for structural changes in the capacity to be
dered, (ii) on the amount of intermittent capacity already in the
taken into account within a relatively short period of time and
system, and (iii) more generally, on the broader power system
consistently with the timeframes of the mechanism.
(structure of demand, structure of the fleet excluding intermittent
capacity, interconnection capacity). The goal is to determine the
5.1.4.2.3  Dynamic constraints
correlation between the intermittent risk and shortfall situations.
The dynamic constraints of generation facilities are not explicitly
factored into the rules. They are taken into account indirectly
The method adopted to determine the contribution coefficients
through the definition of PP2 and the certification process with
for eligible technologies (wind, solar, must-run hydro) is similar
verification of availability. Dynamic constraints that would pre-
to that used to estimate contributions to the shortfall risk of
vent generation capacities from being available on days notified
different consumption profiles: it is based on equivalence with
by RTE are factored into the calculation of the effective capacity
a perfect resource, with no constraints, that receives 1 MW of
level.
certificates per MW installed.
5.1.4.2.4  Accounting for system constraints
The value of the contribution coefficient can then be estimated
In their current form, the rules do not include any specific provi-
based on the value of the certificates issued to the technologies
sions about accounting for network availability constraints. The
and past records of their producible energy at peak.
introduction of such a provision, which would entail introducing
a localised incentive into the certification process, has not been
Values adopted in the rules for the contribution coefficient per
ruled out. However, the complexity of system constraints is such
technology
that the timetable for preparing the rules for the first delivery
For the first delivery years of the capacity mechanism, the rules
year was not compatible with the inclusion of a provision on this
adopt the following CC values for the technologies in question:
subject.
> CChydro = 85%
> C Cwind = 70%
> CCsolar = 25%
This issue was nonetheless raised during the consultation.
Two options for taking system constraints into account were
presented:
5.1.4.2.2.3  Length of historical data required
level of the security factor, with related constraints (unavaila-
incorporate past producible energy values for the capacity. The
bility of networks) being neutralised in the calculation of the
length of historical data used varies depending on the techno-
effective capacity level;
logy. These lengths are determined in such a way as to be:
>
128
> T he first was based on a pooling of system constraints at the
Certification calculations based on the normative approach
> T he second was based on the terms of connection contracts
S
ufficiently long for the average producible energy value to
regarding temporary limitations with ex-post verification if
be close to producible energy value certified. This allows risks
network availability does not meet an operator’s expecta-
associated with the primary source to be smoothed.
tion. RTE favours this second option, as it avoids having the
CAPACITY CERTIFICATION   / 5
community bear a cost stemming from an inability to remove
The Kw coefficient reflects the influence of weekly energy
power from certain facilities. The guiding principle in the rules
constraints on a capacity’s contribution to reducing the short-
proposed is that obligated parties should have resources to
fall risk
manage their obligation and not be exposed to costs that are
Normative approach
completely beyond their control.
CapacityLevel = HistoricPeakProducibleEnergy x CCtechnology
5.1.4.3  Provision adopted on the calculation of
the capacity level
In compliance with the provisions of the decree and in the light of
Chronological summary of the certification process:
the considerations above, the formula for calculating the capacity
For the first two delivery years, the rules adopt specific provi-
level (certified or effective) adopted in the rules takes the form:
sions making it possible to take into account:
> A specific first delivery year (from 30 November 2016 to
CapacityLevel = PP2AvailablePower x K
31 December 2017 with July and August excluded) enabling
transition to a delivery year matching the calendar year;
The K coefficient adopted in the rules applies only to the energy
> A shorter period between the start of the term and the deli-
constraints discussed in § 5.1.4.2.1 and breaks down as follows:
very year. The rules directly incorporate the mechanism parameters for these two years and certification request deadlines
K = Kd x Kw
have been modified accordingly.
The Kd coefficient reflects the influence of daily energy constraints
Once the mechanism is established, i.e. as of the third delivery
on a capacity’s contribution to reducing the shortfall risk
year, the chronology of the certification process will be as follows:
01
/1
01
1D
Y-4
/1
01
/1
1D
Y-3
DY
1D
Y-1
01
31
/0
/0
1
/1
PP2
DELIVERY
PERIOD
DELIVERY YEAR
Operational
generation
capacities
/0
/1
1
A+
15
31
PP2
Publication
of certification
parameters
Certification
period
3
01
2
01
3m
1D
Y+
1
ois
/1
15
2D
/1
Y+
2
Notification
of effective
capacity level
15
2D
/0
Y+
2
Transfer
deadline
2D
Y+
3
Collection
deadline
Imbalance
notification
date
Planned generation capacities
Demand response capacities
REBALANCING period
5.2  Period covered by capacity certification (PP2)
5.2.1  Period during which the contribution
in estimated
Two main approaches were given consideration during the
consultation:
>
by month on the basis of a shortfall landscape evaluated several years before the delivery year. In this case the PP2 periods
consists of approximately 1,200 hours;
> A “demand-based” approach with PP2 targeting the actual
A
“time-based” approach with PP2 being a non-targeted
hours of highest demand during the delivery year. Each hour
period defined in advance made up of working days between
of the PP2 peak period is equivalent. This definition results in a
November and March. The hours included in PP2 are weighted
lower number of PP2 hours (between 100 and 300).
129
159
A “perfect” resource
is a capacity with no
technical constraints and
that is available at full
power all the time.
identified in RTE’s probabilistic supply-demand balance
Figure 58 – Link between shortfall
and hours of highest consumption
studies and demand levels during shortfall hours.
100%
Two key conclusions can be drawn from it:
The hours of highest demand are a good indicator of shortfall situations. 99% of shortfall hours are contained in the
300 hours of highest demand;
> The 100 hours of highest demand include 94% of the hours
with shortfalls.
The adoption of a targeted period and demand-based approach,
resulting in a PP2 of between 100 and 300 hours during the
delivery year, is thus an appropriate way to estimate capacity’s
contribution to reducing the shortfall risk.
Share of hours with shortfall
>
Figure 58 shows a comparison of the shortfall periods
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%
0
100
200
300
400
500
600
Rank of hours of highest consumption
Given the link between contributions to reducing the shortfall risk
and the hours of highest demand, a capacity that is available all win-
The blue curve shows the link discussed above between short-
ter will make the same contribution to reducing the shortfall risk as
fall hours and the hours of highest demand. A resource available
one that is only available during periods of high demand. Both must
in the 200 hours of highest demand has a contribution almost
therefore receive the same number of capacity certificates.
equivalent to that of a “perfect” resource159 (98% of the shortfall
hours are within the 200 hours of highest demand). The green
However, their capacity level depends on availability during PP2.
and purple curves illustrate the impact of the scope of PP2 on
To illustrate the influence of PP2 on the volume of certificates
the volume of certificates allocated with regard to the availa-
allocated to a capacity, the chart below considers two capacities,
bility constraint. Since capacity availability is measured over
one available over 100 hours and one over 500 hours.
PP2, capacity that is available during the 200 hours of highest
Figure 59 – Impact of the duration of PP2 on the contribution calculated for capacity
(Source: RTE, WG of 07/02/2013)
Reduction of shortfall risk
100%
80%
60%
40%
20%
90
1
1,0
01
1,1
01
1,2
01
1,3
01
1,4
01
1,5
01
1,6
01
1,7
01
1,8
01
1,9
01
2,0
01
80
1
70
1
60
1
50
1
40
1
30
1
20
1
1
10
1
0%
Hours of highest consumption/Duration of PP2
Contribution to reduction of shortfall risk according to number of hours of availability
Contribution allocated to a capacity available for 100 hours according to duration of PP2
Contribution allocated to a capacity available for 500 hours according to duration of PP2
130
CAPACITYCERTIFICATION / 5
demand, and thus has a high contribution, will receive fewer
response capacity even through its effective contribution can
capacity certificates if availability is measured over a longer
be significant.
period (the allocation would only be about 50% with a PP2 of
1,000 hours for example). As such, the certificates allocated to
A comparison of the demand-based approach targeting the
this capacity would not reflect its contribution to reducing the
200 hours of highest demand and a time-based approach
shortfall risk.
covering the whole winter with monthly weightings linked to
the shortfall probability highlights the impact PP2 has on the
The bottom line is that the application of a non-targeted (and
number of capacity certificates allocated to each technology.
therefore long) PP2 period underestimates the certificates that
This impact is illustrated in figure 60, which was taken from a
should be allocated to capacity that is available less but may
study presented during the consultation on four technologies
make a considerable contribution to reducing the shortfall risk.
characteristic of the French fleet: nuclear, combined-cycle gas,
wind and demand response.
5.2.2 Consequences of the PP2 period defined
on the distribution of certificates between
technologies
Choosing a PP2 period not targeted to the hours of highest
demand and weighting availability over the whole winter results
in much less certification of demand response and similar capa-
As discussed above, the definition of the PP2 period can have
cities. The effective capacity level thus does not reflect the real
major redistributive effects between the different types of
contribution of demand response to reducing the shortfall risk
capacity, particularly demand response. Indeed, it appears that
during the delivery year, regardless of weightings. Conversely,
demand response capacities are often available during targe-
with a targeted PP2 period, the amount of certificates allocated
ted periods: all other things being equal, a longer PP2 period
to demand response reflects its contribution to security of sup-
will reduce the number of certificates allocated to a demand
ply, without prejudice to generation capacity.
Figure 60 – Winter 2011/2012 – Comparison of time- and demand-based approaches
Trend in effective availability according to method of defining PP2
CCGT
6,000
BM DEMAND RESPONSE
250
200
Effective power (MW)
4,000
150
100
2,000
50
0
0
2011
WIND
3,000
2011
NUCLEAR
60,000
2,500
2,000
40,000
1,500
1,000
20,000
500
0
0
2011
2011
Delivery year (Winter)
 100h of highest demand
 200h of highest demand
 300h of highest demand
 Winter with weighting [1,8,70,20,1]%
 Winter with weighting [2.5,30,55,10,2.5]%
 Winter with weighting [5,20,40,30,5]%
131
5.2.3 Consequences of the PP2 period defined on
the variability of certificate volumes
availability of the generation fleet was calculated for the years from
2006 to 2011. The figure below and accompanying table show the
aggregated results of availability calculations for the period from
Some generators questioned the choice of a targeted PP2
2006 to 2011 depending on the PP2 period chosen.
period, citing the underlying risk of instability and saying they
consequently did not have enough visibility to make commit-
The first conclusion to be drawn from this study is that levels
ments with regard to availability.
are consistent with time- and demand-based approaches and
stable over time.
To test this argument, RTE conducted a study that quantifies the
impact of the choice of the PP2 period on the effective capacity
Similar results are obtained with all methods each year and none
level. This study was based on past availability data and compared
can be considered divergent or more volatile than the others:
the effects of the two approaches (targeted vs. non-targeted) on
> Trends are the same, since a drop in the effective level of avai-
the same perimeter, using the same hypotheses. Results are pres-
lability is observed only in the winters of 2008 and 2009, and
ented for the fleet as a whole and for each technology. The effective
the level increases for the other years with both approaches;
Figure 61 – Trend in total effective availability level
Hours of highest demand
100,000
95,000
90,000
85,000
80,000
100,000
100h of highest demand
200h of highest demand
Weighted winter
95,000
90,000
85,000
80,000
2006
2007
2008
2009
2010
300h of highest demand
Winter with weighting
[5,20,40,30,5]%
Winter with weighting
[1,8,70,20,1]%
Winter with weighting
[2.5,30,55,10,2.5]%
2011
Delivery year (winter)
Max DIFFERENCE between methods adopting
the same approach
2006
2007
2008
2009
2010
2011
Demand-based
371
105
1,156
713
221
402
Time-based
845
1,326
1,314
1,523
1,751
2,593
Table 3 – Trend in total effective availability level
132
Type
#
PP2 method
2006
2007
2008
2009
2010
2011
Demand
1
100 hours of highest demand
85,124
88,301
94,204
91,841
96,763
98,059
Demand
2
200 hours of highest demand
84,865
88,291
93,574
91,372
96,580
97,667
Demand
3
300 hours of highest demand
84,753
88,197
93,048
91,128
96,542
67,657
Time
4
Winter with weighting [5,20,40,30,5]%
83,228
87,494
91,406
89,217
95,915
96,118
Time
5
Winter with weighting [1,8,70,20,1]%
84,073
88,820
92,720
90,740
97,665
98,711
Time
6
Winter with weighting [2.5,30,55,10,2.5]%
84,029
87,572
91,693
89,600
96,975
97,932
CAPACITY CERTIFICATION   / 5
> Orders of magnitude are similar in terms of raw results with
capacity that could be certified but then declare
a difference of less than 3%. The maximum difference of 3%
itself unavailable (with regard to the certifica-
corresponds to the winter of 2008, between methods 1 and 4;
tion) during PP1 hours while being activated
T he standard deviation over the five delivery years is compa-
during these hours. With a period PP2 spanning
rable (4 GW effective) whatever the method.
the whole winter and a targeted PP1 period, this
>
capacity would be double remunerated: it will be
Time- and demand-based approaches can then be compared
rewarded implicitly for being activated during PP1
based on the choice of parameters:
hours (leading to a reduction in the capacity obli-
> With
a time-based approach, monthly weightings heavily
gation) and then recognised as certified capacity
affect the effective availability of the fleet. The maximum dif-
(relating to availability). Even if was not available
ference between the methods {4, 5 and 6} varies between
during PP1 hours, these hours could carry a very
845 MW (winter of 2006) and 2,593 MW in effective value (win-
low weighting with a “time-based” approach160,
ter of 2011). The weighting applied thus has a major impact
meaning it could receive almost the full remune-
on the capacity level. This weighting depends on modelling
ration possible as certified capacity;
choices that can have an arbitrary component. For instance,
> It makes capacity and energy signals consistent.
during the consultation in the first half of 2013, significant dif-
With a time-based approach, capacity subject
ferences were observed between evaluations conducted by
to availability constraints could give priority to
RTE and EDF using monthly weightings.
months with a very high weighting rather periods
> With a demand-based approach, the choice of the number
160
Note: the “time-based”
approach involves
defining the winter
period as the PP2 peak
period. Winter hours
are weighted with a
probability coefficient
reflecting the associated
level of risk. With this
approach, January alone
contains between 50%
and 70% of the shortfall
risk depending on the
models used. PP2 hours
are thus determined
several years in advance,
initially as peak hours
(morning and evening
peaks) on working days
in the winter period.
The amount of capacity
certificates allocated to a
capacity is calculated by
multiplying its availability
in each winter month
by the risk coefficient
associated with each
month.
when supply is actually tight.
of hours in the PP2 period has little impact on the effective
availability of the fleet. The maximum difference between
The studies conducted also provided some insight into the
the methods {1, 2 and 3} ranges between 105 MW (winter of
comparison of the two approaches (see below). The results sup-
2007) and 1,156 MW in effective value (winter of 2008). This
port the choice of a demand-based approach.
low level of sensitivity to the number of hours taken into
account is an advantage of this approach and a major factor of stability.
5.2.5  Notification of PP2 hours
The decree stipulates that there is to be no discrimination
5.2.4  Approach adopted in the rules
between a reduction of the obligation and certified demand response capacity, implying that the PP1 period must be included
The rules adopt the “demand-based” approach since it presents
in the PP2 period. This is notably necessary to take into consi-
the following advantages:
deration the activation of demand response capacity, either in
>
It ensures consistency between the contribution to reducing
the certification or the obligation. The notification system adop-
the shortfall risk and the amount of certificates allocated,
ted for PP1 days is therefore also for the notification of PP2 days.
notably for capacity available for shorter periods. If a capacity
A large share of PP2 days (at least 40% and potentially as much
is available during peak hours, it will receive all the capacity
as 100%) will consequently be notified on D-1 at 10:30am.
certificates to which it is entitled. Peak capacity, and particularly peak demand response, is not penalised and given the
During the consultation, many stakeholders stressed the need
same treatment as base/semi-base load capacity;
for the capacity mechanism to address periods of tension
> It avoids diluting operators’ responsibilities with regard to the
beyond those of high demand to comply with the provision
availability of their capacity: in particular, it guarantees that if
of the decree relating to peak periods: “the hours of a delivery
load shedding is required due to the unavailability of genera-
year during which the shortfall risk is highest, particularly those
tion capacity during the peak period, some capacity portfolio
during which national demand is highest.”
managers will necessarily show imbalances;
> It is in keeping with the provision of the decree regarding the
Consequently, the notification of PP2 days not included in
principle of non-discrimination between a reduction in the
the PP1 period will be based on a criterion incorporating
amount of the capacity obligation due to load reduction and
data related to demand and tension on the system. This pro-
the certification of demand response capacity;
vision adds flexibility because the projected shortfall landscape
It prevents a potential windfall effect for demand response
is not set in stone. To factor in tightness of supply, information
>
133
will have to be gathered about forecast demand, exchanges
system, RTE will be able to notify PP2 hours as soon as situa-
between France and neighbouring countries and capacity avai-
tions of tight supply are anticipated, i.e. after the network access
lability. For this purpose, RTE will rely on information gathered
deadline time.
through the programming system. Taking this dimension into
account necessarily puts notification after the economic optimisation of stakeholders’ customer portfolios, which is done after
spot market fixing. Consequently, PP2 days outside PP1 will be
5.2.6 Sensitivity of effective capacity level to the
location in time of PP2 hours
notified at the latest at 7pm for the following day, leaving at
The issue of operators’ visibility on the effective capacity level of
least 12 hours before the first PP2 hour of the following day. By
their capacities was addressed during the consultation, just as
using the information made available through the programming
debates were held about the sensitivity of the obligation to the
Figure 62 – Variability of effective capacity level for France depending on location in time of PP2 days
2,000
Standard deviation (MW)
1,800
1,600
1,400
1,200
1,000
800
  Jan. to March &
Nov. and Dec.
600
  Jan. to March &
Nov. and Dec.
with max. 5 d in
March and Nov.
400
200
0
  Jan and Feb. & Dec.
2006
2007
2008
2009
2010
2011
Average
Figure 63 – Variability of effective capacity level for France and per technology depending on
location in time of PP2 days (average, minimum and maximum between 2006 and 2012)
Standard deviation (MW)
2 000
1 500
1 000
  Jan. to March &
Nov. and Dec.
  Jan. to March &
Nov. and Dec.
with max. 5 d in
March and Nov.
500
  Jan and Feb. & Dec.
0
France
134
BM demand
response
Wind
RoR
Hydro
Nuclear
PV
Thermal
CAPACITYCERTIFICATION / 5
location in time of PP1 hours (see chapter 4). Some stakeholders noted that their effective capacity level depended in part
on the location in time of PP2, and therefore on effective climate
> Setting a maximum number of days that could be selected in
March and November;
> Selecting days exclusively in January, February and December.
conditions. This could create uncertainty about the amount of
Figures 62 and 63 show the standard deviation of available
capacity certificates operators will receive.
power in France and per technology applying the different
A study was conducted, applying the provisions adopted in the
approaches to PP2.
rules, to test the sensitivity of the effective capacity level to climate scenarios using data from the 2006-2011 period. For each
The first conclusion that can be drawn from the study is that the
year, 100 scenarios were considered with different distributions
variability of the capacity level in France is indeed accounted
of PP2 hours, applying 100 consumption scenarios for France
for primarily by nuclear capacity: the standard deviation of the
based on the 100 Météo France climate scenarios.
capacity level in the nuclear segment corresponds on average
to 90% of the total standard deviation of the total capacity level.
It should be noted that the study overstates the sensitivity we
Standard deviations for the hydro and thermal power segments
are seeking to establish. The distribution of PP2 days and the
are nearly three times lower than for the nuclear segment.
availability of certified capacities are not independent variables.
Capacity availability depends on demand forecasts and the pro-
Secondly, volatility in the capacity level ranges between 500 and
jected state of the system, particularly for nuclear power at the
1,800 MW (between 0.5 and 1.9% of the total capacity level for
beginning and end of the period. Consequently, if risk realisation
France) depending on the provisions adopted for PP2 and the
plays out differently, generators will adjust the availability of their
related signal. By way of comparison, this level of uncertainty is
capacity accordingly, for instance by postponing scheduled main-
of the same order of magnitude as the error in demand fore-
tenance shutdowns. As such, implicitly assuming that the availa-
casts for the following day during winter peaks.
bility of the capacity certified in 2010 would have been the same
even if weather conditions had been different is an approximation.
This study also illustrates the stabilising effect of the signal. The
standard deviation decreases by about 20% with a milestone
The number of PP2 days was set at 25. PP2 days were notified
limiting the number of days in November and March. This stabili-
using two approaches:
sing effect only has a noticeable impact on the nuclear segment
Figure 64 – Trend in average maximum power available on eligible PP2 days
Nuclear
Thermal
Maximum available power (GW)
25
60
20
55
15
50
10
45
Nov.
Dec.
Janv.
Month
Feb.
November
March
Apr.
December
5
Nov.
January
Dec.
February
Janv.
Feb.
March
Apr.
February
135
exogenous factor. Operators can adapt the availability of their
Figure 65 –Distribution of EJP days
between 2004-2005 and 2011-2012
capacities on the basis of their consumption forecasts and the
state of the system, particularly at the beginning and end of the
period (for instance by rescheduling shutdowns). Studies based
50%
on actual results therefore overestimate the volatility of capacities, including nuclear capacities.
40%
Secondly, it is essential that the period during which PP2 days
30%
are selected cover all shortfall risk periods. Different assessments of the shortfall landscape were presented during the
20%
consultation, and all showed a shortfall risk in November and
March. Depending on the estimate used, these months contain
10%
between 2 and 10% of shortfall situations in probabilistic supply0%
Nov.
Dec.
 Maximum
Jan.
 Minimum
Feb.
March
 Average
demand balance studies; the figure can rise to almost 50% looking at the records of degraded modes for the supply-demand
balance on the balancing mechanism. The proposal to exclude
March and November from the period during which PP2 days
are selected was therefore not adopted in the rules.
and is not constant for all delivery years. Milestones might be
able to attenuate extreme situations but they cannot eliminate
For illustration purposes, the historical distribution of EJP days,
them. The highest variability was seen in the system in 2009,
decided by EDF, was analysed from 2004-05 to 2011-12.
reflecting the variability of the actual availability of nuclear capacity (standard deviation between 1,100 and 1,500 MW).
The analysis shows that on average, 30% of EJP days were activated in November and March, with highs of more than 40% in
These results reflect the strong seasonality of the availability of
certain years and a minimum of 10% for all years. A signal sub-
nuclear capacities based on the timing of scheduled shutdowns.
ject to energy constraints (22 days for EJP) requires a conside-
Figure 64 illustrates the change in available power in the nuclear
rable volume in November and March for the management of a
and conventional thermal segments for the winter of 2010/11;
portfolio that is preponderant in the French power system.
each dot represents the average over a day, in line with the
methods adopted in the rules (eligible time slot and days).
The availability curve of nuclear capacity is “bell-shaped” and moves
considerably between early November and mid-January (difference
of more than 10 GW), whereas the availability of conventional thermal is “flatter”. The effective capacity level of nuclear capacity is
thus much more sensitive than conventional thermal to the number of PP2 days positioned in November and March.
Some participants in the consultation spoke of the need to sta-
The rules proposed include a provision limiting
the number of PP2 days that can be activated in
November and March (maximum 25% of total). This
regulates the variability of the capacity level in
the nuclear segment and therefore in the system
while ensuring that there are still enough PP2
days to cover most potential shortfall and tight
supply situations in these months. The studies presented above give an estimate of the effects of this
provision (20% attenuation of the variability associated with the location in time of PP2 days).
bilise the capacity level via the selection of PP2 days. The idea
was to reduce the weighting of November and March by adding
milestones; some even suggested that no PP2 days should be
selected in these months.
5.2.7 Provisions adopted in the rules on PP2
The rules define the PP2 peak period as a targeted period corresponding to a limited number of days (between 10 and 25) and a
The first point to bear in mind is that the studies cited showed
time slot defined applying the “demand-based” approach adopted.
that these provisions only affect the nuclear segment because
136
of the highly seasonal nature of its availability. And the avai-
Consistency between PP1 and PP2 is ensured by the fact that
lability curve for nuclear capacity must not be considered an
PP1 is included in PP2 (all PP1 hours are PP2 hours). Because PP1
CAPACITYCERTIFICATION / 5
and PP2 volumes are comparable, there is no significant deviation from the principle of non-discrimination between certified
1. The PP2 period corresponds to the time slots
[07:00; 15:00[ and [18:00; 20:00[ (i.e. 10 hours
per day) of the days notified by RTE.
2. All days notified for PP1 are days notified for
PP2 (inclusion of PP1 in PP2).
3. PP2 days are notified on D-1: the PP2 days
that are also PP1 days will be notified before
10:30am; PP2 days outside PP1 will be notified at 7pm at the latest.
4. The signal is based mainly on a demand criterion (days when demand is expected to be
highest) and factors in information about
anticipated tension in the system.
5. Between 10 and 25 PP2 days are notified with no
more than 25% of them in March and November.
demand response capacity and a reduction of the obligation.
Notification of peak days on D-1 gives stakeholders more visibility while also allowing information about anticipated situations
of tight supply to be taken into account, which will make it easier
for the mechanism to be adapted going forward (notably to the
changes resulting from the integration of renewable capacities).
Lastly, milestones were introduced in response to requests
by several stakeholders, the goal being to stabilise the capacity level for France, and particularly for the nuclear segment,
through the PP2 days selected.
5.3 Calculation of the capacity level
5.3.1 Available power of capacity
5.3.2.1.1 Kd chart
The Kd chart for a delivery year is based on supply-demand
Available power corresponds to the power that can be activated
balance simulations for the delivery year focused on evaluating
during PP2. Data can be gathered about available power either:
the contribution to reducing the shortfall risk of a resource with
> Through a separate system for collecting capacity availability
a daily energy constraint on a time slot of a PP2 day.
data that is not directly linked to the capacity mechanism rules;
> Or through a system developed by RTE to fulfil its role and
responsibilities with regard to implementing the rules.
The Kd chart for a delivery year is established by RTE and specified in the rules. This chart is known to operators from the start
of a capacity mechanism term and remains stable throughout.
5.3.2 Determination of the coefficient to reflect the
technical constraints of capacity (K)
The Kd chart for the first delivery year is shown below:
The formula used to calculate the parameter K is as follows:
Figure 66 – Illustration of the Kd chart
K = Kd x Kw
100%
5.3.2.1 Determination of Kd modelling daily energy
The Kd parameter reflects the influence of the energy constraints
associated with a capacity on its contribution to reducing the
shortfall risk.
80%
Value of Kd (%)
constraints
60%
40%
20%
The value of Kd is determined from a chart (Kd chart) in force for
the delivery year and from the parameters declared by the operator (for the calculation of its certified capacity level) or measu-
0%
0
1
2
3
4
5
6
7
8
9
10
Value of Nd (hours in the PP2 time slot)
red (to calculate its effective capacity level).
137
5.3.2.1.2  Parameters used in the calculation of Kd
Figure 67 – Illustration of the Kw chart
The parameters used in the calculation of Kd are as follows:
> E d: Maximum energy activatable on the PP2 time slot
> MaxP: Maximum available power of the capacity
PP2
100%
Nd = min
(
EPP2d
MaxP
; 10
)
Value of Kw (%)
80%
An Nd coefficient is calculated from this data as follows:
The Nd coefficient corresponds to the number of hours capacity
can be activated at MaxP per day on the PP2 time slot.
60%
40%
20%
0%
0
1
Based on these data and the Kd chart, an operator can estimate
2
3
4
5
Value of Nw (number of consecutive days)
the value of the Kd coefficient associated with its capacity.
5.3.2.1.3  Daily constraint and available power
5.3.2.2.2  Parameters used in the calculation of Kw
As indicated above, the available power of a capacity corres-
The parameters used in the calculation of Kw are as follows:
ponds to the power that can be activated on the PP2 time slot.
The daily constraint reflects the maximum energy that can be
activated on the PP2 time slot.
> EPP2d mentioned for the calculation of Kw
> wE: energy that can be activated over five consecutive working days on the time slots [07:00-15:00[ and [18:00; 20:00[
On a PP2 day, if an operator has activated the capacity and the
The approach differs however from the one used for Kd in the
energy generated corresponds to the maximum energy decla-
sense that data is not measured over PP2 days but monitored
red, it has fulfilled the commitment in its certification contract.
more broadly over the delivery period.
It is therefore necessary to ensure that the energy constraint is
not counted twice.
An Nw parameter is calculated from this data as follows:
In this specific case, the formula PP2Available-
Nw = min
Power x Kd is replaced by PP2Activation.
(
wE
EPP2d
;5
)
Nw corresponds to the number of working days during which the
5.3.2.2 Determination of Kw modelling the weekly
capacity can be activated taking into account its daily constraint.
energy constraint
The value of the Kw coefficient is also determined using a chart
Based on these data and the Kw chart, an operator can estimate
(Kw chart) applicable to the delivery year and parameters decla-
the value of the Kw coefficient associated with its capacity.
red by the operator (for the calculation of its certified capacity
level) or measured (to calculate its effective capacity level).
5.3.2.3 Illustration of how the Kd coefficient is
5.3.2.2.1  Kw chart
determined for capacity
The Kw chart for a delivery year is based on supply-demand
The information below is provided purely for illustration
balance simulations for the delivery year focused on evaluating
purposes.
the contribution to reducing the shortfall risk of a resource with
an energy constraint over several consecutive days of the deli-
For capacity with available maxP of 100 MW, maxE,d of 400 MWh
very period.
and no energy constraint (meaning it can be activated every day
of the delivery period):
This chart is known to operators from the start of a capacity
138
400
hours per day at maxP during hours of the PP2 time slot
100
mechanism term and remains stable throughout.
Nd =
The Kw chart adopted in the rules for the first delivery year is
The value of the Kd associated with a capacity is calculated as:
shown below:
Kd (4) = 70%
CAPACITYCERTIFICATION / 5
Figure 68 – Determination of the Kd coefficient for a capacity
100%
Value of Kd (%)
80%
60%
40%
20%
0%
0
1
2
3
4
5
6
7
8
9
10
Value of Nd (hours in the PP2 time slot)
5.4  Certifi cation requests
Certification requests can be filed for capacity once the capa-
5.4.1.1.1 Existing capacity / new capacity
city mechanism term starts, i.e. when the register is opened for
Under the terms of the decree, existing capacity is capacity that
the delivery year in question following the publication of the
is included within a certification entity for a future, present or
mechanism parameters (possibly including updated certifica-
past delivery year. New capacity is capacity that has never been
tion charts); requests can be filed for planned capacity based on
part of a certification entity.
a predefined specific technical milestone.
5.4.1.1.2  Operational capacity/planned capacity 
5.4.1 Definition of capacity
Capacity can be certified several years before the delivery year.
It is possible for capacity to be considered existing capacity, as
5.4.1.1 Capacity status
defined in the decree, but still in the project phase. The terms
Under the terms of the decree, deadlines are set for certification
above (existing capacity/new capacity) are applied to the certi-
requests “based on the technical characteristics of the capacity
fication process, and particularly to the certification entity. They
and, for new capacity, based on the status of the project” (para-
do not specify whether the capacity exists or not. For instance,
graph I of article 8 of the decree). The rules must therefore make
a capacity may be certified for the first time three years before
it possible to define the technical characteristics to be taken into
becoming operational; it is in this case considered existing capa-
account for setting certification request deadlines.
city for the following delivery year, but is still planned capacity
until industrial operations begin.
The status of capacities (existing or new) also has an impact on
the security deposits required. The decree specifies that “the
A distinction must therefore be made between capacities that
certification contract includes […], where appropriate, especially
are operational and those still in the project phase. All capacity
for new capacities, the amount of the security deposit to be pro-
that is operational for a delivery year must have a certification
vided by the operator” (paragraph III of article 9 of the decree).
contract for that delivery year.
The rules factor in this requirement that security deposits be
provided for planned capacity for each delivery year for which
5.4.1.2 Nature of capacities
certification is requested. Security deposits are only returned
It is essential that the addition (new capacity) and removal
when the capacity is brought into service.
(decommissioning) of capacities be properly accounted for in
139
the mechanism. The mechanism is intended to achieve the level
reduce its load, but all consumers cannot be obliged to request
security of supply desired by public authorities, but it must not
certification.
create an entry barrier for new capacity or reward “phantom”
capacity.
A proper definition of “demand response capacity” must therefore be used for the specific purposes of certification: demand
Two risks relating to planned capacities have been identified:
> Projects might not be completed: the risk is that projects
response capacity is a demand response capability (flexibility)
that has been certified as such. Applying this principle, it is pos-
may be postponed or cancelled even though the capacity is
sible to accurately define operational demand response capa-
necessary to guarantee security of supply. This creates a risk
city and planned demand response capacity.
of default by an operator that has sold certified capacity;
> If planned capacities are not taken into account, then the
investment signal will be meaningless.
5.4.1.2.2.1  Operational demand response capacity
Operational demand response capacity is an existing extraction
site or group of extraction sites constituting a certification entity
Essentially, there are two possible approaches to this issue: one
for a given delivery year.
involves certifying all planned capacity declared, with significant
financial guarantees required in exchange; the second involves
The operator of operational demand response capacity can only
physical verifications of capacity, in which case the financial gua-
declare certification parameters (available power and data used
rantees demanded can be lower since the risk is lower.
for the calculation of K) on the basis of the extraction sites that
are affiliated with it when the certification request is made.
5.4.1.2.1  Generation capacity
5.4.1.2.2.2  Planned demand response capacity
5.4.1.2.1.1  Operational generation capacity
Planned demand response capacity refers to the planned peri-
Using the definitions given at the beginning of this section, any
meter of extraction sites declared by the capacity operator and
generation site covered by a network access contract or calcula-
constituting a certification entity for a given delivery year.
tion service contract is considered operational generation capacity. For the first delivery year, any generation site with either
The operator of planned demand response capacity can declare
type of contract in force as of 1 November 2014 is also counted
certification parameters (available power and data used for the
as existing generation capacity.
calculation of K) on the basis of the extraction sites affiliated with
it when the certification request is made and its forecasts regar-
Existing generation capacities will be certified once the mecha-
ding future changes in the perimeter.
nism term starts, and this will provide additional information
about the state of the fleet, above and beyond what is included
Certification of planned demand response capacity requires a
in adequacy studies based on the declarations made by genera-
security deposit.
tors (a certification request indicates that the generator plans to
be present during the delivery year).
5.4.1.3  Aggregation methods
5.4.1.2.1.2  Planned generation capacity
5.4.1.3.1  Aggregation thresholds
As discussed above, there is often uncertainty about when plan-
The rules specify how different capacities can be aggregated
ned capacities will become operational. With this in mind, the
within a certification entity. For aggregated capacities, only
rules adopt a proposal that sets the certification deadline as
one certification request is filed and one certification contract
close as possible to the delivery year, to ensure a high probability
issued.
that the underlying capacity project will be completed.
This is in keeping with the provision of the decree stating that
5.4.1.2.2  Demand response capacity
140
“The methods of certifying and verifying capacities making a
The Energy Code stipulates that “certification requests must be
limited contribution to security of supply be adapted accor-
submitted by operators for all demand response capacity” (Art.
dingly” (paragraph 1 of Art. 10). The decree specifies that
L321-16). As written, this provision is difficult to put into prac-
“requests for certification of such capacities can only be made
tice. Technically, any consumption site with a circuit breaker can
in aggregated form” (paragraph II of Art. 10). In the rules, the
CAPACITY CERTIFICATION   / 5
individual volume of capacities is adopted as the technical
characteristic used to determine to which capacities these
Figure 69 - Illustration summarising the
aggregation thresholds adopted in the rules
provisions apply.
Capacities with a power rating of less than 1 MW must be aggre-
Volume of capacity
unit (MW)
gated with one or more capacities of the same type (generation
or demand response) to constitute a certification entity with
No aggregation possible
total power of at least 1 MW.
100 MW threshold
Some stakeholders indicated during the consultation that they
needed to be able to aggregate capacities beyond the sprea-
Aggregation possible
ding of imbalances ensured by capacity portfolio manager perimeters. The idea is to take into account technical characteristics
1 MW threshold
such as rotating activations of individual capacities for demand
response or mutual influence for hydro capacities.
Aggregation compulsory
A threshold was therefore introduced in the rules. Aggregation is
possible for capacities with individual power of at least 1 MW and
no more than 100 MW.
Capacities with power ratings of 100 MW or more must be certi-
5.4.2  Certification deadlines
fied individually: every capacity with a power rating of 100 MW or
The certification deadlines set represent a compromise between
more must form its own certification entity. The same 100 MW
two contradictory goals:
threshold is applied in EU regulation 543/2013 of 14 June 2013,
the “transparency regulation”.
> O ne was to give stakeholders as much visibility as possible on
the future state of the system. This would imply setting the
certification request deadline well ahead of the delivery year;
The minimum threshold of 1 MW is consistent with the target
> The other was to factor in the maximum amount of capacity
level of detail of offers on the balancing mechanism for 2016
that can be activated, including in the short term, to avoid the
(the threshold is in the process of being lowered from 10 MW
extra cost of building new capacities that are not needed to
to 1 MW).
achieve the desired level of security of supply.
5.4.1.3.2  Capacity aggregation perimeter
5.4.2.1  Existing generation capacity
The Energy Code stipulates that certification requests must be
The deadline for requesting certification of existing generation
filed for all generation and demand response capacities. Under
capacity depends on whether it is already operational or in the
the rules, aggregated sites forming part of the same certifica-
project phase:
tion entity can be connected to different networks, in keeping
> E xisting generation capacities that are operational must ask
with the work being done to update the balancing mechanism
to be certified by 1 November of DY-3 (i.e. three years before
and eliminate technical barriers to aggregation. This provision
the delivery year);
means that RTE must centralise the certification data for these
> Existing generation capacities in the project phase must ask
sites. It avoids segmenting capacities based on the system
to be certified by 1 November of DY-1 (i.e. one year before the
operators with which they are affiliated, and thus an external
delivery year)
constraint serving no economic purpose for operators.
For existing generation capacities that are operational, setting the
The certification of certification entities comprising sites
deadline three years before the start of the delivery year may seem
connected to different networks, together with a mandatory
like a constraint in that operators must submit availability forecasts
aggregation threshold of 1 MW, ensures that capacities partici-
for their capacity. But the rebalancing system adopted eases this
pate. It reduces the risk of overcapacity that could arise if some
constraint. Players must also have sufficient visibility on projected
capacities were not taken into account.
capacity levels for the market to function properly (see chapter 7).
141
For this reason, three years before the delivery year, system capaci-
extraction sites have less visibility on their order books and thus
ties will either be certified and recorded in the capacity register or
their ability to adjust their consumption. This flexibility also helps
considered absent and ineligible to participate in the mechanism at
put into practical application the provision in article 13 of the
a later date (they will have been required to submit an irrevocable
Brottes Act of 15 April 2013 stating that, if costs are the same,
closure notice). These procedures are a powerful tool for monito-
priority should be given to demand response capacities.
ring market manipulation and can be compared to some measures
applied in North American capacity markets, where the behaviours
5.4.2.3  New capacity
of existing capacity during capacity auctions are closely monitored.
Specific procedures are nonetheless being planned for capacities
5.4.2.3.1  Planned capacity
that are in the process of being mothballed (see § 5.4.3.2).
An operator of a capacity in the project phase can request to
have it certified up to two months before the beginning of the
The difference between the amount of capacities in the register
delivery period, i.e. up to 1 November of DY-1. For generation
and the forecasts published by RTE relating to the total certificates
capacities, the connection agreement must also be signed.
required for all stakeholders to meet their obligation will give operators valuable insight for their forecasts on situations of tight supply.
5.4.2.3.2  Operational capacity
Requests to certify new operational capacity must be submitted
5.4.2.2  Demand response capacity
within two months following the commissioning date and two
The deadline to request certification for demand response capa-
months before the beginning of the delivery period.
city is set at the beginning of the delivery period.
5.4.2.4  Overview of provisions adopted for certification
Demand response capacities are given more flexibility to take
request deadlines
into account i) the fact that they can be developed or removed
Once the system is established, i.e. as of the third delivery year,
shortly before the start of the delivery period, and ii) the fact that
the certification request deadlines will be as follows:
Summary of certification request deadlines
Generation
Operational capacity
2 months before the start of the delivery
period in DY-3, i.e. 1 November DY-3
Planned capacity
2 months before the start of the delivery
period, i.e. 1 November DY-1
Demand response
2 months before the start of the delivery
period, i.e. 1 November DY-1
The rules include specific certification request deadlines for the first two delivery years:
> F or the first delivery year
Generation
Operational capacity
1 November 2015
Planned capacity
31 August 2016
Demand response
31 August 2016
> F or the second delivery year
Generation
142
Operational capacity
31 December 2015
Planned capacity
31 October 2017
Demand response
31 October 2017
CAPACITY CERTIFICATION   / 5
5.4.3  Withdrawals of capacities
has been filed for a delivery year is no longer eligible to be issued
capacity certificates: it is definitively excluded from the mecha-
The way a mechanism accounts for “withdrawals” of capacities is
nism for the current year and at least the next two years. The pro-
key to its performance. This is especially important for France, given
vision thus incentivises capacity operators to establish forecasts
the situation described in section 1.2.3 of this report: the introduc-
for their capacity and convey this information to the market; it
tion of a capacity mechanism in France is seen as a means of regu-
makes strategies involving holding back supply citing potential
lating the shift from the historical situation characterised by excess
closures less efficient since, for the capacity in question, opera-
capacity to a new configuration characterised by risks that the
tors cannot take advantage of the price increase their retention
security of supply criteria defined by public authorities may not be
strategy could cause. Moreover, the transparency and monitoring
met. The capacity mechanism will be implemented at a time when
measures discussed in chapter 7 of this report ensure that any
some operators are considering shutting down or mothballing cer-
capacity retention strategy implemented by an operator with
tain facilities, but could reconsider in the light of the value of certi-
several capacities will be detected and sanctioned.
ficates on the capacity market. The way in which units that could
otherwise be shut down temporarily or for good are integrated into
5.4.3.2  Mothballed capacities
the capacity mechanism is therefore all-important.
Given the specific characteristics of the French security of supply landscape, a special system has been introduced for moth-
The specific question of the fate of capacities that have already
balled capacities. Under this system, an operator can participate
been mothballed was also addressed during the consultation.
in the mechanism by using the rebalancing procedure to buy
These capacities could indeed be fired up again if a system need
or sell the corresponding capacity certificates if it provides the
was identified, and it could cost less to bring them back into ser-
Energy Regulatory Commission with prior notice and specific
vice than to develop new ones. In the meantime, temporary shu-
documentation, in the format specified in the rules. In concrete
tdowns could be appropriate if market prices are low (operators
terms, mothballed capacity can participate in the mechanism
save on some operating costs when capacities are mothballed).
by being reactivated between the certification deadline and
the delivery year (in a sense, it has an option to participate in
Improper management of the provisions applicable to these capa-
the mechanism). Likewise, a decision can be made to mothball
cities could disrupt the functioning of the market, or even lead to
capacity between the certification date and the delivery year.
behaviours constituting manipulation. If it was possible for any operator to decline to participate in the mechanism initially because
To participate in the capacity mechanism, the operator of capa-
it might mothball its capacities, the system could be vulnerable to
city that has been mothballed must request certification by the
“capacity retention” behaviours - with some operators voluntarily
certification deadline, declaring a certified capacity level equal
drying up supply to artificially inflate the price. Even though capa-
to 0. If, based on market conditions, the operator subsequently
city certificate trading will be closely monitored when the mecha-
decides to reactivate the capacity, it must rebalance upward.
nism is in place (see chapter 7), the rules governing the mecha-
There are no costs associated with rebalancing before the
nism’s functioning must protect the community from these types
start of the delivery period (except the cost of the certification
of behaviours by making them visible and inefficient.
request), as explained in the next chapter.
