Capacity market in France

The Nouvelle Organisation du Marché de l’Electricité Law n°2010-1488 dated 7 December 2010 (the NOME or New Organization of the Energy Market) instituted a scheme of capacity obligations called the capacity market under articles L. 335-1 and seq. of the Energy Code. Article 6 of the NOME Law provides that « the energy supplier contributes, depending on clients’ consumption specificities, in terms of power and of energy, on the continental metropolitan soil, to the safety of energy supply ».

Order n°2012-1405 dated 14 December 2012 and the implementing decree dated 23 January 2015 specify the conditions of implementation of the capacity market mechanism. Every year, energy suppliers are assigned a capacity obligation under which they are required to ensure their capacity to provide the actual consumption of their clients during peak periods¹, i.e. they guarantee they have energy capacity in a certain amount (garantie de capacité). In order to do so, suppliers must either own production plants or energy curtailment system, or purchase capacity guarantees from other energy suppliers² in the form of certificates.

Such certificates constitute the proof the obligation was duly fulfilled. The Réseau de Transport d’Electricité (the RTE or Energy Transportation Grid)³ issues the capacity certificates to energy suppliers and consumption curtailment operators⁴. These certificates will prove the contribution of the energy suppliers to the risk reduction of failure during peak periods of energy consumption. From now on, producers will receive an allowance regarding the availability of their production capacity and curtailment operators will be compensated depending on their ability to modulate energy consumption.

The specificities of the energy market in France

Source : RTE – the grid of power intelligence

On the other hand, the energy market offer poorly remunerates investments in capacities of energy production and in capacities of energy consumption curtailment. A report submitted in April 2010 by representatives Poignant and Sido in relation to the control of energy peak outlined the difficulties of the present energy market to attract investments in high-technology plants, even though such plants are necessary to guarantee a sufficient level of available energy during peak periods.

However, energy cannot be stored and must be constantly produced in accordance with the consumers’ demand. The consequence of these two specificities of the French energy market is the inadequate balance between the level of the available energy and the quantity of energy requested during peak periods.

According to a published RTE assessment, such inadequacy will increase in the coming years and will constitute a genuine threat for the safety of French energy supply by year 2016. Thermal production means (fuel, coal) will slowly be abandoned. As from 2013, GDF Suez (renamed Engie) mothballed⁵ its combined cycle power plant located in Cycofos (Bouches-du-Rhône) and cut off the electric grid of a 490 MW capacity. The very same year, the group cut back its activities, each with a 435 MW capacity, in Montoir-de-Bretagne (Spem) and in Fos-sur-Mer (Combigolfe)⁶. Coal plants and oil-fired plants have also been shut down since the specificities of the plants did not comply with European environmental norms that will be in force from early 2016.

The assessment also states that in case of severe winter conditions, the lack of energy could be up to 900 MW during winter 2015-2016 and up to 2,000 MW during winter 2016-2017. According to Dominique Maillard, President of RTE, the global cost of one unprovided kilowatthour was estimated to be 200 times higher than the production cost of the same kilowatthour. Two factors must be noted: a massive power curtailment involves loss for companies and individuals, and energy must be imported at high prices.

Therefore, as a strong sign of France’s commitment in the energy transition, the capacity market is bound to prevent any failure risk in the French energy system by helping to ease the transition to consumption peaks. It will be instituted by year 2016.

The multiplication of national capacity markets in Europe

Many European countries have already set domestic capacity schemes to ensure the safety of energy supply (United-Kingdom, Ireland, Sweden, Finland, Belgium, Poland, Hungary, Portugal, Spain, Italy, Greece). Capacity schemes are generally divided in three instruments, the last one being the most complex:

• capacity payment : providers receive a fixed compensation;
• strategic storage : grid managers must create an energy storage to cover risks of shortage;
• capacity market: a new market is created on which energy capacity is traded in the form of certificates.

Within the European Union, the United-Kingdom is the sole country to be already endowed with a capacity market. It is expected that each year, the British energy grid manager organizes centralized reverse auctions from which a capacity level is obtained. Such capacity level is required in order to guarantee a production level in adequacy with the energy demand. The first auctions occurred at the beginning of 2015 and set the energy capacity price that would be in force during peak periods of winter 2018-2019. A 49.3 GW capacity will be traded for an equivalent price of £19.40/KW-year.

In addition to France, Italy and Hungary are currently instituting a capacity market.

In a press release dated 19 December 2012 in relation with the decree dated 14 December 2012, the French Minister of Environment pointed out the targets of the capacity market regarding the specificities of the French energy market:

• to offer an additional remuneration for energy producers regarding the availability of their plants. Such additional remuneration would enable them to invest in energy peak production means⁷;
• to remunerate the structured offers of curtailment operators which would enable them to develop new commercial offers of curtailment ;
• to add value to production and curtailment capacities which are only solicited during peak periods and with a low-functioning rate.

The curtailment market development will be enhanced in a long-term perspective.

Various actors in the electricity market are called upon to contribute to the implementation of the capacity market. The below figure outlines the key actors in the capacity market and their respective missions⁸.

Mandatory actors

Mandatory actors refer to:

• suppliers, as actors with power purchase activity in order to resale power to end consumers or to grid managers in compensation of their loss, and entitled to an administrative authorization;
• end consumers (large consumers) who do not partially or entirely purchase power from a supplier;
• grid managers regarding their loss and who do not purchase power from a supplier;

Capacity owners

There are two kinds of capacity holders:

• production capacity owners (producers) who commit to make their production means available ;
• curtailment capacity owners (curtailment operators) who encourage consumers to reduce their consumption during peak periods.

