BRUSSELS INSIDER #1 - September 11, 2018
Seven Member States have written to the European Commission to argue that they should be free to organise capacity mechanisms the way they want. They argue that security of supply is a national responsibility. But capacity mechanisms also affect climate and competition, which are European competences. The fight over capacity mechanisms in Brussels is coming to a head.
There is a fight brewing in Brussels over the use of capacity mechanisms. These are publicly-funded schemes in which the state pays generators (or demand response providers) simply for being available. Their rationale is anchored in fears for security of supply in an ever more decentralised, renewables-dominated energy system. The basic idea is that when the wind drops or the skies darken, there is the option of calling upon other generators or demand response providers to plug the gap. Environmentalists warn that this risks creating new subsidies for coal.
A thorn in the side
The European Commission’s first guidance on how to assess capacity mechanisms came in July 2014, as part of new EU guidelines on state aid for energy and the environment. Those guidelines run from 2014 to 2020. Capacity payments are market distortions, hence they need to be approved as state aid. In theory, these guidelines are up for a post-2020 review about now, but no news on that so far. Energy Post did not get a reply from the Commission in response to a request for further information on this.
Since the new guidelines entered into force, the Commission has approved no less than 15 capacity mechanism requests from Member States. In a sector enquiry report finalised in November 2016, it counted 35 capacity mechanisms in the 11 Member States it analysed. Spain alone has four.
Problem is, the same report warned that Member States “have often failed to adequately assess the need for a capacity mechanism before introducing one”. In addition, “many Member States have yet to implement market reforms that are indispensable to deliver on security of supply”. And “the design of most capacity mechanisms could be significantly improved”. In practice, mushrooming capacity mechanisms are a thorn in the side of a Commission pushing for a European energy market.
Informal energy council
In its proposals on power market design in the Clean Energy Package of November 2016, the Commission took capacity mechanisms to task from another perspective. It proposed the conditions under which Member States can set them up. The Commission wants them to be a temporary, last-resort option. It included a controversial proposal too for a 550gCO2/kWh emission performance standard (to exclude coal). All these proposals are finally entering “trilogues”, or negotiations between Member States, MEPs and the Commission, this autumn. After a kick-off session at the end of June, negotiators meet again today, 11 September.
Capacity mechanisms are not on the official agenda. But they will be on everyone’s minds. The 550gCO2/kWh proposal proved a flashpoint even at the June “meet-and-greet” session. And if capacity mechanisms are not on the agenda today, it is because the Austrian EU presidency is saving them up for a discussion by EU energy ministers when they meet for their informal energy council in Linz, Austria, next week.
Capacity mechanisms are one of the key topics on the informal’s agenda on 18 September, Energy Post understands. It is surely in the run-up to this, as well as to coincide with today’s trilogue, that seven European governments have issued a “non-paper” setting out their views on capacity mechanisms.
Protect your own
The essence of the paper, which is dated to 4 September, is that Member States should be free to do what they want on capacity mechanisms. Security of supply is a Member State responsibility so it should be up to Member States to decide if they need a capacity mechanism or not, and what form it should take. A “broad spectrum” of capacity mechanisms makes a lot of sense, the paper suggests.
The seven signatories – France, Poland, the UK, Italy, Greece, Hungary and Ireland – have all had capacity mechanisms approved by the Commission in the past four years. So their position makes sense: they have existing schemes to defend against fresh interference by Brussels. Except Hungary – this is the odd one out in the list. One expert that Energy Post spoke to suggested it was showing solidarity with Poland. The same EU source expressed surprise that Spain was not on the list, attributing this to its recent change in government.
These seven countries emphasise the importance of national adequacy assessments as the basis for decisions on capacity mechanisms. Yes, regional and/or European assessments may be valuable, but they should not be the “deciding factor”. They reject the Parliament’s call for “implementation plans” to eliminate issues creating adequacy concerns. They want to protect existing contracts, mechanisms and installations.
The non-paper argues that existing capacity contracts should be exempt from the new rules. This would mean that Poland and Italy could pursue capacity contracts of 15 years, as per their schemes approved by the Commission in February this year, even if MEPs suceed in limiting contracts to one year in the new legislation.
Keeping coal alive
It gets more complicated when we get to the proposed emissions performance standard. This should apply to planned as well as approved capacity mechanisms, the seven countries say. But they want a “suitable and realistic transition period for existing installations that do not yet meet the emission criteria”. Moreover, their definition of an “existing” installation is generous: one whose final investment decision was taken before the new electricity market regulation entered force (not one whose production had started at entry into force, as MEPs want).