5.4.3.1  Closure notices
Basically, an operator can decide to mothball a facility after the
The first rule governing “withdrawals” involves requiring closure
certification deadline by rebalancing back to zero. It will in this
notices for capacity to not participate in the mechanism. Prepa-
case have to return the amount of capacity certificates corres-
red by operators, these notices specify the duration of the clo-
ponding to the capacity initially certified through the procedure
sure, which must cover at least the delivery year considered and
outlined in the next section.
at least three years total for generation capacities and at least
one year for demand response capacities.
In both cases described above - if certification is requested or
the capacity level is rebalanced back to zero - operators must
This provision is in keeping with the decree, which stipulates that
submit documentation explaining the technical and economic
all existing capacities, whether generation or demand response,
reasons and specifying how long it would take for the capacity to
must either request certification or submit a closure notice by
be reactivated. This documentation is sent to the Energy Regu-
the certification deadline. Capacity for which a closure notice
latory Commission, which is charged with overseeing markets
143
by article L. 131-2 of the Energy Code. In sum, the procedures
on the number of sites, etc. With the industrialisation of the cer-
for entering and exiting the mechanism are tightly regulated.
tification process, most costs will correspond to operational
maintenance costs for IT systems. The number of sites or certifi-
In practice, the capacity mechanism can significantly influence
cation entities is thus not a discriminating factor: the number of
operators’ decisions about mothballing or reactivating certain
certificates is what counts.
facilities. And these decisions impact all stakeholders, given the
key role they play in shaping the market price for all capacity (this
The rules therefore stipulate that the scale will be defined
effect is notably visible in North American markets). As a result,
in euros per MW certified. A different approach to invoicing
maximum transparency is required about the amount of capacity
(for instance indexation to the number of sites) would have
mothballed. This is why the rules stipulate that specific informa-
been unfavourable for aggregation, and this would have gone
tion will be included in the certified capacity register about the
against the objective of giving priority to demand response
number of facilities mothballed and their historical capacity levels.
defined by publication authorities in the Brottes Act161. It
All operators should be able to use this information to determine
would also have been detrimental to new entrants with smal-
how many capacity certificates might be returned into the system.
ler capacities.
5.4.4  Certification fees
Several options are possible for invoicing certification fees: they
Certification fees are also set in the rules. The values proposed
are 6 euros per MW certified for RTE and 57 euros/MW for distribution system operators.
can be calculated per MW certified, per certification entity, based
5.5 Rebalancing
The certification procedures adopted make operators res-
5.5.1  The rebalancing process
ponsible for imbalances between the level of availability they
indicate when certifying their capacity and the effective availa-
Rebalancing is the mechanism that ensures consistency
bility of their facilities verified during the delivery period. Such
between the market and the physical reality. The rebalancing
an accountability system only makes sense if operators have
mechanism proposed allows an operator to submit a rebalan-
options to manage the risk. Rebalancing is one tool at their dis-
cing request as soon as a contingency occurs that impacts its
posal: as the delivery year approaches, operators will have more
effective capacity level. The price of rebalancing must incenti-
accurate information about the future availability of their facili-
vise operators to take action as soon as they observe a discre-
ties, and by rebalancing they can modify the reference used to
pancy between their expected effective capacity level and their
calculate their imbalance.
certified capacity level. The mechanism thereby guarantees that
capacity supply in the market corresponds at all times to the
The procedures involved in rebalancing are thus a core aspect
best estimate of the effective capacity level.
of the mechanism’s functioning: the more onerous rebalancing is, the more committed operators will be to the availability
The rules define rebalancing as the process by which a capacity
forecasts provided on the certification deadline (three years
operator modifies the capacity certification parameters it decla-
before the start of the delivery year for generation capacity);
red, resulting in a fresh certification of the capacities in question
conversely, if there was no cost involved in reba-
(in other words a new certification contract is established) which is
lancing, then operators would not be bound by
recorded in the certified capacity register for transparency’s sake.
161
Article 13 of this act,
now article L. 335-2 of
the Energy Code, affirms
that “At equal cost, [the
capacity mechanism]
gives priority to demand
response capacity over
generation capacity.”
144
the availability forecasts submitted ahead of time,
and the information originally recorded in the
register may be of less value, which is why appropriate transparency and oversight measures are
necessary.
There are two types of rebalancing:
> U pward rebalancing, resulting in the issue of new capacity
certificates;
> D ownward rebalancing, after which capacity certificates are
returned.
CAPACITY CERTIFICATION   / 5
Figure 70 – Cost of rebalancing depending on timing
End of delivery
period
(31/12/DY)
Start of delivery
period
(01/01/DY)
Start of term
(01/01/DY-4)
PP2
Rebalancing
cost
Zero rebalancing cost
PP2
Progressive rebalancing cost
according to number
of PP2 days elapsed
Rebalancing requests are accepted between 1 January of year
5.5.2.1  Absence of rebalancing costs before the delivery
DY-4 and 15 January of year DY+1. The capacity portfolio manager
period starts
submits a rebalancing request to the transmission system ope-
As indicated above, the absence of rebalancing costs before
rator for a capacity within its perimeter. Rebalancing requests
the delivery period begins has a major advantage: the certified
generally include:
capacity register is not “set in stone” several years in advance,
>
>
A
new certification application with updated technical
nor is the certificate price that will be calculated on this basis.
parameters;
This ties back in with the general debate discussed in chapter
T he signed consent of the holder of the certification contract
3 about the compromise between the stability and accuracy
for the capacity;
of the mechanism signals: while “closing” the register several
D
ocumentation of technical justifications;
years ahead of time would certainly afford more visibility on
>
> F or capacities with certified capacity levels exceeding 100 MW,
a declaration of change in parameters.
the capacity price, the economic value of the signal would
be reduced since it would not factor in information about the
projected supply-demand balance that becomes available
Rebalancing requests may also be submitted for modifications
between the start of the term and the start of the delivery
resulting from the constitution of demand response capacity
period.
(change in the perimeter of the extraction sites covered).
This choices makes it essential to guarantee a high level of
5.5.2  Financial consequences of rebalancing
transparency with regard to the registers and systematic
monitoring of the market by the competent authorities. The
It is proposed in the rules that rebalancing be free of cost
measures adopted, which are discussed in more detail in
between the start of the mechanism term (four years before the
chapter 7, appear sufficient to prevent operators from sub-
start of the delivery period) and the start of the delivery period
mitting frivolous initial declarations that could impact the tru-
and then rise incrementally after that. This choice is all-impor-
thfulness of the market and interfere with price formation: any
tant in determining how the mechanism will function: in sum,
strategy involving the deliberate declaration of projected avai-
the projected capacity level declared by an operator with its ini-
lability that does not match up with historical levels or com-
tial certification request is not binding and may be modified over
parable capacities will easily be spotted by other stakeholders
the following three years with no penalty. If its availability fore-
and CRE. And with the procedures for submitting rebalancing
casts change during these three years, an operator will only pay
requests adopted in the rules, operators must systematically
the transaction costs associated with rebalancing to modify its
justify their requests, which provides an additional verification
declaration, which is what makes the procedure efficient. Many
tool for relevant authorities to use.
generators and demand response operators requested this type
of flexibility during the consultation.
145
162
These principles are
without prejudice
to changes made
subsequently to the
balancing mechanism
in application of
the Network Code
currently being drafted
in application of EU
Regulation 714/2009 of
13 July 2009.
163
This is a legal
requirement for
generators connected to
the public transmission
system and optional for
others.
5.5.2.2  Progressively increasing imbalance
negative imbalance of ΔV<0 that waits for a settlement is com-
settlement prices after the delivery period starts
pared with that of a stakeholder that rebalances.
Rebalancing guarantees that market signals are
consistent with the physical situation. It must be
When the capacity portfolio manager waits for the settlement,
possible for information about contingencies, inclu-
the cost associated with its imbalance is:
ding those that arise during the delivery period, to
CostImbalance settlement = – ∆V x (1 + K) x MarP
be conveyed to the market through rebalancing.
This is why rebalancing is authorised until the end of
If the stakeholder rebalances, it must buy back the missing
the delivery period.
certificates on the market at the MarP price (or, if it has not
However, it does not make sense for the cost of
yet sold them, this will represent its cost of opportunity) and
rebalancing to be nil as the delivery period begins.
then rebalance the amount ∆V. The total cost for this stake-
In order to give stakeholders incentive to commu-
holder is:
nicate any new information they have about their effective
CostRebalancing = – ∆V x MarP + I∆VI x Crebal
capacity level to the market as quickly as possible, rebalancing
must take into account the value associated with the timing of
rebalancing requests. It is therefore proposed that the rebalan-
To ensure that rebalancing is more advantageous regardless of
cing price will increase progressively over the delivery period,
the market price during a given delivery year, the rebalancing
as PP2 days elapse. For a same contingency, an operator that
cost must be structured in the same way as the imbalance sett-
rebalances earlier will be subject to a lower settlement than one
lement price for capacity portfolio managers, i.e. around the
that rebalances later.
market price. It is therefore proposed that:
Crebal = krebal x MarP
To encourage stakeholders to accurately disclose their imbalance situations, the rebalancing price must be defined in such a
way as to provide an incentive to opt for rebalancing rather than
To guarantee that the CostImbalance settlement is always
a settlement and to rebalance as soon as a contingency arises
higher than the CostRebalancing, it is therefore necessary that:
affecting a capacity level.
krebal < K
The desired incentive structure can be visualised using a simple
example. The situation of a capacity portfolio manager with a
This result is illustrated below:
Figure 71 – Illustration of relationship between rebalancing and imbalance settlement
∆V
∆V
Certified
capacity
level
x (1+K) x marP
Effective
capacity
level
Initial situation
x marP
Purchase of
certificates
on the market
Imbalance settlement
-∆V x (1+K) x marP
146
∆V
+ ∆V
x krebal. x marP
Rebalancing
Rebalancing
-∆V x (1+krebal.) x marP
CAPACITYCERTIFICATION / 5
Formulaefordeterminingthesettlementforrebalancingbyacapacityportfoliomanager
The amount of the settlement associated with rebalancing by a capacity portfolio manager is calculated with the following
formula:
SettlementRebalancing,CPM = ∑ VolumeRebalancing,request x UnitPricerequest
compliant
rebalancing
requests,CPM
The amount of a rebalancing request is the difference, in absolute value, between the certified capacity level as of the rebalancing request date (datereauest) and the capacity level shown in the rebalancing request. It is calculated as follows:
VolumeRebalancing,request =
I CertifiedLevelcapacity (daterequest) – CapacityLevelrequest I
The unit price of a settlement for a rebalancing request depends on when it is submitted. It is calculated as follows:
UnitPricerequest (daterequest) = rmP x KDY x
NbPP2daysnotifiedDY(daterequest)
NbPP2daysnotifiedDY(FPL)
> rmP: reference market price used to determine the unit price for the imbalance settlement (see chapter 6);
> K : The incentive coefficient K for the delivery year used for settlements (see chapter 6);
> NbPP2daysnotified (d): Number of PP2 days notified for the delivery year between the start of the delivery period and the
DY
DY
request date d.
A unit price of zero is thus applied to settlements for rebalancing requests submitted before the date the delivery year begins.
5.6 Collection of data required to calculate effective capacity level
Since declarations are the cornerstone of the certification pro-
not generally not used in Europe when a separation has been
cess under the approach adopted, the effective availability of
created between the functions of the network operator and the
capacities must be systematically verified (along with the other
day-ahead market operator: specific procedures for verifying
parameters used). This verification process necessarily requires
availability must in this case be implemented.
going through appropriate channels to systematically collect
data that can attest to the availability of capacities. This is one of
However, through the balancing mechanism, France already has
the reasons why mechanisms that remunerate available capa-
a means of gathering much data that can attest to the availabi-
city (rather than installed capacity), which are economically pre-
lity of facilities, whether they are connected to the transmission
ferable, are sometimes considered costlier to implement.
or distribution networks. In other words, the French balancing
mechanism is not just a venue for activating energy and making
It is easy to calculate the availability of generation and demand
the adjustments necessary to guarantee equilibrium in real time;
response capacity on power systems organised according to a
it is also used to verify the availability of each facility connected
mandatory pool scheme: North American capacity mechanisms
to the public transmission system and of many units connec-
(PJM, New England, New York) are for instance organised around
ted to the public distribution systems to evaluate the operating
a pool structure in which all transactions must be either centra-
margins of the system162. This unusual organisation is centred
lised or reported to the system operator. This type of scheme is
round a programming process under which generators163 report
147
their technical constraints and dispatching schedules to RTE
However, to ensure that the data necessary to calculate the effec-
one day ahead at 4pm and declarations are regularly updated
tive capacity level and accurately verify capacity164 is collected effi-
after that through a series of rebalancing gates. The advantage
ciently, the rules define the combinations that are possible between
of this system is that available reserves can be better evaluated,
certification entities and balancing and demand response entities,
allowing the system operator to fine-tune its efforts.
applying a simple principle: all sites that are part of the same balancing entity or demand response entity must either belong to the
Relying on the balancing mechanism to collect data about
same certification entity or belong to certification entities that are
availability and carry out verifications would thus be an obvious
affiliated with the same capacity portfolio manager.
option in France, since the mechanism exists and has proved
its worth. This organisational structure would save on costs
The rules include a specific treatment demand response:
that would otherwise be generated by the implementation of
1. A demand response certification entity is strictly equivalent to
new verification measures. The data collection and verification
one or more entities (balancing entity or demand response entity).
mechanism RTE proposes would thus rely whenever possible
2. A demand response certification entity can modify its consti-
on the balancing mechanism, in the interest of technical and
tution (i.e. the sites it comprises).
economic efficiency.
This flexibility afforded to demand response in creating certifiAs regards the explicit certification of demand response capacity,
cation entities (2) offsets the strict equivalence constraint (1).
extensive discussions were held about how to gather information
It is justified by the fact that the composition of balancing enti-
about capacity availability. Here again, it would be possible to leve-
ties and demand response entities changes very frequently, and
rage existing systems, notably the NEBEF mechanism, through
their contractual ties with extraction sites must be able to evolve
which activated demand response capacity can already be eva-
with them. For generation capacity, the flexibility afforded by the
luated a day ahead, and it could be expanded to allow information
absence of the strict equivalence requirement makes it possible
to be gathered about the availability of non-activated NEBEFs.
to address situations where relevant data for certain facilities
(hydro capacities for instance) are only available on a broader
Other data will also have to be gathered through ad hoc mecha-
scale than the certification entity (entire hydropower valley).
nisms (maximum daily energy that can be activated during PP2
peak hours, maximum weekly energy) that will cost less to create
The method adopted for linking certification entities and balan-
if they are designed as extensions of the balancing mechanism.
cing/demand response entities (or the absence of linking)
affects the procedures used to collect and verify capacity data.
5.6.1  Linking of certification entities with BM and
NEBEF entities
The way the activatable power of demand response capacity
is collected will typically differ depending on whether it participates in the balancing mechanism. At the same time, capa-
With the chosen option of using existing systems to collect and
city that does not participate in any of these mechanisms can
verify data about capacities, the links between the aggregates
only be rewarded for the power activated, in keeping with the
used for certification purposes in the capacity mechanism (cer-
mechanism objectives.
tification entities) and existing procedures for identifying facilities and sites on the balancing mechanism (balancing entities)
or the participation of demand response in the market (NEBEF)
(demand response entities) must be properly defined.
164
In filing a certification
request, the capacity
operator just indicate
specific combinations
for its capacity, which
must be active during
the verification. If a
capacity does not comply
with the configuration
requirements, the data
collected and verified
shall be considered null.
148
The rules must also seek to reduce any potential
entry barriers and plan a specific regime for demand
response from the outset.
5.6.2  Collection of activated power data
The collection of activated power data is based:
> F or generation capacities, on metering data for injections to
the public transmission and distribution systems;
> F or demand response capacities, on the results of the load
reduction verification methods put into place on the NEBEF
and balancing mechanisms.
The capacity mechanism rules do not impose equivalence between certification entities and these entities
Records, in MW, of the participation of capacities in primary and
(balancing and demand response entities), as this could
secondary system regulation are incorporated into the calcula-
make these mechanisms more rigid and less efficient.
tion of activated power.
CAPACITY CERTIFICATION   / 5
5.6.3  Collection of activatable power data
additional information is required from operators
to account separately for the hours during which
The collection of activatable power data is based on:
>
>
shortfall risks are the greatest. Indeed, “maxE” decla-
U
pward offers made on the balancing mechanism for capaci-
rations made on the balancing mechanism may
ties participating in it;
cover a whole day, whereas the capacity mecha-
A
specific system incorporating the methods of rewarding
nism targets a specific time slot. Basically, capaci-
demand response on energy markets for demand response
ties that are available and activatable outside these
capacity not participating in the balancing mechanism. This
hours do not contribute to reducing the shortfall
system relies on declarations by demand-side operators,
risk, and this must be reflected in their effective
notably containing:
capacity level.
The sheddable load record that will be taken into
•
account as activatable power for the share not effectively
activated;
• The technical and economic conditions for activation,
5.6.5  Collection of weekly maximum
energy data
165
The value of the daily
maximum energy
depends on the
activations of previous
days. Concretely, a
capacity that can only
be activated one day
a week can declare,
each day of the week, a
daily maximum energy
corresponding to a
stock covering one day
if it is never activated.
If the weekly maximum
energy was calculated
as the sum of the daily
maximum energies, it
would then correspond to
a possible activation for
five days in a row.
particularly the price above which the capacity will be
New systems will have to be implemented to collect weekly
activated;
maximum energy data. The existing systems cover a one-day
• The demand response entities concerned.
window and weekly maximum energy does not correspond to
the sum of daily maximum energies of the days making up the
The first declaration submitted through this system must be
week165.
received by 11am.
To this end, operators will have to submit new declarations on
5.6.4  Collection of maximum energy data for PP2 days
their energy stocks. The type of information required is similar
to that provided with certification requests to justify declared
The collection of maximum energy data for PP2 days is based
values (one example would be upstream reservoir levels repor-
on existing systems, notably the balancing mechanism, but
ted for hydro capacity).
5.7  Capacity verification
The importance of verifications in a system relying on declara-
to security of supply): therefore, all capacities must have been
tions with controls after the fact was discussed at the beginning
activated at least once by the end of the delivery period;
of § 5.6. In drafting the rules, RTE focused on proposing control
> It must also be possible to use verifications to establish whe-
procedures that (i) allow for an efficient verification of the effec-
ther operators have met their availability commitments: verifi-
tive availability of capacities and their contributions to reducing
cations of capacity must therefore be systematic.
the shortfall risk, (ii) are extensions of existing systems, as this
minimises costs, and (iii) create possibilities for new entrants
The second criterion is that verification procedures must be
to effectively compete with existing capacities, notably in the
extensions of existing mechanisms for gathering data. This ties
demand response sector, in keeping with the objectives outli-
in directly with the choices discussed in § 5.6, i.e. the priority
ned in § 1.4.
given to using the balancing and NEBEF mechanisms as the
main channels for gathering and checking data. Introducing
The first criterion for evaluating verification procedures is their
new verification mechanisms that are not extensions of existing
efficiency in safeguarding security of supply and ensuring that
ones would inevitably drive up the costs associated with the
each capacity is rewarded in proportion to its contribution to
mechanism’s implementation.
security of supply:
> Verifications must prevent the appearance of “phantom” capa-
Thirdly, verification procedures must not, generally speaking,
cities (capacities that exist only on paper and cannot contribute
create entry barriers. In the particular case of demand response,
149
which public authorities have opted to promote as a structural response to the need to ensure long-term equilibrium in
5.7.2  Verification of certified intermittent
capacities under the normative approach
the power system, barriers to aggregation must be abolished.
Any inconsistent or redundant verification measures applied
The verification procedure applied to operators that have opted
to demand response entities would be a step backward with
for the normative approach described in § 5.1.2.1.3 (neutrali-
regard to the progress made in France since 2010. This is why
sation of the risk affecting the primary source of intermittent
RTE is proposing that verification not be fragmented beyond the
capacities) has been adapted. Verification is intended to ensure
certification entity level:
that the capacities effectively contribute to security of supply
> If a capacity (certification entity in this context) is connected
during the PP2 peak period. For instance, an intermittent capa-
to only one public system (for instance one PDS), verification
city that undergoes extended maintenance during the delivery
will be ensured by the corresponding system operator, as part
year should not be issued certificates. With this adaptation, the
of the responsibilities entrusted to it in the decree;
normative approach to availability is compatible with the stated
> If a capacity (certification entity) comprises facilities or sites
connected to several public systems, verification will be ensu-
goal of not issuing certificates to capacities that do not effectively contribute to security of supply in a given year.
red by RTE, though the data relating to each capacity will be
conveyed through the relevant system operators.
The role assigned to distribution system operators in terms of
5.7.3  Verification of certified capacity under
the generic approach
verification must be considered in the light of the Competition
The procedure for verifying certified capacity under the generic
Authority opinion of 20 December 2013, which, on the related
approach involves two separate levels of controls:
subject of the “demand response” decree provided for in the
> Most capacities are regularly dispatched on the energy market or
Brottes Act of 15 April 2013, suggested that distribution system
balancing mechanism: in this case verification simply involves chec-
operators should not take part in verifications of demand res-
king that declared data matches up with collected data (availability);
ponse. The rules proposed by RTE comply with the decree of
> S ome capacities are never dispatched on markets or the
December 2012, which specifically gives these operators an ope-
balancing mechanism (unless a shortfall situation actually
rational responsibility in verification, and take the Competition
occurs): they are verified by being regularly activated outside
Authority’s opinion into account whenever possible.
>
the merit order to confirm that they are in working order;
F or capacities subject to specific technical or energy constraints,
The sections below outline the verifications the rules provide for
additional verifications are required, either through desk or on-
in accordance with these principles, from the certification request
site audits.
stage all the way through to the delivery period concerned.
These verification procedures are based on generic processes
5.7.1  Initial consistency check at the time of
certification
and can be applied with the same standards to generation and
demand response capacities.
When a capacity certification request is received, a series of
5.7.3.1  Verification of injected quantities
consistency checks is carried out to verify the information
These verification procedures involve analysing data relating to
declared by operators, notably focusing on:
the activation of capacities to calculate their effective availability.
> C ompliance of the data used to identify existing capacities
(e.g. CARD or CART contract);
> C ompliance of the estimated available power of the capacity,
Actual results are taken into account in order to verify a capacity’s maximum available power (factoring in the sensitivity of available power to
which cannot be greater than (i) the sum of the Net Continuous
weather conditions) and its ability to be activated at the power level
Power values of the production sites of a generation capacity or
required (success of upward offers for the balancing mechanism,
(ii) the sum of the subscribed power values of extraction sites for
compliance of demand response programmes for NEBEF).
existing demand response capacities.
5.7.3.2  Activation tests
During the consultation, it became apparent that capacity
availability could not be confirmed solely on the basis of these
150
CAPACITY CERTIFICATION   / 5
verification procedures and that “physical” activations could be
At the end of the delivery period, all capacities will have been
required. Since verification methods evolve rapidly, RTE opted
activated at least once through the verification system (activa-
to outline the guiding principles for activation tests rather than
tion test) or another system.
setting precise procedures in stone.
There is also a question about responsibility for verifications,
Though no stakeholders opposed the idea of activation tests,
particularly after the Competition Authority’s recent opinion on
there was some discussion about who should bear the related
demand response. Under the rules, tests conducted on an entity
costs. The rules put into practical application the provision of the
comprising sites connected to only one system will be decided
decree calling for operators to be billed for the “costs incurred
by the operator of that system and carried out by RTE through
by [the system operator to which the capacity is connected] for
the balancing mechanism, thus providing an aggregated view
the certification and verification of their capacity” (article 9). To
of all capacities. Where demand response is concerned, these
limit the extra costs to the community of too large a number of
provisions might not comply with the recommendations in the
tests, a capacity cannot be tested more than three times within
opinion issued by the Competition Authority on 20 December
a given delivery year. The rules also stipulate that the tests must
2013: RTE would like to point out that total compliance with
be decided on and carried out by system operators in a propor-
this recently issued opinion would require an amendment
tionate manner and under the supervision of CRE.
of the decree of 14 December 2012 instituting the capacity
mechanism.
Activation tests may cover all of the technical parameters declared by the operator; however, their main aim will be to verify the
5.7.3.3 Audits
activatable power of capacities. Any capacity that has a non-
Verifying some technical parameters or energy constraints
zero activatable power (i.e. that is not fully activated) can be sub-
declared for capacities necessarily require audits.
jected to one or more activation tests. The scope of activation
tests is limited and regulated: for instance, if an activation test
The rules distinguish between and describe two types of audit:
focuses on verifying activatable power and the capacity fails, the
> D esk audits: according to the rules, an operator must provide
consequences will relate only to the activatable power level on
to RTE, through a distribution system operator if its capacity is
record.
only connected to that operator’s network, all information that
can be used to validate the technical parameters declared for
Two approaches to activation have been adopted:
> Within the market. The technical and economic data declared
its capacity. For instance, an audit of the data declared with
the certification request about weekly maxE may be ordered,
for demand response capacity not participating in the balan-
and the operator will then have to submit data that can be
cing mechanism must be verified through activation (if the
objectively validated (measurements, updated file, etc.);
spot price is higher than the price indicated by the operator, a
> O n-site audits: once a certification contract has been signed,
NEBEF has to be declared, or else the capacity is considered to
RTE, a third party mandated by it or a distribution system ope-
fail the activation test within the market);
rator (if all capacities within a certification entity are connec-
> Outside the market. Random tests are carried out without
ted to its network) can at any time go to a capacity site or any
prior notice to operators. At each time step of the PP2 period,
other site where it is possible to measure, monitor and acti-
a random sample is taken for each activatable but non-acti-
vate capacities, and can ask the operator to produce any proof
vated capacity. A sample is taken for each capacity (not for
of the technical characteristics declared and its ability to start
one out of all the non-activated capacities). There is therefore
and monitor activations.
no systematic activation on each time step. Activation probabilities are determined in such a way that a capacity that
The comments above about the role of system operators in
is not activated once within the market over the entire PP2
verifying capacities also apply to audits, the Competition Autho-
period has a high probability of being activated through tests.
rity having considered in its opinion of 20 December 2013 that
Conversely, a capacity that is activated over a significant part
distribution system operators should not take part in the verifi-
of the PP2 period has a very low probability of being activated
cation of demand response. The rules proposed by RTE comply
during the time steps when it is not in use. A capacity’s proba-
with the decree of December 2012 on the capacity obligation.
bility of being activated also incorporates the results of audits
where applicable.
151
6.THE CAPACITY MECHANISM
SETTLEMENT SYSTEM
The capacity mechanism is designed to function in a works
operators to submit their best power availability estimates for
within a decentralised market architecture; this structure deci-
their facilities.
sion is in keeping with the founding principles of the internal
European energy market166 and particularly the core principle
The provisions relating to governing settlements in the capacity
of holding market stakeholders accountable. Under this struc-
mechanism rules will thus play a central role in incentivising mar-
ture, suppliers and capacity operators are active with regard to
ket stakeholders to adopt behaviours and make economic deci-
their obligations and commitments, and have incentives to take
sions that help meet the security of supply target. For the capacity
the actions required to help maintain security of supply strictly
mechanism to function efficiently, market stakeholders must: (i)
within their respective perimeters.
have incentives to base their actions on their best forecasts, (ii)
not be able to make arbitrages that are suboptimal collectively,
This principle of accountability applies when it comes to fore-
and (iii) have incentives to disclose information and transfer it to
casting demand or generation plant availability needs167, and
the market so it can be efficiently integrated into the price.
also to the capacity mechanism rules regarding settlements,
as provided for in the decree. Similarly to the imbalance settle-
The present This chapter presents the provisions in the capacity
ment system in place in the energy sector (the imbalance set-
mechanism rules that relate to how these incentives translate
tlement price must reflect the cost of the imbalances observed
into settlements. It begins with an overview of the general prin-
within the perimeter of a balance responsible party), the rebal-
ciples applicable to the settlement for capacity rebalancing by
ancing price for suppliers and the imbalance settlement for
suppliers and the imbalance settlement for capacity portfolio
capacity portfolio managers hold stakeholders responsible for
managers (§ 6.1). The factors to be taken into account in the
the cost associated with their imbalances. The market mecha-
capacity mechanism rules for the calculation of settlements are
nism implemented thus encourages suppliers to cover their
then discussed (§ 6.2). A third section reviews the options rela-
obligations as accurately as possible and incentivises capacity
tive to settlements included in RTE's proposal (§ 6.3).
6.1  General principles of settlements
Article 1 of the decree describes the settlement relating to rebal-
The sections below discuss the provisions in the decree that
ancing by suppliers and that relating to imbalances of capacity
relate to these definitions and within the framework of which
portfolio managers.
RTE has made its proposal related to settlements.
The settlement for supplier rebalancing is the financial transaction conducted between that supplier and the transmis-
6.1.1  Capacity rebalancing by suppliers
sion system operator when rebalancing occurs for a given
The provisions concerning relating to the settlement for capacity
delivery year.
rebalancing by suppliers are found in article 6 of the decree. An integral
part of the model chosen by public authorities, these provisions were
166
See chapter 2 of this
report.
The capacity portfolio manager imbalance settle-
introduced while the decree was being prepared, after being approved
167
See chapters 4 and 5 of
this report.
ment is the financial transaction conducted by that
by the Energy Regulatory Commission168, to ensure that efficient eco-
manager when the total effective capacity within
nomic incentives are in place to make suppliers accountable.
168
See chapter 3 of this
report.
152
its portfolio differs from the total capacity certified, or when a capacity operator in its portfolio
A settlement for capacity rebalancing by a supplier is proportion-
rebalances.
ate to the supplier's imbalance – i.e. the difference between the
THE CAPACITY MECHANISM SETTLEMENT SYSTEM  / 6
amount of its capacity obligation and the amount of capacity
6.1.3  Overview of principles governing settlements
certificates held in its account – and to a unit price that depends
on the sign of the imbalance.
The formula applied in calculating the settlement can be written
as follows:
The decree also stipulates that the method of calculating the
unit price for capacity rebalancing must be defined in such a
Capacity rebalancing by suppliers
way as to (i) ensure, over the medium term, that suppliers have
an economic incentive to meet their capacity obligation, (ii)
Settlement = – imbalanceVolume x unitPrice
encourage suppliers to evaluate their capacity certificate needs,
with an eye to meeting their capacity obligation, based on a
A supplier with a negative imbalance pays the amount corre-
good faith estimate of their customers' reference power, and
sponding to its imbalance, multiplied by the settlement price
to (iii) limit arbitrage possibilities between an imbalance settle-
for negative imbalances, into the settlement fund for capacity
ment at the capacity portfolio manager level and a settlement
rebalancing by suppliers.
for rebalancing at the supplier level.
A supplier with a positive imbalance receives the amount corThis calculation method is approved by the Energy Regulatory
responding to its imbalance, multiplied by the settlement price
Commission, on the basis of a proposal by the public electricity
for positive imbalances, from the settlement fund for capacity
transmission system operator.
rebalancing by suppliers. It may receive less if the balance in the
account is too low to compensate all stakeholders with positive
6.1.2  Imbalance settlement at the capacity
portfolio manager level
The provisions relating to concerning the settlement for imbal-
imbalances. In this case, they will receive a settlement proportionate to their imbalance.
Imbalance settlement for capacity portfolio manager
ances at the capacity portfolio manager level are found in article
14 of the decree.
Settlement = – imbalanceVolume x unitPrice + rebalancingCost
Under the terms of the decree, the imbalance settlement
Capacity portfolio managers with negative imbalances pay into
of a capacity portfolio manager is calculated based on the
the settlement fund for capacity portfolio manager imbalances
capacity portfolio manager's imbalance – i.e. the difference
the amount corresponding to their imbalances, multiplied by
between total effective capacity and total certified capacity
the negative imbalance settlement price, plus the cost associ-
within its portfolio – and the sum of the amounts rebalanced
ated with rebalancing.
within its capacity portfolio. If rebalancing has occurred several
times, the settlement also takes into account the number and
Capacity portfolio managers with positive imbalances receive
direction of these adjustments. Thus, for a given imbalance,
from the settlement fund for capacity portfolio manager imbal-
recourse to rebalancing will increase the algebraic value of the
ances the amount corresponding to their imbalances, multiplied
settlement compared with a situation where rebalancing did
by the positive imbalance settlement price, plus the cost associ-
not occur.
ated with rebalancing. They may receive less if the balance in the
account is too low to compensate all stakeholders with positive
The decree also stipulates that the method of calculating the
imbalances. In this case, they will receive settlements proportion-
imbalance settlement of a capacity portfolio manager must be
ate to their imbalances.
determined in such a way as to (i) ensure, over the medium term,
that operators have an economic incentive to meet their commitments, (ii) encourage capacity operators to submit truthful
information with certification and rebalancing requests, particularly regarding the projected availability of their capacity, and
to (iii) limit arbitrage possibilities between an imbalance settlement at the capacity portfolio manager level and a settlement
for rebalancing at the supplier level.
153
6.2  Key aspects of capacity mechanism settlements
To ensure that the settlement gives stakeholders the right economic incentives, RTE drafted the capacity mechanism rules
with three key parameters in mind, the goal being to ensure that
the settlement will give stakeholders the right economic incentives: the security of supply criterion set by public authorities
(§ 6.2.1), the reference unit price of the settlement used to calculate the imbalance price (§ 6.2.2) and the interplay between
capacity rebalancing by suppliers and the imbalance settlement
The challenge in drafting the rules was to determine the reference or references to be that
should be used to calculate this unit price. Two
options emerged during the consultation:
> A unit price based on prices applied in different
mechanism-related transactions (market price);
> A unit price set at the administrative level.
for capacity portfolio managers (§ 6.2.3).
6.2.1  Security of supply target
The decree stipulates that the settlement system can be
adapted when “there is no significant threat to security of sup-
6.2.3  Interplay between capacity rebalancing by
suppliers and imbalance settlement at the capacity
portfolio manager level
ply”. Moreover, article L.335-2 of the Energy Code states that
The efficiency of the provisions governing the settlement can-
“obligations assigned to suppliers are calculated in such a way
not be measured solely by analysing the impact of each compo-
as to incentivise them to work, over the medium term, towards
nent separately: a broad assessment of stakeholders' economic
the security of electricity supply target used to prepare the Ade-
results is required. The settlement creates incentives through
quacy Forecast Report”.
the gains to which stakeholders can aspire and the risks to
which they are exposed.
These provisions show that In other words, the calculation of the
settlement system must support the objective of safeguarding
Market stakeholders' economic results may overlap with incen-
security of supply and be proportionate to this objective. The
tives for capacity rebalancing by suppliers and the imbalance
settlement definition adopted in the capacity mechanism rules
settlement at the capacity portfolio manager level for integrated
must therefore take into account both the security of supply cri-
companies.
terion and the imbalance amount (in absolute terms) beyond
which the threat to security of supply is considered significant.
The challenge in drafting the rules was to manage the interplay
between the systems applicable to capacity rebalancing by sup-
6.2.2  Unit price of the settlement
pliers and imbalance settlements for capacity portfolio managers while upholding the provisions of the decree that seek to
The provisions of the decree explicitly state that a settlement amount,
limit the possibility for stakeholders to arbitrage between the
be it for an imbalance at the capacity portfolio manager level or for
two types of settlement.
capacity rebalancing by a supplier, is based on a unit price.
6.3  Settlements provided for in the rules
6.3.1  Interplay between capacity rebalancing by
suppliers and the imbalance settlement at the
capacity portfolio manager level
settlement for capacity portfolio managers must be aligned.
Indeed, an imbalance between the number of capacity certificates held by an integrated stakeholder and its obligation could
alternatively be considered a certification or obligation compo-
154
To ensure that the settlement creates the right incentives, and
nent, depending on the number of certificates transferred by
that integrated stakeholders cannot engage in arbitrage, the
the part of the company that acts as an “operator” to its “sup-
systems governing rebalancing by suppliers and the imbalance
plier” arm.
THE CAPACITY MECHANISM SETTLEMENT SYSTEM  / 6
Figure 72 – Interplay between obligation- and certification-related settlements
Imbalance
settlement
at supplier
level
Imbalance
settlement
at CPM level
∆V
Obligation
level
Capacity
certified
level
Capacity
certified
level
Capacity
level
Real situation
Player certifies
at obligation level
Pays ΔV * CPM settlement price
The chart below illustrates how an integrated stakeholder could
arbitrage between its imbalance as a supplier and its imbalance
Player certifies
at capacity level
Pays ΔV * Supplier settlement price
6.3.2  Unit price for the settlement and the security
of supply target
as a capacity portfolio manager when it shows an imbalance
(ΔV) between its obligation and capacity.
The decree specifies that the unit price for the settlement can
be adapted when there is no significant threat to security of sup-
If the stakeholder opts for the capacity portfolio manager set-
ply. Bearing this in mind, RTE is proposing a two-part settlement
tlement, its imbalance ΔV will be valued based on the capacity
scheme:
portfolio manager settlement price. In the other case, the set-
> When security of supply is not at risk, the settlement price will
tlement will be equal to the product of ΔV and the supplier set-
be based exclusively on the market price. In this case, stake-
tlement price. To make arbitrages impossible, the capacity port-
holders are not penalised for imbalances, which are simply
folio manager settlement price and supplier settlement price
restated based on their market value. An incentive coefficient
must be equal.
K is nonetheless still necessary to incentivise stakeholders to
go through the market rather than wait for a settlement;
Having a “supplier” settlement and a “capacity portfolio man-
> When security of supply is at risk, the settlement price must
ager” settlement comes down to defining a settlement unit
switch over to an administered price. This price, which by
price that represents the same variable for capacity rebalancing
definition sets the maximum value capacity can reach on the
by suppliers and the imbalance settlement for capacity portfolio
market, plays a key role in creating incentives to invest in new
managers. This approach is also in keeping with the idea that
capacitiesy. It is therefore set based on the annualised cost of
all contributions to the shortfall risk should be treated equally,
the reference peak-load capacity and made public four years
whether generated by an imbalance at the level of a supplier
before the delivery year.
or capacity portfolio manager.
By structuring the settlement around the market price in this
way, the mechanism introduces an important self-regulation
Arbitrages between an imbalance settlement
at the capacity portfolio manager and supplier
levels are effectively prevented when the unit
price for rebalancing by suppliers is the same
as the unit price for rebalancing by capacity
portfolio managers.
function that makes the signals generated by the capacity market more consistent with forecast levels of security of supply levels. This ensures that if overcapacity becomes an issue, the reference market price can be low or even zero, reflecting the state
of the system, and thus avoid unnecessary extra costs for consumers. Conversely, if capacity is tight in terms of safeguarding
155
Table 4 – Matrix of the imbalance settlement depending on the state of the system
Security of supply at risk
Security of supply not at risk
Negative imbalance settlement price
AdminP
(1+K) MarP
Positive imbalance settlement price
(1-K) MarP
(1-K) MarP
security of supply, the reference market price will rise, in line with
to security of supply creates incentives that are consistent with
anticipated tension in the system.
the actual state of the system and enhances the mechanism's
efficiency. The signal generated by the market closely reflects
Settlements are thus shaped by two reference prices: a refer-
physical tension between effective obligations levels and effec-
ence market price (MarP) and an administered price (AdminP).
tive capacity levels. Any risks that emerge on either side are
RTE proposes that the “reference capacity price for the deliv-
communicated to the market and can be addressed with capac-
ery year” and the “maximum price determined with reference
ity adjustment measures. In particular, demand response and
to the cost of building new capacity”, defined by CRE169, be
load reduction capacity, suitable responses to short-term capac-
used as the reference market price and the administered price,
ity concerns, can be fully leveraged.
respectively, for settlements within the framework of the capacity mechanism.
Using the overall imbalance observed as the indicator also prevents stakeholders from manipulating the market by certifying
6.3.3  Definition of indicators for assessing threats
to security of supply
an excessively high (or low) level of capacity to artificially modify
the market price.
With a settlement scheme based on the actual level of secu-
In such situations, if the imbalance price was based on the fore-
rity of supply, a meaningful indicator must be determined
cast overall imbalance, measures with an activation cost that is
to estimate if security of supply is effectively threatened
higher than the imbalance price based on the reference market
(§ 6.3.3.1) and a threshold value must be defined for this indi-
price will not be activated, even though the state of the system
cator (§ 6.3.3.2).
would justify their use.
6.3.3.1  Determining the overall imbalance
The actual level of security of supply would be lower, as
The decree stipulates that the settlement scheme can be calcu-
would the rewards offered for such measures, particularly on
lated based on “the sum of the imbalances of capacity portfolio
the demand side, than if the actual imbalance was taken into
managers and the difference between the sum of the capacity
account.
obligations of suppliers and the total capacity certificates they
hold as of the capacity certificate transfer date”. In other words,
Conversely, the actual state of the system might not be as
the decree stipulates that the difference between effective
unfavourable as anticipated. In this case, capacity could be
capacity levels and the aggregated obligations of all obligated
dispatched even when the level of security of supply did does
parties in France (assuming that all certificates effectively par-
not require it, thus generating extra costs for suppliers and, ulti-
ticipate in the market) is the indicator to be used to determine
mately, for consumers.
whether security of supply is at risk. This difference corresponds
to the overall imbalance.
6.3.3.2  Determining the maximum imbalance
If the overall imbalance observed is considered the best indica-
169
Decree 2012-1405,
Article 23
156
This choice of the Using the overall imbalance
tor to assess the threat to security of supply, then a threshold
observed as the indicator for measuring the threat
value must be defined to establish the level beyond which the
THE CAPACITY MECHANISM SETTLEMENT SYSTEM  / 6
overall imbalance observed is considered to pose a threat to
security of supply. This threshold value is referred to as the maximum imbalance.
Figure 73 – Illustration of the impact taking the
actual imbalance in the system into account has
on measures activated during the delivery year
Above and beyond the objective of keeping the settlement
Negative imbalance price
proportionate, the challenge for RTE in determining the maximum imbalance is to ensure that market stakeholders have
I
sufficient visibility on the settlement scheme to which they
will be subject.
o (overall imbalance) actual
Adm
P
The sensitivity analyses conducted on the obligation, presented
in chapters 4 and 5 of this report, provide preliminary informa-
I
o est.
tion about the variability of the capacity mechanism, applying
Price gap not factored in,
preventing activation
of resources, notably
on demand side
the provisions of the capacity mechanism rules to the six years
P
between 2006 and 2011.
Mar
I
o limit
RTE proposes that the maximum imbalance be
defined in such a way as to ensure that the settlement scheme does not depend on the occurrence of short-term risks, and that the maximum
imbalance be published before the start of the
delivery year.
Overall imbalance
Negative imbalance price
I
with resources
O (overall imbalance)
activated
The maximum imbalance could be set factoring in a quantity of uncontrollable risks – i.e. the
amount of risks that stakeholders would not
have sufficient resources to cover.
Setting the maximum imbalance at 2 GW ensures
that a switch from the market price to the administered price will occur only when there is a significant threat to security of supply, without
depending on the materialisation of short-term
risks.
