Quantitative assessment for a European
Capacity Market
19 June 2012
Johan Linnarsson
Head of Long term Market Analysis, Fortum Trading and Industrial Intelligence
1
Purpose of capacity markets:
Three simplified reasons for the capacity mechanism debate identified
• Back-up for RES generation
– Increasing amount of
intermittent RES capacity is
lowering profitability of thermal
generation, which is needed as
back up when RES capacity is
not available
• Demand response
– Through capacity mechanisms
industrial users and aggregators
can find funding for load
reductions in peak situations
• Support long term carbon free
investments
– Capacity markets could give
incentives for investments in
new (back-up) capacity.
2
Source: Fortum Industrial Intelligence Feb’2012
Source: Red Electrica Espana
Capacity mechanisms planned in some major markets
SE&FI: Capacity reserves for
spot market deficits only
RU: capacity market
with price restrictions.
Long-term capacity
supply agreements for
obligatory investments
GB: developing full-scale
capacity auctions, legislation
to be ready in 2013
Partial capacity
mechanisms
IE&NI: Capacity
payments since
2005
PL: Nodal pricing and
capacity market may be
implemented in 2014
FR: capacity purchase
obligations planned to be
implemented by 2016, but
new government could
change the NOME law
PT: same as in
Spain for new
units
Energy-only
market *)
Major capacity
mechanism
DE: Study 3/2012 for the
government proposes fullscale mechanism, but
political opinion still open
ES: Capacity payments for new
units and to existing coal, gas, oil
and hydro capacity
3
Source: Fortum Industrial Intelligence, May 2012
GR: Capacity obligation
mechanism since 2005
IT: Minor payments. New
capacity market mechanism
to be implemented by 2017
Proposals for
new capacity
elements
Regulated
market
restrictions
*) No capacity
payments to power
plants in the dayahead and intraday
markets, but balancing
market reserve
capacity is contracted
in advance.
Starting point for the modeling exercise
• Capacity remuneration debate in Europe has so far been based merely on
qualitative analysis. Fortum wanted to provide quantitative input for the debate.
• In this simplified exercise we have modeled three alternative case examples for
European Power Markets up to 2020: Base case and two alternative capacity
market options (introduction assumed in 2014)
• Modeling has been done with Plexos European power market model
• Modeling and basic assumptions were provided by McKinsey & Company in order to
secure neutrality and any compliance issues.
Disclaimer note: The quantitative modeling work, including figures, are carried out by
McKinsey & Company and does not present any Fortum market view or forecast on
price developments. Commodity prices and underlying assumptions on demand,
transmission, etc are provided by McKinsey. Hence, the figures used in the modeling
exercise do not necessarily represent Fortum's own long-term market view.
4
Three different cases has been modelled
Base Case
EU-wide capacity market
• No capacity markets
• Capacity market in EU for
all firm dispatchable
generation assets
• Active retirements of
capacity by European
utilities in order to
overcome today’s missing
money problem (individual
power plants making
losses in the energy only
market).
• Early retirements of plants
possible*
• regulatory target of 5%
reserve margin in every
European country as
defined by ENTSO-E**.
• Capacity market clearing
is done on a national level
in order to reduce
complexity.
Capacity market only in
Germany
• Capacity market in
Germany for all firm
dispatchable generation
assets. All other countries
continue with energy-only
schemes.
• Regulatory target of 10%
reserve margin.
• No early retirement of
German power plants
• No early retirement of
power plants
* Plants can be taken out of the market due to poor economics 10 years before the end of their technical lifetime; excluding CHP must-runs
** ENTSO-E defines reserve margin of 5% as sufficient in interconnected systems, isolated systems would need 10% of capacity reserve margin.
