German Study Investigates Move towards New Capacity-Based Energy Market Design

28/03/2013
The German Energiewende targets a 50% share of renewables in the energy system by 2030. Meanwhile flexible conventional power stations are increasingly incapable of generating sufficient earnings to maintain their economic operation, raising generation adequacy concerns for the coming years. Against this background, a new study conducted on behalf of German association VKU[1] this month presented their vision of a sustainable German energy market design. Reaching across all stages of the value chain, the concept aims to guarantee security of supply for customers at acceptable prices, promote a sustainable energy system and establish reliable investment conditions for the energy sector over the long term. Key recommendations include the introduction of an output-based market, promotion of technology-specific cost subsidies, and network regulation that will allow more intelligent investment.

At a time of heated debate about capacity remuneration mechanisms (CRM) at EU level,[2] the report sees the establishment of a capacity market as a cornerstone for ensuring that existing power stations remain in the network and that investment in assured power station and storage continues. Operators who agree to be available in case of shortages would be awarded so-called output certificates, whose price would result from trading in a marketplace set up specifically for this purpose. In addition, consumers able to lower their assured output requirement by reducing their power consumption during periods of shortages would have the incentive to be more flexible and thus achieve cost savings. VKU expects that additional assured output will be needed by the end of the decade and thus calls for establishment of such a capacity market within three years at the latest.

Secondly, renewable energies (RES) should bear appropriate responsibility for the proper functioning of the overall system, which is currently not the case. The authors believe that further support is needed until the respective technologies are competitive. However, future support should be awarded based on tenders. The quantity of renewable energy capacities would be determined by the State according to technologies and regions. In their bids, investors should consider the revenues they expect to generate through the sales of energy over the period of the tender. The support would be granted as an investment cost subsidy spread over the depreciation period of the plant, thereby providing an incentive to keep the plant in operation. By supporting installed output rather than generated electricity, such support could be compatible with the capacity mechanism. The study assumes that RES would respond to price signals on the market in the same way as conventional plants. Plants set up previously should be ‘grandfathered’ and receive the compensation promised under the Renewable Energy Law.\r

EUROPEAN PARLIAMENT RUBBER-STAMPS ENERGY INFRASTRUCTURE REGULATION

Following the political agreement struck with the Council and the European Commission (EC) last November, Members of the European Parliament (MEPs) gave their green light to the EU energy infrastructure regulation at their plenary session in Strasbourg on 12 March. While the text still needs formal approval by the Council before entering into force, the EC is pressing ahead with the completion of the first list of projects of common interest (PCI) that will be prioritised and could potentially receive public support. Meanwhile, MEPs rejected the political agreement reached by the Heads of State and Government on the Multi-Annual Financial Framework 2014-2020.

The draft regulation, adopted with 539 votes in favour, 85 against and 16 abstentions, sets guidelines for the selection of priority trans-European energy infrastructure projects. Informally agreed under the leadership of rapporteur Antonio Correia de Campos (S&D, Portugal) and the then Cypriot Presidency of the Council, it overhauls the obsolete Trans-European Energy Networks (TEN-E) by introducing a new approach to energy infrastructure projects, defining twelve EU-wide geographic ‘corridors’ and functional areas spanning electricity, gas, oil, carbon dioxide networks, and smart grids. All selected projects will have to fall in at least one of those priority areas and meet specific criteria related to market integration, security of supply or sustainability.

Project promoters will have to apply for the PCI status on a rolling basis every two years projects will then be reviewed by representatives from national governments, the Commission, the EU-wide system operators and project promoters – the first two ultimately deciding on the inclusion of projects on the final PCI list. All projects on the list will benefit from a special regulatory treatment which aims at reducing the complexity of cross-border infrastructure projects. Crucially, they will also benefit from lighter permitting procedures, frequently identified as amongst the main hurdles to infrastructure development. This will include a better coordination/centralisation of the permitting process and a binding time limit of three and a half years for the completion of the overall procedure.