I
1
Imbalance price without
resources activated
2
Imbalance price with
resources activated
I
o actual
o est.
Overall imbalance
Figure 74 – Imbalance settlement scheme applicable depending on the overall imbalance observed
Maximum imbalance
0
Overall imbalance
Security of
supply at risk
Security of supply not at risk
Administered price
Reference market price
157
6.4  Assessment of the impact of the provisions
on settlements for market stakeholders
6.4.1  Framework for the assessment
6.4.2  Principle of the study
The previous sections outlined the defining choices made in the
The model comprises ten market stakeholders each with a sup-
rules to ensure that the settlement scheme incentivises stake-
plier perimeter and a capacity portfolio manager. We begin at
holders to balance through the market rather than wait for a
the start of the delivery year, in the following situation:
settlement. With the way settlements are calculated, the settlement price for rebalancing by suppliers or imbalance settlement
by capacity portfolio managers is lower than the market price
> T he reference market price has been set;
> E ach stakeholder positions itself based on its best estimate
(anticipated value).
when they show positive imbalances and higher when they
show negative imbalances. Relying on the settlement thus has
We then model the residual uncertainty stakeholders face
a cost for stakeholders.
with regard to availability and obligation levels, with a variable
centred on 0. The variables are independent standard normal
Moreover, if security of supply is at risk (i.e. if the overall imbal-
distributions. Each simulation represents a delivery year for
ance observed exceeds the value of the maximum imbalance
the mechanism, and yields the settlement to which each par-
set by RTE before the start of the delivery year), a settlement
ticipant is subject. The same climate scenario is used on the
for supplier rebalancing or an imbalance at the capacity portfo-
obligation and certification sides. The simulation is repeated
lio manager level will be based on the administered price. The
a large number of times to obtain the average settlement per
switchover to the administered price entails additional costs for
participant.
stakeholders showing imbalances.
Structure of the settlement
Lastly, articles 7 and 14 of the decree stipulate that the settle-
The structure of the settlement modelled is the one proposed
ment fund for capacity rebalancing by suppliers and the settle-
by RTE in the draft capacity mechanism rules. The parameters
ment fund for capacity portfolio manager imbalances cannot
were defined as follows:
have a negative balance170 and that settlements paid out from
them is reduced proportionately to ensure that the sum of the
Parameter
Value applied
settlements paid is equal to the amount available in the account.
This provision creates an additional incentive for stakeholders
Administered price (€k/MW)
60
Maximum imbalance (GW)
-2
K
0.1
with positive imbalances to rebalance through the market, but
can generate additional costs (particularly for stakeholders with
a zero imbalance expectation and thus only showing a small
imbalance).
170
Article 7 of the decree:
The sum of the amounts
paid out of the fund
cannot exceed the sum of
the amounts effectively
paid in by suppliers with
positive settlement for
that delivery year.
Article 14 of the decree:
The sum of these
settlements cannot
exceed, for a given
delivery year, the sum of
amounts effectively paid
in for positive settlement.
158
The financial risk to which market stakeholders are
Two assumptions are used for the reference market price: €10k/
exposed – , suppliers through the rebalancing set-
MW and €30k/MW (see chapter 8 as well).
tlement and capacity portfolio managers through
the imbalance settlement, – can be analysed. Inso-
Risks incurred by stakeholders
far as stakeholders can turn to the market if risks
The risks incurred by stakeholders are defined by a standard
materialise before the start of the deliver year, sup-
deviation based on their size. Two distributions of risks between
pliers by buying or selling certificates and capac-
stakeholders are simulated: in the first case, standard deviations
ity portfolio managers by rebalancing one or more
for risks are proportionate to stakeholders' capacity/obligation
times, the study focuses only on the residual risks
levels, and in the second the standard deviations are lowered to
that can impact stakeholders during the delivery
factor in risk -spreading.
year, i.e. the real-time risks that cannot be offset
through the market.
THE CAPACITY MECHANISM SETTLEMENT SYSTEM  / 6
171
Obligation – Capacity
level
Case 1: Risks proportionate to stakeholders' capacity or obligation
Risks are aligned as follows:
> For the supplier share: the standard deviation represents 1.5% of the obligation;
> F or the capacity portfolio manager share: the standard deviation represents 2% of certified capacity.
The resulting breakdown between stakeholders is as follows:
Stake­
Stake­
Stake­
Stake­
Stake­
Stake­
Stake­
Stake­
Stake­
Stake­
TOTAL
holder 1 holder 2 holder 3 holder 4 holder 5 holder 6 holder 7 holder 8 holder 9 holder 10
Capacity level/
Obligation (GW)
60
15
10
5
3
2
2
1
1
1
100
Standard deviation for
obligation risk (GW)
0.90
0.23
0.15
0.08
0.05
0.03
0.03
0.02
0.02
0.02
0.95
Standard deviation
for capacity risk (GW)
1.2
0.3
0.2
0.1
0.06
0.04
0.04
0.02
0.02
0.02
1.25
The total variability for the system171 is close to 1.6 GW, consistent with the results obtained using historical data, which showed a maximum overall variability of 1.6 GW.
Case 2: Risks taking into account risk spreading
The alignment of risks per stakeholder is shown in the table below, taking into account whether stakeholders they have the ability to
smooth their imbalances. Risk spreading reduces the standard deviations for the three largest stakeholders:
Stake­
Stake­
Stake­
Stake­
Stake­
Stake­
Stake­
Stake­
Stake­
Stake­
TOTAL
holder 1 holder 2 holder 3 holder 4 holder 5 holder 6 holder 7 holder 8 holder 9 holder 10
Capacity level/
Obligation (GW)
60
15
10
5
3
2
2
1
1
1
100
Standard deviation for
obligation risk (GW)
0.68
0.21
0.14
0.08
0.05
0.03
0.03
0.02
0.02
0.02
0.73
Standard deviation
for capacity risk (GW)
0.90
0.29
0.19
0.10
0.06
0.04
0.04
0.02
0.02
0.02
0.97
6.4.3 Results
Average settlement cost
The first observation is that the average settlement cost in
relation to stakeholders’ capacity or obligation levels is small.
For a stakeholder with an obligation of 10 GW, the amount is
€0.27k/MW, broken down as follows:
Average settlement cost
Negative imbalance
settlement (€k/MW)
0.51
Positive imbalance settlement
(€k/MW)
-0.23
Total (€k/MW)
0.27
Negative imbalance
settlement (€k/MW)
0.25
Positive imbalance settlement
(€k/MW)
-0.07
Total (€k/MW)
0.18
Average settlement cost for stakeholder 3
(Reference market price = €10k/MW)
The simulation results are presented in the chart below. The red
curve represents the results obtained for stakeholders' imbalance settlement costs in the simulation with risks distributed
Average settlement cost for stakeholder 3
proportionately to their capacity or obligation levels. The green
(Reference market price = €30k/MW)
curve shows the results obtained for stakeholders' imbalance
159
30
0.3
20
0.2
10
0.1
0
0.0
 
 
 Total capacity
Imbalance
settlement cost,
1st case
Imbalance
settlement cost
with smoothing
er
ay
Pl
er
ay
Pl
er
Pl
ay
er
ay
Pl
er
ay
Pl
er
ay
Pl
er
ay
Pl
er
ay
Pl
er
ay
Pl
er
ay
Pl
€k/MW
0.4
10
40
9
0.5
8
50
7
0.6
6
60
5
0.7
4
70
3
0.8
2
80
1
GW
Figure 75 – Settlement cost based on size of stakeholder
(reference market price assumed = €30k/MW)
settlement costs in the simulation that takes into account their
ability to smooth their imbalances.
With risks distributed in portion to stakeholders' capacity or obligation levels, the settlement cost is proportionately higher as
the stakeholder’s' size increases. For a stakeholder with 60 GW
of capacity, the settlement cost is €0.48k/MW, compared with
€0.24k/MW for one with 1 GW (assuming a reference market
price of €30k/MW).
This result depends on the stakeholder's quantity of risks in relation to the overall imbalance defined as the maximum imbalance. A larger stakeholder (with potentially high risks) can by
itself, if it has a negative imbalance, trigger a shift in the overall
imbalance on the system and thus a switch to the administered
price. A larger stakeholder will therefore settle negative imbalances at the administered price more often than a smaller one,
given the correlation between the imbalance settlement regime
determined and the sign of its imbalance.
Taking into account the ability to spread risks reduces the imbalance settlement cost for larger stakeholders, from €0.48k/MW to
€0.28k/MW172. It can also be observed that all stake172
Assuming a reference
market price of €30k/
MW.
holders benefit from the spreading of risks through a
173
Obligation – Capacity
level.
changed. This is explained by the decline in the overall
160
lower average imbalance settlement cost, including
smaller stakeholders for which risk levels have not
variability of the system173 from 1.6 to 1.2 GW.
The impact assessment conducted on the provisions relating to settlements in the draft capacity
mechanism rules produced three key results:
>A
larger stakeholder will face a higher settlement cost than smaller stakeholders as a
whole. Due to its size and the potential significance of its risks, there is indeed a correlation
between its imbalance and the overall imbalance on the system: all other things being
equal, a larger stakeholder will therefore settle
negative imbalances at the administered price
more often;
> A stakeholder facing fewer a smaller quantity of
risks does not have to contend with the same
issue and its settlement cost will thus be lower;
> All
stakeholders benefit from the spreading
of risks, including smaller ones that cannot
spread risks at their individual level; this is
because the decrease in the system's overall
variability results in a lower settlement cost for
all stakeholders.
THE CAPACITY MECHANISM SETTLEMENT SYSTEM  / 6
161
7.MARKET FUNCTIONING: TRADING,
TRANSPARENCY AND COMPETITION
The French capacity mechanism is based on suppliers being
The first condition is considered to have been met if the number
required to have capacity coverage equivalent to the consump-
of capacity certificates allocated to each resource through the
tion of their customers. This obligation allows all energy market
capacity certification process accurately reflects its contribution
stakeholders to contribute to security of supply in proportion to
to security of supply, and if those that buy capacity certificates on
their contribution to the shortfall risk, and creates incentives to
the market are not held responsible for a potential failure of the
keep peak demand growth in check, this being a key criterion for
capacity to which the certificates were originally allocated. This
evaluating the shortfall risk in France.
objective is met through the certification principles outlined in
chapter 5 of this report and the method of calculating whether an
It would not be economically efficient to require that all obli-
obligated party has met its obligation found in chapter 4.
gated parties ensure the physical coverage of their own obligation if other operators can do it for them at a lower cost.
The second condition can only be met in relative terms, insofar
This is why obligated parties have the option to go through
as there will necessarily be transaction costs involved in creating
the market and meet their obligation indirectly by buying from
a new negotiable good from scratch. For transaction costs to be
a third party securities representing an operator’s unit contri-
considered sufficiently low to be economically optimal for the
bution to reducing the shortfall risk. These securities, called
capacity mechanism, specific conditions must be met:
capacity guarantees in the rules and capacity certificates in
1. It must be possible for stakeholders to trade capacity certifi-
this report, must therefore be carefully defined and they must
cates freely, based on their needs, and at prices that effectively
be negotiable.
correspond to underlying costs;
2. S
takeholders must have access to relevant information to
This kind of market mechanism, designed to deliver a collective result, is in keeping with an existing body of theory deve-
understand the market fundamentals and act accordingly;
3. C
ompetition in the market must be free and undistorted.
loped in the economic literature based on the work of Ronald
Coase174. Creating standardised products called capacity certi-
Some consultation participants voiced reservations about the third
ficates is a matter of creating property rights to reductions in
condition, and to a lesser degree the second, as did the Competition
the risk of shortfalls on the power system and allowing market
Authority175. Concerns about whether a market mechanism can
stakeholders to trade them to meet the objective set by public
efficiently reveal the value of security of supply and ensure optimal
authorities at the lowest cost. A capacity market is thus crea-
coordination of stakeholders’ decisions are legitimate, as these issues
ted through the trading of capacity certificates between market
are what will determine the mechanism’s economic efficiency. This
stakeholders.
chapter outlines the measures intended to address them, notably
particularly those proposed in the capacity mechanism rules. The
For such a system to be economically efficient, the property rights
provisions that would govern capacity certificate trading are pres-
need to be sufficiently well defined and related transaction costs
ented in § 7.1, those relating to the transparency of the market and its
low enough, especially with regard to the gains stemming from
fundamentals in § 7.2, and those designed to ensure free and undis-
the optimisation of the provision of the good.
torted competition in the capacity market in § 7.3.
174
[Coase, 1960]
175
[Competition Authority,
2012a]
162
MARKET FUNCTIONING: TRADING, TRANSPARENCY AND COMPETITION   / 7
7.1  Trading of capacity certificates
For the capacity market to be efficient, transactions must
important when it comes to planned capacity and investment
involve goods that are clearly defined, and the framework must
decisions.
give stakeholders confidence in a system that allows them to
meet their obligation through the market rather than holding
However, the fact that the mechanism parameters are defined
physical capacity. Transactions should generate a signal-price
several years ahead of time and do not change after they are
that reflects the state of the power system.
published could create some uncertainty when they are being
set. It is impossible to reassess them later if the fundamentals
This “market-driven” approach requires that the mechanism’s
of security of supply change significantly and unexpectedly, and
parameters be stable throughout each term. Otherwise, regu-
this could make them less representative of security of supply.
latory uncertainty could discourage stakeholders from trading,
This is another illustration of the compromise that must be
especially several years before the delivery year, since the value
found between the accuracy and stability of the mechanism
of a capacity certificate could change due to the intervention
(see section 3.2). The disadvantages in terms of accuracy are
of forces outside the market during a term. For instance, a
nonetheless lessened by the fact that the mechanism does
decrease in the security factor during a mechanism term would
not set a capacity target: as such, even if the mechanism para-
reduce the value of a capacity certificate. The publication of the
meters are not perfect, market stakeholders will reassess their
mechanism parameters at the start of the term, i.e. four years
capacity needs and this will bring the value back into line with
before the delivery year, provides the regulatory stability indis-
the fundamentals.
pensable to the smooth flow of trading. By reducing uncertainty
relating to the mechanism’s time horizons, it plays an important
A stable regulatory framework is thus crucial for trading to func-
role in shaping stakeholders’ forecasts.
tion smoothly, and its drawbacks in terms of when the parameters are defined are offset by the absence of a fixed capacity
The capacity mechanism rules are the foundation for capacity
target. In this case, the benefits of stability far outweigh the
certificate trading. They include all of the building blocks required,
disadvantages in terms of accuracy.
from precise definitions (nature of the product, eligible stakeholders, transfer system, etc.) to the tools to be implemented (crea-
The rules stipulate that all capacity mechanism parameters are
tion of the register, traceability, etc.). Though the mechanism rules
to be published together at the start of the term, i.e. four years
do not institute an organised market for certificate trading, they
before the start of the delivery year:
do lay the groundwork for its future creation by leaving enough
leeway for an exchange platform to be created.
> For the obligation: extreme temperature value and security factor;
> F or certification: charts used for capacity certification, contribution coefficients for each technology subject to the certifi-
The section below discusses the effects of the publication of the
cation approach that neutralises the risk affecting the primary
parameters before the delivery year and the provisions intended
source of intermittent capacities;
to make exchanges more fluid.
> F or settlements: the administered price representing the price
applied to negative imbalances when security of supply is
7.1.1  Publication of mechanism parameters at
the start of the term
The publication of the definitive parameters at the start of the
capacity mechanism term gives suppliers sufficient visibility
seriously threatened.
7.1.2  Nature of the product and organisation of
trading
to integrate their obligation into their customer contracts, to
7.1.2.1  Nature of the “capacity certificate” product
cover their certificate needs ahead of time, to organise any
Decree 2012-1405 of 14 December 2012 provides a definition
demand management actions necessary and, ultimately, to
of the “capacity certificate” product:
meet their obligation. Operators can also anticipate their own
certified capacity level and thus the amount of certificates
A capacity certificate is intangible personal property, fungible,
that will be allocated to their capacities. This is especially
negotiable and transferable, corresponding to a normative
163
unit power value, created by the public transmission system
certification contract for the same delivery year, or in the event
operator and issued to a capacity operator after a capacity
of upward rebalancing by an operator. When certificates are
has been certified and valid for a given delivery year.
issued, RTE places an amount of certificates corresponding to
the amount certified in the contract in the holder’s account in
Capacity certificates are all recorded in the capacity certificate
the capacity certificate register.
register kept by RTE. This register lists, in a secure and confidential manner, all transactions involving the issuance, exchange
Capacity certificates can only be cancelled in the event of
or destruction of capacity certificates. The capacity certificate
downward rebalancing by an operator. RTE cancels the certifi-
register is opened once the first capacity certificates are issued.
cates once they have been returned to it by capacity portfolio
manager that rebalanced.
Ownership of a capacity certificate is established once it is
recorded by RTE in the holder’s account in the capacity certi-
7.1.2.4  Transfers of capacity certificates
ficate register. Because capacity certificates are paperless, their
A capacity certificate changes ownership when it is transferred
recording in the capacity certificate register constitutes suffi-
between two legal entities each holding an account in the capa-
cient proof of ownership. The negotiable product exists separa-
city certificate register.
tely once it is issued: a that holds a certificate bears no risk with
regard to the underlying capacity to which the certificate was
To avoid factoring transactions conducted at prices that have
originally issued.
no economic relevance for the market as a whole into the reference price, the rules distinguish between two types of capacity
Each capacity certificate is valid only for a given delivery year.
This means that a capacity certificate issued for a delivery year
and recorded in an account in the register for that year cannot be
transferred to an account in a register for a different delivery year.
certificate transfers:
> C ertificate transactions: certificates are transferred based on a
price agreed upon between the parties;
> C ertificate transfers: the exchange is agreed upon between
the parties but with no payment involved.
Capacity certificates are issued in units of 0.1 MW. They are
numbered to facilitate their management and the tracking of
All transaction prices must be notified to CRE in keeping with
exchanges.
paragraph I of article 17 of the decree.
7.1.2.2 Holder of an account in the capacity certificate
register
7.1.3  Trading procedures
An account holder is a legal entity with at least one account in
Capacity certificates can be traded bilaterally or through orga-
the register. It may be an obligated party, a capacity portfolio
nised markets. A platform to concentrate liquidity would offer
manager, an operator or any other participant in the market.
real advantages in terms of forming and revealing a public reference price to guide stakeholders’ forecasts. This is why the
An account holder may have several accounts, depending on its
capacity mechanism rules proposed by RTE include provisions
own capacity mechanism-related needs. However, an account
that will facilitate the creation of such a platform.
holder can only have one account as an obligated party. It is the
number of certificates held in this account that will be used to
7.1.3.1  Bilateral trades
calculate the supplier’s imbalance for capacity rebalancing, and
The capacity mechanism rules suffice to allow bilateral trading
then to calculate its final imbalance.
between mechanism stakeholders. Two stakeholders must simply agree on a trade and a price, and then carry out the transac-
7.1.2.3  Issuance and cancellation of capacity
tion and notify RTE, which will modify both parties’ positions in
certificates
the capacity certificate register accordingly.
As the body that maintains the register, RTE alone can issue or
cancel capacity certificates.
In sum, the procedures involved in bilateral trades are similar to
those that exist in the energy market with the block exchange
Certificates are issued when a capacity contract comes into
effect for a capacity that was not previously the subject of a
164
notification (NEB) mechanism.
MARKET FUNCTIONING: TRADING, TRANSPARENCY AND COMPETITION   / 7
7.1.3.2  Development of an exchange platform
of an exchange platform, the capacity mechanism
Examples observed in energy markets show that bilateral tra-
rules explicitly make this interface possible, but sti-
ding of long-term products is relatively illiquid. This can be a
pulate that the exact scope and functioning of this
major obstacle to the formation of a credible signal-price and
interfacing will be defined at a later date based on
even make it difficult for stakeholders to find counterparties. It
work to be conducted jointly by RTE and the compa-
seems necessary to have an organised market in place that will
nies organising the exchange platform. This solution
concentrate liquidity through trading sessions in the capacity
avoids the potential problem of creating preliminary
market, thereby enhancing the quality of the signal-price.
constraints that could hinder or turn into obstacles to the deve-
176
Additional information
is made available
every year through
medium-term studies
looking at the following
winter or summer and
the Electrical Energy
Statistics.
lopment of an exchange platform.
The decree recognises the importance of having an exchange
platform for the capacity mechanism. It stipulates that if no such
platform is developed through private initiatives, and the Energy
Regulatory Commission recommends that one be created, the
Energy Minister can organise a call for tenders for this purpose.
During the consultation, EPEX Spot expressed an interest in setting up an exchange platform for capacity certificates.
7.1.3.3  Interfacing with an exchange platform
Setting up an exchange platform will require determining how it
will interface with the capacity certificate register, which records
The capacity mechanism rules create a robust
framework for the trading of capacity certificates
between market stakeholders. This framework
is based on existing provisions for energy, with
a central register maintained by RTE allowing
transactions to be tracked. The future development of an exchange platform is factored into the
capacity mechanism rules. Taken together, these
provisions lay a solid foundation for the development of certificate trading.
ownership of capacity certificates. To facilitate the development
7.2  Transparency of the mechanism
The capacity certificate market must be an efficient tool for
7.2.1  Publications relating to the registers
coordinating the efforts of mechanism participants. This will
be accomplished if the price at which certificates are traded
Since markets were opened to competition, the aggregated data
reveals relevant information. For this price to be meaningful,
about the supply-demand balance outlook provided through
stakeholders must have enough information about the state of
RTE’s Adequacy Forecast Reports have been indispensable to
the system and market fundamentals at the start. This is why in
the functioning of the deregulated power system. The need
designing the rules, particular attention was paid to provisions
for adequacy reports of this kind has since been recognised at
that could ensure that the mechanism functions in a transpa-
the European level and included in the European Commission’s
rent manner.
guidelines as a prerequisite to the implementation of a capacity
mechanism.
Transparency is needed with regard to the fundamentals of the
power system (i.e. the projected supply-demand balance for the
RTE’s annually updated Adequacy Forecast Reports already
delivery year) and the actual functioning of the market (transac-
provide a good deal of information about the supply-demand
tion volumes and prices). The rules therefore include transpa-
balance outlook. They inform market stakeholders about the
rency measures focusing on:
fundamentals of the power system by providing an aggregate
> The physical underlyings of the mechanism, via the publica-
view of forecast electricity supply and demand. These reports
tion of an aggregate of the registers (§ 7.2.1) and forecasts
are also a forward-planning tool in that they allow longer-term
of obligation volumes at the aggregate and individual levels
scenarios of changes in the electricity mix and demand struc-
(§ 7.2.2);
ture to be examined in the light of the targets set by French and
> The functioning of the market, notably to provide visibility on
European authorities176.
transaction volumes and prices (§ 7.2.3).
165
The capacity mechanism rules call for the existing arrangement
This publication will, in and of itself, be a powerful market moni-
to be strengthened through the regular publication of aggre-
toring tool since it will make it possible to gauge the credibility
gates of certified capacity levels and peak demand management
of the information on record. With such measures in place, it
measures. For each delivery year, RTE will create and maintain
will be easy to detect any false information that is intentionally
two registers, in addition to the confidential capacity certificate
conveyed (unrealistic data provided for initial certification with
register in which are recorded, in a secure manner, all transactions
subsequent rebalancing). If market manipulation is involved
involving the issuance, trading or destruction of certificates:
and behaviours violate sector regulations on market abuse or
>
> The peak demand management measure register, listing all
T he certified capacity register, listing all capacity certified;
competition, punishments can be decided by the authorities in
charge of verification.
peak demand management measures reported by consumers and suppliers, particularly any peak demand flexibilities
The information the capacity mechanism rules say must be
recognised through other mechanisms but not certified as
included in the certified capacity register are also required
demand response capacity. RTE takes the data in this register
under the provisions of Commission regulation 543/2013 of
into account in calculating the overall obligation and makes
14 June 2013 on submission and publication of data in elec-
it public in a way that protects the confidentiality of commer-
tricity markets. Known as the “transparency” regulation, it aims
cially sensitive data.
to make electricity markets more transparent by giving market stakeholders access to a common set of data relating to
The publication of the aggregate data recorded in the regis-
generation, transmission and consumption of electricity on
ters will be key to the mechanism’s transparency and convey
a European platform developed and managed by ENTSO-E.
information of a different nature than what is included in RTE’s
The regulation provisions notably define this common set of
Adequacy Forecast Reports. Indeed, the latter are based on non-
data and specify that data gathering is to begin late in 2014.
binding data gathered from generators, whereas the certified
Market stakeholders (generators, consumers, etc.) must pro-
capacity registers will include data that is declared by genera-
vide transmission system operators with different types of data
tors to certify their capacity and can only be modified through
that is made public within the framework of the transparency
rebalancing. This should for instance facilitate the collection of
regulation. For instance, article 14 stipulates that transmission
information about operators’ real prospects with regard to the
system operators are to convey to the platform the sum of
definitive closure or mothballing of certain facilities.
generation capacity installed for all existing production units
with a power rating of at least 1 MW per production type, based
7.2.1.1  Publications relating to the certified capacity
on information provided by generators. For capacity (existing
register
or planned) with a power rating of 100 MW or more, the trans-
The rules stipulate that the data in the certified capacity register
mission system operator must also provide individual informa-
is to be made public. In concrete terms, this means that detailed
tion such as the name of the unit, installed capacity, voltage
information will be made available about individual capacities --
connection level, etc.
volumes certified, technical characteristics, projected availability
and effective levels in previous years. Under the rules, the certi-
Some provisions of the transparency mechanism require that
fied capacity register is to provide stakeholders with information
market stakeholders make public data that are also required
for the next four delivery years, as well as the last two, regarding:
under the capacity mechanism rules. RTE is thus proposing that
>
> Details about individual certification levels for capacities of
T he total level of capacity certified for each technology;
more than 100 MW;
> Details about aggregated certification levels for capacities of
the mechanism allow a pooling of procedures relating to data
provided for capacity certification and publication in the certified capacity register on the one hand and for publication within
the framework of the transparency regulation on the other.
less than 100 MW.
This pooling ability offers advantages at different levels:
The rules also stipulate that effective capacity levels must be
> It limits the number of declarations stakeholders have to make
made available at these same scales for past years. Once the
and thus reduces the transaction costs the mechanism will
mechanism is established, all market stakeholders will thus be
entail;
able to compare the certified capacity level of a capacity or technology with the effective level for previous years.
166
> It enhances the quality of consistency of the data published
by RTE.
MARKET FUNCTIONING: TRADING, TRANSPARENCY AND COMPETITION   / 7
7.2.1.2  Reporting changes in the parameters of capacity
Consequently, the rules stipulate that measures taken by sup-
certification
pliers and consumers to reduce their consumption during peak
Capacity rebalancing does more than offer flexibility to capacity
periods must be recorded in this register, particularly demand
operators. Only if rebalancing procedures are followed and reba-
flexibility at peak that is recognised through other mechanisms
lancing corresponds to the physical reality will the number of
but not certified as demand response capacity. Like the data in
capacity certificates available on the market accurately reflect
the certified capacity register, this information is made public,
security of supply.
taking into account its commercially sensitive nature.
The decree stipulates that “an operator of certified capacity, or
a person mandated by it, informs the public transmission or distribution system operator to which the capacity is connected
7.2.2  Publications relating to the capacity
obligation
of any changes in or additional information available about the
7.2.2.1  Publication of forecasts of overall certificate
characteristics or operating conditions of that capacity suscep-
levels
tible of impacting its projected availability during the PP2 peak
To help suppliers estimate their capacity obligation level, RTE
period.” (paragraph I of article 11).
will publish its own forecasts of the overall obligation level, i.e. of
total demand in France.
Operators have two days to file a declaration if they become
aware of any such major change in operating conditions. Decla-
A first forecast of the total number of certificates required for
rations are required for capacities with certified capacity levels
the security of supply criterion to be met will be published at
exceeding 100 MW. Changes are considered to be major when
the same time as the mechanism parameters, four year before
they cause the level of certified capacity to vary by 10%.
the start of the delivery year. The overall level of certificates will
be estimated applying the same methods and parameters and
The capacity register take into account modifications in the fore-
those used to calculate the obligations of obligated parties.
cast availability of units, and new declarations are made public.
All mechanism stakeholders will thus be informed of changes in
This forecast will then be updated annually taking into account
the amount of certificates in issue.
the data in the certified capacity and peak demand management measure registers, along with the most recent electricity
7.2.1.3  Publications relating to peak demand
demand forecasts. Together with the information continuously
management measures
available through the certified capacity register, this forecast will
The capacity register referred to in the preceding paragraph
allow give mechanism stakeholders insight into the state of the
lists the capacity certificates available, including those offered
system and allow them to act accordingly. Suppliers will notably
by demand-side operators that opt for explicit valuation through
be able to define and adjust their strategies for covering their
the market (certification). Other publications focus on demand.
obligations.
RTE will prepare forecasts of the overall level of certificates each
year (see paragraph below), but suppliers may also organise
7.2.2.2  Estimation of suppliers’ obligation
measures with their customers, notably to reduce the obliga-
The efficiency of the market model proposed is based on the
tion to which they are subject, and these measures may impact
assumption that suppliers are best placed to estimate the capa-
national demand. These measures must also be reported to give
city obligation to which they will be subject. If this was not the
stakeholders more comprehensive information about the sup-
case, then the single buyer (capacity auction) model described
ply-demand balance.
in § 2.3, under which public authorities estimate future capacity needs, could be justified. During the consultation, some
Indeed, article 18 of the decree stipulates that RTE is to create
suppliers expressed doubts about their ability to estimate their
a “register, with information provided by suppliers and consu-
capacity need and concerns that this uncertainty could interfere
mers, listing measures intended to manage demand during
with the formation of the capacity certificate price. This debate,
peak periods”. It goes on to say that the “information contai-
a recurring theme throughout the consultation, boils down to
ned in the register that is necessary for the market to function
whether the economic optimum can be achieved with a decen-
properly is made public and updated in a timely manner when
tralised market structure.
changes occur”.
167
177
The rules call for
notification of the
estimated obligation
within 12 months of
the end of the delivery
period.
178
Decree 2012-1405 of
14 December 2012,
Article 17.
Without seeking to provide a definitive answer to a ques-
RTE is also proposing to provide each obligated party with an
tion that is central to economic and political theory, it is
estimate of its obligation after the end of the delivery period,
important to determine whether, within the guidelines
based on available consumption data, and of the overall imba-
adopted, there are mechanisms that can enable sup-
lance. These estimates will be provided after the end of the deli-
pliers to evaluate their capacity need. They have all the
very period but before the transfer deadline for a term177, ena-
information required to calculate their obligation: they
bling stakeholders to trade certificates on this basis to balance
are in charge of the commercial policies that shape their
their perimeters as obligated parties and thus limit any settle-
customer portfolios, and the parameters for calculating
ment to which they may be subject for imbalances.
the obligation (security factor, reference temperature
and gradient) are set before the delivery year. The one unknown is
the effective consumption of their customers, but this too can be
forecast. The situation is exactly the same for them as in the energy
7.2.3  Publications relating to the functioning of the
capacity market
market (suppliers anticipate extraction levels within their perimeter
The market monitoring measures implemented will allow CRE
to choose their procurement strategy and thus their transactions on
to enhance the transparency of the mechanism by publishing
the forward, day-ahead and intraday markets), and they have tools at
detailed data about the functioning of the mechanism and
their disposal: the incentive created by the mechanism to manage
exchanges. Indeed, the decree stipulates that:
demand during peak periods depends on it.
II. – At least once a year, the Energy Regulatory Commission
When the mechanism is first implemented, RTE will help obligated
publishes, through all appropriate channels, statistical data rela-
parties understand how it functions by offering to calculate what
ting to all transactions and public offers regarding capacity certifi-
their capacity obligation would have been in past years based
cates and related products, including the volumes exchanged or
on historical consumption data provided by them, applying the
offered and prices178.
parameters and rules published. This type of exercise requires
determining, ex post, peak periods that might not match those
This data complements the physical data published by RTE to
that would actually have been defined. The approximation can
provide stakeholders with a clear vision of the market and its
nonetheless help stakeholders better understand how their phy-
underlyings.
sical data translates into a specific number of capacity certificates.
The purpose of the capacity certificate market is to reveal the value of contributions to security of supply. For market stakeholders to be able to assign a price to capacity certificates, they must have access to information about
the general state of the system and the security of supply outlook. To this end, additional provisions have been
introduced to make the market more transparent, beyond the existing mechanisms (Adequacy Forecast Reports),
and correspond to best practices in terms of market transparency:
> The registers that include information about the physical state of the system will be made public (data provided
at an individual level for units with power ratings of more than 100 MW, and aggregated otherwise);
> Each year, RTE will publish a forecast of the obligation level corresponding to total consumption in France, applying the methods in the rules;
> R TE will assist obligated parties when the mechanism is first implemented by calculating, based on historical
data, what their capacity obligation would have been in previous years;
> RTE will provide stakeholders with estimates of their obligations before the transfer deadline, based on available data;
> C RE will publish statistics on exchanges so that estimates can be made of the volumes traded or offered and prices.
168
MARKET FUNCTIONING: TRADING, TRANSPARENCY AND COMPETITION   / 7
7.3  Competition in a decentralised capacity market
Creating a market that allows stakeholders to meet their capa-
> Public interventions to ensure security of supply could distort
city obligation will not suffice to make the mechanism economi-
competition at the national and transnational levels:
cally efficient. How the market actually functions will also be key:
In concentrated markets, interventions to ensure generation
if some stakeholders have market power and abuse it to distort
adequacy risk rewarding dominant incumbents for withhol-
prices, the market process will stray from the overall optimum.
ding strategies. In particular capacity mechanisms risk repliGiven the highly concentrated structure of the French electricity
cating, or even embedding, problems of market concentra-
market, particular attention was paid to competition issues in the
tion which exist in some Member States181.
future capacity certificate market during the preparation of the
decree and the consultation of 2013. The decree was drafted
There is a high degree of concentration in the French electri-
and the rules designed with these issues in mind (§ 7.3.1). None-
city market: incumbent operator EDF has a dominant position in
theless, it seems that the combination of a decentralised market
electricity generation and supply.
architecture and the ARENH scheme implemented in 2011 to
support the deregulation of the supply market in France require
101. In 2011, EDF claims to have had 79.4% of electricity gene-
a re-examination of the competitive structure of the capacity
ration capacity in France. This includes 92% of nuclear capa-
certificate market (§ 7.3.2). The decree also introduced special
city (EDF operates all nuclear power stations in France though
market monitoring procedures that will be that much easier to
competitors hold drawing rights on some of them based on
put into practice thanks to the transparency of the registers,
industrial contracts), 66% of fossil-fired capacity (coal, fuel oil
proof that these considerations were taken into account from
and gas), 81% of hydropower capacity and 32% of renewable
the beginning of the mechanism design process (§ 7.3.3).
energy capacities. Even excluding the capacity certificates
associated with ARENH rights, as provided for in the NOME Act,
it seems that EDF will still have a majority of capacity certificates.
7.3.1  Competition and market power
Energy markets can only be efficient if there is free and undis-
102. At the same time, CRE’s market observatory showed that
torted competition between market participants. Various mea-
in 2011, EDF and public local distribution companies supplied
sures have helped to reduce the market power of incumbent
94% of residential consumption and 78% of consumption at
operators: the development of cross-border interconnections,
non-residential sites (EDF accounts for a very large share of
the harmonisation of methods for allocating rights to use inter-
this total). EDF will consequently by far need the most capa-
connections, the development of implicit allocation methods
city certificates182.
for exchange capacity (market coupling) and the harmonisation
of rules governing exchanges in different Member States. Ope-
This situation is mainly a reflection of the energy policy choices
rators’ positions and ability to influence markets are increasingly
France made in the past, which gave the incumbent operator a
being measured at the regional, and even European level.
nuclear power generation fleet that is competitive at the national and European levels. However, this does not means that its
Capacity mechanisms are being created in Europe under the
dominant position is abused:
aegis of Member States that are responsible for their own security
> M arket concentration is measured by the number of stake-
of supply. This domestic focus has been a source of concern for
holders in a market and their respective market shares. This
the European Commission, which expressed its reservations and
measurement can be taken on the supply or the demand side;
expectations in the guidelines published in November 2013 :
179
> A stakeholder’s market power refers to its ability
to cause market prices to move away from the
> Lack of competition in national energy markets could lead to
level that would be achieved in a market charac-
market manipulations that threaten security of supply:
Appropriate structural solutions to address problems of mar-
terised by pure and perfect competition, for its
>
own benefit;
T he exercise of market power refers to a situation
ket concentration leading to underinvestment should be
where a stakeholder takes advantage its market
identified and implemented180.
power. This usually detracts from the collective
179
[EC, 2013a]
180
[EC, 2013a]
181
[EC, 2013a]
182
[Competition Authority,
2012a]
169
well-being and enhances the profits of the stakeholder in
It found that the introduction of a safety net mechanism created
question. Competition law only punishes the abuse of domi-
capacity withholding risks by permitting opportunistic behaviours
nant position
183
.
by generators (artificially minimising the availability of their generation capacity to activate the mechanism), and suggested that
The two do not always go hand in hand. A market can be
operators not be allowed to commit to availability levels below
concentrated without the company or companies with signifi-
their historical average to prevent strategic behaviours.
cant market share necessarily having market power, especially
if regulations are in place to keep the market competitive. Simi-
These concerns have been taken into account. The safety net
larly, market manipulation can be seen in markets with relatively
mechanism is indeed reserved for exceptional circumstances,
low concentration levels, as evidenced in studies focusing on
and the procedures in place will make it easy to see if opera-
the “pivotal” role played by some firms in specific instances, such
tors are significantly underestimating the future availability of
as the California crisis of 2000-2001184. Lastly, market power is
their capacity. Indeed, the transparency of the certified capacity
only a potentiality, and will not necessarily be exercised: just
register will allow all parties to identify any capacity withholding
because a stakeholder’s position would allow it to distort com-
strategies, including preventively by comparing the amount of
petition does not mean it will do so.
capacity certified for a given year to levels from previous years.
While it seems clear that greater vigilance is required with regard
Another concern is whether the capacity obligation could create
to the design of mechanisms that could reinforce dominant
entry barriers in an already complex regulatory environment. The
positions, this should not be considered sufficient reason to
certification methods proposed in the rules (neutrality between
avoid implementing such mechanisms. First, there are already
all technologies) ensure equal treatment for all capacity operators
specialised authorities in place to evaluate market functioning
(generation, demand response or storage) and prevent forms of
and deal with abuses of dominant position. Second, the regula-
selection that could exclude new entrants. In the supply market,
tory framework in France already includes provisions intended
the capacity obligation adds another layer of complexity that
to promote competition: the Regulated Access to Incumbent
could be seen as an obstacle for new entrants, or as an oppor-
Nuclear Electricity (ARENH) scheme offers a structural and
tunity: it applies to all stakeholders, but each supplier can forge
appropriate solution to market concentration in France185.
its own strategy for covering the obligation. This new facet of the
supply business creates opportunities for stakeholders to dif-
Lastly, the assessment by public authorities, for instance in the
ferentiate their offerings and stimulate competition. Lastly, the
Poignant-Sido report, did not focus on the possibility that the high
verification procedures proposed ensure that stakeholders are
level of concentration in the French market could lead to strate-
not subject to excessively onerous declaration requirements and
gic underinvestment. On the contrary, the workgroup focused on
take special care to avoid imposing a segmentation of demand
how to fairly divide responsibility for investments in peak gene-
response entities, as discussed in sections 5.6 and 5.7.
ration facilities that are not profitable in the energy market despite the positive externalities they create, a responsibility that has
hitherto been implicitly borne by the incumbent operator.
The purpose [of a capacity obligation] is to distribute
183
Article 102 of the TFEU
and article L. 421-2 of the
French Commercial Code.
184
[Wolak, 2003]
185
Appropriate structural
solutions to address
problems of market
concentration leading
to underinvestment
should be identified and
implemented [EC, 2013a].
186
[Poignant-Sido, 2010]
170
responsibility for insurance against the risk of a generation shortfall186.
The French electricity market is highly concentrated and this would be problematic if it resulted
in market manipulation. However, it has not led
to underinvestment and thereby not created
any security of supply risk. Special attention was
nonetheless paid to this situation in designing
the capacity mechanism rules.
On the other hand, the European Commission’s
concerns suggest that a close look must be taken
at how the provisions proposed could, once imple-
7.3.2  Competition under the capacity mechanism
mented, allow strategic behaviours, particularly capa-
Market power is hard to quantify as many factors must be taken
city withholding. It should be recalled that a portion of
into account, and some of them might not be measurable. It is
the Competition Authority’s review of this question in
nonetheless possible to select an indicator of the competitive
April 2012 focused on the robustness of the mecha-
situation, a simplified one necessarily, and to consider the effects
nism with regard to capacity withholding strategies.
of the market architecture adopted with regard to this indicator.
MARKETFUNCTIONING:TRADING,TRANSPARENCYANDCOMPETITION / 7
For instance, market concentration is a traditional measurement
markets suggests that analysts use the firms’
for assessing competition. This type of analysis can be conduc-
net positions to measure the effects of market
ted on the capacity certificate market, though the specifics of
power. As noted above, zero net demand causes
the market architecture must be taken into account. In the sec-
no inefficiency187.
tions below, the effects of two aspects of the market architecture on the structure of the market - its decentralised nature
This effect is particularly pronounced in France,
and the ARENH scheme - are analysed.
given the incumbent operator’s share of the generation and supply markets. Estimated on the sole
187
[Hendricks & McAfee,
2010]
188
[Finon, 2011]
189
[Bushnell et al., 2008]
190
Law 2010-1488 of 7
December 2010 on the
New Organisation of the
Electricity Market.
7.3.2.1 Effects of a decentralised architecture on the
basis of certified capacity, the concentration level is
market’s structure
very high. However, if the incumbent’s net position
In a centralised market, a stakeholder’s market power depends in
is considered, then its weight in the market is relative since it
large part on its market share, or in other words its share of the
also has a significant share of the supply market. In this regard,
total capacity certificates issued for a given delivery year. With a
the decentralised market architecture is particularly suited to
capacity auction scheme modelled after the mechanisms in place
conditions in the French market, as some academic studies
in the Eastern United States, market concentration would thus be
have noted:
largely determined by the market shares held by generation and
demand response capacity operators. In a decentralised market,
Considering the specific characteristics of the French electricity
a vertically integrated company must also cover its own needs: as
market, with a high degree of vertical integration, and the way
such, its potential market influence is primarily determined not by
competition was organised by the NOME scheme, […] the criti-
its absolute position but rather by its net position.
cism directed against [the decentralised obligation] is not valid188.
The decentralised architecture and vertical integration also
Awordaboutthisdiscussionofmarket
power
impact different stakeholders’ incentives. A stakeholder that has
The reasons why market power exists can be numerous and complex, and they cannot be covered solely
by analysing market concentration in terms of absolute
or net positions. Other factors can include the pivotal
role played by certain firms in the market, the elasticity of supply and demand curves and the existence
or absence of entry barriers. The indicators calculated
in the sections below do not take these consideration
into account, and thus only offer a partial picture of the
competitive situation. They are not meant to be substituted for a real analysis of competition in the French
electricity market, but rather to illustrate, through
simple orders of magnitude, the consequences of the
architecture choices made for the capacity market.
price increase: it can actually have more to lose than to gain if it
capacities will not necessary want to see the capacity certificate
is a net buyer.
