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Capacity markets and the EU target model – a Great Britain case study

Hawker, G. S. and Bell, K. R. W. and Gill, S. (2016) Capacity markets and the EU target model – a Great Britain case study. In: e-CIGRÉ. CIGRE, Paris, pp. 1-15. (In Press)

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Abstract

The growth of interconnection between national electricity markets is key to the development and competitive efficiency of the Single EU Market for Electricity. However, in parallel with the development of the Single Market, a growing number of EU Member States have implemented – or are in the process of developing – national Capacity Mechanisms in order to ensure future security of supply, which may distort the cross-border trade of energy across interconnectors and reduce total welfare. In particular, the Electricity Market Reform (EMR) legislative package recently brought in by the UK government introduced a Capacity Market (in which two rounds of auctions have taken place to date) for the provision of generation capacity from 2018. In order to ensure that such national markets do not distort the wider energy market, it is important that the role of cross-border capacity, and the availability of interconnector capacity, is correctly consolidated into such mechanisms. In the first annual GB auction the net contribution of interconnection was included on a conservative basis informed by historical data, and while interconnectors have since been permitted to bid into the Capacity Market at a de-rated value (in a similar manner to domestic generation), generators in other markets are still not able to explicitly participate. This may continue to introduce market distortions and adversely impact both short-term dispatch and long-term investment decisions in both the GB and neighbouring markets. A number of routes are available to resolve this through a mechanism to permit cross-border participation of generators, but this requires resolution of a number of complicating factors, not least a means for properly allocating transmission capacity without introducing further distortions to the energy market. Alternative solutions could be enacted at an EU-level, such as through the alignment of Capacity Mechanisms to a common model, or the introduction of an EU-wide single Capacity Mechanism, but the current regulatory focus appears to remain on resolution of such issues at a national level.