Capacity mechanisms and cross-border participation: the eu wide approach in question

Authors

Dominique Finon

Abstract

A capacity remuneration mechanism (CRM) which excludes cross border participants is considered to have serious distortive effects on long term competition, compared to explicit cross border participation (CBP), on the grounds that it doesn’t capture the advantages of multi-system competition. This paper examines the reality of these advantages by distinguishing situations with and without congestion between systems during critical periods because congestion separates markets and their collective goods of reliability and adequacy for each system, and suppresses any economic and physical relevance of a capacity commitment from a new external participant to a CRM. From the limited perspective of any single system, there are two potential advantages of explicit CBP: the first is the supplement of the set of committed capacities to a CRM; the second is the lower cost of the adequacy policy of the system, thanks to enlarged competition, but it is illusory because the clearing price of capacity is the same with and without explicit CBP. Moreover concretization of such benefits for the system is not possible when there is congestion.
From the EU wide perspective, we identify some potential gains of social efficiency from explicit CBP at the multi-system level, when we have systems with a long standing situation of overcapacity beside systems with tight situations during their critical periods; or when there exists projects of hydro equipment (pumping storage, etc… But again, congestion removes any sense to any additional revenue to them. In any case erratic revenues certainly do not steer new investment towards either system. Furthermore exchanges of capacity rights between systems equipped with different CRMs introduce a supplement of distortions compared to the same situation with implicit CPB and no trade of capacity rights. It is problematic in the case of congestion; this delays the price signal of capacity scarcity in the system with the least attractive CRM in terms of revenue and risk management.