Vertically integrated wholesalers, or those with long-term
contracts, have less incentive to raise wholesale prices […].
Findings suggest that vertical arrangements dramatically
affect estimated market outcomes. Had regulators impeded
vertical arrangements (as in California), simulations imply
vastly higher prices than observed and production inefficiencies costing over 45 percent of those production costs with
vertical arrangements. We conclude that horizontal market
structure accurately predicts market performance only when
accounting for vertical structure189.
These considerations support the use of a market concentra-
The significance of net positions is one effect often cited when
tion indicator that takes the effects of vertical integration into
vertical integration is a factor:
account.
In evaluating proposed horizontal mergers in vertically sepa-
7.3.2.2 Measures to stimulate competition
rated markets, antitrust agencies (and courts) focus primarily
The NOME Act190 provided a structural response to competi-
on […] the concentration levels in the industry prior to the
tion issues in the French electricity market by introducing, from
merger and the predicted change in concentration levels
2012, the ARENH mechanism (Regulated Access to Incumbent
due to the merger, where concentration is measured using
Nuclear Electricity). Developed in cooperation with the European
the HHI. […] [Generalizing] the analysis to vertically integrated
Commission, this scheme is designed to promote competition
171
in the supply market by giving alternative suppliers direct and
from a vertical integration effect through ARENH without bea-
regulated access to electricity generated by the incumbent’s
ring any more costs than they did before the capacity mecha-
historical nuclear fleet on economic terms equivalent to those
nism was implemented.
of the incumbent operator:
In concrete terms, there is no guarantee that the incumbent
191
L. 336-1 of the Energy
Code.
To ensure that consumers are free to choose their
operator will be a net seller of capacity certificates, whereas
electricity supplier, and that pricing across the
some alternative suppliers with capacity will be “long” on cer-
country and all consumers benefit from the compe-
tificates when the mechanism first takes effect. Over the longer
titive pricing of power generated with the historical
term and provided that the ARENH price remains competitive,
192
Decree 2011-466 of 28
April 2011 setting out
the rules for access to
historical nuclear energy,
Article 1, V.
nuclear fleet, it will be possible, during a transitional
suppliers’ net positions will be determined by the temperature
period defined in article L. 336-8, for all operators
sensitivity of their customer portfolios with regard to the ARENH
supplying final consumers in continental France, or
capacity rights held.
193
Calculations have been
simplified and do not
correspond exactly to the
final capacity mechanism
rules. However, the
results suggest orders
of magnitude, since
the simplifications
are not unidirectional.
Simulations were carried
out a time when all
rules and parameters
of the French capacity
mechanism were not
known with certainty.
The most significant
approximations
calculated for the
purposes of this study
are: the peak periods
considered are placed
within the calendar year
on the winter days when
demand is highest, with
a maximum of five days
in March and November;
accounts are separated
for capacities subject to
purchase obligations;
hydro capacities are
overestimated (technical
limitations not factored
into the study), some
capacities connected to
the distribution grid are
not allocated. The orders
of magnitude shown
in the results are thus
significant, but must be
considered as estimates
rather than exact values.
and limited access to nuclear power generated by the
The capacity value associated with the ARENH can be made
incumbent at the nuclear power plants mentioned in
available in two ways:
194
The HerfindhalHirschmann Index, or
HHI, is a measurement
of market concentration
that indicates the degree
to which a market shows
one characteristic of pure
and perfect competition:
market atomicity. The
HHI is calculated as the
sum of the squares of the
market shares of each
participant (expressed as
a percentage).
172
system operators for their losses, to have regulated
article L. 336-2.
> T he first involves the transfer of “physical” capacity certificates
from EDF to alternative suppliers, which could then use these
This regulated access is granted on economic terms
certificates to meet all or part of their obligation;
equivalent to those resulting for Électricité de France
> T he second involves financial transactions: EDF would hold all
from the use of the nuclear power plants mentioned
capacity certificates allocated to the nuclear plants and sell
in the same article L. 336-2
191
.
them on the capacity market, with the proceeds passed on to
alternative suppliers in proportion to their ARENH rights.
The ARENH scheme shapes how the French electricity market functions if the ARENH price is com-
The decree instituting the capacity mechanism tasks the Energy
petitive relative to the wholesale market price, i.e.
Regulatory Commission with proposing specific procedures to
if nuclear power generated with the incumbent
the Minister. When this report went to press, CRE’s intentions in
fleet is competitive relative to electricity generated
this area were not known. If it opted for a financial treatment
in Europe: in this case the market functions as if all
of ARENH rights, the market would be more concentrated, but
suppliers had a form of vertical integration between
probably more liquid as well. Measuring these conflicting effects
upstream and downstream operations through the
from a competition standpoint is complex and would require an
property rights they hold to a portion of incumbent
in-depth analysis that RTE did not conduct. In the rest of this
nuclear electricity.
report, only a system involving the “physical” transfer of capacity
certificates is considered, as the simplified indicators used are
A similar effect can be seen with the capacity
meaningful with this assumption.
mechanism: the decree of 2011 specifying how
the ARENH scheme functions indicates that an
7.3.2.3  Simulations of concentration in the capacity
alternative supplier that exercises its ARENH rights
market
will also have access to the corresponding capacity
The decentralised organisation of the capacity mechanism and
certificates
192
:
initial allocation of capacity certificates to alternative suppliers
provided for under ARENH have combined effects on market
The [ARENH] product includes the generation capa-
concentration. These effects were studied through a simulation
city certificate, as defined in article 4-2 of the afore-
wherein the certification and obligation levels of all capacity mar-
mentioned law of 10 February 2000, corresponding
ket stakeholders, suppliers and capacity operators, were calcula-
to its profile.
ted for the years 2006 to 2011193. Market concentration is measured using the Herfindhal-Hirschmann Index (HHI)194.
This is a particularly important point with regard to
competition, since it means that all suppliers, inclu-
The study focused first on the effect of the decentralised mar-
ding those that do not operate any capacity, benefit
ket architecture with vertical integration. The HHI is calculated
MARKETFUNCTIONING:TRADING,TRANSPARENCYANDCOMPETITION / 7
based on stakeholders’ net positions, or in other words the dif-
With this approach, it is possible to compare the respec-
ference between the capacity certificates allocated to their cer-
tive effects of the decentralised architecture and the
tified capacity and their capacity obligations. Integrated compa-
ARENH scheme on market concentration in France’s
nies are therefore considered net buyers or sellers, depending
situation. Looking at the market concentration of sellers
on the respective weightings of their generation and supply
of capacity, we can see that, on average195:
activities.
>A
decentralised market reduces HHI market
concentration by 3,000 points compared with a
Two slightly different market concentration indicators are compared: an HHI calculated using absolute positions and an HHI
based on net positions. Neither measures the competitive situa-
centralised market;
> The existence of the ARENH scheme reduces the
HHI of the capacity market by 2,400 points.
195
Based on aforementioned
hypotheses and averaged
results from data for
2006-2011.
196
[DOJ, 2010]
197
Guidelines on the
assessment of horizontal
mergers under the
Council Regulation on the
control of concentrations
between undertakings,
paragraphs 16, 19 & 20.
tion perfectly, but the comparison does illustrate how taking
into account the effects of vertical integration in a decentra-
These effects are cumulative. The combination of a decentra-
lised market makes it necessary to reconsider how competition
lised market with the ARENH regulation to increase competition
actually works.
yields a picture of market concentration that is different from
the initial perception.
The second effect studied is that of the ARENH, which rebalances stakeholders’ positions by enhancing the vertical integra-
Having a decentralised architecture and the ARENH scheme in
tion of new entrants. Its impact is estimated by comparing two
place to strengthen competition yields market concentration
HHIs, one with and one without ARENH, taking net positions into
levels that are generally considered acceptable. In the chart
account.
above, the black line corresponds to a HHI of 2,500, considered the limit between high and moderate concentration levels
Net sellers of capacity certificates are considered separately
under the definition applied in the United States196. The HHI of
from net buyers. This gives a better indication of market power,
net sellers of capacity certificates dips in one year below 2,000,
which is mainly the result of a stakeholder’s net position in the
this being the level below which the European Commission says
market once its own needs have been covered. A stakeholder
it is unlikely to identify competition concerns197.
that has exactly enough capacities to meet its own needs will in
theory not be able to influence the market price since it will not
As mentioned above, the indicators presented here do not allow
be buying or selling.
conclusions to be drawn about the real state of competition in
Figure 77 – Illustration of the effects of market architecture and the ARENH on concentration
in the capacity market based on past data
9,000
8,000
7,000
High concentration
HHI
6,000
Decentralised market
and vertical integration
5,000
HHI Capacity
operators
4,000
ARENH effect
3,000
HHI Net sellers
w/o ARENH
HHI Net sellers 2,000
HHI Net buyers
w/o ARENH
Moderate concentration
1,000
HHI Net buyers 0
2006
2007
2008
2009
2010
2011
173
the French electricity market. On the other hand, they do show
can help diversify the energy mix and the structure of the mar-
that the market architecture chosen has an impact on effective
ket. The high capacity value of demand response, the potential
competitive conditions.
of which reaches its height during peak periods, will stimulate
the development of capacities that will also participate in the
7.3.2.4  Anticipated trends in market concentration with
energy market.
the development of demand response
The market concentration estimates presented above are based
on past data. Anticipating future trends requires taking into
account the development of new resources, notably demand
response, and other measures that have a dynamic impact on
demand, particularly during peak periods in winter.
This is an important point since a highly concentrated market
will be less susceptible to the exercise of market power if it can
be easily challenged in the absence of entry barriers. The specific characteristics of certain types of demand response (notably
industrial), some of which may have lower fixed costs than generation capacities, place them in a good position to challenge
dominance in the capacity market. This is in keeping with the
objectives of the mechanism outlined in chapters 1 and 2: the
Taking into account the decentralised architecture of the mechanism and the vertical integration effects resulting from the ARENH scheme
gives a more accurate picture of the capacity
market. The competitive situation in the capacity market thus appears more favourable than
initially thought.
Moreover, competition in the energy and capacity
markets will be mutually strengthened, notably
through the development of demand response.
The French capacity mechanism could thus allow
demand response to play a key role in “rounding
out the capacity equation”, making it harder for
stakeholders to exercise market power while also
reducing costs.
French capacity mechanism must allow demand response to
play its rightful role in ensuring that there is adequate capacity
for supply and demand to balance.
7.3.3  Monitoring of the market’s functioning
7.3.3.1  The need for monitoring
The architecture of the French electricity market has evolved
The preceding sections outlined competition issues in the capa-
recently to allow the explicit participation of demand response
city market and provided evidence that in the final analysis, a
.
decentralised mechanism, taken together with ARENH, a struc-
Consumers and aggregators thus have access to all electricity
tural measure that strengthens competition in the supply mar-
markets (balancing mechanism since 2003, “rapid and comple-
ket, creates a much more complex competitive situation than
in energy markets, including demand response aggregators
198
mentary reserves” since 2010, wholesale electricity
198
These changes are
discussed in chapters 1
and 10 of this report.
market since 2013 and system services as of 1 July
199
The demand-side
operator's regulated
access to the
consumer is based on
Competition Authority
recommendations and
the implementation
by RTE, under the
supervision of CRE, of the
new organisation of the
regulatory framework for
demand response called
for in the Brottes Act
[Competition Authority,
2012b], [Competition
Authority, 2013]
200
The participation of
demand response
in energy markets is
discussed in detail in
chapters 1 and 10 of this
report.
174
what is often described.
2014). There are no restrictions on this participa-
In practice, assuming that ARENH-related transfers will be “phy-
tion since the agreement of site suppliers is not
sical”, all suppliers will be allocated enough capacity certificates
required199.
initially to meet all or part of their obligation. In other words, the
capacity market could function with all stakeholders starting out
The goal in creating this framework for rewarding
with more or less balanced positions: none would have to buy all
demand response is to encourage the development
of the certificates needed to cover its needs, a factor that drasti-
of its potential and the role of demand-side opera-
cally reduces the opportunities for exercising market power.
tors in France. Their participation in electricity markets should help reduce concentration in the energy
However, in this scenario, trading volumes are likely to be low,
market and the capacity market, in which demand
and this will make the capacity certificate market less liquid. In
response capacities can also participate explicitly200.
this sense, the physical transfer of capacity certificates associated with ARENH rights will reduce certificate trading volumes,
The introduction of the capacity mechanism can
whereas a financial treatment would increase it. Under these
in turn boost competition in other markets, inclu-
conditions, it seem necessary to set up an exchange platform, as
ding the energy market. Encouraging the develop-
mentioned earlier, to concentrate liquidity and make it easier for
ment of capacities other than energy production by
a credible reference price to be formed. A geographic extension
rewarding their contribution to security of supply
of the market would also enhance liquidity, which is why efforts
MARKET FUNCTIONING: TRADING, TRANSPARENCY AND COMPETITION   / 7
undertaken with other Member States to promote common
regard, the transparency of the registers will be key to resolving
approaches are so important.
the issue discussed in chapter 5 about stakeholders’ ability to
rebalance at zero cost. During the consultation, some stake-
Nonetheless, capacity certificate trading will have to be closely
holders suggested that while the ability to rebalance at zero
monitored in the beginning to ensure that the mechanism is
cost before the delivery year gives virtuous operators the flexi-
functioning properly.
bility needed to manage their capacity commitments, it could
also create inexpensive market manipulation opportunities for
With this in mind, the regulatory authority decided from the out-
others. RTE took this point very seriously: the solution it adop-
set to give the regulator the resources to efficiently monitor the
ted in the capacity mechanism rules was to insist on maximum
functioning the capacity certificate market. It notably stipulated
transparency (declarations for capacities of more than 100 MW
that all transactions involving capacity certificates were to be
recorded including names and made public, regulation of “signi-
notified to CRE, a requirement that will cost almost nothing if
ficant” rebalancing volumes representing more than 10% of cer-
the notification procedure is coupled with the capacity certifi-
tified capacity) rather than introduce more complexity, for ins-
cate register recording all exchanges of certificate:
tance by making an operator’s ability to rebalance conditional
upon its market power.
The procedures for collecting this data are defined by the
Energy Regulatory Commission after prior consultation with
Likewise, there is no plan to require that capacity operators’
the public transmission system operator201.
commitments be based on availability levels from previous
years, as the Competition Authority suggested in 2012, since
7.3.3.2  Efficiency in detecting market manipulation
this could distort the incentives created by the mechanism,
How efficiently the capacity certificate market is monitored
which are currently based exclusively on commitments. There
should be considered in the light of market manipulation oppor-
is no need for such regulation mechanism in the energy
tunities. As indicated earlier, the concerns voiced by the Com-
market, for instance, to ensure that supply commitments are
petition Authority in April 2012 and reiterated in the European
coherent. However, past availability data will be made public
Commission’s recent Communication focus specifically on the
for each capacity, and CRE will be able to use them in monito-
exercise of market power by the incumbent operator and pos-
ring the market.
sible capacity withholding strategies.
Taking into account these measures, which are stipulated in the
Where the incumbent operator is concerned, specific pro-
decree and put into practice in the rules, CRE estimated in its
visions allow CRE to get information about the exchanges it
opinion of April 2012 that it was in a position to ensure that the
makes, including the cost of internal transfers. Decree 2012-
capacity market functions properly:
1405 of 14 December 2012 provides for two different entities
for capacity operators (capacity portfolio manager) and the
CRE estimates that its market monitoring tasks, both upstream –
obligation (supplier). This provision, which applies to all stake-
where it can track and monitor all transactions, including those
holders, enables monitoring of vertically integrated companies.
relating to self-supply – and downstream – where it can ensure
As specified in article 17 of the decree, CRE must be notified of
that suppliers’ commitments are consistent with
exchanges conducted between these entities:
their purchasing costs – will allow it to ensure that
the capacity mechanism does not interfere with
Any person that transfers a capacity certificate or related pro-
competition in the downstream market.
duct, or makes a public offer to buy or sell capacity certificates
or related products, informs the Energy Regulatory Commis-
If a dysfunction is observed, CRE will propose
sion, directly or through a third party, of the characteristics of
to the Minister any measures necessary to gua-
the transfer or offer, particularly the price
202
.
rantee that competition is effective, both in the
upstream and downstream markets203.
As for the mechanism’s vulnerability to capacity withholding
strategies, the transparency measures adopted in the rules for
The Energy Regulatory Commission will regularly
the registers should make it easy for market stakeholders or
submit reports on its monitoring activities to the
monitoring authorities to detect any abusive practices. In this
Energy Minister:
201
Decree 2012-1405
of 14 December
2012 relative to the
contribution of suppliers
to security of electricity
supply and to the
creation of a capacity
obligation mechanism
in the electricity sector,
article 17.
202
Decree 2012-1405 of
14 December 2012,
Article 17, paragraph 1.
203
[CRE, 2012]
175
I. No later than one year after the capacity mechanism rules
To put this provision into practice, the capacity mechanism rules
are published, and at least once a year after that, the Energy
call for public offerings to be organised once obligated parties
Regulatory Commission submits to the Energy Minis-
have received the final notification of their capacity obligation.
ter a report on the functioning of the capacity certificate
market204.
7.3.3.3  Public offerings
Lastly, to prevent potential capacity withholding strategies,
article 6 of the NOME Act stipulates that:
All certified capacity certificates must be made available to
suppliers, either directly or indirectly, to allow the obligation
mentioned in the same article to be met. Capacity certificates
held by a supplier beyond what is needed for it to meet its
Measures included in the market architecture to
strengthen competition play a preventative role,
but the functioning of the market must also be
closely monitored by CRE. Market monitoring will
be that much more important since the market
is not expected to be very liquid. The monitoring
and transparency measures set out in the decree
and the rules complement one another to form
what is considered a sufficient framework, based
on current needs, as the publication of the information in the registers should allow any suspicious behaviours to be easily detected.
obligation must be offered for sale publicly.
7.4 Conclusions
The capacity obligation is designed to safeguard security of
organisation of exchanges appears necessary given that the mar-
supply, and the capacity market associated with it is intended
ket is unlikely to be very liquid.
to minimise the cost. This will be an economically efficient architecture for delivering a public good (security of supply) provided
As regards transparency, various provisions allow stakeholders
that transaction costs are sufficiently low. The trading of capa-
to participate in the capacity market with full knowledge of the
city certificates and the functioning of the market are thus extre-
security of supply outlook. In addition to the Adequacy Forecast
mely important, and their efficacy depends on three factors: the
Reports RTE already publishes, they will have access to data
existence of a robust framework to govern exchanges, a high
from two registers maintained by RTE:
degree of transparency, and effective competition.
> The certified capacity register, listing all certified capacities
individually;
First, the market is designed to function in such a way as to
facilitate exchanges and give stakeholders confidence in the
> The peak demand management register, listing all demandside measures that impact the mechanism.
“capacity certificate” product. Since the mechanism parameters
are published ahead of time and remain stable throughout the
In addition, RTE will help obligated parties become familiar with
mechanism term, trading can take place in a stable regulatory fra-
the mechanism and send them estimates of their obligation.
mework and the value of the product cannot be modified by the
Lastly, CRE will publish data on the market’s functioning and
intervention of forces external to the market. Though it creates
transactions, helping stakeholders to assess the prices observed
greater uncertainty when the parameters are being set, this pro-
in the market.
vision appears indispensable for the market to function properly.
The last requirement for the market to function properly –
Moreover, the fact that the movements of capacity certificates are
effective competition – was undoubtedly the biggest source
recorded in a register kept by RTE makes the product credible. In
of concern about the mechanism both in France and Europe.
this regard, the architecture adopted is similar to that
Given the high level of concentration around the incumbent
of the energy market: it enables bilateral trades and
operator in the French electricity market, some feared that there
leaves room for the creation of an exchange platform
would be no real competition in the capacity market, and that it
on which supply and demand can be matched. This
could even have harmful consequences for the supply market.
204
Decree 2012-1405 of
14 December 2012,
article 19.
176
MARKET FUNCTIONING: TRADING, TRANSPARENCY AND COMPETITION   / 7
A more careful analysis of the market structure nonetheless
Lastly, it would be limiting to view the capacity mechanism solely
paints a different picture of the risk that market power will be
as a threat to competition in the electricity market. By encou-
exercised. Factoring in the decentralised nature of the market,
raging the development of demand response, it will allow new
and the vertical integration effects created by the measure-
capacities to compete with existing ones, including in energy
ment of stakeholders’ net positions, market concentration will
markets. Moreover, by adding another dimension to the supply
be lower than initially thought. The benefits alternative suppliers
business and creating new activities, it will favour a diversifica-
will derive from the capacity certificates associated with ARENH
tion and differentiation of offerings, depending on the strategies
rights will also significantly reduce market concentration. In this
stakeholders adopt to meet their obligation (a similar philoso-
regard, the risk of market power being exercised seems limited.
phy is applied in the mechanism proposed by the BDEW in Germany). In a word, this new market mechanism will be a source of
Thanks to the verification and monitoring procedures that are
many opportunities for the most efficient stakeholders.
integrated into the mechanism through the certified capacity
register, the regulator will be able to detect any abusive practices and track all exchanges.
177
8. CAPACITY MECHANISM IMPACT
ASSESSMENTS
There has been a gradual paradigm shift in public decision-
to evaluate the aggregate effects the provisions proposed will
making in recent years, both in France and Europe. Preliminary
have on the functioning of the energy market and investments.
assessments are now required to ensure that planned measures
This evaluation allows the cost of the mechanism to be mea-
are necessary and proportionate, and once in effect, these mea-
sured against its security of supply benefits for the consumers
sures are subject to regular evaluations in case modifications are
that finance it. A specific difficulty arises with this type of analy-
required.
sis: to be accurate, it must take into account all of the capacity
mechanism parameters, but these are still being determined
The capacity mechanism is being introduced against this backdrop.
through a consultation with stakeholders and are thus changing
frequently. Moreover, experience has shown that when models
Where the initial impact assessment is concerned, RTE’s pro-
of the functioning of capacity mechanisms are produced hastily,
posed capacity mechanism rules include an analysis of the
the results are unusable since the situations modelled do not
cost to consumers. Provisions are also in place to allow the
correspond to reality.
mechanism’s functioning to be gradually adapted as feedback is received, as the decree of December 2012 calls for the
This chapter takes account of this dichotomy. It begins by pres-
Energy Regulatory Commission to regularly prepare reports on
enting the challenges posed by detailed modelling of the func-
the functioning and integration of the capacity mechanism.
tioning of capacity mechanisms (§ 8.1) and then outlines the
Based on these reports and the assessments RTE will conduct in
difficulties associated with dynamic aspects, underscoring how
accordance with the rules, it will be possible to adjust, adapt or
the analyses currently being considered at the European level to
even reform the mechanism. In a word, the existing regulatory
model the French mechanism need to be expanded (§ 8.2). The
framework and proposals for putting it into practical application
next section presents aspects of the initial impact assessment
are intended to achieve compliance with best practices in the
focusing on the financial consequences for consumers of the
area of public policymaking.
mechanism’s implementation, on an all other things being equal
basis (§ 8.3). The last section is devoted to putting into context
Many studies cited in the previous chapters aim to quantify the
the results of the research efforts under way, which will serve
effects of decisions made about different mechanism parame-
as a basis for the different steps in the implementation process
ters. While they provide useful information, it is also necessary
provided for in the decree (§ 8.4).
8.1  Challenges associated with detailed modelling of how
capacity mechanisms function
8.1.1  Analysis of technical parameters
> T aking temperature sensitivity into account in the parame-
During the consultation on the rules, special attention was paid
ters for calculating the capacity obligation ensures that the
to quantifying the effects of the technical provisions RTE was
obligation is borne by temperature sensitive consumers,
proposing. Numerous studies discussed in chapters 4, 5 and 6
which indeed represent the biggest risk to the power system.
allow the impact of the different aspects of the mechanism to
Large consumers that can reduce load during peak periods
be quantified. All in all, some 30 studies and simulations were
consequently have a zero obligation;
carried out, and the results were presented during the consultation to inform the discussions.
178
Some of the most significant results of these studies were:
> A targeted PP1 period provides an incentive to reduce load
during peak periods, when security of supply is at risk. This
CAPACITY MECHANISM IMPACT ASSESSMENTS   / 8
>
increases competition between capacity suppliers that can
RTE issued nine free user licences to market stake-
respond to the needs of the power system, and thus helps
holders and administrations. The tool illustrated the
lower costs;
benefits of measuring a capacity’s contribution to
S
imilarly, the value of demand response capacity is maximised
reducing the shortfall risk based on availability rather
by defining a short PP2 period.
than solely on installed power. It also supported the
choices made with regard to the parameters used in
8.1.1.1  Use of a simulator during the consultation
the certification method, especially the considera-
In addition to being a forum for sharing technical results, the
tion of technical and management constraints that
consultation was enhanced from the outset by an original fea-
affect capacities’ contribution to reducing the shortfall risk.
205
The simulator was made
available on request by
RTE with free licences
for the purpose of the
consultation.
206
The simulator is called
CLAC (Capacity Lab –
Aide à la Certification).
ture: market stakeholders were given access to a free, calibrated and open source supply-demand balance simulator205. RTE
As a follow-up, a new simulator, in the form of a serious game,
developed this simulator206 specifically for the consultation, to
will be made available to consultation participants, authorities
allow each stakeholder to assess the impacts of the key choices
and other interested parties so they can see how the market
made regarding the certification method and the impact of
will function, from the certification process through to the post-
parameter choices.
delivery year period (§ 8.4.1).
Figure 78 – Functional diagram of the simplified open source supply-demand balance simulator
Simplified, fictional mix
BASIC MODULE
N contingency scenarios
Optimisation
in period T
Setting of LT parameters
Model 1
LT analysis
Results processed
LT > ST
Division into sub-scenarios
T > T 1 … Ti … T N
ADVANCED MODULE
Model parameters
ST
Model 2
ST analysis
Optimisation
over T1
8.1.2  Assessment of the aggregate effects
of the mechanism
Optimisation
over Ti
Optimisation
over TN
borne by consumers (costs) and (ii) the effects of the security
of supply protection provisions (benefits) in two alternative
scenarios:
Analysing the economic impacts of the mechanism requires
> A scenario with no capacity mechanism in place: consumers
taking a step back from the technical discussions relating to
are exposed to the market price in the same was as today (fac-
the obligation, certification and settlement processes and
toring in the complexity of the regulatory framework). Capa-
evaluating the consequences of the mechanism’s aggregate
cities do not generally receive any specific remuneration for
effect on different categories of stakeholders to inform the
contributing to security of supply. The energy price is the
public authorities charged with making decisions about the
economic signal relied upon to optimise both the short-term
proposals.
functioning of generation resources and long-term investment decisions;
To be thorough, this impact assessment must compare (i) the
charges specifically associated with the capacity obligation
> A scenario with a capacity mechanism introduced in accordance with the rules proposed by RTE.
179
There is nothing simple about this type of analysis.
the different capacity mechanisms adopted must be accurately
modelled. For the French mechanism, this would notably require
First (1), for the “no capacity mechanism” scenario to be a cre-
factoring in the impact of the active capacity need management
dible reference, it has to model in detail how the existing market
promoted through the mechanism’s decentralised architecture,
functions. This poses several problems.
as this could reduce the overall cost of covering the shortfall risk
compared with a situation where capacity adequacy is managed
With the way power systems are currently organised in Member
passively. Transaction costs would also have to be evaluated.
States, some capacities already benefit from a form of capacity
remuneration through different means (particularly by being
Different descriptions of the functioning of capacity mecha-
included in the reserves system operators use for real-time
nisms have been presented since European authorities began
balancing) while others receive subsidies that disconnect them
to express concerns about the development of national mecha-
from price signals: a model of the existing market’s functioning
nisms. Some of these descriptions do not seem compelling:
cannot disregard these realities or their impact on the market.
either the mechanisms are described in summary form, in which
case the results reflect the crude nature of the initial assump-
Moreover, the market’s functioning in periods of tight supply
tions, or they are modelled in detail but using simulations that
does not follow the theoretical principles (real, albeit infrequent,
only show costs in a static manner, without considering how
extreme price spikes during which time supply to consumers
these costs will influence the behaviour of those that bear them.
depends on their marginal willingness to have power supply
interrupted) supporting the energy-only model’s ability to gua-
The sections below illustrate this dichotomy:
rantee the optimal remuneration of generation and demand
> C areful analysis of reports, such as the one appended to the
response capacity. In practice, this form of market organisation
summary of the public consultation organised by the Euro-
has consequences for investment structures (underinvestment
pean Commission on the internal market and published in
in peak versus base-load capacity) and security of supply (load
June 2013, shows that trying to simulate the impact of the
shedding), and these consequences are borne by consumers,
introduction of mechanisms in France and Germany can result
either through what they pay for supply or through a level of
in an oversimplified description of the capacity mechanism,
security of supply that fails to meet the objective set by public
such that the mechanism simulated bears no resemblance to
authorities.
the one adopted, making the results incorrect (§ 8.2);
> S imulations aiming to evaluate the financial impact of a capa-
Second (2), it is difficult to quantify the effects the proposed mar-
city mechanism for consumers, with “all other things being
ket models could have over the medium or long terms, as dyna-
equal”, are then presented (§ 8.3): however, the results only
mic analyses of the functioning of complex markets subject to
represent the “first-round” impacts, and do not include a dyna-
multiple regulations over a long period are particularly challen-
mic analysis of the longer-term effects on the power system
ging. To obtain meaningful results, the specific characteristics of
(location of investments, trends in market prices, etc.).
8.2  Limitations of existing analyses of how the capacity
mechanism functions in an interconnected market
180
8.2.1  Analysis of the report accompanying the
European Commission guidelines on public
interventions
numerous Member States. Along with this Communication, it
8.2.1.1  The report and its conclusions
The European Commission took the 132 consultation res-
In its Communication of 15 November 2012 on making
ponses submitted into account in preparing its Communication
the internal market work, the European Commission voiced
on making the most of public intervention. It published the res-
concerns about the introduction of capacity mechanisms in
ponses to the public consultation along with a report entitled
launched a public consultation on the internal energy market,
generation adequacy and capacity mechanisms.
CAPACITY MECHANISM IMPACT ASSESSMENTS   / 8
“Capacity Mechanisms in Individual Markets within the IEM”207,
investments and trade and lead to higher sys-
a document also used in drafting the Communication on public
tem costs. The impacts on investments differ
intervention. This report208 analyses the consequences of the
in the two cases due to differences in capa-
introduction of capacity mechanisms in Europe.
city mix and interconnectivity. Impacts are felt
throughout Europe and total costs increase in
On the whole, the findings of the report209 are unfavourable to
both cases. Compared to the reference sce-
the adoption of capacity mechanisms in Europe. They notably
nario (which also exhibits adequate capacity),
warn of the risk of market distortion if there is no coordination
EU generation costs are found to increase by
on mechanism implementation.
1.3-1.5%.
However, the report does not conclude that the energy-only
The latter conclusion is important: if it is valid, then it
market alone can stimulate investments in electricity:
could call into question the justification for a capacity mechanism in France. The first task must the-
It is difficult on an empirical basis to determine whether the
refore be to examine the robustness and validity of
energy-only market design of the target model will yield
the approach presented in section 7.6 of the Com-
adequate investment signals. Moreover, the academic lite-
mission’s report, “Impact of asymmetric capacity
rature is inconclusive too. Whereas some hold that energy-
mechanisms”.
only markets are fundamentally flawed and that there is a
need for permanent capacity remuneration mechanisms
8.2.1.2  General analysis of methodology
(CRM), others argue that the need for such mechanisms
The methodology underpinning the assessment
is mainly linked to temporary market interventions and
is based on a comparison of a reference situation,
uncertainties as [Climate policy, Market development, Mar-
with energy-only markets in place in all countries,
ket regulations and Market design, Technology and costs &
and an “asymmetric” situation where one only
Economic environment].
country adopts a capacity mechanism210.
[…]
Still, it cannot be ruled out that capacity mechanisms may
This methodology is useful for studying market
be necessary to ensure sufficient peak and back-up capacity
architectures, and is notably used for the OPTIMATE
in the future low carbon European electricity system, or as a
project211. However, the consequences of each
transitory precaution in some individual member states in the
choice must be properly evaluated for the compa-
shorter term.
rison to be meaningful. This was not done for the
study included in the “Capacity Mechanisms in Indi-
The main conclusion of the qualitative analysis is that there is
vidual Markets within the IEM” report:
no immediate and general underlying need for capacity mechanisms in Europe. The two key conclusions of the accompanying
The approach in this section is that the asymme-
quantitative analysis are:
tric capacity mechanism represents a distortion
> T he architecture of the energy-only market may not suffice to
ensure the economic viability of at least a portion of capacities:
of the optimal market configuration presented in
previous sections. This simulation assumes that
reserve and reliability criteria are met in all system control areas, taking interconnections into
>
The model based analysis reveals that the economics of new
account. In other words, the LOLPs are below
capacity, in particular in gas-fired open cycle and CCGT plants,
the maximum accepted thresholds and there is
may be challenging.
no reason for an individual control area to adopt
207
[EC, 2012a]
208
The report was prepared
by Thema Consulting
Group, E3M-Lab and
COWI.
209
Executive summary of
the report: The empirical
analysis shows that
there is generally no
urgent need for capacity
mechanisms in Europe.
Individual (asymmetric)
capacity mechanisms of
all designs are prone to
distort cross-border trade
in two main ways:
- By causing overcapacity: Regulators are
likely to overestimate
the necessary domestic
capacity reserve margin
and to underestimate the
contribution from crossborder trade.
- By distorting allocation
of investments:
Investments are likely
to shift to markets with
CRM, thereby increasing
total costs and distorting
cross-border trade.
210
Section 7.6 of the
Thema report, “Capacity
Mechanisms in Individual
Markets within the
IEM”: Asymmetric
capacity mechanisms
in the IEM imply that
capacity remuneration
in addition to energyonly market revenues
are only applied in some
system control areas
and only remunerate
plants located in this
area. It is assumed that
other (usually adjacent)
system control areas
operate as energy-only
markets. Assuming that
the asymmetry is taken
into account by investors,
generation capacity
investments by country
differ from symmetric
energy-only market
cases.
211
OPTIMATE is a market
architecture simulator
designed as part
of a European R&D
programme.
a unilateral capacity mechanism. The question
N
on-coordinated introduction of capacity mechanisms could
have negative consequences for Europe as a whole:
posed in this section is then what would be the
impacts if a distorting regulation which remunerates capacities unilaterally was adopted in one control area. The mode-
Model simulations of individual CRM in France and Germany,
ling does not account for any direct benefits in terms of loss
respectively, confirm that unilateral mechanisms distort
of load probabilities.
181
In other words, it is assumed that the energy-only market archi-
opposed to the one being introduced in France. The French mecha-
tecture is perfect and ensures optimal investment develop-
nism is based on a capacity market that covers all capacity (market-
. The security of supply benefits a capacity mechanism
wide) and is technologically neutral. The price is not set ahead of time
could provide are not taken into account, even though these
but rather by the market, at the point where the supply and demand
ment
212
benefits are the raison d’être for the mechanisms
.
213
curves for certificates meet. These are fundamental differences and
they profoundly impact the effects of the capacity mechanism.
The methodology used in the study presented in the “Capacity
Mechanisms in Individual Markets within the IEM” report there-
In sum, the results of the study the European Commission
fore introduces non-negligible bias in that:
published as a complement to the consultation on the internal
212
Section 7.6 of the
Thema report, “Capacity
Mechanisms in Individual
Markets within the
IEM”: We assume that
investment develops in
an optimal way under
reference conditions
(cf. 7.1.4) so as to ensure
capacity adequacy
(captured through
system reserve margin
thresholds and the
ramping constraints).
This development of
investment constitutes
the benchmark case or,
as referred to in the text
that follows, the energyonly markets case.
213
Section 7.6 of the
Thema report, “Capacity
Mechanisms in Individual
Markets within the
IEM”: We do not model
capacity adequacy failure
cases. […] The possible
benefits of [a capacity
mechanism] in terms of
avoiding damages from
unforeseen power supply
failures are not accounted
for in our modelling.
214
The European
Commission explicitly
recommends against this
specific characteristic
in its guidance for
state intervention in
electricity: “Does the
chosen mechanism
ensure that identified
adequacy gap will be
filled while avoiding risks
of overcompensation
(unlikely with payments
payments)?”
215
In accordance with the
recommendations in the
European Commission
guidance on state
intervention: “Capacity
mechanisms should be
designed to deliver a
price of zero when there
is sufficient capacity
available.”
182
>
T he reference situation is a perfect energy-only mar-
market do not apply to the French mechanism. At best, they
ket that guarantees adequacy. As the authors explain,
show, based on an extremely simplified model, that a selective
“there is no reason [in this simulation] to adopt a
capacity payment mechanism planned without taking the secu-
capacity mechanism”. In sum, it is considered from
rity of supply situation into consideration can result in massive
the outset that the introduction of a mechanism
and subsidised excess capacity214. This is precisely the concern
purportedly serving no purpose can only detract
that led public authorities in France to opt for a decentralised,
from an initial situation that is theoretically optimal;
quantity-based mechanism (chapter 2). Moreover, in designing
> The
potential benefits of capacity mechanisms
the rules submitted for approval by the Minister and CRE (chap-
in terms of security of supply are not taken into
ter 3), RTE sought to prevent the mechanism from keeping
account. This is tantamount to conducting a cost-
excess capacity in the market when more competitive resources
benefit analysis without taking benefits into account.
were still available to safeguard security of supply. As such, there
should be no bias in favour of overcapacity in the French system
Both of these biases are highly questionable: many
since, with the capacity mechanism in place, the capacity price
academic studies have shown that the energy-only
should tend toward zero in situations of excess capacity215.
market does not produce optimal results (these studies are summarised in chapter 1), and that the exis-
Lastly, the mechanism simulated in the study the European Commis-
tence of externalities makes it necessary to adopt
sion financed only focuses on some technologies (combined-and
specific mechanisms to ensure security of supply.
open-cycle gas turbines). It therefore introduces a distortion and
Empirical observations also support the theory that
promotes the development of these technologies exclusively. The
market failures and investment cycles do exist.
French mechanism will treat all capacities equally through a technology-neutral certification process216, and will also take demand res-
8.2.1.3  Analysis of simulation assumptions
ponse capacities into account, as illustrated in chapter 3.
and data
It is suggested that the study allows the adoption of
The bottom line is that the mechanism simulated in the study,
a capacity mechanism in France to be simulated.
based on hypotheses, includes biases that public authorities
expressly sought to avoid in France. This raises two problems:
However, the assumptions and data inputted to the
> T he fact that the simulations are presented as representations of
model describe a mechanism that is in fact radically
the French capacity mechanism could mislead readers, since the
different from the French mechanism:
mechanism simulated bears no resemblance whatsoever to the
French capacity market. The results can therefore not be used to
We assume that the capacity remuneration fee allows
evaluate the efficiency of the French capacity mechanism;
open cycle gas plants to recover capital costs. We also
> T he results are of limited validity in practice since only one type
assume that the same fee applies to CCGT plants as well.
of mechanism is simulated with only one capacity remuneration
The level of this fee is 40k€/MW-year in both cases.
fee. The fact that they are presented in a very general form217
automatically biases the reading and interpretation of the results.
The study thus considers a capacity payment mechanism that specifically rewards certain technologies at
8.2.1.4  Analysis of study results
a particularly high fee. In other words, the study simu-
The study results are analysed qualitatively, which allows the ori-
lates the adoption of a mechanism that is diametrically
gin of the additional costs identified to be undertsood:
CAPACITY MECHANISM IMPACT ASSESSMENTS   / 8
As expected, the increased incentives to invest in peak load
devices in France leads to an increase in the overall investments in France, while the opposite effect is observed in
8.2.2  Factors minimising the French
mechanism’s impact on neighbouring
countries
neighbouring, interconnected countries. More specifically,
up to 2030, the model suggests that, relative to when France
It is all the more important to carefully examine the
operates an energy-only market, investment in France will
reality of the market architecture adopted when
increase by 21.7 GW, while investments decrease by 15.9 GW
modelling its impact on neighbouring countries
in Germany, 3.6 GW in Belgium and 2.1 GW in the Nether-
given that the interaction between energy markets
lands. The changes mainly concern open cycle gas plants
was a constant concern while the French mecha-
and to some extent CCGT plants (Table 20). The generation
nism was being designed.
mix in France is considerably altered, as capacity remuneration attracts much more investments in open cycle plants
At the very outset of the mechanism design process,
than projected in the reference case. The share of open-cycle
it was perfectly clear that the principles applied to
plants in the overall non-RES projected investments is 40%,
the management of cross-border interconnections
more than double than in the reference case. The correspon-
in Europe made it impossible to duplicate the sys-
ding share of the base-load investments falls to 50% from
tems adopted in the United States, and the progres-
70% in the reference case.
sive coupling of European markets made this issue
all the more pressing218. With this in mind, priority
The additional costs identified stem directly from the errors and
was given to ensuring that the capacity mechanism
approximations mentioned in the previous section:
would not interfere with the organisation of the
> The total quantity of capacity is distorted: the simulations point to
internal energy market:
overcapacity in France and under-capacity in the other countries.
This is a direct result of the “blindness” of the mechanism simula-
The introduction of a capacity mechanism
ted, which involves unconditional capacity payments;
should not jeopardise the benefits of efficient
> The generation mix is distorted: the simulations point to ove-
market functioning […]. This is why it is important
rinvestment in peak generation capacities and an underre-
that the mechanism does not interfere with the
presentation of base-load capacities. These effects are direct
operation of market rules219.
results of the fact that the mechanism simulated targets only
specific technologies (gas-fired power plants).
Under the mechanism, operators’ commitments
to make capacity available during peak periods do
not limit their generation output (which will still be
The “Capacity Mechanisms in Individual Markets
within the IEM” report published with the results
of the public consultation of 15 November 2012
on the internal energy market includes quantitative analyses of the effects of the implementation of the French capacity mechanism.
An analysis of the methodology, assumptions
and data used in the study and its results shows
that the mechanism simulated bears no resemblance to the one adopted in France. The conclusions of this report must be viewed with caution.
It should also be noted that some principles laid
down by the European Commission in its Communication on making the most of public intervention, and the Staff Working Document this
report accompanies, are not upheld with the
mechanism simulated. It would have been useful to have a thorough study of these aspects,
despite the complexity involved.
determined by the functioning of energy markets)
or the destination of that output (still determined
by the rules in effect, and notably by market coupling220). In other words, participation in the French
capacity mechanism does not involve any obliga-
216
In accordance with the
recommendations in the
European Commission
guidance on state
intervention, under the
heading “technological
neutrality”: “Base
restrictions on
participation in a
mechanism to ensure
generation adequacy
on the technical
performance required
to fill the identified
adequacy gap and not on
predefined technology
types.”
217
Taken from the Executive
Summary of the
“Capacity Mechanisms in
Individual Markets within
the IEM” report: “Model
simulations of individual
CRM in France and
Germany, respectively,
confirm that unilateral
mechanisms distort
investments and trade
and lead to higher system
costs. The impacts on
investments differ in
the two cases due to
differences in capacity
mix and interconnectivity.
Impacts are felt
throughout Europe and
total costs increase in
both cases. Compared to
the reference scenario
(which also exhibits
adequate capacity), EU
generation costs are
found to increase by
1.3-1.5%.”
