POTENTIAL CONSEQUENCES OF CAPACITY
MECHANISMS ON THE PLANNED NORDLINK
CABLE
Berlin, October 23rd 2012
Arndt von Schemde,
Partner, THEMA Consulting Group
European integration in electricity
Markets Investments
3
Key questions
1. What are the effects of market integration?
2. What are the effects of new interconnections?
3. How could capacity markets have an impact of the
effects of market integration and on interconnections?
4
Key questions
1. What are the effects of market integration?
2. What are the effects of new interconnections?
3. How could capacity markets have an impact of the
effects of market integration and on interconnections?
5
Effects of market coupling (1) – efficient utilization
Flow vs. price on
German-Danish border
prior to market coupling
Flow vs. price with
market coupling
Wrong
direction
Capacity not
utilized
Wrong
direction
Capacity not
utilized
6
Effects of market coupling (2) – social welfare
• Model estimates
for North-West
Europe
• EU 27 results
obtained by
scaling up
results
• Value of market
integration likley
to increase with
increasing
shares of RES
105
164175
273
0
50
100
150
200
250
300
"Small mistakes" "Large mistakes"
€m
ill p
er
an
nu
m
North-West Europe EU 27
Low estimate High estimate
Source: THEMA Consulting Group
7
Effects of market coupling (3) – consumer benefits
• Clear benefits for
consumers,
driven by overall
lower prices (up
to € 1.6 bill p.a. if
scaled up for EU
27)
• TSOs lose cable
income: price
convergence
• Nordic countries:
water values
increase – similar
effect as cables
728
961
-552
-731
-71 -66
-1 000
-800
-600
-400
-200
0
200
400
600
800
1 000
1 200
"Small mistakes" "Large mistakes"
€m
ill p
er
an
nu
m
Consumer surplus Producer surplus Congestion rent
Low estimate High estimate
Distributional effects for Northwest Europe
Source: THEMA Consulting Group
8
Effects of market coupling (4) – non-quantifiable
Competition
• Capacity is optimized taking into account all bids and offers in all markets
participating in the market coupling, creating larger markets and more
competition – promoting price conversion across borders and regions.
Forward markets –
the need and the
ability to hedge
• Reduced need to hedge – larger markets absorb uncertainties/risks
• Improved ability to hedge – integration promotes more liquid forwards
Security of Supply
• More efficient utilization of the resources in the power system promotes security
of supply. This is becoming more important with the inclusion of more RES.
• Expected improvements in algorithm will further promote SoS
• More money to invest – improved ability (and reduced need) to hedge
• More efficient investments – better price signals / incentives
• Reduced need to invest – more efficient utilization of existing resources Investments
• Implicit auctions across regions promotes efficient optimization of a more
complex power system
• Efficient market coupling is thus key in promoting efficient inclusion of RES and
the in the transition towards a carbon neutral future
RES integration
9
Key questions
1. What are the effects of market integration?
2. What are the effects of new interconnections?
3. How could capacity markets have an impact of the
effects of market integration and on interconnections?
10
Expanding the geographical scope
11
Security of supply
Efficiency
Nature conservation
Integrating the markets Integrating the power system
Grid in Norway
Nordic interconnections
POLITICAL AMBITIONS
TRADITIONAL FOCUS
… EXTENDED AGENDA
FOR EUROPE
Climate change
Independence from
import of fossil fuels
Energy transition
Growing need for grid and
interconnections
Regional, interregional and
European market integration
and cooperatioon
National and regional market
development and cooperation
Value created by differences
12
Annual variations Peak/off-peak Intermittency
Value creation along several variables
13
Cable income Effects for consumers
and producers Other effects
Arbitrage via hourly price
differences
Flat prices in Norway, due
to hydro
Volatile prices Germany,
due to thermal capacities
and RES
Cables have price effect
Price decrease benefits
consumers, price increase
benefits producers
The sum of effects is
positive
Germany: likely lower
peak prices
Norway: In surplus
slightly higher prices,
in deficit lower prices
Same effects as market
integration
Competition
Security of supply
Climate and RES
integration
….
Effects of interconnections - congestion rent (CR)
To Germany
from Norway
To Norway
from Germany
Hour
Po
wer
pri
ce
(€/M
WH
) CR – from
NOR to GER
CR – from
GER to NOR
Price Germany
(historic)
Price Norway
(historic)
Historic prices (a typical Monday)
14
Price volatility
in Germany
Price differences between Germany and Norway
Low
Medium High
Very high
Effects of interconnections - congestion rent (CR)
2002
2003
2004
2005
2006
2007
2008
2009
2010
4
Scenarios:
1. Nordic power balance - low value of flexibility
2. Nordic power balance – high value of flexibility
3. Nordic surplus – low value of flexibility
4. Nordic surplus – high value of flexibility
2 3
1
15
Key questions
1. What are the effects of market integration?
2. What are the effects of new interconnections?
3. How could capacity markets have an impact of the
effects of market integration and on interconnections?
16
Do we need capacity mechanisms?
Market coupling
Integration of
intraday market
Integration of
balancing markets
NordLink
Internal German
connections
Flow based
market coupling
Other European
grid investments
More demand flex
Market integration
and development
Grid and
interconnections
Is this enough, or do
we need capacity
markets?
Make sure capacity
mechanisms act
neutral w.r.t. other
measures and
incentives
• Capacity markets
should resolve a
form of market
failure
• Make sure capacity
markets do not
create new market
failures
17
Will a capacity market distort the effects of integration?
Reduce value by
“cutting the price
peaks”?
The energy transition need
interconnections and more
flexible demand/generation
…but capacity markets may
reduce their income,
including the income of
NordLink
Reduced
competition by
blocking market
access
• Flexibility is traded outside
the regular markets
• Limited (or no) access for
Norwegian generators
• Reduced incentives to
develop competitive flexible
sources in Norway and to
build interconnections to
Germany
• Costs to German
consumers
• Income to German
generators
• Lost opportunities to
Norwegian generators
?
18
Price volatility
in Germany
Price differences between Germany and Norway 0
Local capacity markets could impact revenues
2002
2003
2004
2005
2006
2007
2008
2009
2010
4
Scenarios:
1. Nordic power balance - low value of flexibility
2. Nordic power balance – high value of flexibility
3. Nordic surplus – low value of flexibility
4. Nordic surplus – high value of flexibility
2 3
1
19
Low
Medium High
Very high
Capacity mechanisms should not be local solutions
Not taking account of
X-border capacities
would increase cost of
solution
• Short-term: Higher
costs associated
with utilization of
existing resources
• Long-term: Higher
costs in addition
due to different
investments
Local solutions Cross-border solutions
High cost
Low cost
Short-term Long-term
Ideal
Cap.mrkt.
20