5
Source: McKinsey power market model Jan’2012, Forum Industrial Intelligence Feb’2012
Market price for firm capacity would be around 50 EUR/kW in
Germany in 2020
Coal
Oil
Gas
Pumped storage
Capacity bid cost curve in Germany1
EUR/kW
50
45
40
35
30
25
20
15
10
5
0
0
5,000
10,000
15,000
20,000
25,000
30,000
35,000
40,000
Firm capacity
MW
6
1 Only including bids >0
Source: McKinsey power market model Jan’2012
Capacity price in Europe would vary significantly by country
Capacity clearing price in EUR/kW – colour indicates firm capacity under pressure
Netherlands
27
UK
Denmark
Norway
Germany
Sweden
49
34
33
<30%
30-50%
Finland
49
33
17
Belgium
Czech
52
49
Austria
Poland
48
24
Switzerland
Hungary
17
13
Portugal
Romania
59
37
Spain
37
France
36
7
Source: McKinsey power market model Jan’2012
Italy
Slovenia
33
60
Slovakia
33
Greece
22
Bulgaria
59
>50%
EU-wide capacity markets
EU would see a major increase of gas and hard coal generation capacity compared
to the base case due to capacity payments by 2020. New capacity as well as late
retirements
Installed Capacity in EU 20+2
1000
800
322
GW, 2020
322
Renewables
Gas and Oil
600
248
400
200
193
Hard Coal
Lignite
Nuclear
67
40
96
44
121
121
117
117
Base Case
Capacity market in EU
0
8
Source: McKinsey power market model Jan’2012
Hydro
EU-wide capacity markets
There would be significant new investments in the EU capacity market case
vs. the base case by 2020
New built capacity in EU 20+2
60
50
40
GW, 2020
At an average investment cost of EUR
750/kW for gas and EUR 1500/kW for
coal and lignite, the difference amounts
to up to EUR 40 billion between the
base case and the highest investment
case
30
44
20
10
4
0
4
0
3
Base Case
Capacity market in EU
Lignite
9
Source: McKinsey power market model Jan’2012
Hard Coal
Gas
EU-wide capacity markets
EU-wide capacity market would not completely change import and export
patterns by 2020
40
X Base case
Y Capacity market in EU
30
7.4
7.2
5.8
3.9
Imports
20
Poland
Czech Republic
10
9.5
-2.4
Austria
TWh/a
-0.8
2.4
Swizerland
0
France
Netherlands
2.3
5.1
-11.2
-12.8
5.6
6.0
-10
Sweden
Exports
-12.8
-14.3
Denmark
-20
-30
-40
Base
10
Negative numbers: exports from Germany
Positive numbers: imports to Germany
Source: McKinsey power market model Jan’2012
Capacity EU
Capacity market only in Germany
Oversupply situation in Germany would lead to significant increase in
exports by 2020
40
X Base case
Y Capacity market in DE
30
7.4
4.8
5.8
1.4
20
Imports
10
Poland
Czech Republic
0
9.5
-5.8
2.3
-10.9
-11.2
-13.7
TWh/a
-0.8
-5.2
Swizerland
-10
France
Netherlands
-20
5.6
0.3
Denmark
Sweden
-30
Exports
-12.8
-14.9
Austria
-40
-50
-60
Base
11
Negative numbers: exports from Germany
Positive numbers: imports to Germany
Source: McKinsey power market model Jan’2012
Capacity DE
In summary capacity markets/payments will:
• lead to more firm capacity
– As intended
• impact cross border flows
– Especially if implemented in only one country
• the volume and cost level will differ between countries
– Large risk that national priorities will lead to different national schemes
12
Thank you
13
Backup
14
Capacity market only in Germany
Germany would see a significant increase of capacity compared to the base case by
2020. New capacity as well as late retirements
Installed Capacity Germany 2020
200
180
160
100
GW, 2020
140
120
100
Hard Coal
Lignite
100
29
80
60
14
40
18
20
18
8
9
21
8
9
Base Case
Capacity market in Germany
0
Renewables
Gas and Oil
15
Source: McKinsey power market model Jan’2012
28
Nuclear
Hydro
Fundamental assumptions are the same across all
scenarios 2020
– 3,390 TWh in EU20+21
Demand
Commodity
prices
– Oil price of USD 80/bbl leads to coal price of 103
USD/t and gas price of 22.6 EUR/MWh
– CO2 price of EUR 25 EUR/t (all real 2011)
Renewables
– 196 GW of wind, thereof 35.5 GW offshore
– 86 GW of solar
– 40 GW of biomass
– 121 GW of nuclear
Nuclear
1 EU27+2 excluding Estonia, Ireland, Latvia, Lithuania, Luxembourg, Malta and Cyprus
16
Source: McKinsey power market model Jan’2012
Power demand only expected to increase slowly on European level
Power demand, TWh
3,458
3,523
3,308
3,389
1,280
1,302
1,215
1,235
1,258
512
538
548
556
France
526
Germany
562
565
567
566
566
355
332
320
307
U.K.
345
Italy
323
344
375
402
429
Spain
278
292
319
341
363
2011
2015
2020
2025
2030
3,244
Other
• Overall modest demand
change over time
–Overall demand
increase of 0.4% per
year
–Highest increase in
Spain and Italy (1.4 1.5% p.a.)
–UK demand goes
down by 0.8% per
year
17
Source: McKinsey power market model Jan’2012
17