218
[Veyrenc & Bhavaraju,
2008]
219
[EC, 2013a]
220
As was shown during
the 2011 consultation,
energy market coupling
eliminates the concept of
energy destination.
tion in terms of generation supply on energy markets or equivalent restrictions on exports: a capacity
that is dispatched within the framework of the market, even if an export contract is in effect, is considered to be available. Nor does the supplier that
holds the certificates associated with the capacity
have rights to the energy produced: energy cannot
be reserved in this system. Lastly, the adoption of
the capacity mechanism has no consequences in
terms of regulating energy prices, for instance on
the setting of price caps/floors.
183
These principles imply that the energy market will be com-
adopted for the French mechanism ensures that the market price
pletely decoupled from the capacity mechanism in the short
of capacity certificates will tend toward zero if no capacity is needed.
term. They will prevent the mechanism from having any direct
short-term effects on energy prices, since the full separation of
ACER’s recommendations nonetheless stress the incomplete-
capacity and energy as products is guaranteed, meaning Euro-
ness of the studies currently available in terms of the long-term
pean energy markets will continue to play the same role. These
impact the coexistence of different national regulations will have
options make the system very different from that in effect in the
on security of supply. More thorough studies would be complex
United States, where the revenue earned by a generation unit in
and cannot be conducted before the parameters of the mecha-
the energy and capacity markets can in some cases be offset.
nism are defined. It is proposed that such studies be conducted
Once the mechanism is in place, it will be necessary to verify that
as part of the effort to support the mechanism’s rollout, applying
decoupling is truly a source of economic efficiency and that is
the provisions proposed in the rules in application of the decree.
does not translate into undue rents during peak periods.
On the other hand, over the long term, the mechanism could
indirectly influence prices. As the Agency for the Cooperation of
Energy Regulators notes in its report on capacity mechanisms,
direct effects are not the only impact to consider:
Secondly, [Capacity Mechanisms] may influence investment
decisions (investment in plants and their locations), with
potential impacts in the long term […]221.
It would not be desirable for the capacity mechanism to have no
influence whatsoever on investment decisions, except if there was
no capacity need at all. The idea, rather, is to ensure that the mechanism’s long-term impacts are strictly proportionate to its objectives,
in which case there is no distortion since the different mecha-
The French capacity mechanism was designed in
such a way as to minimise its impact on energy
markets:
In the short term, energy and capacity “products”
will be completely independent and there will
be no interference;
In the long term, the capacity mechanism will
influence investment decisions proportionately
to security of supply targets: the resulting impact
on energy prices should be indirect and small.
Additional studies are required to quantify this
effect. To be conclusive, they must factor in all
parameters set by public authorities. These studies will be conducted within the framework of
the existing provisions of the decree and those
adopted in the rules when the capacity mechanism is in place.
>
>
nisms allow the objectives set for them to be met. The architecture
8.3  Detailed analysis of short-term effects
In response to stakeholders’ request to have a comprehensive
the scope of validity of the results presented in the pages that
view of the mechanism’s effects, in September 2013, RTE pro-
follow.
vided some data on the financial impact the mechanism would
have on certain categories of consumers. These data have since
The impact assessments presented analyse how the cost of the
been expanded and are presented below. They show the first-
capacity obligation is distributed between different consumer
round effects of the implementation, on an all other things being
categories. They combine the different hypotheses in a number
equal basis, and illustrate the immediate impact the mechanism
of scenarios to identify the configurations that are the most or
will have, not taking into account any effects implementation
least favourable to individual stakeholder categories (§ 8.3.2).
will have on stakeholders’ behaviours or strategies, something a
dynamic analysis can show.
A numerical estimate is also provided of the indirect effect on
final consumers through the contribution to the public service
221
[ACER, 2013]
184
The methodological framework and hypotheses
of electricity (CSPE) they pay. Indeed, facilities benefiting from
used in the impact assessments are outlined below
purchase obligations effectively participate in the capacity mar-
(§ 8.3.1). This information is crucial to establishing
ket since they are awarded capacity certificates; in accordance
CAPACITY MECHANISM IMPACT ASSESSMENTS   / 8
with the provisions of the law, the value of these certificates is
within the security factor, or (ii) stabilising the parameters for
returned to final consumers via a reduction in public service
calculating the obligation or normalising the amount of certi-
charges through the CSPE (§ 8.3.3).
ficates allocated to certain capacities and pooling the related
“imperfections” through the security factor.
8.3.1 Hypotheses
Various factors must be taken into account in analysing the eco-
As discussed in § 4.4, RTE proposes that the security factor be
set at 0.93 for the first two delivery years.
nomic impact of the mechanism. Six explanatory parameters
were identified and tested in the simulations described below:
>
A different approach could have been taken in accounting for
T he value of the security factor, which notably changes depen-
the contribution of interconnections. If public authorities decide
ding on the recognition of the contribution of foreign capacity
not to take the contribution of interconnections into account, or
(see chapter 9 for more details);
to account for it while also increasing the three-hour coverage
> T he capacity price, which allows different configurations to be
tested with regard to the security of supply outlook;
> T he temperature sensitivity of consumers, which varies widely
threshold (considering the three-hour criterion without taking
interconnections into account would result in a higher level of
effective coverage), the value of the security factor could be 1.
between consumers and results in a very uneven distribution
of the national obligation, meaning that economic impacts are
The two hypotheses tested below thus correspond to a security
highly segmented;
factor of 0.93 or 1.
which is a means for consumers to directly manage the “capa-
8.3.1.2  Capacity price
city risk” and influences the impact of the mechanism depen-
Assessing the economic impacts of the mechanism requires
ding on consumers’ flexibility;
using a hypothesis of the average capacity price that will result
> T he consumer’s ability to reduce load during peak periods,
> The regulatory framework in the wholesale market, which
from transactions in the market. Of course this price depends on
affects the initial distribution of capacity certificates between
the projected state of the power system, but also on the para-
market players. The procedure adopted for the transfer of
meters set in the rules, such as the value of the security factor
capacity certificates associated with ARENH generation (see
and the reference extreme temperature. Insofar as the “security
chapter 7) will thus be all-important, since it will have a deci-
factor” variable is tested separately, testing the “capacity price”
sive influence on the competitive structure of the future
variable means examining the impact of the “reference extreme
capacity market (and, in practice, it will also do a great deal to
temperature” parameter.
balance players’ positions);
> T he regulatory framework in the retail market, which affects
The capacity certificate price could in theory move between 0
how costs are passed on to consumers, notably depending on
and the administered price used for the imbalance settlement,
the rates suppliers offer them. A distinction must therefore be
which RTE proposes to define as the annualised cost of develo-
drawn between large consumers whose rates depend on mar-
ping a peak generation plant (combustion turbine), of €60k/MW
ket prices and smaller consumers that can remain on regula-
for a given delivery year. The simulation could therefore test the
ted tariffs between now and when the capacity mechanism
range [0; €60k/MW]
takes effect.
However, given the supply-demand balance outlook presented
8.3.1.1  Security factor
in chapter 1, which predicts a situation that requires vigilance
The value of the security factor depends on two parameters:
but does not imply a definite shortage, it is proposed that a nar-
> H ow the contribution to security of supply in France of capa-
rower price range be considered. A capacity price of €30k/MW/
cities located in other countries is modelled: this contribution
year for all capacities corresponds in all likelihood to a high value
is accounted for implicitly, through a reduction in the security
for the first delivery years.
factor; the higher the contribution of foreign capacities, the
>
greater the reduction in the security factor;
The two hypotheses tested below thus correspond to prices of
T he technical choices made in the rules, are notably between
€10k/MW/year and €30k/MW/year. A reference situation with
(i) making the reference extreme temperature the main contin-
a capacity price of zero will also be considered.
gency considered or on the contrary pooling all contingencies
185
8.3.1.3  Temperature sensitivity
discussed in § 7.3 affect the analysis of competitive conditions
The data presented in chapter 4 allow a qualitative assessment
in the capacity certificate market.
of the impact of the formula used to determine the obligation.
Because the formula selected is based on the consumption gra-
ARENH is a regulatory mechanism that was instituted by the
dient, the lion’s share of the national obligation will be allocated
NOME Act in 2010 to facilitate the deregulation of the French
to temperature sensitive consumers. This is logical since they
supply market while also allowing consumers to benefit directly
are responsible for peak power demand and thus the need for
from the competitiveness of historical nuclear electricity. The
peak generation capacity. On the other hand, non-temperature
law provides that each supplier shall have Regulated Access to
sensitive consumers should not be affected by the capacity
Historical Nuclear Electricity (ARENH) under the same econo-
mechanism; the gradient is even set at 0 for some of them.
mic conditions as the incumbent operator222.
In the simulations presented here, differences in consumers’
As a result, alternative suppliers:
temperature sensitivity are considered through “idealised”
> Pay a price that factors in the costs associated with histori-
hypothetical cases (100% base-line consumption) and concrete
cal nuclear generation capacity: the ARENH purchase price is
examples based on actual load curves.
representative of the economic conditions under which historical nuclear electricity is generated;
The configurations tested thus correspond to a gradation
between the consumer that is not temperature sensitive at all
> Benefit from all advantages associated with historical nuclear
electricity in terms of energy but also capacity certificates.
(industrial user for instance) and a residential consu222
As stated in L. 336-1 of
the Energy Code: “To
ensure that consumers
are free to choose their
electricity supplier,
while also promoting
the attractiveness of the
country and allowing all
consumers to benefit
from the competitive
pricing of nuclear power
generated in France,
it will be possible,
during a transitional
period defined in
article L. 336-2, for all
operators supplying final
consumers in continental
metropolitan France,
or system operators
for their losses, to have
regulated and limited
access to historical
nuclear electricity from
the nuclear plants
mentioned in article
L. 336-2 on economic
terms equivalent to the
conditions for Electricité
de France resulting from
the use of the nuclear
plants mentioned in the
same article L. 336-2.”
223
Decree 2011-466 of 28
April 2011 setting out the
rules governing access
to historical nuclear
electricity stipulates that
“the product transferred
includes the generation
capacity certificate, as
defined in article 4-2 of
the aforementioned law
of 10 February 2000”.
186
mer with electric heating.
In application of this second principle, current regulations stipulate that alternative suppliers will receive the capacity cer-
8.3.1.4  Consumer’s ability to reduce load at
tificates associated with energy sourced through the ARENH
peak times
mechanism223. This is a crucial factor in evaluating how the
The principle underlying the mechanism adopted in
mechanism will function; the consequences in terms of com-
France is that any consumer or supplier should be
petition were discussed in chapter 7. In practice, alternative sup-
able to manage the risk the obligation represents
pliers with ARENH rights will not be “net buyers” on the market,
for it by leveraging its demand response potential
but rather will be in a situation comparable (at least in part) to
during peak periods.
that of players with upstream-downstream integration.
This means that the capacity mechanism will have a
The capacity value associated with ARENH is an important com-
very different impact on a highly temperature sen-
ponent of the impact assessment. However, whereas RTE is res-
sitive consumer that absolutely cannot adjust its
ponsible for proposing a security factor value, CRE is charged
consumption and a consumer that can reduce load
with proposing a method for calculating the amount of capacity
during peak times. A consumer with a very low obli-
certificates to be delivered with ARENH rights224, and it has orga-
gation (industrial user for instance) can take advan-
nised a consultation in recent months to consult market stake-
tage of this flexibility to generate a net gain with the
holders on this subject. The fact that the results of this process
mechanism.
are not yet known makes it necessary to formulate hypotheses
about the coefficient that will be applied to convert 1 MW of
The simulations illustrate this by considering two
ARENH electricity delivered into a number of capacity certifi-
hypotheses: a consumer that never reduces load
cates. Needless to say, these hypotheses are without prejudice
and one that reduces its peak consumption by half
to the choice that will ultimately be made by CRE.
on all PP1 days.
In conducting the evaluations below, RTE considered two
8.3.1.5  Specific mechanism regulating the
hypotheses, corresponding to the two lines of reasoning
wholesale market: transfers of ARENH-related
promoted by stakeholders during the consultation. These
capacity certificates
hypotheses were presented in September 2013, and were not
Another significant variable is how capacity cer-
challenged in the responses to the public consultation orga-
tificates associated with the ARENH mechanism
nised by RTE:
CAPACITY MECHANISM IMPACT ASSESSMENTS   / 8
> The first involves allocating one MW of capacity guarantee for
value has been rounded down from 1.16 to 1.15 by
each MW of ARENH electricity delivered;
default for the purposes of the assessments.
to create a level playing field for alternative suppliers and EDF.
As such, the conversion key values applied in the
> The second involves using a different conversion key to try
simulation to translate MW of ARENH capacity into
First hypothesis
capacity certificates are 1 and 1.15, respectively.
ARENH is defined as a “flat” product and alternative suppliers’
allocation rights are based on their customers’ consumption
8.3.1.6  Regulatory framework in retail
during the reference periods defined in the regulations. By this
market
same logic, the transfer involves allocating one capacity certifi-
The regulatory framework governing the retail mar-
cate for each MW of ARENH electricity delivered.
ket affects how costs are passed through to consumers, notably depending on the type of rates sup-
Second hypothesis
pliers are likely to offer them.
Transfers based on a conversion rate of more than 1 suggested
during the consultation apply a different logic to the allocation
Under current legislation, regulated tariffs, to
of capacity certificates. It involves calculating the distribution of
which large consumers226 can still subscribe, will
certificates in such a way as to ensure that each supplier is in an
be phased out on 1 January 2016, before the first
“equivalent economic position” to EDF with regard to historical
capacity mechanism delivery year begins. From the
nuclear generation capacity. This calculation can be based on
first delivery year on, large consumers will only have
an estimation of the number of capacity certificates “contained”
access to market rates, which will factor in the bene-
in each MWh of nuclear electricity produced:
fits of ARENH generation if it is more competitive
>
It is assumed that the certification of the historical nuclear
than the market price.
power plants will result in the issuance of 55 GW of capacity
certificates (estimated applying the certification methods pro-
On the other hand, small consumers (subscribed
to historical availability data in recent winters, based
power of no more than 36 kVA) will be able, as of the
posed
225
on RTE’s assessments);
> T his amount is then compared to annual nuclear electri-
first deliver year, to choose between the regulated
tariffs offered by the incumbent operator and local
city generation (416 TWh on average in the past ten years):
distribution companies or the market rates offered
each MWh of nuclear electricity thus “contains” an average
by alternative suppliers. The continued availabi-
0.132 kW of certificates;
lity of regulated tariffs will impact how the market
> T he conversion key thus works out to 1.16 (1 MW of ARENH
functions. Indeed, the law establishes a principle
generated produces 8760 x 0.132 kW = 1.16 MW of capacity
of reversibility allowing small consumers to switch
certificates in a year).
from regulated tariffs to market rates and vice versa.
From a competition standpoint, regulated tariffs act
It may seem surprising that the ratio between certificates in
as an automatic price cap on the rates offered by all
MW and ARENH generation in MW is greater than 1. This result
suppliers in the French electricity market: it can be
actually reflects the fact that the nuclear power plants are
considered, in this segment, that the regulated tariff
more available in the winter, and thus during the PP2 periods:
is the reference price for the retail market.
the amount of certificates allocated to nuclear power plants is
higher than the average power delivered in a year (55 GW in
In other words, the capacity mechanism will not
winter, compared with average output of 48 GW over the year).
have the same impact on different categories of
In other words, the second hypothesis involves transferring to
consumers:
224
Decree 2012-1405 of 14
December 2012 relative
to the contribution of
suppliers to security of
electricity supply and to
the creation of a capacity
obligation mechanism
in the electricity
sector states that it is
CRE’s responsibility to
propose the method for
calculating the amount
of capacity certificates
to be delivered with
ARENH electricity
(the method used to
calculate this amount
of capacity certificates,
along with the transfer
terms and timeframe,
are defined in an order
by the Energy Minister
based on a proposal by
the Energy Regulatory
Commission”). Article
337-14 affirms: “To
ensure fair remuneration
for Electricité de France,
the price, which will be
reassessed every year,
shall be representative of
the economic conditions
under which the nuclear
power plants mentioned
in Article L. 336-2
generate electricity
over the duration of the
mechanism defined in
Article L. 336-8.”
225
See section 5.1.2 of this
report.
226
Large consumers are
defined in accordance
with the terminology
used in decree 2011466 of 28 April 2011
setting forth the rules
for regulated access
to historical nuclear
electricity, i.e. sites
subscribing to power
of more than 36 kVA,
by contrast to small
consumers.
227
This is a simulation
hypotheses that
obviously does not imply
that all rates will be
effectively aligned.
suppliers, through ARENH, the value associated with the modu-
> For large consumers, it is the impact on market rates (deter-
lation of generation. To be thorough, this hypothesis should
mined based on the ARENH price plus a market supplement)
be qualified: the cost of imbalance settlements resulting from
that must be analysed;
the certification of nuclear capacity should also be passed on
> F or small consumers, the goal is to assess the impact on cur-
to suppliers if they are to be on equal economic footing with
rent supply prices in the segment, assuming that they will be
EDF. It is assumed that this cost will be minimal: nonetheless, the
aligned with the regulated tariff at this timescale227.
187
The simulations presented below therefore draw a distinction
for something this complex: the method applied involves com-
between the impact for large (industrial) consumers and small (resi-
bining certain hypotheses to produce different scenarios.
dential and tertiary) consumers. Insofar as the tariff framework applicable to the latter after 1 January 2016 will be adjusted by the Govern-
This scenario-based approach notably allows correlations
ment and Energy Regulatory Commission between now and then,
between different coefficients to be taken into account. For ins-
the simulations involving large consumers are more detailed.
tance, selecting a low security factor will, all other things being
equal, result in a lower market price. The studies below therefore
8.3.1.7 Results
do not simultaneously test a hypothesis involving a low security
To be thorough, the impact assessment must vary these six
factor together with a high capacity price.
explanatory factors. It is not easy to provide an aggregate result
Figure 79 – Overview of explanatory factors to be taken into account in the impact assessment
Explanatory
factor
Hypotheses applied in the scenario-based approach
0.93
Security factor
1
Value proposed by RTE in the rules
Higher level of security of supply chosen for France
(No taking account of the contribution of interconnections or increase in the criterion)
€0k/MW/year
Capacity price
Determination
Floor price scenario
€10k/MW/year
Median scenario tested
€30k/MW/year
High scenario tested
Industrial
consumer
Set in the RTE rules
Residential
consumer
Transfers of
ARENH-related
certificates
Regulatory
framework
in retail market
188
Dependent on functioning
of capacity market
Non-temperature sensitive
Consumer
Temperature
sensitivity
Consumer's
ability to
reduce load
Set in the RTE rules
Consumer using
electric heating
Consumer that never reduces load
Dependent on consumers
Consumer that reduces peak power demand by half throughout PP1
1 MW of ARENH =
1 MW of certificates
Same approach as for allocation of rights to alternative suppliers
Set by Minister and CRE
1 MW of ARENH =
1.15 MW of certificates
Alternative approach that involves estimating the number of capacity
certificates “contained” in each MWh of nuclear electricity produced
Large consumer
Impact on market rates
(based on ARENH price plus a market supplement)
Small consumer
Impact on market rates linked to regulated tariffs (it is assumed
they will align with regulated tariffs in effect at this timescale)
Set by Minister and CRE
CAPACITY MECHANISM IMPACT ASSESSMENTS   / 8
8.3.2  Quantitative assessment of cost
to consumers
capacity obligation it creates for its supplier. This
amount can nonetheless be adjusted to reflect
the capacity certificates transferred to alternative
The outcomes of the simulations presented here depend on the
suppliers through the ARENH and priced through
hypotheses above. They exclude taxes and network costs.
the capacity market. Assessing the mechanism’s
impact on these consumers therefore involves
As with the discussion of competition-related factors in chap-
weighing the capacity obligation they create for
ter 7, the ARENH effects are central to the assessment. Cal-
their supplier against the certificates these same
culated based on the methodology that will apply in 2015 to
suppliers receive in relation to the ARENH, assu-
a virtual consumer with a consumption profile similar to the
ming that suppliers will indeed pass on to their
national load curve, ARENH rights will represent, by RTE’s esti-
customers the capacity value included in ARENH
mates, about 78% of its energy needs228. In power terms, his-
rights thanks to effective competition in the elec-
torical nuclear electricity should account for just over half of
tricity supply market.
its capacity certificate needs. Assuming a total capacity certifi-
228
Throughout the
assessment, it is assumed
that the maximum total
ARENH electricity that
can be delivered, which
the law caps at 100 TWh,
is not reached. If the
cap is reached, then
regulations stipulate
that the ARENH rights
allocated to each supplier
shall be reduced in such
a way that the amount
is divided between
suppliers requesting
ARENH.
229
CRE’s 2011-2012 report
on the functioning of
retail electricity and
natural gas markets in
France, published in
January 2013, mentions
(p. 56) that the ARENH
rights calculated for
the off-peak/peak hour
profile is 64.1%.
cate requirement of 92 GW (estimated applying the proposed
Three cases are analysed below: (1) a virtual consu-
methods for certifying the total capacity needed in 2016-
mer consuming base-load electricity exclusively,
2017), and that certification of historical nuclear generation
(2) a very large consumer with the “average” pro-
capacity totals 55 GW (estimated applying the proposed cer-
file typifying all consumers connected to the public
tification methods to availability data for recent winters), then
transmission system, and (3) a typical remotely read
historical nuclear electricity will represent 60% of the overall
large consumer connected to the public transmis-
capacity need.
sion system.
This ratio varies considerably depending on the type of
All three analyses were conducted bearing in mind that the
consumption. For a small consumer with subscribing to a peak/
mechanism parameters were subject to further modifications. In
off-peak tariff (which most consumers with electric heating do),
all three cases, the delivery year is staggered with a winter period
ARENH electricity could cover about two-thirds of its energy
in the middle in order to obtain, within the time allotted for the
, but less than half of its capacity obligation.
consultation and the drafting of the rules, an initial estimate of
Conversely, for an industrial consumer with a consumption
the capacity mechanism’s consequences. The fact that a calen-
profile that is not very seasonal, ARENH electricity could cover
dar year is adopted in the rules only has a marginal impact on
almost all of its energy and capacity certificate needs. Impacts
outcomes, as explained in chapter 4.
consumption
229
thus vary depending on the consumer category.
8.3.2.1.1  Virtual consumer consuming base-load
8.3.2.1  Large consumers
generation exclusively
By the time the capacity mechanism is in effect, all large
The ideal configuration for this consumer (excluding demand
consumers will be paying market rates, as the regulated tariffs
response) is a low capacity price, the security factor proposed
still available to consumers that never exercised their right to
by RTE and a conversion key greater than 1 (i.e. the second
switch since the market was deregulated will be phased out on
hypothesis for this parameter).
31 December 2015.
Pursuant to the order of 17 May 2011 relative to the calculation of
Suppliers base their market rates on wholesale market prices.
rights to regulated access to historical nuclear electricity, a consu-
If ARENH electricity is still a competitive source for alternative
mer with steady power consumption creates, for its supplier, an
suppliers when the mechanism comes into effect, market rates
ARENH right corresponding to 96.4% of the energy consumed.
should align with ARENH supply costs, tacking on a “market supplement”. Otherwise, the rates offered to large suppliers will be
If 1.15 MW of capacity certificates are transferred for every
based entirely on the wholesale market price.
MW of ARENH electricity delivered, then the certificates obtained through ARENH represent 110.6% of power consumed
Bearing this in mind, the capacity mechanism’s impact on each
(calculated by multiplying the ARENH right by the capacity
consumer in this segment should be a direct reflection of the
certificate).
189
Figure 80 – Case of virtual consumer consuming
base-load generation exclusively
In terms of the obligation, assuming a security factor of 0.93, the
obligation represents 93% of power consumption. In this case, it
appears that ARENH electricity goes beyond covering the consumer’s need and results in a surplus of certificates, with ARENH
1.15
covering 119% of the obligation. Assuming a capacity price of
1.1
€10k/MW, the net gain for the consumer will be €0.2/MWh.
1.05
1
A site with a “flat” consumption profile and capable of reducing
0.95
its consumption by half during peak periods can also transfer
the corresponding certificates through the market, for a gain of
0.9
€0.6/MWh (assumed capacity price of €10k/MW). Added to the
0.85
€0.2/MWh mentioned above, this consumer’s net gain will be
€0.8/MWh.
01
/0
6
01
/0
5
01
/0
4
01
/0
2
01
/0
3
01
/0
1
01
/1
2
01
/1
1
01
/1
0
01
/0
9
01
/0
8
01
/0
7
0.8
The tables below show outcomes using different hypotheses about
 Constant profile
the capacity price, the security factor and ARENH certificates.
 Obligation with security factor of 0.93
 Obligation with security factor of 1
 Related capacity certificates transferred under ARENH (hypothesis: 1/1)
Now, if it is assumed that the security factor is determined with-
 Related capacity certificates transferred under ARENH (hypothesis: 1/1.15)
out taking into account the contribution of interconnections
and thus set at 1 (instead of 0.93), that each MW of ARENH
Outcome with an alternative set of hypotheses
The tables below show outcomes using different hypotheses about the capacity price, the security factor and ARENH certificates.
Capacityprice:€10k
WITHOUT DEMAND RESPONSE
WITH DEMAND RESPONSE*
€/MWh
1 MW of ARENH >
1 MW of certificate
1 MW of ARENH >
1.15 MW of certificate
€/MWh
1 MW of ARENH >
1 MW of certificate
1 MW of ARENH >
1.15 MW of certificate
C = 0.93
0.0
-0.2
C = 0.93
-0.6
-0.8
C=1
0.0
-0.1
C=1
-0.6
-0.7
Capacityprice:€30k
WITHOUT DEMAND RESPONSE
WITH DEMAND RESPONSE*
€/MWh
1 MW of ARENH >
1 MW of certificate
1 MW of ARENH >
1.15 MW of certificate
€/MWh
1 MW of ARENH >
1 MW of certificate
1 MW of ARENH >
1.15 MW of certificate
C = 0.93
-0.1
-0.6
C = 0.93
-1.8
-2.3
C=1
0.1
-0.4
C=1
-1.6
-2.1
* Peak consumption reduced by half
190
CAPACITY MECHANISM IMPACT ASSESSMENTS   / 8
230
In this case, ARENH covers
96.4% of the obligation.
electricity produced translates into 1 MW of capacity certificates
assuming base-load consumption exclusively. This
(instead of 1.15), and that the market capacity price is €30k/MW,
configuration is a fair description of the consump-
the impact on the consumer’s bill becomes very slightly posi-
tion profiles of most electro-intensive industrial users
tive230 (+€0.1/MWh).
connected to the transmission system.
Taking flexibility into account has a substantial impact on the
The capacity obligation is calculated for the
outcome: if the consumer can reduce its consumption by half at
100 hours of highest consumption, included in the
peak times, its gain will be €1.7/MWh (assumed capacity price of
PP1 eligibility time slot [07:00; 15:00[ then [18:00;
€30k/MW). The net balance is positive for the consumer, which
20:00[, defined in accordance with the rules, norma-
will save €1.6/MWh.
lising the temperature gradient to 0 for the reasons explained in
231
The data considered
have not been adjusted
for NEBs.
232
ARENH covers in this case
85% of the obligation.
chapter 4. ARENH rights are calculated applying the rules appli8.3.2.1.2  Very large consumer with the “average”
cable in 2015, based on a series that combines the first half of
profile typifying consumers connected to the public
2012 and the second half of 2011.
transmission system
The results above can be refined a first time by inputting the ave-
ARENH covers 105% of the obligation (conversion coefficient:
rage consumption profile of customers connected to the public
1.15). Assuming a capacity price of €10k/MW, the consumers in
transmission system in the winter of 2011-2012
231
rather than
question will see a net gain of €0.1/MWh.
Figure 81 – Case of large consumer with an “average” profile
1.4
1.2
P
rofile extraction
PTS
1
Obligation
with security
factor of 0.93
0.8
Obligation
with security
factor of 1
0.6
Related capacity
certificates
transferred
under ARENH
(hypothesis: 1/1)
0.4
Related capacity
certificates
transferred
under ARENH
(hypothesis:
1/1,15)
0.2
6
/0
01
5
/0
01
4
/0
01
3
/0
01
2
/0
01
1
/0
01
2
/1
01
1
/1
01
0
/1
01
9
/0
01
8
/0
01
01
/0
7
0
A site with this kind of consumption profile and capable of redu-
Now, if it is assumed that the security factor is determined without
cing its consumption by half at peak times can also transfer the
taking into account the contribution of interconnections and thus
corresponding certificates through the market. This results in a
set at 1 (instead of 0.93), that each MW of ARENH electricity pro-
gain of €0.7/MWh (assumed capacity price of €10k/MW). Added
duced translates into 1 MW of capacity certificates (instead of
to the €0.1/MWh mentioned above, this consumer’s net gain
1.15), and that the market capacity price is €30k/MW, the impact
will be €0.8/MWh.
on the consumer’s bill will be an additional cost of €0.6/MWh232.
191
Outcome with an alternative set of hypotheses
The tables below show outcomes using different hypotheses about the capacity price, the security factor and ARENH certificates.
Capacity price: €10k
WITHOUT DEMAND RESPONSE
WITH DEMAND RESPONSE*
€/MWh
1 MW of ARENH >
1 MW of certificate
1 MW of ARENH >
1.15 MW of certificate
€/MWh
1 MW of ARENH >
1 MW of certificate
1 MW of ARENH >
1.15 MW of certificate
C = 0.93
0.1
-0.1
C = 0.93
-0.6
-0.8
C=1
0.2
0.0
C=1
-0.5
-0.7
Capacity price: €30k
WITHOUT DEMAND RESPONSE
WITH DEMAND RESPONSE*
€/MWh
1 MW of ARENH >
1 MW of certificate
1 MW of ARENH >
1.15 MW of certificate
€/MWh
1 MW of ARENH >
1 MW of certificate
1 MW of ARENH >
1.15 MW of certificate
C = 0.93
0.3
-0.2
C = 0.93
-1.7
-2.2
C=1
0.6
0.1
C=1
-1.4
-1.9
* Peak consumption reduced by half
Here again, taking flexibility into account has a substantial impact
Assuming a capacity price of €10k/MW, the net cost to these
on the outcome: if the consumer can reduce its consumption
consumers is €0.2/MWh.
by half at peak times, its gain will be €2/MWh (assumed capacity
price of €30k/MW). The net balance is positive for the consumer,
A site with this kind of consumption profile and capable of
which will save €1.4/MWh.
reducing its consumption by half at peak times can also
transfer the corresponding certificates through the mar-
8.3.2.1.3 Typical large consumer (TSO or DSO)
ket. This results in a gain of €0.8/MWh (assumed capacity
A third variant can be introduced to estimate the impact on the
price of €10k/MW), which more than offsets the €0.2/MWh
energy bills of standard industrial consumers representative of
cost mentioned above, putting this consumer’s net gain at
alternative suppliers’ portfolios. The simulation is conducted by
€0.6/MWh.
aggregating the remotely-read load curves of the balance responsible entities of these suppliers. The capacity obligation is
Here again, assuming that the security factor is determined with­
calculated for the 100 hours of highest consumption, included
out taking into account the contribution of interconnections and
in the PP1 eligibility time slot [07:00; 15:00[ then [18:00; 20:00[,
thus set at 1 (instead of 0.93), that each MW of ARENH electricity
defined in accordance with the rules, normalising the tempera-
produced translates into 1 MW of capacity certificates (instead of
ture gradient to 0 for the reasons explained in chapter 4. ARENH
1.15), and that the market capacity price is €30k/MW, the impact
rights correspond to average rights for the calendar years 2011
on the consumer’s bill would correspond to an additional cost of
and 2012 calculated applying the method applicable in 2015.
€1.4/MWh233.
233
ARENH covers 70% of
the capacity obligation
(instead of 86%).
192
ARENH covers 86% of the capacity obligation for
Taking flexibility into account again has a substantial impact on
these customers as a whole.
the outcome: if the consumer can reduce its consumption by half
CAPACITY MECHANISM IMPACT ASSESSMENTS   / 8
Outcome with an alternative set of hypotheses
The tables below show outcomes using different hypotheses about the capacity price, the security factor and ARENH certificates.
Capacity price: €10k
WITHOUT DEMAND RESPONSE
WITH DEMAND RESPONSE*
€/MWh
1 MW of ARENH >
1 MW of certificate
1 MW of ARENH >
1.15 MW of certificate
€/MWh
1 MW of ARENH >
1 MW of certificate
1 MW of ARENH >
1.15 MW of certificate
C = 0.93
0.4
0.2
C = 0.93
-0.5
-0.6
C=1
0.5
0.3
C=1
-0.3
-0.5
Capacity price: €30k
WITHOUT DEMAND RESPONSE
WITH DEMAND RESPONSE*
€/MWh
1 MW of ARENH >
1 MW of certificate
1 MW of ARENH >
1.15 MW of certificate
€/MWh
1 MW of ARENH >
1 MW of certificate
1 MW of ARENH >
1.15 MW of certificate
C = 0.93
1.0
0.6
C = 0.93
-1.3
-1.7
C=1
1.4
0.9
C=1
-0.9
-1.4
* Peak consumption reduced by half
at peak times, its gain will be €2.3/MWh (assumed capacity price
8.3.2.2  Small consumers
of €30k/MW). The net balance is positive for the consumer, which
The regulations governing the functioning of the retail market are
will save €0.9/MWh
an important consideration in assessing the mechanism’s impact
on smaller consumers. It is possible to conduct simulations considering that consumers in this segment will buy electricity at
For large consumers, ARENH-related certificates
cover a large share of the obligation generated
for their suppliers. The most favourable configuration for these consumers (excluding demand
response) is a low capacity price, a security factor matching that proposed by RTE and a conversion key above 1 for ARENH rights (i.e. the
second hypothesis for this parameter). If large
consumers’ flexibility is taken into account,
the results are substantially different, as the
quantity of certificates will largely exceed the
level required to cover the obligation. In sum,
the mechanism’s “first-found” impact is very
limited for large consumers, and can even be
“positive” (n the sense that gains are possible) if
consumers leverage their flexibility through the
mechanism.
market rates, though the impact of regulated tariffs remaining in
effect after 1 January 2016 should not be overlooked.
Moreover, residential customers subscribing to the regulated
tariff already pay a capacity-type fee since tariffs have historically been calculated based on the long-term adaptation of the
mix including a reference to the cost of capacity. A comparison
of the current situation with that resulting from the capacity
mechanism would require comparing these two values. The
issue is more complex for residential consumers buying electricity from alternative suppliers based on market rates since,
even though the availability of regulated tariffs should result in
an alignment of rates on offer, alternative suppliers source electricity through ARENH and the market, and must therefore set
their rates by adding various cost components without taking
into account any type of capacity cost. The difference between
193
the two approaches and the price squeeze risks they create are
More detailed simulations would have to (i) be based on an
amply discussed elsewhere and are not addressed in this sec-
accurate analysis of the capacity component included in regula-
tion, but they must be borne in mind to establish the scope of
ted tariffs, (ii) factor in the final decisions made by public autho-
validity of the orders of magnitude presented below.
rities about the future tariff system, and (iii) use load curves that
are representative of each category or subcategories of consu-
By the time the capacity mechanism is in place and consumers
mer (for instance customers on the off-peak/peak tariff.). These
first begin to feel its effects (2016), the applicable tariff system will
results can thus only be presented once public authorities’ deci-
have evolved. Article L. 337-6 of the Energy Code stipulates that,
sions about the future tariff system are known.
between now and 1 January 2016, tariffs will “gradually be calcu-
lated taking into account the addition of the regulated access to
In the meantime, broad assumptions can help provide an order
historical nuclear electricity price, the supplemental electricity
of magnitude of the sensitivity of the impact for small consu-
supply cost which includes the capacity certificate, electricity
mers. Considering an overall capacity need in France of 92 GW,
transmission and marketing costs as well as normal remunera-
in keeping with the simulations presented in the previous sec-
tion”. However, the contours of this future tariff system have not
tion, and that small consumers represent about 165 TWh of
been finalised. It will be the responsibility of CRE (from 2016) to lay
annual energy consumption and thus account for half of this
down the applicable principles, within the regulatory framework
need, or 46 GW, the value of the capacity certificate for each
defined by the Government.
MWh consumed works out to 0.28 kW. If ARENH covers half of
this need, then the balance to be covered is 0.14 kW. Based on
In the analysis below, it is assumed that the new tariff system is
a difference of €10k/MW between the average cost of capacity
based on a “market” approach. Rates offered to small consumers
operated by EDF (excluding historical nuclear) and the market
are thus calculated by adding together the different cost compo-
capacity price, the result is €1.4/MWh.
nents: ARENH, a market supplement for energy, the
234
Regulated tariffs must
be calculated in such a
way as to cover costs.
They therefore include
a capacity component
corresponding to
the share of fixed
costs associated
with generation
assets developed and
maintained by EDF that
cannot be recovered
through the energy
market. Their structure is
based on the theoretical
updated generation mix,
and takes into account,
in this case, a normative
capacity cost (which
may be different from
the real capacity costs)
associated with the
shortfall risk. See, for
example, the CRE report
of 4 June 2013 (analysis
of EDF's generation and
marketing costs relating
to regulated electricity
tariffs), page 40.
235
This method builds on
the qualitative analysis
included in the impact
assessments carried
out on the draft NOME
Act and presented by
the Government in
April 2010. See [French
Department in charge
of Energy and Climate
(DGEC), 2013]
194
capacity certificate price, etc. The elements below are
In other words, if the average cost of the capacity operated by EDF
not applicable if regulated tariffs continue to be set on
excluding historical nuclear is €10k/MW below (above) the market
the basis of costs.
price, then the sensitivity of the impact on the average price paid by a
small consumer, provided that the new tariff setting system is based
With a “market” approach, the capacity cost com-
on a “market” approach, should be +€1.4/MWh (-€1.4/MWh).
ponent, which public authorities currently factor
into regulated tariffs234, will have to be replaced by a
This corresponds to the average between the most temperature sen-
component that refers to capacity certificate prices
sitive consumers (for instance those that have opted for the peak/
set by the market. To provide an order of magnitude
off-peak tariff) and others. In reality, there are likely to be large gaps
of the sensitivity of the impact on consumers, it is
between results depending on the consumers considered, for ins-
necessary to formulate a hypothesis about the dif-
tance a non temperature-sensitive customer versus one that relies
ference between the two references for the capacity
exclusively on electric heating. As was the case with large consu-
. For the purposes of the simulations below,
mers, the potential impact can be partly or totally mitigated if a peak
cost
235
this difference is set at ± €10k/MW.
demand management or demand response mechanism is in effect.
Three situations are possible:
> If the difference between the current capacity
price component and the market price is negative, then the implementation of the capacity
mechanism will, all other things being equal, put
downward pressure on tariffs;
> If there is no difference, the effect on tariffs will be
nonexistent;
> If the difference is positive, the implementation of
the capacity mechanism will result in an increase
in this component within regulated tariffs.
The simulations carried out for different consumer categories give an idea of the “first-round”
effects of the capacity mechanism implementation and the impact the change in approach
to setting regulated tariffs will have on small
consumers.
The mechanism’s financial impact on large consumers should be limited. For small consumers,
the impact could be positive or negative depending on the difference between the capacity certificate price and the capacity component currently
CAPACITY MECHANISM IMPACT ASSESSMENTS   / 8
To assess the impact of the capacity mechanism’s
implementation compared with the existing situa-
included in regulated tariffs. In all cases, the cost
of the capacity obligation is borne by temperature sensitive consumers alone.
In addition to the values presented here, which
obviously vary depending on the parameters
selected, three observations can be made:
The transfer to alternative suppliers, and
through them to consumers, of the certificates
associated with ARENH capacity significantly
reduces the cost of implementing the mechanism for consumers;
Results are substantially modified when consumers’ flexibility is taken into account, and
the mechanism even creates opportunities for
gains for the most flexible consumers;
The real impact on consumers will depend on
how suppliers set their rates in a competitive
environment: the pricing policies applied to
small consumers may differ from the approach
to calculating regulated tariffs, and should take
into account any capacity they operate themselves, their commercial strategies, etc. tion, hypotheses must be formulated about the
quantity of certificates that could potentially be allocated to the facilities in question, the capacity price
236
Energy Regulatory
Commission deliberation
of 9 October 2012 on
a proposal relative to
public electricity service
charges and the unit
contribution for 2013.
and the CSPE financing base.
>
Determining the quantity of certificates that could be allocated to facilities subject to a purchase obligation requires
making an assumption about the subsidised technologies’
>
penetration when the mechanism is implemented. The figures
below correspond to the installed power estimates for these
technologies in 2017 adopted in RTE’s 2013 Adequacy Fore-
>
cast Report update:
> Installed wind power: 11.4 GW;
> Installed photovoltaic power: 7.5 GW;
> Cogeneration subject to feed-in tariff: 1.2 GW;
> R enewable embedded thermal: 1.9 GW.
The next step is to determine a quantity of capacity certificates for
each technology applying the provisions in the rules, and notably
8.3.3  Impact on the CSPE
the contribution coefficient for intermittent energy sources
Like all capacities situated within the interconnected French
based on the values presented in § 5.1. This quantity is multiplied
market, generation facilities that receive public support through
by a reference capacity price: in keeping with the analytical fra-
purchase obligations will participate in the capacity mechanism.
mework used until now, this calculation is done considering two
These capacities will thus be awarded capacity certificates that
hypotheses (€10k/MW/year and €30k/MW/an).
obligated parties can buy. The proceeds will be deducted from
the charges for the public service of electricity financed through
The results of the impact assessment are summarised in table
the CSPE, and this deduction will ultimately benefit the consu-
5 below.
mers subject to this contribution.
Table 5 – Assessment of the impact on the CSPE of the pricing of capacity
certificates allocated to technologies subject to a purchase obligation
Installed capacity
(GW)
Certificates
(GW certified)
Value in €m with price
of €10k/MW
Value in €m with price
of €30k/MW
Wind power
11.4
2.3
22.8
68.4
PV
7.5
0.4
3.8
11.3
Cogeneration (<12MW)
1.2
1.0
10.2
30.6
Embedded thermal
1.9
1.6
16.2
48.5
22.0
5.3
53.0
158.8
Total
The amounts calculated should be considered in relation to the financing base of the CSPE (forecast domestic consumption (excluding
losses) net of around 380 TWh of energy exempt from the CSPE236).
195
Depending on the market price, the certification of capacities subject to a feed-in tariff could reduce the charges
covered by the CSPE by between €50m and €160m a year, translating into savings of between €0.13 and €0.42/MWh.
8.4  Plans to strengthen the impact assessment system
The considerations discussed in § 8.3 confirm that the provisions adopted will initially carry a moderate cost for consu-
8.4.1  A mechanism simulator made available to
stakeholders
mers. The studies presented will be useful during the first two
delivery years of the mechanism, when there is unlikely to be
For educational purposes, RTE is developing a capacity mecha-
a significant capacity shortage. However, it is important to
nism simulator called “CLéM”. It is a multiplayer web application
stress that this information is indicative only and was collec-
allowing users to “play the part” of a capacity operator, a capacity
ted during the limited time allotted to the consultation and the
portfolio manager, a supplier or a trader. The former estimate the
drafting of the rules, while the mechanism parameters were
availability of their capacities, request to have them certified and
still subject to modification. These elements must therefore
seek to maximise the value of the capacity certificates received
be viewed only as a first analysis of the consequences of the
over the different phases of the mechanism; the latter estimate
capacity mechanism.
the obligation their customers’ consumption will represent and
buy electricity at the best price on the market or, depending on
When the time comes to implement the rules, it is proposed that
additional tools be used to complement these analyses.