State

The State pilots the scheme but does not directly intervene on the market.

In particular, it defines the rules of capacity scheme, after the RTE submitted a report and the CRE, its recommendations.

Réseau de Transport d’Electricité (RTE)

The RTE, energy transport grid manager, has several functions in relation with the operation of the capacity mechanism:

• the global management of the mechanism: the issuance of capacity certificates, the notification of obligations to capacity market’s actors – including the calculation of the capacity obligation of each supplier, - the accounting of the capacity guarantee held by suppliers, the control of the effectiveness of the production capacities and of curtailment owners, the calculation of capacity gaps, keeping records of the certified capacities and of the capacity guarantees;
• proposing rules for capacity mechanism, including calculation and enforcement of penalties in case of capacity gaps;
• the identification of capacity needs and energy consumption forecasts during consumption peak periods.

The manager of certification perimeter

In a manner similar to that of the energy balance manager (the RE or Responsable d’Equilibre), a decree dated 14 December 2012 introduced the notion of a manager of certification perimeter⁹ (the RPC or Responsable de Périmètre de Certification).

Such quality is required to be entitled to enter into an agreement with RTE.

The RPC is a legal entity, financially responsible for gaps that are assessed on his certification perimeter between the declared availability level and the real availability level. The RPC settles penalties owed by owners and as provided by article L. 335-3 of the Energy Code. Under this article, the owner must settle a penalty to the energy transport grid manager in the event the effective capacity is lower than the certified capacity.

French Regulatory Commission of Energy (CRE or Commission de Régulation de l’Energie)

The CRE has several control and supervising functions:

• supervising the operation of the capacity market, including financial transactions;
• approving mechanism rules as proposed by RTE, in particular the calculation method of gaps between the real availability and the certified availability of capacity owners;
• defining and enforcing financial penalty scale in the event of gaps : it is expected penalties shall be an amount of EUR 0 to EUR 40,000 per MW a year;
• substantiating information on obligation and certificate transactions.

The implementation of the capacity market started on 1 April 2015 and the capacity scheme will be effective during winter 2016-2017. The following calendar was set for the first years of delivery:

• 1 April 2015: opening of the counter for certification requests, opening of the certified capacity register and of control measures during consumption peak periods, opening of the capacity guarantee register;
• as from 1 April 2015 until 31 December 2015¹⁰: certification of production capacity, already operating, on the first and second years of delivery (2017 and 2018);
• as from 1 April 2015 until 31 October 2016 : certification of curtailment capacities, already operating or in the form of projects, and of the production capacities, in the form of projects, for the first year of delivery (2017);
• as from 1 April 2015 until 31 October 2017: certification of curtailment capacities, already operating or in the form of projects, and of the production capacities, in the form of projects, for the second year of delivery (2018).

Certification attributes a volume of capacity guarantees for each capacity. Such allocation shall match the given contribution to the risk reduction of electric system failures. The following figure outlines the steps of certification:

The regulatory framework provides the following certification method:

• a certification request is sent by the owner to the relevant grid manager regarding the capacity connection¹¹ ;
• the level of certified capacity is based on data as declared by the capacity owners;
• the level of effective capacity is estimated from control results collected during the year of delivery;
• within financial regulatory framework, the assessed gaps between the levels of certified capacity and of effective capacity are corrected.

Certification permits the holder to obtain capacity guarantees in a period that shall not exceed two months as from the reception of the certification request until the issuance of capacity guarantee to the owner.

In order to abide by their capacity obligation, capacity suppliers are allowed to purchase or sell capacity guarantee on the capacity certificate market.

The price of a traded capacity amounts to the value of curtailment and of the availability of production capacities during peak periods.  

Trade register or register of the certified capacities

The capacity guarantees are recorded in a trade register¹² held by RTE. This secured and confidential register collects issuance operations as well as trade transactions and destructions of capacity guarantees. The register is opened as from the first issuance of capacity guarantees and can be consulted on the following website: https://rega-rte.fr/.

A public register of certified capacities, held by RTE, is at the disposal of the actors. Such register contains information regarding the coming four years of delivery as well the past two years:

• the global level of certified capacities for each sector;
• the detailed level of certified capacities for each EDC which capacity is higher than 100 MW;
• the detailed level of certified capacities, on an aggregate basis, for each EDC which capacity is lower than 100 MW;

The ownership of a capacity guarantee is granted after RTE has registered the said guarantee on the holder’s capacity guarantee account.

A capacity guarantee is only valid for one year of delivery: a capacity guarantee issued for a specified year of delivery and recorded on the relevant year register cannot be transferred from that register account to another of a different year of delivery.

Sale of capacity guarantee

Change in the ownership of a capacity guarantee results from a sale of guarantee entered into between two legal entities, each holding an account in the trade register of capacity guarantees.

There are two ways to sell a capacity guarantee:

• a guarantee transaction: the parties agree upon a sales price;
• a guarantee transfer: no price is required for this operation.

Trade conditions

Trade of capacity guarantees shall be made accordingly to the following conditions:

• by a mutual trade agreement: two actors agree on the object of the trade and its price. The actors finalize the transaction by sending a notification to RTE who modify in consequence each actors’ account in the register of capacity guarantees;
• on a regulated market: a specific platform centralizes sale and purchase offers. The implementation of such platform is outlined by the rules of capacity mechanism. However, the platform operation shall be ultimately specified during ulterior discussions between RTE and companies in charge of this type of platforms.