The Regulatory Assistance Project

rue de la Science 23 B - 1040 Brussels Belgium

Phone: +32 2-894-9300web: www.raponline.org

“Energy-only markets” or “a given form of capacity mechanism”?

Asking the wrong question

Michael HoganSenior Advisor28 September

2015

2

“The market is swimming in supply…the difficulty regulators and grid operators need to address is not finding flexibility but creating a structure so that flexibility value is revealed.”Peter Styles, Board Member of European Federation

of Energy Traders (24 September 2015)

Why are market prices so low?________________________________________________

3

Source: Brattle Group, “ERCOT Investment Incentives and Resource Adequacy”

Price formation in markets________________________________________________

4

Which mkt design is best for Europe?

________________________________________________

Relevant ConsiderationsRestores “missing money”

Promotes “adequate” investmentEfficient stakeholder risk/rewardMonetizes full value of flexibilityPromotes demand participationFacilitates low-carbon transition

Facilitates progress toward the IEMEnables market power mitigation

Promotes innovationPromotes new entry

5

New investment in ERCOT market________________________________________________

6

New investment in Australian NEM mkt________________________________________________

7

0 0.5 1 1.5 2 2.5 3 3.5 4

ratio of actual to target reserve margins

North America

Australia

SWIS

NEM

ISO-NE

PJM

NYISO

ERCOT

0 1 2 3 4 5 6 7

avg annual new-build as % of 2014 peak

Investment (& over-investment) experience________________________________________________

Strength of FCM

8

Reserve shortage pricing mechanism

________________________________________________

Within 30 minutes

9

Reserve shortage pricing mechanism

________________________________________________

10

GB cash-out price reform________________________________________________

Source: Baringa/Redpoint

11

Which CRM design is best for Europe?

________________________________________________

€/MWh Relevant Considerations €/MWRestores “missing money”

Promotes “adequate” investmentEfficient stakeholder risk/rewardMonetizes full value of flexibilityPromotes demand participationFacilitates low-carbon transition

Facilitates progress toward the IEMEnables market power mitigation

Promotes innovationPromotes new entry

✔

✔

✔

✔✔

✔

✔

✔✔ ✘

✔✔

✔

✘ ✘ ✘

✔

✔

✔

✘✘✔

✔ ✘ ✘ ✘

✔

✔

✔

✔✔✔

✔

✔

✔

✔

✘ ✔

About RAP

The Regulatory Assistance Project (RAP) is a global, non-profit team of experts that focuses on the long-term economic and environmental sustainability of the power and natural gas sectors. RAP has deep expertise in regulatory and market policies that:

Promote economic efficiency Protect the environment Ensure system reliability Allocate system benefits fairly among all consumers

Learn more about RAP at www.raponline.org

Michael Hogan – mhogan@raponline.org