Figure 82 – Presentation of CLéM
196
costs, initiate peak demand management measures.
CAPACITY MECHANISM IMPACT ASSESSMENTS   / 8
237
[Cepeda & Finon, 2011]
The goal is thus to illustrate the roles of the different players and
It was due to this complexity that a “second-round”
the timescales of the mechanism, and to make the microeco-
impact study could not be carried out during the
nomic determinants of the capacity price sensitive by leading
consultation, since the rules must necessarily be
players to a collective trade-off between different options to
stabilised before such a study can produce meaningful results.
ensure that capacity supply and demand are balanced. The first
However, it is not because the task is difficult that it must be
external session is planned for June 2014.
skipped, since the results could provide valuable insight to
inform future adjustments to the mechanism.
8.4.2  Expand the “first-round” impact assessment
by factoring in small consumers
As mentioned in chapter 1 of this report, RTE is planning to carry
As discussed in § 8.3, it will be possible to further refine the
capacity mechanism within the framework of the role assigned
impact assessment for small consumers once the new metho-
to it in article 20 of decree 2012-1405 of 14 December 2012.
dology for setting regulated tariffs is known. In its present wor-
The results of these studies will be sent to CRE so improvements
ding, the Energy Code leaves several options open, the main two
can be made to the capacity mechanism and shared with stake-
being a historical vision of accounting cost coverage or a vision
holders to continue the consultation approach adopted for desi-
based on the principles of contestability, in which case tariffs will
gning the mechanism.
out economic studies on the functioning and impact of the
be determined by adding together independent components
(ARENH, price of wholesale market supplement, price on capa-
These studies will look beyond national borders and take a broa-
city certificate market).
der view of security of supply to reflect the integration of European electricity markets. RTE’s models already include several
More should be known about these choices within the coming
European countries, for instance for the studies in its adequacy
months (CRE’s remit has been expanded to include tariff sys-
reports. It could also be possible for these studies to be conduc-
tems). It is possible that the capacity mechanism rules and the
ted in cooperation with other countries, for instance through
functioning of the capacity market itself could be factored into
a France-German partnership. Collaboration with academics
the tariff setting formula. In this case, RTE is ready to contribute to
could also be useful depending on the objectives sought and
the analyses based on which the tariff formula will be modelled or
methods applied.
to assist with monitoring, within a framework determined by CRE.
The main purpose of these models will be to represent the
impact of the market architecture adopted on investment and
8.4.3  Include a study on the dynamic impact of the
mechanism over the long term in the assessment
security of supply in European countries. They thus require
a clear picture of the security of supply policies that will be
As discussed in § 8.1.2, it is particularly challenging to conduct a
implemented by European countries. Observation of the capa-
meaningful study of mechanism’s dynamic impact over the long
city’s mechanism’s initial functioning will also provide relevant
term due to the difficult choice that must be made between
information for studies and simulations of how it could evolve.
the accuracy and feasibility of the model. The process involves
Indeed, the first years will be a learning period for all power sys-
evaluating the long-term performances of various market archi-
tem stakeholders, and it will be possible to analyse their beha-
,
viours to improve the mechanism and anticipate the impact it
tectures, taking into account the costs and benefits of each
237
along with factors ranging from the asymmetry of information
will have toward 2018-2020.
between agents or regulatory authorities, factors that can cause
the mechanism to be less efficient than hoped.
197
9. EUROPEAN INTEGRATION OF
THE FRENCH CAPACITY MARKET
9.1 Interconnections’ contribution to security
of supply in France
9.1.1 Integrating power systems improves
security of supply
countries as the risks on security of supply originate from
structurally different issues and can be country-specific. This
leads to a reduction of the correlation of contingencies and
By enabling the exchanges of energy between countries, inter-
to a greater degree of complementarity or mutual assistance
connections have always contributed to enhance security of
between countries.
supply in Europe. Indeed, interconnections mitigate the risks on
security of supply at a larger scale than the national one. Impor-
A contingency can be simply defined through three characte-
ting energy can therefore be one of the most efficient solutions
ristics: its probability, intensity and duration. The following taxo-
to balance the system, including during periods of system-stress.
nomy describes the main contingencies affecting security of
supply and proposes an indicative evaluation of their key-cha-
This mitigation of risks is all the more important that the
racteristics. This evaluation can differ between countries.
structure of electricity supply is different between European
Figure 83 – Main contingencies affecting security of supply
AVAILABILITY OF THERMAL PLANTS
AVAILABILITY OF HYDRO CAPACITY
> Probability: HIGH
> Intensity: LOW
> Duration: VARIABLE
> Probability: LOW
> Intensity: MODERATE
> Duration: LONG
lcpx0
h†xt0
o ctu
cxt0
o ck
lwkp
lwkn0
cq¯ v
ugr v0
qev0
pqx0
f †e0
lcpx0
99 000 - 102 000
102 000
93 000 - 96 000
99 000
90 000 - 93 000
93 000
96 000
90 000
93 000
MW
> Probability: LOW
> Intensity: MODERATE
> Duration: LONG
MW
96 000 - 99 000
105 000
96 000
99 000
87 000
84 000
87 000 - 90 000
84 000 - 87 000
81 000 - 84 000 90 000
78 000 - 81 000
87 000
81 000
75 000 - 78 000 78 000
84 000
75 000
81 000 Jour
72 000
7:00
14:00
Heure
21:00
01/12/11
15/12/11
29/12/11
12/01/12
72 000 - 75 000 7823/02/12
000
26/01/12
09/02/12
75 000
Jour
72 000
7:00
14:00
Heure
21:00
01/12/11
15/12/11
29/12/11
12/01/12
26/01/12
09/02/12
> Probability: VERY HIGH
> Intensity: LOW
> Duration: - PV: LOW
23/02/12
CORRELATIONS
198
cxt0
o ck
lwkp
lwkn0
Eolien
102 000 - 105 000
102 000
o ctu
cq¯ v
ugr v0
RES GENERATION
COLD SPELL/HEAT WAVE
105 000
h†xt0
- Wind: MODERATE
PV
qev0
pqx0
f †e0
EUROPEAN INTEGRATION OF THE FRENCH CAPACITY MARKET  / 9
The exposure to a given contingency differs from one country to
another. This report has already described the peak-load issue in
9.1.2  Recognition of the cross-border
dimension in the French capacity market
France (chapter 1). The thermo-sensitivity of the French demand
238
Details of the model used
can be found in chapter
10 of this report.
and its impact on the peak-load during cold spells represent the
9.1.2.1  Economic efficiency of the French
main risk on security of supply in France. Contingencies affec-
capacity market
ting demand are also a concern for other European countries,
The efficiency of a market mechanism largely depends on its abi-
such as Sweden, Finland or Hungary.
lity to accurately reflect the physical state of the system in which
it is implemented. Regarding the energy market, the accuracy of
The level of penetration of renewable energy sources (chiefly
market coupling mechanisms is directly linked to their ability to
wind and solar) in the energy mix of a given country has a direct
reflect as truthfully as possible the impact of cross-border energy
impact on the intensity of the contingency linked to their inter-
exchanges on physical energy flows and on the power system. By
mittency, which is considered as low in France. However, in other
the same token, the French capacity market needs to reflect the
countries such as Denmark or Germany, where there is a high
contribution of capacities to security of supply, including the inter-
penetration of renewable energy sources, intermittency has
connected system between France and neighbouring countries.
become the main risk on security of supply. As the production
from renewable energy sources depends on weather conditions,
On the one hand, a market-design focusing on the sole contribu-
intermittency is by definition a highly probable contingency.
tion of French capacities or underestimating the contribution of
This enhances the need for back-up capacities (be it generation,
cross-border capacities to security of supply would result in over-
demand-response or storage capacities).
capacity in France. This overcapacity is costly for the French system and therefore sub-optimal from an economic point of view.
Some countries have a large share of hydro generation in their
energy mix – such as Norway, Switzerland or Portugal. There-
On the other hand, a market-design overestimating the contribution
fore, drought years constitute a structural risk on their secu-
of cross-border capacities to security of supply in France could cause
rity of supply, especially in case of long and severe drought
a capacity shortfall, which means that the adequacy criterion defined
periods. Drought years can affect security of supply in other
by the government would not be met. This situation leads to a very
countries. For example, in the Netherlands, where river water is
high cost of shortfalls and therefore to economic inefficiencies.
used to cool thermal power plants, drought years also threaten
security of supply because temperatures of rivers are growing.
RTE is particularly aware of the important contribution of crossborder capacities to security of supply in France. Indeed, RTE is
Contingencies affecting the availability of thermal plants can
legally in charge of the establishment and publication of ade-
affect security of supply in every single European country. At the
quacy forecasts in France and is strongly involded in ENTSO-E’s
European level, the power system is highly interconnected and
work on adequacy report at the regional or pan-European levels.
the failure of a plant has a low impact. Nonetheless, at the natio-
Therefore, the methodology of its Adequacy Forecast Reports
nal level, the failure of a plant can have a major impact, espe-
is based on a detailed model of the Western European power
cially in countries where plant sizes are significant compared to
system238 in order to reflect as accurately as possible the contri-
their electricity consumption.
bution of interconnections to security of supply in France.
The integration of European power systems mitigates the
9.1.2.2  French and European frameworks
risks on security of supply between European countries and
The “loi NOME/NOME law” has recognized the importance of
reduces the impact of main contingencies and enables mutual
the cross-border dimension in the French capacity market:
assistance between countries. This integration is two-fold. On
the one hand, it relies on the “hardware”: the development of
Le mécanisme d’obligation de capacité prend en compte
interconnections. On the other hand, it relies on the “software”
l’interconnexion du marché français avec les autres marchés
in order to enable the efficient use of infrastructure: the mar-
européens.
ket design. The European electricity market is a major asset
to ensure security of supply in France and other European
This provision clearly reflects the willingness to recognise the
countries.
European dimension of security of supply in the design of the
capacity market.
199
The French approach is consistent with European Commis-
The Commission has also included requirements on the need to
sion’s guidelines on generation adequacy in the internal
recognize the cross-border dimension in capacity mechanisms’
electricity market. Indeed, the Commission stresses the need
market designs:
to properly include the cross-border dimension in adequacy
[Capacity] mechanisms should be open to any capacity, inclu-
assessments:
ding capacity located in other Member States, which can
Given this increasing integration of electricity markets
effectively contribute to meeting the required generation
and systems across borders it is now increasingly dif-
adequacy standard and security of supply240.
ficult to address the issue of generation adequacy on a
purely national basis. Member States’ generation adequacy assessments need to take account of existing and
forecast interconnector capacity as well as the generation adequacy situation in neighbouring Member States.
Surplus generation in neighbouring Member States may
alleviate adequacy concerns; shortages may exacerbate
The French capacity market has a cross-border
dimension because it makes sense economically
and because it is necessary in order to meet legal
requirements (both French and European). This principle should now be declined in the market design
and different design solutions can be considered.
them239.
9.2  Current status of cross-border participation
in capacity mechanisms
9.2.1  Cross-border participation in existing
and planned capacity mechanisms
pay a capacity payment to the SEM system based on their
volume of exports.
[…]
Many European countries have introduced capacity mecha-
An example of how specific design choices may lead to a CRM
nisms (chapter 1) based on different market designs. However,
having a distortive effect on energy market is provided by the
ACER has underlined in its report on “Capacity remuneration
capacity payment scheme operating in Ireland and Northern
mechanisms and the internal energy market” that, most of the
Ireland. In this case, the distortions extend to the energy mar-
time, these mechanisms are purely national schemes:
ket in Great Britain.
[…]
The existing CRMs are to a large extent tailored to a specific
The way the SEM CRM has been designed may raise two chal-
market situation. As a result there is a large variation in the
lenges. First, its compatibility with the day-ahead target model for
existing CRMs’ design features. The experience with cross-
cross-border trade (market coupling) to be implemented on the
border participation is virtually non-existing241.
Ireland - Great Britain interconnector. Once market coupling is
implemented it is no longer possible to distinguish which market
For instance, the Spanish and Italian capacity payments
participant exports and/or imports and therefore to distinguish
do not provide for a remuneration of cross-border
who should receive or reimburse the capacity payment.
capacities. Some countries have attempted to address
Second, and maybe of lesser importance, the ex-post ele-
241
[ACER, 2013]
the issue of the impact of their capacity mechanism
ment of the capacity remuneration payment induces a risk
on the energy market (e.g. Ireland’s capacity payment
for traders and therefore requires a higher price difference
242
[ACER, 2013]
scheme ) but it can also lead to distortions:
between the SEM and the Great Britain market to trigger
239
[EC, 2013a]
240
[EC, 2013a]
243
The electricity markets
of Ireland and Northern
Ireland are unified
through what is called
the “Single Electricity
Market”, or SEM.
200
242
exports, which can impact utilisation of the interconnectors
The [Capacity Mechanism] in the SEM takes account
and affect generation dispatch decisions243.
of non-domestic generation by providing that importers into the SEM receive a capacity payment based
Swedish and Finnish strategic reserves do not provide for the
on their volume of imports; exporters from the SEM
participation of cross-border capacities either. For example, in
EUROPEAN INTEGRATION OF THE FRENCH CAPACITY MARKET  / 9
Sweden, cross-border participation has not been considered
la partecipazione di capacità localizzata all’es-
as a possible option because the capacity mechanism was ori-
tero non è prevista dallo Schema di Disciplina.
ginally designed to avoid the decommissioning of domestic
Tuttavia, in coerenza con le future linee guida
plants, which were considered as necessary to maintain an ade-
della Commissione Europea, laddove operatori
quate level of security of supply.
localizzati sulla rete di un altro gestore di rete
europeo esprimessero, tramite il predetto ges-
These examples highlight that the explicit participation of cross-
tore, l’interesse a partecipare al mercato della
border capacities is not considered as a priority option in the
capacità italiano, Terna potrebbe esplorare col
design of capacity mechanisms through Europe, regardless of the
medesimo gestore le eventuali modalità di par-
type of capacity mechanisms chosen (strategic reserves, capacity
tecipazione di capacità localizzata sulla sua rete
payments...). The participation of cross-border capacities is rather
al fine di delineare una proposta di modifica dello
defined implicitly, most of the time when dimensioning the needs.
Schema di Disciplina245.
For instance, the volume of strategic reserves needed in isolated
systems might be higher than in interconnected ones.
244
[DECC, 2013]
245
[AEEG, 2013]
246
Germany’s reserve power
plant mechanism, ResKV,
enables the participation
of capacities from other
European countries.
However, it is designed
to secure reserves for
the system (congestion
management), not to
guarantee security of
supply.
247
[RTE, 2011]
Lastly, the transposition of mechanisms implemented in other
parts of the world, especially in the United States, can’t be consi-
However, in the context of an integrated European electricity
dered as a proper option (chapter 8). Indeed, major differences
market, the absence of cross-border participation can’t be
exist between the European and US electricity markets especially
considered as a long-term target. Many countries will adapt their
regarding the regulatory framework, the governance framework
mechanisms. For example, such adaptations are currently being
and the division of responsibilities between markets parties.
considered in Spain, Italy and Ireland.
To sum up, there is no practical example of capacity mechanism
Cross-border participation is an open-issue for capacity mecha-
targeted on security of supply which allows for the participation
nisms which are currently under consideration or being imple-
of cross-border capacities in Europe246.
mented in other Member States. No “one-fits-all” solution has
emerged so far. Some explanations on the complexity of this
issue can be found in the United Kingdom’s consultation paper
on “Proposals for the implementation of a capacity mechanism
in the context of the Electricity Market Reform”.
9.2.2  Decision to implicitly recognise foreign
capacity in the French capacity mechanism
During the process of designing the future capacity market
in France, the participation of capacities located outside the
The Government is keen to find a way for interconnected
French borders has been discussed many times and will be
capacity to be able to participate in the Capacity Market. Parti-
implicitly recognized as a first step.
cipation of interconnected capacity would increase efficiency
by increasing competition in the auction, and provide appro-
Indeed, this question was raised in 2011 during a public consul-
priate incentives for additional investment in interconnection.
tation led by RTE in the framework of the report on the proposi-
[…]
tions for the design of the capacity mechanism commissioned
This is a complex area and we have worked closely with expert
by the Energy Minister. The report issued in October 2011 advo-
stakeholders, other EU Member States and the European
cated that cross-border interconnection could be taken into
Commission to explore possible solutions. However despite
account implicitly at a first step, and explicitly in a second step.
this work we have been unable to find a solution that the
Government believes offers a practical solution for the first
Notably prerequisite to allow the explicit participation of
capacity auction in November 2014. We continue to work
cross-border capacities are not currently fulfilled and an
on this issue however and aspire to finding a solution that is
additional implementation time is required. Consequently,
capable of being implemented at the earliest in time to com-
the explicit participation of cross-border capacities is not
pete in the 2015 capacity auction244.
foreseeable in a short-term vision, though RTE would like to
keep it as an “open-option” for the future. Notably if some
While reforming its capacity mechanism, Italy has not directly
neighbouring countries adopt capacity mechanisms similar
addressed the question of cross-border participation. This issue
to the French scheme, the operational implementation of this
if left open:
explicit option would be much simpler247.
201
The perspective of explicit cross-border participation
Based on these considerations and on the relatively short imple-
was not a minor argument in favor of a decentralized
mentation timeframe of the capacity market, explicit cross-bor-
capacity market, based on tradable certificates. The
der participation is ruled out in the first stages of the capacity
report detailed how a market design based on the
market. The 2012 decree provides that:
exchange of certificates that could be traded as a
248
[CRE, 2012]
249
The examples cited in
chapters 1 and 10 of this
report are evidence that
interconnection capacity
between France and
other European countries
is being proactively
developed.
250
[EC, 2012]
251
All quotations in this
section are taken from
the document [EC,
2013a]
252
[EC, 2013a] It should
be possible to allow
capacity equal to the
maximum import
capacity of the Member
State to participate in a
national mechanism. This
would create a demand
for the use of the
interconnection which
could be marketed by
TSOs separately from the
normal allocation of cross
border capacity.
253
[EC, 2013a]
Alternatively, long term
allocation capacity on
interconnectors could
allow for cross-border
participation in capacity
mechanisms by
allowing generators to
demonstrate their ability
to deliver electricity to
the Member State in
question.
254
[EC, 2013a] Long term
allocation capacity on
interconnectors could
allow for cross-border
participation in capacity
mechanisms by
allowing generators to
demonstrate their ability
to deliver electricity
to the Member State
in question. […] With
reliability options the
incentive effect of the
option should ensure
that generators located
in other Member States
would anyway ensure
they had sufficient
interconnection capacity
rights.
202
commodity, regardless of Members States choices
Interconnections between the French electricity market
on the level of security of supply, could offer a bet-
and other European markets are taken into account in cal-
ter prospect for further European integration than
culating the capacity obligation; their effect is reflected in
a system based on national auctions. The target is
the determination of the security factor, taking into account
therefore an explicit participation of cross-border
the shortfall risk.
capacities through cross-border exchanges of capacity certificates.
The scope of the consultation led by RTE in 2013 was legally
framed by the decree of December 2012. Consequently, the
The 2011 consultation listed several potential obs-
implicit participation was not questioned as a principle, and only
tacles to explicit cross border participation and led
the different possibilities to implement it were discussed.
to the recommendation of an implicit participation
of cross-border capacities as a first step. These obs-
This implicit solution already delivers important gains in terms
tacles need to be carefully addressed in order to
of economic efficiency, by lowering domestic capacity require-
consider the explicit participation of cross-border
ments and thus avoiding overcapacities. As such, the participa-
capacities in the French capacity market:
tion of cross-border capacities to the capacity market is model-
> Certification and control of foreign capacities;
> P articipation of demand-side capacities from
led as a positive externality.
countries where their integration in the market is
This approach does not negatively impact the development of
not as developed as in France;
interconnections as security of supply is also modelled as an
> Equivalence of the commitments of foreign and
externality in RTE’s network development studies249 (incl. cost/
French capacities;
benefit analysis).
French capacity market;
9.2.3  Towards an explicit cross-border participation
in capacity mechanisms in Europe
border capacities participating in the French capa-
In its Communication “Making the internal energy market
city market to security of supply in France;
work”250, the European Commission has expressed concerns
> Settlement of imbalances for foreign capacities;
> S election of foreign capacities participating in the
> G uarantees on the individual contribution of cross
> Limited interconnection capacities require dedica-
about the implementation of national capacity mechanisms
ted cross border capacity calculation and alloca-
and especially on the potential risk of fragmentation of the inter-
tion processes;
nal market.
>
S
cope of cross border participation, from selected
countries to any interconnected country;
Since then, capacity mechanisms are one of the most debated
Involvement of relevant foreign TSOs;
topics regarding the electricity market design in Europe. The
>
> Involvement of relevant foreign public authorities
in charge of security of supply;
> Consistency
in Capacity Mechanisms participa-
tions and avoidance of double counting.
European Commission along with ACER and industry representatives have highlighted the need to properly design capacity
mechanisms. This means that their impact on the internal market needs to be considered and that the participation of crossborder capacities needs to be addressed in a near future.
The French National Regulatory Authority, Commission de régulation de l’énergie, also acknowledged
This section of the report gathers the positions of the European
that the complexity of these issues and that the
Commission, ACER and Eurelectric regarding the cross-border
implicit participation of cross-border capacities was
participation in order to identify common principles.
an appropriate solution as a first step248.
EUROPEAN INTEGRATION OF THE FRENCH CAPACITY MARKET  / 9
9.2.3.1  European Commission
mechanism. However, it is not the only issue that
The European Commission has recommended the explicit parti-
needs to be addressed by the market design.
cipation of cross-border capacities in capacity mechanisms in its
Indeed, it is crucial to design a solution in which
Staff Working Document “Generation Adequacy in the internal
the contribution of cross-border capacities parti-
electricity market - guidance on public interventions”, accom-
cipating to a given mechanism is guaranteed with
panying the Communication “Delivering the internal electricity
regard to security of supply in this country. The
market and making the most of public intervention”
251
:
European Commission has also stressed this issue
and defined it as the “effective contribution” of
[Capacity] mechanisms should be open to any capacity, inclu-
cross-border capacities to security of supply. Such a
ding capacity located in other Member States, which can
definition can also be found in the NOME law.
effectively contribute to meeting the required generation
adequacy standard and security of supply.
The Commission suggests two ways to address this
issue of “effective contribution”: a system based on the
However, the Commission has recognized that the implicit par-
allocation of interconnection capacity rights (financial
ticipation of cross-border capacities could be considered, as a
or physical) or a system involving “reliability options”254.
temporary solution:
Both proposals are worth exploring, but could create
ties between capacity and energy markets.
[I]t may be necessary, as an interim step, for Member States to
calculate the contribution of imports to meeting the genera-
The European Commission has recognised that the
tion adequacy standards.
explicit participation of cross-border capacities is a
complex issue and that it requires further and careful
The Commission has proposed two possible solutions for the
attention from Member States and stakeholders255.
explicit participation of cross-border capacities in capacity
Notably, the Commission has highlighted the need
mechanisms. Both solutions are based on the hypothesis that
to avoid double-counting if a given capacity partici-
the cross-border participation of capacities should be limited to
pates in several mechanisms simultaneously256.
the physical import capacity of a given country.
Based on this diagnosis, the Commission has recomIt should be possible to allow capacity equal to the maximum
mended the establishment of a regional cooperation in
import capacity of the Member State to participate in a national
order to properly address those questions and issues257.
mechanism. This would create a demand for the use of the interconnection which could be marketed by TSOs separately from
9.2.3.2 ACER
the normal allocation of cross border capacity252. Alternatively,
In its report on “Capacity remuneration mecha-
long term allocation capacity on interconnectors could allow for
nisms and the internal market for electricity”258, the
cross-border participation in capacity mechanisms by allowing
Agency for the Cooperation of Energy Regulators
generators to demonstrate their ability to deliver electricity to
(ACER) has supported the participation of cross-
the Member State in question253.
border capacities in capacity mechanisms, while
255
[EC, 2013a] The
Commission Services
recognise there may
be practical difficulties
of implementing a
framework for cross
border certification of
capacity and accounting
for “capacity” import
and export. […] The
Commission Services will
continue to work with
Member States, ACER
and National Regulatory
Authorities, and ENTSO-E
and TSOs to examine how
cross border trading can
be facilitated in capacity
mechanisms.
256
[EC, 2013a] Obviously
generation abroad or
interconnector capacity
should not be doublecounted or double
remunerated.
257
[EC, 2013a] Regional
cooperation would
facilitate addressing this
problem and should be
pursued where possible.
258
All quotations in this
section are taken from
the document [ACER,
2013]
259
[ACER, 2013] In the case
of national [Capacity
Mechanisms], greater
efficiency could be
achieved and the
distortion of the IEM
minimised by assuring
participation – to the
extent possible – of
adequacy and system
flexibility resources
provided by generators
and load in other
jurisdictions. The
challenges to this are
however significant.
recognising the difficulties linked to its implementaBoth options are designed in order to manage scarcity situations
tio259. ACER has defined these practical difficulties and proposed
while taking into account realistic physical imports. However,
potential solutions in point 45 of its report:
they can lead to very different results, since the volume of longterm physical transmission rights allocated to market parties is
Cross-border participation to CRMs does not necessarily require
significantly below the maximum import capacity. Indeed, long-
that cross-border capacity is set aside. However, it requires a
term capacity calculation is subject to a high-degree of uncer-
strong coordination of national security of supply policies and
tainty and therefore, the effective import capacity can only be
the fulfilment of additional conditions, namely that:
known as real-time approaches.
a) the TSO, in whose jurisdiction the CRM is implemented,
is able, directly or through the adjacent TSO, to monitor the
The management of scarcity situations is one of the main
actual availability of the (capacity) resources committed by
challenges raised by the design of a cross-border capacity
foreign provider over the contracted period and that the
203
260
[ACER, 2013] Without such
a guarantee, the foreign
provider would not be able
to deliver the same level of
commitment with respect to
security of supply than a local
provider.
261
[ACER, 2013] The Agency
observes […] that MSs currently
have national and diverging
approaches to security
of supply with a lack of
coordination among them.
262
The quotations in this
section are taken from the
accompanying note to this
presentation [Eurelectric,
2013]
263
[Eurelectric, 2013]
EURELECTRIC agrees with
the European Commission
that national capacity
remuneration mechanisms
(CRM) should be open to
cross-border participation.
264
[Eurelectric, 2013] We believe
that it is possible to let
capacity providers from other
bidding zones participate in
capacity mechanisms using
market-based procedures. […]
EURELECTRIC recognises the
complexity of the [Capacity
Mechanism] cross-border
participation concept.
265
[Eurelectric, 2013] A possible
design for CRM cross-border
participation could be based
on the same principles as DayAhead market coupling. Two
situations are possible:
- CRM is based on central
auctions to set the value of
the CRM: The cross-border
capacity for participation
in CRM could be allocated
implicitly during a common
auction to determine the
CRM price in different bidding
zones.
- CRM is not based on
auctions, but on other
mechanisms: The cross-border
capacity for participation
in CRM could be auctioned
separately (explicit auction).
In both situations, crossborder capacity will be
allocated by TSOs several
times for two purposes:
1) to use resources
(generation, demand
response, storage) from two or
more bidding zones to ensure
adequacy […]
2) to ship energy […]
Congestion rent accumulated
during these two auctions
should be essentially used
for building cross-border
interconnection capacity.
204
foreign provider is able to provide the same level
Eurelectric has made a detailed proposition of market design in
of commitment with respect to security of supply
order to enable cross-border participation in capacity mechanisms.
than a local provider;
This proposition aims at defining key principles for such a design
b) efficient cross-border allocation mechanisms are
but needs to be further assessed, especially regarding operational
implemented on all timeframes, in particular in the
aspects. The key elements of this proposition are as follows:
day-ahead, intra-day and balancing timeframes;
c) MSs accept that their national resources (e.g.
> All participants (national or foreign) in a CRM must fulfil the
generation plants) are partly contracted to ensure
same requirements and market rules in relation to e.g. cer-
the security of supply of a neighbouring MS and
tification, penalty regime, availability requirements, energy
guarantee that providers will not be hindered in
producing requirements, etc.
exporting at any moment in time, i.e. TSOs do not
> It should not be possible to participate with the same capa-
deviate from their routine in offering cross-border
city in more than one CRM at a time. Each MW in the CRM
capacity in particular in stressed situation on both
cannot be committed twice and receive double earnings.
sides of the border.
Therefore it should also be possible for capacity providers
According to ACER, in order to enable the explicit
ticipate in a mechanism established elsewhere.
to “opt out” of their national scheme in order to instead parparticipation of cross-border capacities, Member
> TSOs
should bear the responsibility of proposing the
States must recognise that part of their national
amount of cross-border interconnection capacity volume
resources are contracted to ensure security of
that can be offered for CRM cross-border participation. This
supply of a neighbouring Member States and
amount should be approved by the relevant regulators. The
guarantee that there will be no export restriction
higher the amount, the more competition from foreign par-
including during stress events260.
ticipants will be possible in the national CRM.
> There would be a separate congestion rent for the CRM
To that extent, ACER has underlined a lack of
cross-border capacity allocation. This congestion rent
coordination between Member States on secu-
should be used in the same way as the energy congestion
rity of supply issues261 and made the following
rent from forward and day-ahead allocation. This means
that the benefit from cross-border capacity and energy tra-
recommendations:
ding will be considered when calculating the benefit of new
I. the harmonisation of generation adequacy
criteria and security of supply levels should be
>
transmission investments.
T here should be no cross-border capacity reservation for
undertaken where possible;
CRM: cross-border participation in a CRM should have no
II. a common (at least regional) and coordina-
influence on the cross-border allocation for forward, day-
ted approach for a thorough security of supply
ahead, intra-day and balancing markets.
assessment should be implemented.
Eurelectric has also explored options in terms of market design
9.2.3.3 Eurelectric
to allow cross-border exchanges of capacity products including
Numerous stakeholders have contributed to the
the allocation of cross-border interconnection capacity. This
debate on cross-border participation in capa-
proposed model is based on the same principles as the day-
city mechanisms. Eurelectric has notably pres-
ahead market coupling ones265.
ented a possible solution during its conference
of December 2013: “Future electricity markets
The paper presents examples of implementation of such
with or without capacity mechanisms: What
models, including a schematic vision of cross-border trades in
does Europe say?”
different market situations.
262
Like the European Commission and ACER,
Lastly, Eurelectric has recommended greater coordination
Eurelectric has advocated for cross-border
on security of supply in Europe to allow cross-border capacity
participation in capacity mechanisms
263
and
acknowledged the complexity of the issue264.
mechanisms to work efficiently266.
EUROPEAN INTEGRATION OF THE FRENCH CAPACITY MARKET  / 9
The European debate on capacity mechanisms has grown in 2013, especially regarding the design of cross-border
participation. Common principles have been elaborated by different stakeholders in order to tackle the issue of
explicit cross-border participation:
> C apacities participating in a given capacity mechanism need to have an effective contribution to security of supply of the dedicated country;
> T he participation of cross-border capacities to different capacity mechanisms needs to be properly designed in
order to be consistent and effective ;
> C ross-border participation should be limited to the effective physical import capacity;
> A regional cooperation framework on security of supply needs to be agreed upon by Member States and TSOs.
Currently, no capacity mechanism has implemented a solution for the explicit participation of cross-border capacities. This underlines the complexity and the numerous challenges raised by this issue.
This European debate on capacity mechanisms has arisen during the last consultation process on the French
capacity market, which was framed by the 2012 decree’s provision on the implicit participation of cross-border participation. Taking into account both the European and the French context, RTE proposes to pave the way towards
explicit cross-border participation in the French capacity market through a dedicated roadmap.
9.3  A practical way forward for explicit cross-border participation
To ensure consistency between the French legal framework and
report to the French National Regulatory Authority and the
recent guidelines from the European Commission, RTE proposes
Energy Minister on potential evolutions of the French capa-
a roadmap on cross-border participation. Based on a three-step
city market design regarding cross-border participation no
approach, this roadmap enables the implementation of the
later than ten months after the entry into force of the French
French capacity market on schedule with an implicit participa-
capacity market rules. These propositions should include the
tion of cross-border capacities while investigating on practical
design of a target towards explicit cross-border participation
evolutions in order to reach the target of explicit cross-border
and can be based on a step-by-step approach to implement
participation.
this target.
> S tep 1: Implicit cross-border participation
This roadmap paves the way towards explicit cross-border partici-
In accordance with the provisions of Decree 2012-1405 of
pation in the French capacity market (incl. a timeline to conduct
14 December 2012 creating a capacity obligation mechanism ,
this work).
the rules of the French capacity market provide for the implicit
participation of cross-border capacities. This cross-border partici-
Prior to the consultation process and in order to foster concrete
pation is based on the representation of the positive impact of
propositions on cross-border participation, RTE is conducting
interconnections on security of supply and leads to a reduction of
internal studies on this topic and shares forward-
the obligation of suppliers in the capacity market.
looking principles on explicit cross-border participation in this report.
> Step 2: Public consultation on cross-border participation
In accordance with the provisions of Decree 2012-1405 of
14 December 2012 , the rules of the French capacity market
267
> S tep 3: Evolutions of the French capacity
market design
entrust RTE with the responsibility of proposing potential evo-
In order to implement evolutions of the French
lutions of the market design regarding cross-border participa-
capacity market design regarding cross-border
tion. To that extent, RTE will launch a public consultation regar-
participation, amendments to the decree of
ding cross-border participation in the French capacity market.
December 2012 might be required.
Following this consultation process and its outcomes, RTE will
266
[Eurelectric, 2013] [Capacity
Mechanisms] should be
[…] underpinned by close
coordination between
Member States and respective
transmission system operators
(TSOs). […] EURELECTRIC […]
pleads for harmonisation/
coordination of national CRMs
to facilitate participation of
foreign generation, demand
response and storage.
267
Article 5.2.3.4.
205
Figure 84 – Roadmap on cross-border participation in the French capacity market
Step 1
Implicit
Step 2
Consultation
Publication
of capacity
mechanism rules
+10 months
Step 3
Modifications
Transition
Intermediate model
Target model
Therefore, and as proposed by RTE, a step-by-step approach
The French and German governments, along with stakehol-
seems to be an efficient way forward as it enables the relatively
ders from both countries, have recently called for greater
quick implementation of transitory solutions. A transitory solu-
Franco-German cooperation in the area of electricity. To that
tion can be defined as the phase between the current implicit
extent, the Union française de l’électricité and its German
cross-border participation and the target (the so-called “full”
counterpart – BDEW269 – have elaborated, along with their
explicit cross-border participation).
members, a work program in order to identify common subjects of interest and cooperation. Their goal is notably to pro-
As all prerequisites for a go-live of the target might not be fulfil-
mote mutual understanding on security of supply issues and
led simultaneously on all borders and, especially, depend on the
to foster electricity market reforms in order to tackle those
implementation of a cooperation framework between Member
issues.
States at a regional level, there is a chance of overlapping between
explicit and implicit cross-border participation solutions. In such a
RTE has included forward-looking principles on explicit cross-
case, it will be important to avoid double counting.
border participation in this report. These principles are the
outcomes of early discussions on explicit cross-border parti-
Any form of explicit cross-border participation requires an effec-
cipation in the French capacity market. They constitute a raw
tive contribution of foreign capacities to security of supply of
material elaborated in order to prepare the public consultation
the country in which the capacity mechanism is implemented.
process provided for in article 5.2.3.4 of the French capacity
However, the definition of effective contribution may differ in
market rules.
the target (“full” explicit cross-border participation) or in a tran-
268
This will nonetheless
require a change
to the method of
accounting for foreign
bids currently applied
in the French balancing
mechanism. Changes
made to the balancing
mechanism following
the implementation of
the Electricity Balancing
Code will also have to be
taken into account.
269
Bundesverband
der Energie- und
Wasserwirtschaft.
206
sitory solution. In this regard, during the implemen-
Contrary to the French capacity market rules, these principles
tation of a transitory solution, explicit participation
have not yet been shared and discussed with stakeholders. It will
of cross-border capacities to the French capacity
be the scope of discussion of the public consultation on cross-
market should be limited to capacities which are also
border participation. Such a discussion will necessary have to be
participating to the French balancing mechanism268.
challenged at a regional level.
The integration of the energy market has shown the
efficiency of the “regional” approach for cross-border
projects. This approach is based on the cooperation
of a set of countries within an electricity regional initiative and the progress reports of those initiatives in
terms of market coupling are of crucial importance for
the completion of the target model at the EU level.
The points discussed in this section should be
considered as RTE’s prospective contribution
to the European debate on cross-border participation in capacity mechanisms, and go beyond
the current legal framework implementing the
French capacity market.
EUROPEAN INTEGRATION OF THE FRENCH CAPACITY MARKET  / 9
9.3.1  Key principles to design a solution for explicit
cross-border participation
degree of uncertainty regarding the implementation timeframe of explicit cross-border participation
or even question the ability to implement it at all.
Cross-border participation in capacity mechanisms is a complex
subject that needs to be tackled while considering the target
Moreover, harmonising security of supply criteria in
model for the European electricity market. Therefore, in order to
Europe would not necessarily make sense from an
design and implement a solution for cross-border participation,
economic point of view. Defining a common value of
it is important to have a common understanding on high-level
lost load that could be agreed upon by all countries
design principles and on the challenges that need to be tackled.
despite their differences seems very unlikely. Indeed,
270
[EC, 2012]
271
See section 10.2 of this
report for a discussion of
the absence of provisions
in the French capacity
mechanism that would
disrupt energy markets.
272
See chapter 10 of this
report.
European countries have structural differences: their
9.3.1.1  Preservation of the internal energy market
economy, their energy mix, their structure of energy supply and
The progressive integration of the internal energy market is a
their exposure to risks on security of supply. Therefore, a constrained
major success for Europe. Security of supply in Europe is also
harmonisation of security of supply criteria could lead to economic
enhanced by the optimisation of cross-border trades through
inefficiencies. Moreover, it is worth underlining that a regional har-
market coupling mechanisms. The European Commission has
monisation does not solve the issue as the interface between these
outlined the benefits of the internal energy market in its Com-
regional security of supply still needs to be addressed.
munication “Making the internal energy market work”
.
270
These breakthroughs towards the integration of the internal
energy market have required several years of intensive work and
are not yet completed. To that extent, any market design evolutions driven by the implementation of capacity mechanisms
needs to be done while preserving the internal energy market
A solution for explicit cross-border participation
in capacity mechanisms must be compatible with
Member States’ competences as provided for in
the Lisbon Treaty. Therefore, it should also be
respectful of their (different) choices in terms of
security of supply.
and its benefits271. This applies both for the implementation of
capacity mechanisms at the national level or for the design of
explicit cross-border participation solutions.
9.3.1.3  Economic efficiency and real value for security
of supply in concerned countries
Preserving the internal energy market and its
benefits is a crucial principle to take into account
while designing solutions for explicit participation
in capacity mechanisms.
The design of an explicit cross-border participation solution
should be seen as an opportunity to improve the economic
efficiency of capacity mechanisms. To that extent, it is worth
acknowledging that implicit cross-border participation already
is an efficient solution as the positive impact of interconnections
is valued through a reduction of the obligation of suppliers and
9.3.1.2  Compatibility of Member States’ competences
therefore avoid a situation of overcapacity in France. This effi-
and choices
ciency will be further enhanced by:
The Lisbon Treaty provide for the division of competences
between the European Union and Member States and energy is
> The completion of the energy market;
defined as a shared competence. Moreover, the Treaty specifies
French stakeholders have been strongly involved in electricity
that Union energy policy measures shall not affect a Member
regional initiatives, including for innovative projects272. This has
State’s right to determine the general structure of its energy sup-
led to an early and significant level of integration of the French
ply. This means that the final responsibility with regard to security
market with its neighbours.
of supply issues remains national (incl. security of supply targets).
A review of this division of competences would require major legal
> Improved adequacy assessments;
amendments, possibly up to the European treaties.
European TSOs, within ENTSO-E, are currently working on the
improvement of their adequacy assessments at the European
Therefore, explicit cross-border participation in capacity mecha-
level. This work is a step in the right direction to reach this objec-
nisms should not be conditioned to a pan-European harmonisa-
tive. At the French level, RTE’s adequacy assessments comply
tion of security of supply criteria. Indeed, it would create a high
with the guidelines from the European Commission273.
207
Explicit cross-border participation to the French
273
See chapter 10 of this
report.
capacity market could increase its economic effi-
9.3.2  Relevant event to be considered to allow
effective cross-border exchanges of capacity products
ciency as it will enlarge the choices of investors
274
[ACER, 2013]
regarding the location of capacities.
The expected outcome of explicit cross-border participation in a
capacity mechanism is to be able to rely on imports when security
However, explicit cross-border participation only makes sense if the
of supply is threatened. This implies that the definition of a capa-
effective contribution of a capacity to security of supply in a country
city product tradable cross-border and the associated market
is not impacted by the geographical location of this capacity. It is
design cannot be separated from a broader discussion over secu-
not enough to enable capacities to participate in a capacity mecha-
rity of supply and the way it is ensured in a market environment
nism: the underlying physical reality must be similar, regardless
at the European level.
of the location of these capacities (domestic or cross-border). In
other words, a capacity should be able to choose the geographical
In most cases, the way cross-border capacities could contribute
zone in which it will effectively contribute to security of supply. This
to security of supply of a given country – like France – is straight-
choice should be consistent with the geographical scope of the
forward: power flows indicated by the market coupling algorithm
capacity mechanism in which this capacity participates.
would most certainly be directed towards the country facing the
risk of shortage. This means that current markets already provide
ACER has made a similar observation
:
274
for the participation of cross-border capacities to security of supply – albeit in an aggregate form and without any kind of guarantee.
Cross-border participation to [Capacity Mechanisms requires
This explains why the implicit solution considered so far is in itself
that] […] MSs accept that their national resources (e.g. genera-
already a fair way to consider the interconnection of countries.
tion plants) are partly contracted to ensure the security of supply of a neighbouring MS and guarantee that providers will not
However, capacity mechanisms are precisely implemented to ensure
be hindered in exporting at any moment in time, i.e. TSOs do
the effective contribution of capacities to security of supply. In a way,
not deviate from their routine in offering cross-border capacity
the capacity mechanism works like an insurance policy. As the consu-
in particular in stressed situation on both sides of the border.
mer pays for insurance, he needs to be granted an insurance cover.
[…]
The effective contribution is the cover granted to consumers as they
Without such a guarantee, the foreign provider would not be
pay for security of supply. Explicit cross-border participation solutions
able to deliver the same level of commitment with respect to
need to provide this “insurance” cover to the system or will be ineffi-
security of supply than a local provider.
cient. To properly assess this issue, it is necessary to consider events
during which the current markets do not spontaneously direct energy
Explicit cross-border participation in the French capacity market
flows towards countries that have chosen to cover their consumers
will only lead to an increased economic efficiency if cross-bor-
towards risks on security of supply through a capacity mechanism.
der capacities can effectively and physically contribute to security of supply in France. This means that:
> A certified cross-border capacity should be available during periods
of system stress. This availability should be subject to a control;
> The level of certified cross-border capacities should be compatible with the import capacity of interconnections;
> Certified cross-border capacities for a given capacity mechanism
Indeed, in some specific situations, it is not sure that the natural outcome of energy markets will lead to optimal flows between areas.