The Polish Electricity Association (PKEE) welcomed all of the above in a press release on 6 September, in particular the “predictability” created by the care for existing contracts, mechanisms and installations. Climate Action Network (CAN) Europe took quite a different view: “Some Member States disturbingly back Poland in its struggle to keep coal alive,” it warned in its press release. It accused the seven signatories of being in “stark contradiction” to their Paris climate commitments. Coal plants could get public money for “decades” to come. And that while France, the UK and Italy are part of the “Powering Past Coal Alliance”.
It’s true that two of the seven signatories, Poland and Greece, are the only two members of Eurelectric, the European electricity association, who did not sign up to its no-new-coal-after-2020 pledge just over a year ago. But as we reported at the time, there are unlikely to be a lot of new coal plants built in Europe. To give just a few reasons: ten national coal phase-outs announced so far, an EU carbon price that has just hit the €25 mark, and new NOx, SOx, mercury and particulate matter limits from 2021 (via the EU’s “LCP bref”).
The big challenge is existing coal – and to some extent, gas – plants. Germany is going to be a pivotal voice. Nearly 40% of the coal burned for electricity in Europe is in Germany (see EUenergy App). It’s not a signatory of the non-paper because this paper categorically rejects any differentiation between different kinds of capacity mechanisms, notably the Parliament’s preference for less-distorting “strategic reserves”. Germany has exactly this kind of reserve. They are kept out of the market and only switched on in emergencies.
Germany famously created a so-called lignite reserve two years ago. In May 2016, the Commission approved €1.6 billion in public funds (i.e. state aid) to mothball and close eight German lignite plants. This was supposed to save 11-12.5 million tonnes of CO2 by 2020. That’s over half the contribution the German energy sector still needed to make for Germany to meet its 40% emission reduction target for 2020. The German government should have published a report about the actual savings this summer. There is no sign of it so far, although Energy Post understands that the work has been completed.
As part of their alternative treatment of strategic reserves, MEPs have proposed that a 200kgCO2/KW annual cap rather than the 550gCO2/kWh standard should apply to them. France has also introduced the idea of an absolute cap to the Council – originally 350kgCO2/KW, later doubled in Council discussions – but without the distinction between reserves and other mechanisms.
Manon Dufour, head of the Brussels office for environmental think tank E3G, explains that the idea of an absolute cap was proposed by France as a way to accommodate open cycle gas plants. “It was created to make the proposal acceptable for gas and ended up being a really strong exemption for coal,” she told Energy Post on 10 September. At 700kgCO2/KW per year and with no attached end date for such capacity payments, the Council’s position could enable thousands more hours for coal and even lignite plants, she warns.
Dufour describes capacity mechanisms as a “risk management tool”. This echoes Andris Piebalgs, the EU’s former Energy Commissioner from 2004-9, in a webinar on capacity mechanisms last week. The webinar was organised by Make Power Clean, a campaign for the 550gCO2/kWh standard, backed by organisations such as Eni, Shell, Siemens and SolarPower Europe. Piebalgs called capacity mechanisms a “safety valve”.
He also ascribed to capacity mechanisms a role in investment: “There are not enough signals in the market for new investments. We cannot exclude that for some transition period, there could be justification for a capacity mechanism basically to encourage new investment. But it should encourage renewables investment, not fossil investment.” In parallel, he warned against being “overcautious” about security of supply – “someone will have to pay for it”.
Virginie Schwarz, Director for Energy at the French Ministry for Environment, Sustainable Development and Energy, speaking at the same webinar, suggested that capacity mechanisms can help accelerate the transition by giving “comfort to investors”.
Felix Matthes, Research Coordinator for Energy and Climate at the German Oeko-Institut, and a member of the German Coal Commission, took it one step further: “In the long-term there will be a need for both capacity mechanisms that remunerate variable renewables and those that remunerate all the flexibility options that need to complement those renewables.” He warned of the tension between stakeholders trying to protect the old and bring in the new: “We need environmental safeguards that prevent capacity mechanisms compensating for the effect we try to achieve with carbon pricing.”
The Clean Energy Package is not about prolonging the life of coal, said Schwarz. Especially when the EU has committed to phase out fossil fuel subsidies by 2025. And with the next round of UN climate talks in Katowice coming up, France would like the EU to step up its climate target ahead of COP24. Matthes warns that it’s about delivery as well as targets, and delivery is where market design comes in. Europe has to demonstrate that it can decarbonise its power sector as a precondition for meeting any of its climate targets. Matthes’ advice? Use capacity mechanisms to take care of system adequacy and save the political capital for the really difficult stuff, such as dealing with regional job losses from a coal phase-out.