This is notably the case when there is a shortage in two countries
simultaneously: what should happen to the capacity contracted
through a capacity mechanism and the energy it generates? The
market coupling algorithm might not be able to clear in those situa-
should be committed to contribute to security of supply in this
tions. Indeed, in case of simultaneous shortages, the market situa-
country even in cases of simultaneous shortage in several countries.
tion will probably result in a lack of offers of energy bids (included “at
any price”) to meet the demand. In those cases where the market
does not clear, the allocation of bids might not be accurate despite
As for domestic generation or demand-side capacities, the effective contribution of cross-border
capacities to security of supply in the country in
which the capacity mechanism is implemented is
a crucial point to be addressed.
their key role regarding the energy flows between countries.
In those situations, specific provisions could be required to handle
power flows properly and ensure that they benefit to consumers
on the basis of what they have paid for security of supply. Such
208
EUROPEAN INTEGRATION OF THE FRENCH CAPACITY MARKET  / 9
provisions would constitute a clear basis for cross-border partici-
necessary prerequisite for cross-border trading.
pation in capacity mechanisms, and would be impacted by cross
Indeed, the European target model for electricity
border exchanges of capacity.
provide for two different types of auctions. In the
day-ahead timeframe, transmission capacity and
In order to be efficient and credible, these provisions need to be
electricity are traded together through implicit auc-
embedded in a broader cooperation framework on security of sup-
tions. It completes the explicit auctions where capa-
ply and especially on the management of shortage situations. Such
city (PTR) and electricity are traded separately in the
a cooperation framework could be negotiated and implemented by
long-term timeframe.
transmission system operators with the approval of national regulatory authorities and under the control of Member States. Along
Moreover, nominating PTRs is not a sufficient condi-
with market arrangements, it needs to include provisions on opera-
tion to guarantee the direction of a power flow.
tional issues and could be completed by cooperation agreements
Indeed, as capacity is allocated in different time-
at Member State level, especially bilateral agreements to ensure a
frames (long-term, day-ahead, intraday), the aggre-
faster implementation (for example between France and Germany).
gated balance of flows provide for the direction and
These cooperation frameworks need to be consistent with Mem-
volume of power flows. To that extent, an individual
ber States’ competences regarding the structure of their electricity
stakeholder nominating a PTR can’t guarantee the
supply as defined by article 194 of the Lisbon Treaty, and especially
physical flow linked to this commercial exchange.
275
[CRE, 2012] Stronger
cooperation between
Member States, system
operators and regulators
appears crucial to
guarantee that the tools
implemented are similar
and coordinated or,
failing that, to ensure that
different mechanisms
can interact effectively.
276
PTRs are “physical
transmission rights
with a use-it-or-sell-it
condition”.
277
[RTE, 2011]
278
See, among others,
the provisions of the
Network Code for
Capacity Allocation and
Congestion Management.
without considering harmonisation of security of supply criteria as
a prerequisite. The Commission de régulation de l’énergie has also
This particular point has been detailed in RTE’s 2011 report to the
stressed the importance of European coordination regarding expli-
Energy Minister on the main design principles of the French capa-
cit cross-border participation in the French capacity market .
city market277.
275
9.3.3  “No-go” solutions to implement explicit
cross-border participation
Cross-border capacities contribute to security of supply in France
Holding PTRs is a neither necessary nor sufficient condition to
ensure the effective contribution of cross-border capacities to
security of supply in a given country. This design solution for
cross-border trades of a capacity product must be ruled out.
through interconnections, of which transfer capacity is limited.
The potential of their contribution is therefore constrained, and
9.3.3.2  Reservation of interconnection capacity
there are situations in which an additional cross-border capacity
Reservation of interconnection capacity could also be considered
will not bring any improvement to security of supply in France
as a potential design solution for explicit cross-border participa-
because interconnections are already fully used. This physical
tion. However, this solution has an obvious negative impact on
limitation needs to be properly addressed in the design of a solu-
energy trades and might not be compatible with the existing legal
tion to ensure explicit cross-border participation in the French
provisions on the allocation of interconnection capacity278.
capacity market.
Though this solution could guarantee the effective contribution
Various solutions can be considered as able to ensure the effec-
of cross-border capacities to security of supply, it does not pres-
tive contribution of cross-border to security of supply. Although
erve the European energy market. Reservations of interconnec-
intuitive, two options must be ruled out: the use of physical trans-
tion capacity would limit the possibility for cross-border energy
mission rights and the reservation of interconnection capacity.
trades, disturb the optimisation process of trades and therefore
lead to economic inefficiencies.
9.3.3.1  Use of physical transmission rights (PTR)
Intuitively, one could consider that holding, or even nominating,
Considering this solution would nonetheless be justified if capa-
PTRs is a sufficient solution to ensure the effective contribution of
city and energy trades were exclusive goods, i.e. if capacity trades
cross-border capacities to security of supply in France276.
automatically precluded energy trades.
However, while PTRs provide for an entitlement to use part of
However, at the national level, generation plants can trade capa-
the available cross-border transmission capacity at a point in
city certificates through the capacity mechanism without lowe-
the future to flow energy between countries, they are not a
ring their energy outputs or restraining their ability to participate
209
in the energy market. This means that a “security of supply” pro-
not exclusive. This solution therefore seems sufficient to ensure
duct and an energy one are not exclusive goods.
the effective contribution of cross-border capacities to security of
supply in France but is disproportionate.
By the same token, cross-border trades of “security of supply” products – in other words capacity products – do not compete with crossborder energy trades. To that extent, to ensure the effective contribu-
> L imited to the effective physical import capacity and based
on market rules (condition 3).
tion of a capacity to security of supply in a given country, reservation of
Cross-border capacities can contribute to security of supply in France
interconnection capacity appears to be an excessive solution.
through interconnections. Their contribution therefore cannot
exceed the import capacity of interconnections between France and
To sum up, reservation of interconnection capacity is a sufficient
its neighbours. This physical limitation needs to be address through
but not necessary condition to ensure the effective contribu-
a market-based allocation process of the interconnection capacity.
tion of cross-border capacities to security of supply. Moreover, it
would probably a distortive solution with regards to the European
Moreover, to ensure the effective contribution of cross-border
energy market outcomes. As this solution is not a necessary one
capacities to security of supply in France, these capacities need to
and leads to economic inefficiencies, it should be ruled out.
be available during system stress events in France.
9.3.4  Target solution for explicit cross-border
participation in the French capacity market
The design of a market solution to allow explicit participation
and effective contribution of cross-border capacities in capacity
mechanisms need to respect ground principles. Based on internal studies, RTE has defined 5 main design conditions and shares
them in the following section
RTE also considers that the target model for explicit cross-border
participation in the capacity market should allow trades of capacity products and be consistent with cross-border energy trading
mechanisms. The implementation of this target model is possible:
> If a cross-border certification or control process is in place
(condition 4).
Explicit cross-border participation in the French capacity market will require a dedicated and robust market architecture that
RTE considers that it is possible to allow explicit cross-border par-
reflects the specific characteristics of “capacity” as a product
ticipation in the French capacity market:
along with the various aspects of security of supply.
> Without harmonising security of supply criteria between
Cross-border capacity trades can only be efficient if there is a
Member States (condition 1).
cross-certification process between Member States or if conver-
A solution for the explicit cross-border participation in capacity
sion keys different “capacity” products are defined. This is a prere-
mechanisms must be compatible with Member States’ competences
quisite to ensure the effective contribution of cross-border capa-
as provided for in the Lisbon Treaty. A review of this division of com-
cities to security of supply in a given country.
petences would require major legal amendments, possibly up to the
European treaties, and should therefore not be questioned, especially
If cross-border trades does not include such arrangements, there will
to allow a fast implementation of explicit solutions. Moreover, from an
be no certainty towards cannot the effective contribution of capaci-
economic point of view, national security of supply criteria accurately
ties to security of supply and thus these types of solutions should not
reflect a Member State’s specific situation and might therefore be
be considered as a way-forward for the future market design.
more efficient than a European harmonised criterion
> Without reserving interconnection capacity (condition 2).
210
> If cooperation frameworks are in place to manage shortage
situations (condition 5).
This point was discussed in paragraph 9.3.3.2. Reserving intercon-
As discussed in § 9.3.2, widespread shortage situations should be
nection capacity would go against the principles of the internal
considered as reference events to assess the effective contribu-
market and reduce the economic optimisation enabled through
tion of cross-border capacities to security of supply in another
energy trades. Indeed, capacity and energy are not exclusive pro-
country. These specific events can be defined as a situation when
ducts. This means that participation in the capacity mechanism
a shortage situation in one country creates a shortage situation in
does not preclude participation in energy markets. Likewise,
other countries (a sort of snowball effects) or in case of simulta-
cross-border capacity trades and cross-border energy trades are
neous shortages in two countries.
EUROPEAN INTEGRATION OF THE FRENCH CAPACITY MARKET  / 9
In such situations, a cooperation framework on security of sup-
albeit imperfectly, their effective contribution to security of sup-
ply and especially on the management of shortage situations is
ply and to the reduction of the shortfall risk in France (substitute
required. Such a cooperation framework could be negotiated and
for condition 5). The participation of cross-border capacities in
implemented by transmission system operators with the approval
the French balancing mechanism would also allow cross-border
of national regulatory authorities and under the control of Mem-
capacities to have similar verifications and controls as the French
ber States. This cooperation framework would allow the proper
ones (substitute for condition 4).
management of widespread shortage situations and the effective
contribution of cross-border capacities to security of supply.
This option could even be pushed further based on a reciprocity
principle applied to Member States that have introduced a capa-
The fulfilment of these conditions requires a major regional coordi-
city market with availability commitments. Through a mutual
nation. The agreement of cooperation frameworks on security of
recognition of capacity mechanisms and ensuring the absence of
supply will notably require an intense work between Member States,
double counting, this system could allow cross-border capacities
national regulatory authorities and transmission operators. To that
to participate in the French capacity market and to French capaci-
extent, it makes sense to consider a transitory solution for the explicit
ties to participate in other capacity mechanisms.
cross-border participation with a shorter implementation timeframe.
If a transitory solution is adopted and conditions 4 and 5 are removed,
9.3.5  Shaping a transitory solution
provisions would still be required to ensure that condition 3 is met.
This means that the physical limit of interconnection import capacity
Whereas the target solution will require significant preliminary work,
needs to be taken into account. Such provisions could be designed
it could be possible to introduce a transitory solution in the rela-
as transmission rights dedicated to capacity markets. Some stakehol-
tively near future. Though it would be imperfect and designed to
ders have recently suggested a solution along these lines. The idea is
be ultimately replaced by the target solution, a transitory solution
for suppliers to hedge part of their obligations with interconnection
could truly improve the design of the capacity market, provided
transmission rights, which would be based on the average contri-
that it offers real benefits in terms of security of supply. As discussed
bution of interconnections to security of supply during a peak load
above, in the absence of a cooperation framework ensuring that
event. This proposition assumes that the transmission rights would
conditions 4 and especially 5 are met, it will be necessary to define
be allocated free of charge, on a pro-rata basis. This solution would
another process to ensure the effective contribution of cross-bor-
have to be considered during the public consultation that RTE is pro-
der capacities to security of supply. This control process could be
posing to organise on explicit cross-border participation.
based on existing market mechanisms and could entail:
> The mandatory participation of cross-border capacities in
Other propositions were made. For instance, the French Competition Authority has proposed in 2012 a solution involving the
the French balancing mechanism (condition 6, which can be
allocation of cross-border capacity rights. This would be based
substituted for conditions 4 and 5)
on market rules through an auction process. This type of system
Explicit cross-border participation needs to rely on the effective
could also be considered.
contribution of cross-border capacities to security of supply. If it
does not, the credibility of the entire process will be called into
Lastly, implementing transitory solutions could lead to the imple-
question. As in France, cross-border capacities need to have avai-
mentation of a different approach at each border, as it might
lability commitments. In the absence of such a commitment, it will
take a lot of time to define a unique harmonised approach. This
not be possible to check their effective contribution to security
also means that implicit and explicit participation of cross-border
of supply. Moreover, an availability commitment limited to a few
capacities will coexist for a time. Implicit participation will remain
GW of capacities located in a foreign country has no added-value
for market zones which are not covered by the explicit solution.
on security of supply in France. Indeed, this size of this capacity is
insufficient to cover the needs in its own country in case of shor-
Implementing such a transitory solution would go beyond the
tages. Therefore, the method of participation and the definition
current legal framework of the French capacity market. RTE is
of commitment need to be adapted for cross-border capacities.
thus requesting a mandate of the Energy Minister on the possible
implementation of a transitory solution regarding explicit cross-
In this regard, the direct or indirect participation of cross-border
border participation in the French capacity market and on the
capacities in the French balancing mechanism could ensure,
scope of the proposed public consultation.
211
10.COMPLIANCE WITH EUROPEAN
PROVISIONS AND PRINCIPLES
The creation of a capacity mechanism in France is provided for
capacities’ certification or imbalance settlements. These
in law 2010-1488 of 7 December 2010 reforming the organisa-
choices were made in order to design a capacity mechanism
tion of the electricity market (NOME Law) and is a major evolu-
that targets security of supply, is proportionate to this objective
tion of the market design in France. This provision is embedded
and guarantees equal treatment for all stakeholders281. To this
in a broader review of the functioning of the regulated power
end, RTE has prepared a roadmap and common principles for
system and, especially, of market mechanisms. The main goal of
allowing the explicit participation of cross-border capacities in
this revision program is to integrate demand-side response in all
the mechanism along including a timetable to conduct a public
market mechanisms, all timeframes279.
consultation on this issue before submitting concrete proposals
to the French Energy Minister and Regulatory Authority282.
Imperfections observed in the energy market, together with
a substantial change in the physical needs of the French and
All provisions included in French laws and in the rules proposed
European power system, have raised questions about whether
by RTE regarding the capacity mechanism must be considered
the energy-only market alone can guarantee security of supply,
within a European context. Indeed, though security of supply
notably at a time when the energy transition is under way and
is a component of Member States’ energy policies, there is, on
peak demand in France is increasing. Therefore, public interven-
the one hand, significant interplay between Member States’
tion to complement the existing market signals is justified.
energy policies in an integrated market, and on the other hand,
a competence of the European Union in the area of energy .
Three fundamental choices about the capacity mechanism’s
In this report, RTE has sought to assess the French capacity
market design were made in decree 2012-1405: (1) it would
mechanism’s compatibility with the provisions of European
be a market mechanism, (2) involving all capacities, and (3) all
law. This chapter reviews the European legal framework within
market stakeholders would be held accountable for their contri-
which the capacity mechanism falls (§ 10.1) and demonstrates
butions to security of supply thanks to a decentralised archi-
that the market design adopted for the capacity mechanism
. The capacity mechanism rules proposed by RTE put
and developed in the rules proposed by RTE complies with the
these principles into practice. Moreover, while drafting its pro-
general principles of necessity and proportionality set out in the
position of rules, RTE paid a special attention to the definition
EU acquis and the European Commission’s recommendations
of the required parameters to calculate suppliers’ obligation,
(§ 10.2).
tecture
280
10.1  The European legal framework governing State
intervention to ensure security of supply
279
See chapter 1 of this
report
10.1.1  Competence of Member States
with regard to security of supply
280
See chapter 2 of this
report
Article 4 of the Treaty on the Functioning of the
281
See chapters 3 to 7 of
this report
list of areas of shared competence between the
282
See chapter 9 of this
report
212
European Union (TFEU) includes energy in the
Union and Member States. Article 194 of the TFEU
specifies how this competence is shared between
the Union and Member States when it comes to
energy policies. This article indicates that Union policy on
energy shall aim to:
(a) Ensure the functioning of the energy market;
(b) Ensure security of energy supply in the Union;
(c) Promote energy efficiency and energy saving and the
development of new and renewable forms of energy; and
(d) Promote the interconnection of energy networks.
COMPLIANCE WITH EUROPEAN PROVISIONS AND PRINCIPLES   / 10
10.1.2  Regulation of Member States’
competence through the provisions of
the Treaty and secondary legislation
283
Article 3 of Directive
2005/89/EC
tence and this competence must be exercised with due regard
Though the EU acquis does not prohibit public inter-
to the principles and provisions of European law.
vention to ensure security of supply, Member States’
285
Recital 10
This article also emphasises that measures taken by the Union
shall not affect a Member State’s right to determine its own
energy mix and the “general structure of its energy supply”. In
other words, security of supply is a matter of national compe-
competence is regulated by the provisions of the Treaty
Secondary legislation takes this competence sharing into account
and by secondary legislation, notably the provisions of
when defining the role of Member States in security of supply mat-
the Third Energy Package and Directive 2005/89/EC.
ters. Article 4 of Directive 2009/72/EC of 13 July 2009 concerning
common rules for the internal electricity market notably affirms that
10.1.2.1  Provisions of the Treaty
“Member States shall ensure the monitoring of security of supply
The provisions relating to the free movement of goods –
issues”, and particularly “measures to cover peak demand and deal
articles 34 and 35 of the TFEU – impact the design of
with shortfalls of one or more suppliers”. Member States thus define
the French capacity mechanism insofar as, in European
their own security of supply criterion and arrange to meet it by taking
Court of Justice case law, electricity is considered a
the measures necessary to ensure a “stable investment climate”283.
good286. These articles respectively prohibit restrictions
on imports and exports along with any quantitative res-
The EU acquis thus does not prohibit state intervention to
trictions and measures having equivalent effect.
ensure security of supply. The European Commission confirms
this in its Communication “Delivering the internal electricity
These provisions have a direct link with the capa-
market and making the most of public intervention”:
city mechanism’s provisions on the participation of
284
[EC, 2013]
286
Considering different
rulings in European
case law, notably ECJ,
27 April. 1994, Case
C-393/92, Municipality
of Almelo ECR I, p. 1477,
according to which
electricity constitutes a
good, it seems difficult to
challenge that capacity
can be considered
a good, despite its
potentially strategic
characteristics (ECJ, 4 Oct.
1991, Case C-367/89,
Richardt: ECR 1991, p.
I-4621, point 16).
287
[EC, 2013], [ACER, 2013]
288
[EC, 2013]
cross-border capacities to security of supply in France. As dis-
Public intervention can be useful and effective to attain policy
cussed in chapter 9 of this report, the issue was raised during
objectives set at Union, regional, national or local level, but it must
the consultation of 2011, when the decree was being drafted,
be well designed and should be adapted to changes in market
and the various problematic points and difficulties identified led
functioning, technology and society that occur over time284.
to the decision that the contribution of cross-border capacities
to security of supply in France would be implicitly accounted for
Capacity mechanisms are explicitly named within the secondary
the implementation of the capacity mechanism. The European
legislation among the tools for guaranteeing security of supply.
Commission and the Agency for the Cooperation of Energy
The possibility for Member States to introduce capacity mecha-
Regulators have also noted the difficulties related to the explicit
nisms is notably included in the measures provided for in Direc-
cross-border participation in capacity mechanisms287.
tive 2005/89/EC of the European Parliament and of the Council
of 18 January 2006 concerning measures to safeguard security
Implicit participation of cross-border capacities to security of
of electricity supply and infrastructure investment:
supply in France already ensures a high degree of economic
efficiency since it reduces capacity needs and prevents overca-
Measures which may be used to ensure that appropriate
pacity. Chapter 9 also outlines the key principles to allow explicit
levels of generation reserve capacity are maintained should
cross-border participation to the French capacity market, and
be market-based and non-discriminatory and could include
therefore to security of supply in France, along with milestones
measures such as contractual guarantees and arrangements,
RTE has proposed in the rules to pave the way towards this expli-
capacity options or capacity obligations. These measures
cit cross-border participation.
could also be supplemented by other non-discriminatory instruments such as capacity payments285.
The European Commission considers this step-by-step approach as a
possible solution in its Staff Working Document “Generation Adequacy
It was against this backdrop that the French Energy Code, in
in the internal electricity market - guidance on public interventions”:
articles L.335-1 et seq., called for an obligation to be imposed on
suppliers to contribute to security of electricity supply. The goal
[I]t may be necessary, as an interim step, for Member States to
was to supplement existing measures with a market mechanism
calculate the contribution of imports to meeting the genera-
targeting security of supply.
tion adequacy standards288.
213
2006292 specified the framework, scope and study horizons for
RTE considers that implicit participation of crossborder capacities already fairly recognises their
contribution to security of supply in France. In
a first step, it is thus a way to include the participation of cross-border exchanges to security of
supply in the French capacity market provisions,
in compliance with the European Commission’s
recent recommendations.
In order to allow the implementation of the target
solution – explicit participation of cross-border
capacities – a second step is required. To that
extent, the proposed capacity mechanism rules
provide for the organisation of a public consultation in order to submit propositions regarding
explicit participation of cross-border capacities
in the capacity mechanism ten months after the
publication of the rules.
10.1.2.2  Provisions of secondary legislation regarding
the energy sector
The provisions included in the Third Energy Package and Directive 2005/89/EC define the competence of Member States in
these reports, in compliance with the provisions of Directive
2005/89/EC.
Article 11 of the decree of 20 September 2006 provides for an
adequacy criterion to be applied in France, which is an average
3 hours annual loss of load expectation:
The Multi-year Adequacy Forecast Report required by Article
1 of the present decree […] takes into account the annual
loss of load expectation used in previous adequacy forecast
reports, i.e. an average annual loss of load expectation due to
imbalances between electricity supply and demand of three
hours293.
The provisions of Directive 2005/89/EC concerning adequacy assessments are taken into account
by RTE in its Adequacy Forecast Reports, which
examine the electricity supply and demand balance outlook for France over the medium and long
terms.
assessing their national level of security of supply and taking
safeguard measures in case of emergency situations.
Safeguard measures implemented by Member States in emerAlong these lines, article 7 of Directive 2005/89/EC
289
provides
that Member States must prepare reports to:
gency situations shall be taken respectfully of other EU provisions. Notably article 3 Directive 2009/72/EC provides that
measures introduced by Member States must be “clearly defi-
289
Directive 2005/89/
EC of 18 January 2006
concerning measures
to safeguard security
of electricity supply
and infrastructure
investment.
Describe the overall adequacy of the electricity sys-
ned, transparent, non-discriminatory and verifiable”. These
tem to supply current and projected demands for
conditions are also provided for in article 2 of decree 2012-
electricity, comprising:
1405, which specifies that the capacity mechanism rules must
a) Operational network security;
be transparent and non-discriminatory.
b) The projected balance of supply and demand for
the next five-year period;
The key provisions of the rules proposed by RTE were deve-
c) The prospects for security of electricity supply for
loped in chapters 3 to 6 of this report and have been designed
290
Article L.141-1 of
the Energy Code.
the period between year five and 15 years from the
to implement a mechanism that is clearly defined and unders-
date of the report; and
tandable by all market stakeholders.
291
Several of these
provisions were also
included in the Energy
Code, following
amendments and repeals
to the law of 10 February
2000, notably the NOME
Act.
d) The investment intentions, for the next five or
292
Decree 2006-1170 of
20 September 2006
relating to multi-year
adequacy forecast
reports.
293
Decree of
20 September 2006.
214
more calendar years, of transmission system opera-
The non-discrimination requirement relates not only to the dis-
tors and those of any other party of which they are
tinction between French and cross-border capacities but also to
aware, as regards the provision of cross-border inter-
the application of non-discriminatory provisions to all capacity
connection capacity.
mechanism participants. The participation of cross-border capacities has been addressed both in the previous section of this
The law of 10 February 2000 had already tasked RTE
chapter and in chapter 9 of this report. As regards the second
with the publication of adequacy reports in France290,
point, all provisions proposed by RTE in the capacity mechanism
well before such adequacy assessments became
rules are respectful of the principle of non-discrimination, as it
mandatory in Europe. These reports, called Adequacy
was demonstrated in chapters 3 to 7 of this report. Two signi-
Forecast Reports, are prepared under the control of
ficant examples are the non-discrimination between demand-
public authorities291. The decree of 20 September
response, renewables and conventional generation capacities
COMPLIANCE WITH EUROPEAN PROVISIONS AND PRINCIPLES   / 10
in the certification process described in chapter 5 and the non-
whether this measure constitutes an aid, and if so, if it is compa-
discrimination between suppliers in the parameters defined
tible with the internal market, given its exclusive jurisdiction over
to calculate their capacity obligation, which are described in
competition matters.
chapter 4.
The framework for the energy sector is currently changing since
The consultation process on the capacity mechanism design
the European Commission is revising its guidelines on environ-
was transparent, as described in chapter 3. Stakeholders (incl.
mental State aids – the guidelines that serve as an analytical
the transmission system operator) are subject to transparency
framework for assessing whether State aids are compatible with
obligations in the capacity mechanism and those provisions
the internal market – and organised a public consultation on the
have been described in chapter 7.
issue between 18 December 2013 and 14 February 2014. The
new draft guidelines include, for the first time, a section devoted
to energy State aids296.
RTE considers that all legal and regulatory provisions, and the regulatory framework governing the implementation of the capacity mechanism, meet the conditions laid down in Directive
2009/72/EC.
The draft guidelines notably include a list of conditions under
which an exemption can be granted if a State adopts a capacity
mechanism that qualifies as State aid, i.e. if the five conditions
outlined above are met.
The European Commission has indicated that the final draft of
10.1.3  Legal forms of public intervention
the guidelines on environmental and energy State aids should
Public interventions in the electricity market can take different
be adopted in the first half of 2014.
forms, the two most common of which are State aid and public
service obligations provided for in the Third Energy Package, as
10.1.3.2  Public service obligations provided
the European Commission notes:
for in the Third Energy Package
The provisions of Directive 2009/72/EC authorise
Public intervention at regional, national or local level can take
Member States to impose public service obligations
different forms. Examples include state aid to certain sectors
on private undertakings in the energy sector.
or companies in the form of grants or exemptions from taxes
and charges, the imposition of public service obligations, and
Member States may impose on undertakings
regulation through general measures294.
operating in the electricity sector, in the general economic interest, public service obligations
10.1.3.1  Environmental and energy State aid
which may relate to security, including security
State aids in the energy sector are governed by the general pro-
of supply, regularity, quality and price of supplies
visions of article 107 of the TFEU relative to State aids and their
and environmental protection, including energy
interpretation by the European Court of Justice. Paragraph 1 of
efficiency, energy from renewable sources and
article 107 of the TFEU provides that forms of aid granted by
climate protection297.
Member States that threaten to distort competition are incompatible with the internal market. Paragraphs 2 and 3 of that
Supplementing the conditions laid down in article 3
article define the forms of aids that can be considered compa-
of Directive 2009/72/EC, European Court of Justice
tible with the internal market.
case law has specified the framework for evaluating
the compatibility of public service obligations with
State aid exists when all of the following five conditions are met:
the EU acquis, particularly in its Federutility298 and
there must be (i) a transfer of State resources (ii) conferring an
Enel Produzione299 decisions, and has affirmed that
advantage (iii) on certain undertakings (iv) which distorts com-
the legality of measures undertaken by Member
.
States should be evaluated based on necessity and
petition and (v) which affects trade between Member States
295
When a State considers that these conditions are met, it must
notify the European Commission of the measure, in accordance
with article 108 of the TFEU, so the Commission can evaluate
proportionality tests.
294
[EC, 2013]
295
See e.g., the definition
adopted by the ECJ in
Case C-280/00 Altmark
Trans GmBH [2003] ECR
I‑7747 (ECJ, 24 July 2003).
296
In their previous version,
the guidelines only
addressed the issue
of State aid in the
environmental sector.
297
Article 3, paragraph 2 of
Directive 2009/72/EC.
298
Case C-265/08
Federutility and Others
v Autorità per l’energia
elettrica e il gas [2010]
ECR I-3377 (ECJ Grand
Chamber, 20 April 2010.
299
Case C-242/10 ENEL
Produzione SpA v
Autorità per l’energia e
il gas [2011] ECR I-0000
(ECJ, 21 December 2011).
215
It is not RTE’s role to determine the legal qualification of the capacity mechanism. It could be noted, however, that
the design adopted for the capacity mechanism can be assessed with regard to the framework for public service obligations. The obligation is imposed upon suppliers to help meet the security of supply target set by public authorities
by having sufficient capacity to ensure electricity supply to their final customers. Generators and demand-response
operators are required to participate in the mechanism and ensure that it functions properly by certifying all of their
generation capacities. The commitments undertaken during the certification process to make their capacities available ensure that they will effectively contribute to security of supply during peak demand periods.
Regardless of how the capacity mechanism is legally qualified, the legality of the public intervention is notably evaluated based on necessity and proportionality tests. These principles therefore need to be respected when implementing the capacity mechanism.
10.2  Compliance with the principles of necessity and
proportionality
Compliance with the principles of necessity and proportionality
France and Europe are changing significantly, and this could
should be assessed in the light of the adequacy between the
increase the occurrence of market failures. The power system
given public intervention and the objective of public interest it
will have to do more to help meet the ambitious energy transi-
pursues. In this instance, ensuring security of supply is the aim of
tion objectives set by the European Union; it must therefore be
public interest pursued by French public authorities300.
adapted to accommodate growing and massive penetration of
renewables. This makes it all the more important to have flexible
It is important to emphasise that the European Commission
capacities, be they generation or demand-response resources,
recently expanded its analytical framework for examining public
to protect the electricity supply and demand balance.
intervention to ensure security of supply through the Staff Working Document “Generation Adequacy in the internal electricity
Additional information must also be provided in response to the
market - guidance on public interventions” accompanying its
specific framework proposed in the “Generation Adequacy in the
Communication “Delivering the internal electricity market and
internal electricity market - guidance on public interventions”
making the most of public intervention”. This Staff Working
Staff Working Document. According to European Commission
Document features a checklist regarding (1) the
recommendations, the necessity of a capacity mechanism is
assessment of needs, (2) the adoption of structu-
determined by whether a risk to security of supply has been
ral measures to improve the functioning of energy
identified on the basis of generation adequacy assessments
markets, and (3) design choices compatible with the
that are “objective, facts based and comprehensive”301 and whe-
internal market.
ther this risk persists after other measures positively impacting
300
Because the principle
of subsidiarity applies,
national authorities
have, under EU case-law,
discretionary power
to define what they
consider to be services
of general economic
interest and “to provide,
to commission and to
fund such services”, “in
compliance with the
Treaties”, as specified in
article 14 of the TFEU. It
is thus within the remit
of Member States, under
the aegis of national
judges, to determine
what is in the general
interest, in compliance
with the qualifications
specified in EU law.
301
[EC, 2013a]
302
[EC, 2013a]
216
the supply-demand balance have been introduced.
The facts presented by RTE regarding the necessity
and proportionality of the mechanism thus refer pri-
10.2.1.1  Assessment of generation adequacy in France
marily to the framework proposed by the European
The time horizons considered for the capacity mechanism
Commission in November 2013.
are such that the methodology and conclusions of the section of RTE’s Adequacy Forecast Reports devoted to the five-
10.2.1  Principle of necessity
Chapter 1 of this report discusses various points
year medium term must be considered. A description of RTE’s
methodology can be found in the 2012 Adequacy Forecast
Report or the 2013 Adequacy Forecast Report update.
that justify public intervention to ensure security
of supply. Indeed, empirical observation points to a
10.2.1.1.1  Transparency and stakeholder consultation
number of imperfections in current energy markets.
The Adequacy Forecast Report is based on hypotheses about
In addition, the physical needs of power systems in
future trends in electricity supply and demand that RTE
COMPLIANCEWITHEUROPEANPROVISIONSANDPRINCIPLES / 10
European Commission recommendations on the introduction of capacity mechanisms302
JUSTIFICATION OF INTERVENTION
Causes of generation adequacy concerns
Assessment of generation gap
(9) Has retail price regulation (with the exception of social
prices for vulnerable customers) been removed?
(1) Is the capacity gap clearly identified and does this distinguish between need for flexible capacity at all times of year
and requirements at seasonal peaks? Has a clearly justified
value of lost load been used to estimate the cost of supply
interruptions?
(10) Have wholesale price regulation and bidding restrictions been removed?
(11) Have renewable support mechanisms been reviewed in
line with the Guidance on renewable support before intervening on generation adequacy grounds.
(2) Has the assessment appropriately included the expected
impact of EU energy and climate policies on electricity infrastructure, supply and demand?
(12) Has the impact of existing support schemes for fossil
and nuclear generation on incentives for investments in
additional generation capacity or maintenance/refurbishment of existing generation capacity been assessed?
(3) Does the security of supply and generation adequacy
assessment take the internal electricity market into
account; is it consistent with the ENTSO-E methodology
and the existing and forecasted interconnector capacity?
(4) Does the assessment explain interactions with assessments in neighbouring Member States and has it been
(13) Are effective intraday, balancing and ancillary service’s
markets put in place and are any remaining obstacles, in
those markets removed? Have any implicit price caps from
the operation of balancing markets been removed?
(14) Have structural solutions been undertaken to address
problems of market concentration?
coordinated with them?
Options other than support for capacity
(5) Does the assessment include reliable data on wind and
solar, including in neighbouring systems, and analyse the
amount as well as the quality of generation capacity needed
to back up those variable sources of generation in the system?
(6) Is the potential for demand side management and a realistic
(15) Have the necessary steps been taken to unlock the
potential of demand side response, in particular has Article
15(8) of Directive 2012/27/EU on Energy Efficiency been
implemented and do smart meter roll out plans include the
full benefit of demand side participation in terms of generation adequacy?
time horizon for it to materialize integrated into the analysis?
(7) Does the assessment base the assessment of generation plant retirements on projected economic conditions,
electricity market outcomes and the operating costs of that
generation plant?
(8) Has the assessment been consulted on widely with all
stakeholders, including system users?
(16) Have the benefits of expanded interconnection capacity been expanded, in particular towards neighbouring
countries with surplus electricity generation or a complementary energy mix been fully taken into account.
(17) Have the impacts of the intervention on the achievement of adopted climate and energy targets been assessed
holistically, and is lock-in of high carbon generation capacity
and stranded investments avoided?
Continuation l
217
Continuation j
CHOICE OF MECHANISM
(10) Does the lead time for a capacity mechanism correspond to
the time needed to realise new investments, that is 2-4 years?
Choice and design of intervention
(1) Has the effectiveness of a strategic reserve been examined?
(2) Has the potential for a credibly one-off tendering procedure to address the identified capacity gap been examined?
(3) Does the chosen mechanism ensure that identified adequacy gap will be filled while avoiding risks of overcompensation (unlikely with payments payments)?
(11) Is the mechanism open to all capacity which can
effectively contribute to meeting the required generation
adequacy standard, including from other Member States?
Insofar as imports are accounted only on an implicit basis, is
a mechanism established to calculate this benefit and allocate funds to this value for the development of additional
interconnection capacity?
(12) Is it ensured that there are no export charges or proce-
Recommendations to avoid distortion of internal
electricity market
dures to reserve electricity for the domestic market?
(13) Have all barriers to the equal treatment of national and
(4) Is the chosen mechanism open to demand side participation?
cross border contracts been removed?
(5) Is the mechanism to ensure generation adequacy consistent with the long term decarbonisation of the power sector?
(14) Are there no price caps or bidding restrictions as a
(6) Is the chosen mechanism (other than a tendering
scheme) open to existing and new generation?
(15) Is it ensured that the operation of the chosen mecha-
(7) Are conditions for participation in the mechanism based
on technical performance and not technology type?
(16) Is it ensured that the capacity mechanism does not
result of the chosen mechanisms?
nism does not lead to inefficient production by operators?
adversely affect the operation of market coupling or cross
(8) Does the chosen mechanism deliver a price of zero
when there is already sufficient capacity available?
border intraday trading?
(9) Has a framework for the phase out of the mechanism in
line with a roadmap for addressing underlying market and
regulatory failures been developed
sumers on a non-discriminatory basis, taking into account
(17) Does the chosen mechanism allocate the costs to contheir consumption patterns and without reductions for particular customer segments?
calculates as realistically as possible. RTE consults power sys-
The assumptions incorporated into models of the Western Euro-
tem stakeholders on the hypotheses used in the Adequacy
pean power system are based on information provided to RTE
Forecast Report.
by different power system actors during bilateral exchanges304;
on work done by ENTSO-E; on information made public by
303
[RTE, 2012a]
304
RTE guarantees the
confidentiality of
all information of a
commercially sensitive
nature to which it is given
access.
218
In line with RTE’s commitment to transparency,
stakeholders in the European power market (generators, sup-
the hypotheses adopted in the 2012 Adequacy
pliers, system operators, electricity exchanges); and on research
Forecast Report were submitted to a collegiate
conducted by various energy market research consultancies or
consultation process with the “Network Outlook
government agencies. RTE also met with different stakeholders
Committee” (Commission Perspectives du Réseau)
in the European power system (transmission system operators,
of the Transmission System Users’ Committee
regulators, etc.), through working groups (ENTSO-E) and bilate-
(Comité des utilisateurs du Réseau de Transport de
ral meetings, to exchange ideas about changes in the methodo-
l’Electricité – CURTE)303.
logies used in its Adequacy Forecast Reports.
COMPLIANCE WITH EUROPEAN PROVISIONS AND PRINCIPLES   / 10
economic situation and a weak demographic
RTE’s Adequacy Forecast Reports fully comply
with the European Commission’s recommendations regarding transparency and stakeholder
consultation.
variant305.
305
[RTE, 2012a]
The key factors differentiating the scenarios are shown in the
table below.
10.2.1.1.2  Demand forecasts
Economic growth also has a significant impact on electricity
Demand forecasts are constructed in two phases: 1) forecasts
demand in other European countries. To be able to build projec-
established for annual energy demand for each year of the study
tions of European demand while maintaining a consistent fra-
horizon, and (2) forecasts established for power demand on an
mework, GDP assumptions have also been established for these
hourly basis. Each of these phases includes a retrospective analy-
countries using a similar approach as the French one.
sis of past years, making adjustments to years used as reference
All scenarios assume that energy efficiency will steadily improme,
periods for simulations, as well as a forward-looking study.
helping to keep electricity demand growth in check, notably
Four demand scenarios were created for the medium term to
through the diffusion of technological progress and the imple-
represent the spectrum of possible outcomes: “Baseline”, “High”,
mentation of laws or regulations favouring the development of
“Low” and “Stronger DSM”. The main assumptions differentiating
energy efficiency, including Directive 2009/125/EC of 21 Octo-
these scenarios are outlined below.
ber 2009 creating a framework for defining eco-design requirements applicable to energy-related products.
The “Baseline” scenario integrates the central assumptions
for each driver of demand.
The Adequacy Forecast Report is prepared using demand data
series for France as well as for European countries (at a Western
The “High” scenario incorporates all assumptions implying an
European scale).
increase in demand. […]
The demand forecasts produced by RTE for the
Adequacy Forecast Report comply with the European Commission’s recommendations regarding
their consideration of the impact of EU energy and
climate policy, particularly energy efficiency targets. A steady improvement in energy efficiency is
highlighted in all scenarios.
The “Stronger DSM” scenario assumes the same economic environment as the “Baseline” scenario but calls for an acceleration
of demand-side energy management efforts in general. […]
The “Low” scenario incorporates assumptions leading to
a decrease in demand, including a relatively unfavourable
Table 6 – Main assumptions used in demand scenarios
Demand scenario
“Baseline”
“High”
“Stronger DSM”
“Low”
Key assumptions
Central
Higher overall
demand
Increased energy
efficiency
Lower overall
demand
GDP
Central
High
Central
Low
Energy efficiency
Central
Lesser effect
Greater effect
Central
Demographic
Central
Haute
Central
Low
Electricity price
Central
Favourable to rollout of
new electricity-based
solutions
Central
Unfavourable to rollout
of new electricity-based
solutions
219
10.2.1.1.3  Supply forecasts
Portugal, United Kingdom, Ireland, Belgium, Luxembourg,
Medium-term supply trends are presented by technology in the
Netherlands, Germany, Switzerland, Austria and Italy) are taken
Adequacy Forecast Report: (1) centralised fossil-fired capacity, (2)
into account.
nuclear power, (3) embedded thermal generation, (4) renewable
energy sources and (5) generation capacity outside France.
The development of the electricity transmission system is also
factored into the assumptions307.
For centralised fossil-fired generation, and particularly combinedcycle gas plants, the Adequacy Forecast Report takes into account
official announcements by generators, notably the mothballing of
one unit (between 2014 and 2016) and the shutdown of several
others in the summer of 2013, with these same units taken offline
every summer in all the years considered in the report through
2018. It is assumed that no new capacity will be commissioned
outside France over the period considered in the report.
As regards nuclear power in France, it is assumed that the two
reactors Fessenheim will be out of service at the end of 2016,
reducing installed capacity by 1,760 MW, per the announcements made by public authorities.
Onshore wind capacity development should resume in 2014,
thanks to several policy signals306, and expansion in the coming
years is expected to at least match that observed in the past two
years, implying the addition of around 800 MW a year, which
would take wind power capacity to more than 12 GW in 2018.
The Adequacy Forecast Report assumes that photovoltaic capa-
The supply forecasts produced by RTE within
the framework of the Adequacy Forecast Report
comply with the European Commission’s recommendations on taking into account EU energy and
climate policy, particularly the greenhouse gas
emissions reduction target, by factoring in the
effects the EU directives designed to help achieve
this target will have over the period under review
and the renewable energy development target.
Regarding renewable energy development, the
trend still points to a more robust expansion of
these resources than other technologies over the
period under review. Demand management is also
taken into account through demand response
capacity, including within the framework of market mechanisms.
Regarding the closure of generation units, RTE’s
assumptions take into account the shutdowns
officially announced by generators, which have
the most up-to-date information about their
capacities and the economic outlook for them. The
internal market is factored into supply forecasts
by including capacity assumptions for 11 Western
European countries.
city will increase by 800 MW a year, to factor in uncertainty about
the industry’s development (particularly the effects of the measures introduced by the French government in 2013 to encou-
10.2.1.1.4  Probabilistic approach
rage its expansion). Based on this growth estimate, photovoltaic
Future supply and demand forecasts thus produced are com-
capacity should reach 8.3 GW in 2018.
pared by simulating the operations of the Western European
power market on an hourly basis over a full year.
As regards demand response, it is assumed in the Adequacy
Forecast Report that capacity will be flat over the medium term,
For both Europe and France, around a hundred demand
stabilising at a level slightly above that observed
series have been produced based on temperature datasets
306
Examples: Adoption of
Regional Climate, Air and
Energy Plans, changes in
the law to facilitate wind
turbine installation.
today, with a decrease in tariff-based demand res-
produced in cooperation with Météo France for Europe, to
ponse being offset by the increased participation
assess the impact of cold spells and heat waves on the Euro-
of demand response in market mechanisms. The
pean power system.
forecast could be revised upward depending on the
[…]
307
Over the medium
term, two noteworthy
changes will affect
interconnections to
France, both of which
are scheduled for 2015:
the strengthening of
exchange capacity
with Spain […] and the
strengthening of the
French network in
the Alps.
effects the framework laid down in law 2013-312
With regard to generation capacity, the methodology applied
(Brottes Act) on preparing for the transition to a low-
to foreign countries for the medium term is similar to that
energy system will have on the demand response
used for France.
potential, and on the reintroduction of demand res-
[…]
ponse tariffs announced by the Government.
Generally speaking, to ensure the balance between supply
220
and demand, generation facilities are used in ascending order
Regarding generation capacity outside France,
of their marginal cost of production (the merit order), until
assumptions for all 11 countries modelled (Spain,
demand is met. Since the late 1990s, when instruments were
COMPLIANCE WITH EUROPEAN PROVISIONS AND PRINCIPLES   / 10
developed to allow comparisons of supply between different
countries, this merit order has been seen from a European
standpoint, meaning that at any given time, the units with
the lowest production costs in Europe can be called upon
to meet demand expressed in Europe as a whole. The merit
order is respected provided that exchange volumes do not
exceed transmission capacity between countries or regions
within a same country308.
The simulations take into account the main contingencies that
infrastructure; recommendations on taking the
internal market into account are complied with
since the simulations are carried out for the Western European power system. Moreover, the comparison of simulation results with and without
exchanges highlights the role interconnections
play in ensuring security of supply in France. As
regards the inclusion of variable sources, the
simulations respect the spatial and temporal correlations of individual contingencies (including for
wind power) at the European level.
can threaten security of supply, including weather conditions
and especially outdoor temperatures, unscheduled unavailability of thermal generation capacities, water resources and wind
10.2.1.1.5  Compatibility with ENTSO-E’s methodology
and photovoltaic power production. The spatial and temporal
RTE’s Adequacy Forecast Report is compatible with ENTSO-E’s
correlations of a given natural hazard are taken into account at
“Scenario Outlook and Adequacy Forecast”311. However, the
the European scale.
results vary due to differences between assumptions applied to
countries other than France and the fact that the probabilistic
A set of temporal series, loads on the demand side and avai-
simulations used in the Adequacy Forecast Report are more ela-
lable capacity of units generating supply reflecting various
borate that the deterministic calculations in the “Scenario Out-
possible outcomes are created for each of the phenomena
look and Adequacy Forecast”.
considered. These series are then combined in sufficient
number (1,000 for each scenario) to give statistically signifi-
ENTSO-E has publicly announced that it plans to propose
cant results in shortfall (risk of demand not being met due to
changes to the methodology used in the “Scenario Outlook
a lack of generation) and annual energy balances (output of
and Adequacy Forecast” and participate in their implementa-
different units and exchanges with neighbouring systems) .
tion, notably to generate studies at a European scale based on
309
the same probabilistic approach as the one RTE uses in the
The supply-demand balance is assessed by comparing each
Adequacy Forecast Reports for France.
demand scenario with the supply scenarios. Moreover, as
required by the decree of 20 September 2006, the “Baseline”
ENTSO-E is already committed to examining possible changes
demand scenario is compared to supply forecasts with and with­
with particular regard to treatment of RES-E resources. These
out exchanges to identify the contribution interconnections
range from small changes to existing methodologies to fully
make to covering the shortfall risk in France.
implementing probabilistic adequacy assessments in the
short and long term. However any changes need to consider
In the zero exchange balance analysis required by the decree,
the conflicting objectives of depth of analysis with the asso-
the shortfall criterion is exceeded under the “Baseline” scenario
ciated need for increasing requirements against the timely
over the duration of the period considered (including today),
production of useful outlook reports.
illustrating how crucial electricity imports are to security of supply
[…]
in France. The capacity that would be needed to meet the crite-
Nevertheless ENTSO-E and its member TSOs are actively
rion without interconnections exceeds 6 GW starting in 2016 .
developing the tools and techniques to address these issues
310
over time.
[…]
The probabilistic approach used by RTE to assess
the supply-demand balance complies with the
European Commission’s recommendations on
taking into account European energy and climate policy (20-20-20 objectives) and upholding
the provisions of Regulation 347/2013 by factoring in the development of new interconnection
It would be highly desirable if stakeholders (EC,
ACER, market participants) and ENTSO-E could
further discuss and agree on a high-level vision
on the expected scope and content of the adequacy reports. Thereafter appropriate and necessary adjustments in methodology and structure
of the report could be made312.
308
[RTE, 2012a]
309
[RTE, 2012a]
310
[RTE, 2012a]
311
[ENTSO-E, 2013]
312
[ENTSO-E, 2013]
221
10.2.1.2  Other measures to improve the supplyAs part of the work being done by the Electricity
Coordination Group at the European scale and by
the Pentalateral Forum for Western Europe, Member States and the European Commission have
asked transmission system operators to adapt
the methodologies used by ENTSO-E to enhance
the quality of its European reports. ENTSO-E has
also created a workgroup focusing on adapting the
methodologies used in the Scenario Outlook and
Adequacy Forecast, one priority of which will be to
propose a harmonised probabilistic methodology
for adequacy assessments.
With this in mind, RTE considers that any discrepancies between the Adequacy Forecast Report
and ENTSO-E’s Scenario Outlook and Adequacy
Forecast will narrow as ENTSO-E’s methodologies
are updated, and that current differences are not
a hindrance. Should hypotheses continue to differ
over the long term, it will be for reasons such as
time gaps between studies.
demand balance
On the basis of this comprehensive assessment, the European Commission recommends a series of measures that can
improve the supply-demand balance and help resolve adequacy
gap situations.
Questions about retail price regulation313, renewable support
mechanisms and support schemes for fossil and nuclear generation do not pertain to areas in which RTE is directly involved.
These issues are therefore not addressed in this report.
Lastly, the issue of whether the capacity mechanism will lock in
high-carbon generation capacity, which would be counter to EU
energy and climate objectives, is addressed in chapter 2 of this
report, where the main architectural choices proposed for the
capacity mechanism are outlined.
10.2.1.2.1  Measures to improve the functioning of the
10.2.1.1.6  Conclusions regarding generation adequacy
wholesale market and intraday, balancing and system
assessments
services markets
The European Commission’s first consideration in evaluating the
need for public intervention to safeguard security of supply is
10.2.1.2.1.1  Wholesale market
that a facts-based, objective and comprehensive assessment
The European Commission has voiced concerns that energy
of adequacy and security of supply has been conducted. RTE’s
price caps could hinder the formation of prices that send ade-
Adequacy Forecast Report is used to assess the electricity sup-
quate signals to market participants. In the North Western
ply and demand balance in France, and the methodology used
Europe day-ahead market coupling, prices transmitted through
to carry out this assessment complies with the European Com-
bids by market participants in the French market have ranged
mission’s recommendations:
between -€500/MWh and €3,000/MWh since NWE price cou-
>
>
D
emand forecasts take into account European energy and cli-
pling was launched on 4 February 2014. Price caps were har-
mate policies (particularly with regard to demand-response);
monised across the region in order to reduce constraints in the
S
upply forecasts take the internal market into account
market. As the European Commission notes in its “Generation
through the integration of hypotheses regarding the genera-
Adequacy in the internal electricity market” guidelines, these
tion fleet of other European countries;
limits are among the highest in Europe.
> Simulations are carried out using a probabilistic approach with
313
The introduction of the
market mechanisms
presented in chapters 1
and 10 of this report, e.g.
the NEBEF mechanism,
allows demand response
to participate in
electricity markets over
all time horizons and
thus help make the load
curve more flexible, even
when regulated tariffs
are applied. Moreover,
the French Government
recently committed to
reintroducing demand
response tariffs to create
incentives to reduce
consumption.
222
a careful modelling of contingencies and their corre-
It should also be noted that these price limits are not defined
lations (particularly for variable sources);
through laws or regulations and can thus be periodically revised.
>
A
ll requirements in terms of transparency and
stakeholder consultation are met.
Wholesale market participants can trade on the EPEX SPOT market but also over the counter or through a broker. There is no
The results presented in the most recent update of
regulated tariff governing prices on the wholesale market. The
the Adequacy Forecast Report (2013), outlined in
ARENH mechanism, a specific regulation governing the ability
chapter 1 of this report, show that safety margins
for alternative suppliers to source electricity directly from EDF
vis-à-vis the security of supply criterion will gradually
at a regulated price, was introduced to open the French supply
shrink and then disappear in 2017. This suggests
market to competition under the control of the European Com-
that security of supply in France will have to be care-
mission. Since 1 July 2011, in accordance with the provisions of
fully monitored and will be at risk in 2017, particu-
the NOME Act, suppliers have been able to exercise their right
larly if a cold spell occurs.
to regulated access to historical nuclear electricity (ARENH) by
COMPLIANCE WITH EUROPEAN PROVISIONS AND PRINCIPLES   / 10
buying electricity directly from EDF at a regulated price and in
To this end, RTE conducted a consultation through
quantities defined by the regulator. This measure was intended
a Transmission System Users’ Committee (CURTE)
to stimulate competition in the French wholesale market by
workgroup in 2013 to consider the design of
allowing new entrants to make competitive offers.
an organised secondary market for Frequency
Containment Reserve and automated Frequency
10.2.1.2.1.2  Intraday market
Restoration Reserve and propose rules to govern
Price limits are higher on the intraday market than on the day-
the participation of demand response in system
ahead market, ranging between -€9,999/MWh and €9,999/MWh.
services315.
Mechanisms are already in place to enable the integration of
The idea of an organised secondary market to
the French intraday market at the European level. For instance,
help optimise the power system emerged from
on 26 June 2013, intraday market mechanisms between France,
the consultation with market stakeholders. Par-
Germany, Austria and Switzerland were launched in order to allow
ticipation in this market should be optional and
market participants in these countries, EPEX SPOT members, to
standard products would have to be defined to
engage in intraday cross-border trades.
facilitate trading initially. It was on the basis of this
314
The TERRE project is
designed to allow the
trading of replacement
reserves between France,
Italy, Portugal and Great
Britain and was selected
as a pilot project for the
implementation of the
Electricity Balancing
Network Code.
315
See section 10.2.1.2.2.1.
316
In particular, the role of
the “reserve manager”
was introduced and a
system was created for
notifying exchanges
of reserves along with
a related financial
guarantee system.
consultation that RTE introduced technical and
This mechanism will be an essential building block in fostering
legal prerequisites into the system service rules316 to make the
migration to the intraday solution called for in the European tar-
creation of a secondary Frequency Containment Reserve and
get model.
automated Frequency Restoration Reserve market possible.
10.2.1.2.1.3  Balancing and ancillary services markets
All of RTE’s proposals were approved by CRE in its deliberation
Bids submitted to the balancing mechanism are not subject to
of 28 November 2013 approving the system service rules. The
price limits. Since the mechanism was created in 2003, it has been
new rules have superseded system service contracts since
possible for demand response bids to participate in the same way
1 January 2014. RTE will specify procedures for notifying reserve
as bids from generators. Cross-border bids have been possible
exchanges and financial guarantees by 1 January 2015.
with Switzerland since 2003 and with Germany since 2005.
RTE has also participated in the creation of cross-border balancing mechanisms to allow cross-border trading, including after
the intraday cut-off. For instance, the BALIT mechanism (BALancing Inter TSO) allows transmission system operators RTE and
National Grid to exchange balancing energy (beyond required margins). BALIT enhances competition on the balancing
mechanism by bringing new market participants into national
mechanisms, thereby boosting economic efficiency. The
mechanism is a precursor for the development of cross-border
balancing energy trading at the European level, in keeping with
the provisions of the Electricity Balancing Network Code. RTE is
also taking part in the TERRE project in partnership with National
Changes are being effected in many areas to add
new functionalities to markets, only one of which
is the creation of an organised secondary market
for ancillary services.
Implementation of the capacity mechanism will
not prevent improvements from being made to
the existing market architecture.
France continues to be increase its integration
into the European electricity market and is playing
a pioneering role through the initiatives in which
It is actively involved (NWE market coupling, flowbased capacity allocation in the CWE region, integration of French, Swiss, German and Austrian
intraday markets, BALIT mechanism, etc.)
Grid, REN and Terna314.
Where frequency containment reserves and frequency resto-
10.2.1.2.2  Participation of demand-response
ration reserves (ancillary services)are concerned, article L. 321-
in electricity markets
11 of the Energy Code charges RTE with “ensuring that ancillary
The sections below elaborate on the summary data presented in
services for the operation of the grid are available and effecti-
chapter 1 of this report about the various mechanisms in place
vely provided” and with setting terms of participation and rules
or being developed to allow the demand side to participate in
for calculating the remuneration of system services, subject to
the French electricity market over different time horizons.
approval by CRE.
223
10.2.1.2.2.1  Participation of demand-response in
The consultation process organised in 2013317 led RTE to pro-
the balancing mechanism, reserves procurement
pose an experimental phase during which extraction sites
and ancillary services
will be allowed to provide ancillary services (FCR and aFRR) in
The balancing mechanism gives RTE real-time access to upward
limited quantities starting on 1 July 2014. Extraction sites’ abi-
and downward balancing reserves so it can ensure equilibrium
lity to provide frequency containment or restoration reserves
in the power system.
will be rewarded indirectly: operators can sell these reserves to
obligated generators, setting their own price. Transactions will
Since it was created in 2003, the balancing mechanism has
be conducted over the counter and then, if applicable, through
allowed the activation of demand response by industrial users
an organised secondary market. The methods used to certify
connected to the public transmission system. In 2007, an expe-
and verify the performances of these capacities will be defined
riment was launched to enable the participation of distributed
in the first half of 2014, based on a consultation with market
demand response as well.
stakeholders.
The experiment RTE is conducting in Brittany will give market partici-
The CRE deliberation of 28 November 2013 approving the ancil-
pants additional opportunities to participate in the balancing mecha-
lary services rules calls for RTE to submit to CRE draft ancillary
nism and contribute to the supply-demand balance. It makes it pos-
services rules for allowing the participation of extraction sites,
sible to offer local generation connected to the public distribution grid
based on the outcome of the experiment conducted in 2014, by
or demand response that can be activated on the balancing mecha-
1 September 2015 at the latest.
nism, subject to minimum aggregate power of 1 MW.
10.2.1.2.2.2  Explicit participation of demand-response
Article L.321-11 of the Energy Code authorises RTE to enter into
in the energy market
contracts with generators and suppliers for replacement reserves
Demand-response can be a competitive alternative to electricity
that can be activated on the balancing mechanism. These
generation. It thus makes economic sense to adopt provisions
contracts are established through “competitive, non-discriminatory
that allow demand response to participate in electricity mar-
and transparent procedures”. Since 2008, it has been possible to
kets, i.e. to be activated (on the day-ahead or intraday market)
select demand response for rapid replacement reserve contracts.
in the same way as available generation capacity to ensure that
The market share of demand response has been growing steadily
forecast demand is covered (and not just to offset residential
ever since, thanks to the product segmentation proposed by RTE.
imbalances).
Lastly, specific mechanisms have been introduced to allow
Demand-response can be rewarded “implicitly” via private opti-
demand response to participate in short-term market
misation within a supply portfolio, for instance through dyna-
mechanisms.
mic pricing318, or “explicitly”, as provided for in the Brottes law.
Thanks to the NEBEF mechanism introduced on January, 1st
In accordance with article 1 of the order of 10 December 2012
2014, demand-side operators can capitalise on the flexibility of
applying article L. 321-19 of the Energy Code, RTE “enters every
consumption sites to fully leverage short-term optimisation pos-
year into one-year interruptibility contracts with consumption
sibilities, since a site that reduces load benefits either directly or
sites connected to the transmission system with ins-
through a demand-side operator from any differential between
tant interruptibility profiles […]”.
market and supply prices over the period. In sum, it is a tool for
317
See section 10.2.1.2.1.3.
318
For instance peak/offpeak hours (allowing
water heaters to be
switched on at off-peak
times). This implicit
valuation of the storage
potential is emphasised
by the European
Commission in the Staff
Working Document,
“Incorporating demand
side flexibility, in
particular demand
response, in electricity
markets“.
224
enhancing the flexibility of the load curve including when sites
Article 7 of the NOME law calls for the organisation of
are on regulated tariffs or have entered into fixed-price supply
“a call for tenders (…) to secure additional demand-
contracts through the market.
response capacity for a period of three years”. In
other words, it has been possible for demand res-
The NEBEF experimental rules notably specify the conditions
ponse capacities to participate in specific tenders
and terms under which a demand-side operator can sell a block
since 2011. The tender organised in 2012 allowed at
of energy resulting from explicit load reduction on electricity
least 400 MW of capacity that can be activated until
markets, and how the block must be perfectly fungible with
September 2013, along with at least 200 MW that
other energy blocks traded on markets.
can be activated until 2015.
COMPLIANCE WITH EUROPEAN PROVISIONS AND PRINCIPLES   / 10
The rules are designed to create a level playing field for dif-
RTE’s ten-year plan presents a number of intercon-
ferent stakeholders in the demand response market, suppliers,
nection projects:
demand-side operators and consumers. With this in mind, the
> France/England:
> A new regulation framework, based on competitive assess-
that could be operational before 2020. It will
ment319, especially regarding the financial relations between
>
demand-side operators and suppliers
The IFA 2 project under way
involves a 1,000 MW, approximately 250 km link
proposed design is based on:
connect the Normandy coast with southern
;
England at the Isle of Wight. The “France-Alder-
320
T he nomination of a third party (RTE) as the “independent
ney-Britain” (FAB) project, intended to harness
third party” and intermediary between suppliers and demand-
the tidal power potential off the coast of Auri-
side operators, charged with protecting the confidentiality of
gny, includes the study of a new interconnection
data transferred, handling the certification process and the
between France and the United Kingdom with
control of data used and of the physical reality of the demand-
a capacity of between 1,000 MW and 1,400 MW
response activated.
that could be in place in 2022.
> F rance/Ireland:
RTE and the Irish TSO, Eirgrid,
are studying the feasibility of a new link between
The electricity market design in France is currently undergoing structural changes to allow
the participation of demand-response in all markets, in keeping with the European Commission’s
recommendations.
France and Ireland with a maximum capacity of
700 MW.
> INELFE
The launch in 2014 of an experiment testing the
participation of demand-response in ancillary services is the third pillar of the new market design.
Électrique
France-
Espagne, a mixed-capital corporation shared
by REE and RTE) is leading a project to build an
In this regard, the NEBEF experimental rules represent a big step forward for electricity market
design in France and Europe and enable demandresponse to be an additional competitive tool to
balance the system in an optimal way.
The ability for demand-response to participate
in the balancing mechanism and contracts for
the provision of system services and restoration
reserves is another crucial building block for integrating the demand-side into markets. Specific
mechanisms are also in place for demand response
(demand-response and interruptibility auctions).
(Interconnexion
319
Decision 13-A-25 of
20 December 2013 on
demand response in
the electricity sector –
paragraphs 204 – 217 on
methods for calculating
payment by demand-side
operator to the supplier
of the site that reduces
demand.
320
Decision 13-A-25 of
20 December 2013 on
demand response in
the electricity sector –
paragraphs 177 – 185
on the absence of
agreement from the
electricity supplier for the
demand-side operator
to activate demand
response at sites supplied
by this supplier.
321
Regulation 347/2013
on guidelines for energy
infrastructure.
322
[RTE, 2012 ten-year plan
2012]
underground interconnection by 2015 between
France and Spain, in the Eastern Pyrenees, to lift
exchange capacity between the countries to 2,800 MW. Joints
studies are also under way to study the possibility of building
a direct current line running under the sea between Bilbao
and Aquitaine, through the Gulf of Gascony, which would take
exchange capacity between the countries to 4,000 MW in
2020.
> France/Italy: The Savoie-Piemont project conducted with the
Italian system operator will ultimately boost exchange capacity with Italy by 500 MW.
> F rance/Belgium: RTE and Elia are looking into strengthening
interconnections to increase exchange capacity by about
1,000 MW.
10.2.1.2.3  Development of interconnections
> France/Germany: RTE is working with Amprion and TransnetBW
on ways to increase interconnection capacity between the
The points discussed below are intended to complement chapter 1 of this report, which notably highlighted the fact that five
of the projects RTE is conducting with European partners have
>
countries, notably by strengthening existing interconnectors.
T hrough ENTSO-E, RTE is working with Swissgrid to study the
been identified as Projects of Common Interest as defined in
feasibility of increasing interconnection capacity by streng-
Regulation 347/2013321, and briefly describe the cross-border
thening existing interconnectors.
projects included in RTE’sten-year plan of 2012.
RTE and its partners are planning to develop new interconnection capacity with the British Isles, Italy, Spain, Belgium,
Luxembourg and Germany, which together could add 10 GW
of exchange capacity between France and partner countries by
The interconnection projects presented in RTE’s
ten-year plan are proof that the introduction of
the capacity mechanism will not interfere with the
development of interconnections between France
and neighbouring countries.
2025. RTE estimates that it will invest some 1.5 billion euros a
year in these projects over the next ten years322.
225
10.2.1.2.4  Conclusions about the adoption of other
Indeed, measures are less effective when taken curatively and
measures to improve the supply-demand balance
in haste than when their effects are proportionate to their
The European Commission only considers public intervention
objective.
in the form of capacity mechanisms necessary when structural measures have been taken to improve the functioning and
integration of energy markets. Such measures have a favourable
10.2.2  Principle of proportionality
impact on the price signals generated by the market and its abi-
Having established the necessity of the mechanism, this sec-
lity to assign the right value to energy.
tion discusses its proportionality: the capacity mechanism
implemented in France should not go beyond what is strictly
The measures discussed in chapter 1 and the present chap-
necessary to meet the objective of security of supply as an aim
ter of this report show that the actions undertaken in French
of public interest. In other words, it must be demonstrated that
electricity markets comply with the European Commission’s
the market architecture adopted is best suited to the objectives
recommendations.
pursued.
These measures promote the integration of markets and
The compatibility of this market architecture with the European
improve their functioning. In this regard, they help correct
Commission’s recommendations will also be discussed.
market imperfections and allow system needs, notably in
terms of flexibility, to be taken into account. The French capa-
10.2.2.1
Proportionality regarding the security of
city mechanism is not being introduced as a standalone ini-
supply objective
tiative, but rather in the light of all the measures taken and
The information in chapters 2 through 7 of this report can be
their positive effects. In other words, these measures cannot
used to evaluate the proportionality of the architectural choices
be substituted for the capacity mechanism, which remains
made to the security of supply objective, or in other words to
necessary to generate an additional signal targeting security
demonstrate that these choices do not go beyond what is
of supply.
strictly necessary to meet this objective.
Without a capacity mechanism in place, these measures cannot
A market-based architecture was chosen because it ensures
address the existence of externalities discussed in chapter 1.
economic efficiency by allowing obligated parties to trade certificates to minimise the cost of their capacity obligation.
In addition, measures must be planned taking into account
the time dimension. These actions are not taken on the same
A market-wide mechanism was adopted to ensure that secu-
timescale, and their effects on the supply-demand balance are
rity of electricity supply is truly guaranteed and to avoid discri-
not simultaneous. For instance, it takes at least ten years to build
minating between market participants. It also creates the right
an interconnection, whereas new demand response capacity
incentives for demand to participate in the capacity mechanism,
can be made available with much shorter time constraints. The
thereby increasing competition.
European Commission’s checklist does not address this time
dimension.
Insofar as suppliers can cover their obligation by trading in a
decentralised market, the French capacity mechanism pre-
It can also be advisable to introduce a capacity mechanism
serves the responsibility structure of energy markets where
before an imminent threat to security of supply is identified:
investments are concerned and avoids having public authorities
make decisions in lieu of market participants. Parties subject to
323
[De Vries, 2006]
226
Waiting entails a significant risk, because it is not possible to
obligations in the capacity market are responsible for forecas-
monitor the market and forecast generation adequacy with
ting their customers’ needs, covering these needs, and settling
sufficient certainty, far enough into the future, to allow time
any differences between their coverage and actual results. The
for policy intervention when it becomes apparent that a shor-
positive aspect of a decentralised market architecture on the
tage of generating capacity looms.
responsibility of market participants is reflected by economic
[…]
efficiency and proper cost allocation, and thus upholds the prin-
The smoother transition and the lower risk to the reliability
ciple of proportionality.
of service are arguments in favor of a ’preventive’ strategy323.
COMPLIANCE WITH EUROPEAN PROVISIONS AND PRINCIPLES   / 10
One key priority for RTE in applying the provisions of the decree
trading will be conducted in a steady regulatory framework, and
in the proposed rules was to ensure that power system stake-
that the value of the product will not be modified due to inter-
holders’ real contributions to security of supply are accurately
vention from outside the market. Moreover, the fact that capa-
reflected. Five key choices demonstrate this priority:
city certificates are recorded in a register held by RTE makes the
> A mechanism based on available capacity is consistent with
to that of the energy market, enables bilateral trading, and lays
ensure that capacities are rewarded based on their real contri-
the groundwork for an exchange platform on which supply and
bution to security of supply;
demand can be matched.
mitment period – i.e. securing commitments for the periods
Various provisions have been included to ensure that stakehol-
when demand is highest – is a way to ensure that the capacity
ders in the capacity market will have full knowledge of the security
mechanism’s effects target the needs of the power system
of supply outlook. In addition to RTE’s Adequacy Forecast Reports,
when security of supply is threatened;
which is already published by RTE, they will be able to consult the
T he parameters used for calculating suppliers’ capacity obliga-
data in two registers that RTE will make open to the public:
> Using a demand-based approach to define the capacity com-
>
product credible. In this regard, the architecture adopted, similar
the proposal to adopt a market-wide capacity mechanism and
tion – such as the security factor – and the amount of certificates
issued for capacity – for instance technical constraints impacting
the capacity’s contribution to reducing the shortfall risk – must
be set in such a way as to reflect as accurately as possible the real
> The certified capacity register, which will list all certified capacities individually;
> The peak demand management register, where all demandside measures impacting the mechanism will be recorded.
contribution of suppliers to the shortfall risk and the real contribution of capacities to reducing the shortfall risk;
> Taking into account actual measurements for consumption
The choices allowing the implicit participation of foreign capacities in the mechanism initially and the milestones set for a pos-
and capacity availability during the delivery year allows the
sible explicit participation further out are also taken into account
contribution of each market stakeholder to security of supply
in assessing the capacity mechanism’s proportionality to the
to be recognised. Small imbalances between the data submit-
security of supply objective for France.
ted and actual results lead to a mere adjustment. To ensure
a balance between this need for individualisation and market
stakeholders’ request for stability and predictability, a normative approach can also be taken in calculating capacity levels
for intermittent capacity;
> T he methods used to calculate capacity obligations and cer-
All findings presented in this report show that
the architecture adopted for the French capacity
mechanism, as described in the decree and RTEs
proposed rules, is proportionate to the objective of
ensuring security of supply.
tify capacity must be defined in such a way as to guarantee
non-discrimination between the implicit and explicit valuation
of demand response. To ensure that demand response capa-
10.2.2.2  Compatibility with the European Commission’s
cities effectively contribute to security of supply, capacities
recommendations on market design
that are certified must be subjected to the same availability
The European Commission looks first at the type of capacity
commitments as generation capacities during the period
mechanism proposed and had expressed a preference for
considered (PP2), and demand-side management measures
targeted mechanisms such as strategic reserves and one-off
factored into the reduction of suppliers’ obligations must be
tenders. The reasoning behind the adoption of a market-wide
effectively activated during the period considered for the cal-
mechanism is discussed in detail in chapter 2 of this report, with
culation of the obligation (PP1).
evidence to support that strategic reserves or one-off tenders
would not meet the security of supply objective in a proportio-
In drafting the capacity mechanism rules, special attention was
nate manner. For instance, a strategic reserve would, in France,
also paid to ensuring that stakeholders would have confidence
result in excess capacities being created to meet the physical
in the “capacity certificate” product, this being essential to facili-
needs of the power system during peak demand periods, which
tating trading and allowing the capacity mechanism to produce
are the primary risk for the French power system.
effects proportionate to the security of supply objective. For instance, the decision to publish the mechanism parameters and
RTE’s analysis shows that the design of the French capacity
stabilise them over the entire mechanism term guarantees that
mechanism complies with all of the European Commission’s
227
324
Enel Produzione case
cited above, paragraph
75: “As regards the
duration of the
intervention provided
for under the legislation
at issue in the main
proceedings, it must be
limited to the length
of time that is strictly
necessary for attaining
the objectives which it
pursues. In that regard,
it must be held that,
since the list of essential
installations is annually
reviewed and updated,
it would appear that
installations are not kept
on it for more than a
limited period”.
recommendations except with regard to the par-
their explicit participation is compatible with the European Com-
ticipation of cross-border capacities. This specific
mission’s recommendations.
recommendation in partially addressed in the present chapter as well as in 9. The information provi-
The table below provides an overview of the issues discussed in
ded shows that a mechanism that initially allows the
detail in the previous chapters to demonstrate the compatibility
implicit participation of cross-border capacities and
of the French capacity mechanism with the European Commis-
lays out steps to be taken to subsequently enable
sion’s other recommendations.
Table 7 – Compatibility of the French mechanism with the European
Commission’s recommendations presented during the RTE WG, 5/12/13
Guideline
RTE analysis
Participation of new and
existing capacities
Participation of all capacities in the mechanism.
Technological neutrality
Single product, certification based on technical performances.
Zero price in situations of
excess capacity
Market price: excess supply will drive the price toward 0.
2/4 year timescale
Mechanism term starting in Y- 4, shorter timescales possible to better fit with demand response.
No export restrictions
No clause specifying the destination of energy produced by capacities participating in the
mechanism.
No restrictions on energy sales
No price caps associated with participation in the capacity mechanism, no restrictions of offers.
No inefficient production
The capacities participating in the mechanism commit to availability, not production.
Commitment periods are limited (short PP2 period).
No impact on coupling
or intraday
No changes affecting the functioning of energy markets or stakeholders' behaviours
(marginal cost offers).
Participation of demand
Perfectly compatible mechanism with two forms of participation possible (implicit/
explicit) to better reflect the specific characteristics of demand response.
Mechanism encouraging better consumption behaviours.
Real adequacy guarantees
with unnecessary excess costs
avoided
Commitments secured for all capacity: the fact that all capacities are committed to
availability enhances security of supply benefits. Capacity that is not available is not
rewarded through the capacity mechanism.
Market price: the price tends toward zero in situations of overcapacity.
Importance of measuring actual results to guarantee that market results reflect reality.
Virtuous cost allocation
The obligation reflects the contribution to the shortfall risk = to ensure a virtuous allocation
of costs, the obligation must be calculated carefully taking into account the specific
characteristics of demand with stakeholders being held responsible individually.
There are no exemptions from the obligation.
Transitional mechanism
With a market-based mechanism, the price reflects the real value of the capacity need, and
will tend toward zero if no capacity is needed; it will be possible to review how this system
functions based on CRE's annual reports on the mechanism and reassess it if necessary.
CRE will report annually on the mechanism’s functioning and integration into the European
market. The European Court of Justice determined in its Enel Produzione decision that a
measure that is reviewed and reassessed annually can be considered transitional 324.
RTE considers that the French capacity market design is compatible with the European Commission’s
recommendations and does not go beyond what is necessary to ensure security of supply in France.
228
COMPLIANCE WITH EUROPEAN PROVISIONS AND PRINCIPLES   / 10
10.3 Conclusion
The introduction of a capacity mechanism in France, as provided for in the NOME Act, must be considered within a European
perspective. Indeed, while security of supply is ensured through
European Union Member States’ energy policies, there is in reality a high degree of interplay between the policies adopted by
Member States in an integrated market.
> D emand forecasts take into account EU energy and climate
policy (particularly with regard to demand management);
> S upply
forecasts take the internal market into account
through estimates of generation capacity in Europe;
> S imulations are carried out using a probabilistic approach with
a careful modelling of contingencies and their correlations
(particularly for variable sources);
While the European Union has competence in energy-related
matters, security of supply is a Member States competence,
> All requirements in terms of transparency and stakeholder
consultation are met.
according to the provisions of article 194 of the TFEU. In this
regard, the EU acquis does not prohibit public intervention to
The results presented in the most recent update of the Ade-
guarantee security of supply, and capacity mechanisms are
quacy Forecast Report (2013), outlined in chapter 1 of this
included in the measures listed in Directive 2005/89/EC of the
report, show that safety margins vis-à-vis the security of supply
European Parliament and of the Council of 18 January 2006
criterion will gradually shrink and then disappear in 2017. This
concerning measures to safeguard security of electricity supply
suggests that security of supply in France will have to be care-
and infrastructure investment.
fully monitored and will be at risk in 2017, particularly if a cold
spell occurs.
Analysis of the legal framework governing public intervention in
the energy sector in Europe shows that two forms of public inter-
Actions undertaken to increase liquidity in French electricity
vention are possible for capacity mechanisms: State aid and public
markets also comply with the European Commission’s recom-
service obligations, as provided for in Directive 2009/72/EC.
mendations, notably by supporting projects to integrate the
European market over all time horizons, since they allow
It is not RTE’s place to determine the legal qualification of the
demand response to participate in all market mechanisms
capacity mechanism, though the architecture adopted for the
over all timescales, and by fostering the continued develop-
mechanism can be considered with regard to the framework
ment of interconnections between France and neighbouring
for public service obligations. The obligation is imposed on
countries.
suppliers, which contribute to compliance with the security of
supply criterion set by public authorities by having sufficient
These measures all promote the integration of markets and
capacities to ensure electricity supply to their final customers.
improve how they function. In this regard, they help correct
Generators are required to participate in the mechanism and
market imperfections and allow system needs, notably in
ensure that it functions properly by having all of their generation
terms of flexibility, to be taken into account. That being said,
capacity certified. The commitments undertaken during the
the French capacity mechanism is not being introduced as a
certification process to make certified capacity available ensure
standalone initiative, but rather in the light of all the measures
that the capacity will effectively contribute to security of supply
undertaken and their positive effects. In other words, these
during peak periods.
measures cannot be substituted for the capacity mechanism,
which is necessary to generate an additional signal targeting
That being said, regardless of how the capacity mechanism
security of supply.
is qualified, the legality of the public intervention is evaluated
notably based on necessity and proportionality tests, particu-
As regards proportionality, the analyses presented in this report
larly based on the specific analytical framework proposed in the
demonstrate compliance with the European Commission’s
Staff Working Document “Generation Adequacy in the internal
recommendations and show that the choices made are pro-
electricity market - guidance on public interventions”.
portionate to the objective of ensuring security of supply. The
one remaining open point is the participation of cross-border
Regarding necessity, RTE’s Adequacy Forecast Reports comply
capacities in the mechanism. Indeed, some legitimate questions
with the European Commission’s recommendations:
can be raised about the compatibility with European rules of the
229
decision to account for the contribution of foreign capacities to
the kind of market architecture that would allow such effective
security of supply in France implicitly. It should be noted that
participation. The European Commission considers this to be
this implicit solution results in a high degree of economic effi-
one possible approach.
ciency. By reducing domestic capacity needs and thus avoiding
situations of overcapacity, the contribution of foreign capacities
RTE thus considers that the French capacity mechanism takes
to security of supply is already factored in as a positive exter-
into account the provisions of the EU acquis, particularly those
nality. Moreover, chapter 9 features a roadmap outlining the
included in Directives 2009/72/EC and 2005/89/EC, and that
specific milestones included in the rules for moving toward a
it complies with the principles of necessity and proportionality
target mechanism that explicitly recognises the contribution of
described in the European Commission’s recommendations.
foreign capacities to security of supply in France and discusses
230
COMPLIANCE WITH EUROPEAN PROVISIONS AND PRINCIPLES   / 10
231
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capacity: markets failures and capacity instruments in France and
the United States, CIGRE C5 Proceedings, 2008
Wolak, Frank A. (2003), Measuring Unilateral Market Power in
Wholesale Electricity Markets: The California Market 1998 to
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233
ANNEXE 1: LIST OF PARTICIPANTS
IN MAC CONSULTATION
RTE contributors:
Clotilde LEVILLAIN (Présidente de la CAM)
(RTE)
Chloé LATOUR
(RTE)
Mathilde BOURIGA
(RTE)
Cédric LEONARD
(RTE)
Colas CHABANNE
(RTE)
Céline MARCY
(RTE)
Mathieu CHUPIN
(RTE)
Bruno MENU
(RTE)
Jean-Jacques COURSOL
(RTE)
Marie PETITET
(RTE)
Gabriel DA-SILVA
(RTE)
Rebecca NAKACHE
(RTE)
Christophe DERVIEUX
(RTE)
Thomas VEYRENC
(RTE)
Anne DUBUISSON
(RTE)
Gérald VIGNAL
(RTE)
Arthur HUBERT
(RTE)
RTE would like to thank all participants in the consultation:
Mehdi HAJJAM
Géry LECERF
(EDF)
Christophe TRZPIT
(EDF)
(ALPIQ)
Nicolas BARBANNAUD
(EDF-T)
Pierre BAUD
(ANPEEP)
Bertrand CHAMINAUD
(EGL)
Sylvain ROMIEUX
(ANROC)
Vincent HOFFBECK
(ELECTRICITE DE STRASBOURG)
Alexis JACQUILLARD
(ELECTRICITE DE STRASBOURG)
Marc KOENIG
(ELECTRICITE DE STRASBOURG)
Natacha HAKWIK
Barbara WUYTS
(AXPO)
Quentin HARLE
(COFELY)
Yann MICHEL
(CRE)
Benoit DOIN
Aurélien PAILLARD
(CRE)
Juan LOPEZ-TERRADAS
Emmanuel WATRINET
(CRE)
Anne-Soizic RANCHERE
(ENERGY POOL)
(ENEL)
(ENERGY POOL)
(ENEL)
Antoine CARON
(DGEC)
Emilie SCHOLTES
Etienne HUBERT
(DGEC)
Emmanuelle CARPENTIER
(EON)
Thibault LEINEKUGEL
(DGEC)
Maëlle DURANT
(EON)
Antoine PELLION
(DGEC)
Emmanuelle JOUBERT
(EON)
(DGEC)
Gad PINTO
(EON)
David CHANTELOU
(DIRECT ENERGIE)
Bruno GAILLARD
(EOS)
Fabien CHONE
(DIRECT ENERGIE)
Julien TOGNOLA
234
Hervé LEXTRAIT
(ALPIQ)
(ACTILITY)
Aurore LANTRAIN
(EPEX SPOT)
Arnaud BORTOLOTTI
(EDF)
Audrey MAHUET
(EPEX SPOT)
Julian BOUCHARD
(EDF)
Rémi OUDOUL
(EPEX SPOT)
Clotilde BRETON
(EDF)
Florence ARNOUX-GUISSE
(ERDF)
Richard COMBESCURE
(EDF)
Remi GRASSET
(ERDF)
Jean-Christophe GAULT
(EDF)
Christophe GROS
(ERDF)
ANNEXES
Coralie NASLIN
(ERDF)
Maxime DAUBY
(SGE)
Alexis SAUVAGE
(ERDF)
Antoine DEBROVES
(SGE)
Johann ZAMBONI
(FLEXIWATT)
Francisco DELFINI
(FNSICAE)
Pascal GAT
Raphael LAUBRÉAUX (FNSICAE)
Claude CONRARD
Jean-Michel MICLO
(FNSICAE)
Julien DELAGRANDANNE
Philippe GAY
(SGE)
(SNCF)
(SOLVAY)
(SOREGIES/ELE)
Alain FUSER
(GDF-SUEZ)
Lillian DALE
Stephane HECQ
(GDF-SUEZ)
Thibault CHRISTEL
Redha LOUIDA
(GDF-SUEZ)
Baptiste MAMET
Chantal LY
(GDF-SUEZ)
Gildas BARREYRE
(UNIDEN)
Arnault MARTIN
(GDF-SUEZ)
Stephane DELPEYROUX
(UNIDEN)
Patrick GODFRIN
(GEG/ELE)
Sophia ELASRI
(UNIDEN)
Sandra EDOU
(HEX)
Raphaelle IMBAULT
(STATKRAFT)
(TOTAL)
(UEM)
(UNIDEN)
Aurora ALVAR MIRO
(IBERDROLA)
Dorothée COUCHARRIERE
(VATTENFALL)
Guillaume FAUCONNIER
(MARKENER)
Laurence MARTIN
(VATTENFALL)
Aurélie LEMERCIER
(NOVAWATT)
Stephane CHANCY (VERBUND)
(Planete OUI)
Philippe COUCHE
Pierre BIVAS
(VOLTALIS)
Jean ANGOTTI
(POWEO Pont sur Sambre Production)
Nicolas GAULY
(VOLTALIS)
Stéphanie BOUCHET
(POWEO Pont sur Sambre Production)
Jérôme SIMON
(WATTVALUE)
Thomas ULRICH
(RWE)
235
ANNEXE 2: CONTRIBUTIONS TO
THE STAKEHOLDER CONSULTATION
Workgoup/Questionnaire
#
Stakeholders
Q1 28/01 Basic parameters
14
Alpiq, ELD, EDF, Enel, Energy Pool, ERDF, EON, GDF Suez, NovaWatt, Direct Energie,
SmartGrid Energy, Statkraft, Total Gas & Power, UNIDEN
WG of 07/02 on questionnaire 1
3
RTE, EDF, GDF Suez
Q2 12/02 Obligation
12
Alpiq, ELD, EDF, Enel, Energy Pool, ERDF, EON, GDF Suez, Direct Energie, SmartGrid
Energy, Statkraft, UNIDEN
WG of 19/02 on questionnaire 2
2
RTE, UNIDEN
Q3 20/02 Certification
13
Alpiq, ELD, EDF, Enel, Energy Pool, ERDF, EON, GDF Suez, NovaWatt, Direct Energie,
SmartGrid Energy, Statkraft, UNIDEN
WG of 27/02 on questionnaire 2
(continued)
3
RTE, EDF, ERDF
WG of 20/03 on questionnaire 3
4
RTE, EDF, ERDF, GDF Suez
WG of 02/04 on overall scheme
2
RTE, Direct Energie
WG of 25/04 Illustrations
2
RTE, EDF
WG of 17/05 Settlement
4
RTE, EDF, Energy Pool, GDF Suez
WG of 29/05 Certification of
controllable capacities
6
RTE, EDF, Energy Pool, EON, GDF Suez, UNIDEN
WG of 07/06 Obligation
parameters
3
RTE, EDF, GDF Suez
WG of 19/06 Certification of
intermittent capacities and
reduced contribution
3
RTE, EDF, ERDF
WG of 28/06 Capacity verification
4
EDF, ERDF, EON, GDF Suez
WG of 09/07 Calculation of
obligation
3
RTE, EDF, ERDF
WG of 02/10 Draft rules, parts 1 to
4, 7 and 8
7
Alpiq, EDF, ENEL, EON, EPEX SPOT, ERDF, GDF-Suez
WG of 09/10 Draft rules, part 5
8
Alpiq, Direct Energie, EDF, ENEL, Energy Pool, EON, ERDF, GDF-Suez
WG of 14/10 Draft rules part 6
7
Alpiq, EDF, ENEL, Energy Pool, EON, ERDF, GDF-Suez
Feedback from consultation on
draft rules
16
Alpiq, Direct Energie, ELD, EDF, EFET, Energy Pool, EON, ERDF, GDF-Suez, Novawatt, Poweo
Pont sur Sambre Production, SGE, Statkraft, UIC, UNIDEN, Voltalis
WG of 14/11: Exchanges,
transparency and competition in
the market
1
RTE
WG of 22/11 Treatment of
intermittent capacities
2
RTE, EDF
WG of 28/11 Calculation of
temperature sensitivity
3
RTE, Direct Energie, EDF
WG of 05/12 Capacity monitoring
and verification; European aspects
3
RTE, ERDF, GDF-Suez
All contributions can be found on the CURTE concerte website (https://concerte.fr).
236
RTE Réseau de transport d’électricité, Société anonyme à Directoire et Conseil de surveillance au capital de 2 132 285 690 € - RCS Nanterre 444 619 258
Conception & réalisation : Good Eye’D - ©Fotolia - Impression sur papiers issus de forêts gérées durablement.