EUROPEAN COMMISSION RENEWS ITS PROPOSAL FOR A FINANCIAL TRANSACTION TAX

On 14 February 2013, the European Commission adopted a new proposal for a financial transaction tax (FTT). The proposed directive was requested by 11 member states that wish to proceed with this tax, which was first put forward by the Commission in September 2011. At that time, a lack of consensus between all 27 member states prevented further progress. The tax will therefore now be implemented under ‘enhanced cooperation’, applying only to the 11 countries in question, which nevertheless represent two thirds of the EU’s GDP. The tax is expected to deliver annual revenues of €30-35bn.

The objectives of this new directive remain the same as those of the original proposal. They are threefold: 1) to avoid the fragmentation of the Single Market that an uncoordinated patchwork of national FTTs would create 2) to ensure that the financial sector makes a fair and substantial contribution to public finances and covering the cost of the crisis and 3) to create disincentives for speculative financial transactions which do not contribute to the efficiency of transactions carried out by financial institutions on all financial instruments and markets with an established link to the FTT-zone, with tax rates of 0.1% for shares and bonds and 0.01% for derivatives. Day-to-day financial activities of ordinary financial markets or to the real economy.

The scope of the FTT also mirrors the 2011 proposal. Taxes will be levied on all citizens and businesses are excluded, in order to protect the real economy. As before, the ‘residence principle’ will apply: the tax will be due if any party to the transaction is established in a participating member state, regardless of where the transaction takes
place. This is the case both if a financial institution engaged in the transaction is, itself, established in the FTT-zone, or if it is acting on behalf of a party established in that jurisdiction. As a further safeguard against avoidance of the tax, the new proposal adds the ‘issuance principle’: financial instruments issued in the 11 participating member states will be taxed when traded, even if those trading them are not established within the FTT-zone. Furthermore, explicit antiabuse provisions are now included.

UPDATE ON THE EU DEBATE ON THE ETS

The debate on the (un)health of the EU Emissions Trading Scheme (EU ETS) looks set to continue at least until the end of 2013. Here is our latest update* on recent and coming developments.
On 19 February the Environment Committee of the European Parliament (ENVI) voted in favour of the rapporteur’s report on the back-loading Decision. The report supports the European Commission’s proposal, although adding slightly tighter conditionality of “an impact assessment showing that impact of such intervention on sectors exposed to a significant risk of carbon leakage is limited” and that “the Commission should be able to make no more than one such adaptation and only during the eight-year period beginning on 1 January 2013.” MEPs from the centre-left S&D group supported the report unanimously, along with three-quarters of the liberal ALDE group, while more than half of the centre-right EPP group voted against the report. The ENVI report will now be submitted for a vote of the Parliament plenary in the week starting 15 April. Meanwhile several additional Member States have adopted positions in favour of the back-loading, including France and the UK, and the Council has continued to discuss the Decision at working party level.\r
The forward timetable on back-loading is uncertain. For the moment it is not expected that the EU Environment Council will vote until after the inter-institutional trialogue which will follow the Parliament plenary. With a quick trialogue, the back-loading Decision could then potentially be finalised during the 18 June EU Environment Council and in another Parliament plenary in the weeks of 10 June or 1 July. Presuming that the Climate Change Committee would then vote on the back-loading Regulation in July/September, followed by 3 months of Parliament scrutiny, the earliest date at which the back-loading could be implemented is late 2013.

EMIR: ENTRY INTO FORCE SCHEDULED FOR MID-MARCH FOLLOWING SURPRISE WITHDRAWAL OF PARLIAMENT CONCERNS

18th February 2013 - In an unexpected last-minute development during the European Parliament’s plenary session in Strasbourg last week, the ECON Committee decided to withdraw its motion rejecting two regulatory technical standards, developed to implement EU financial regulation EMIR, from the agenda of the plenary. ECON MEPs had originally expressed concerns that the standards would be too onerous for non-financial businesses and were not in line with EMIR requirements. Rejection by the plenary could have triggered a formal review of the RTS, postponing their entry into force. But with the motion off the table, Commissioner Barnier confirmed last week that “the standards can now enter into force 20 days after their publication in the Official Journal of the EU, most likely around mid-March.”

EMIR, the EU Regulation on over-the-counter (OTC) derivatives, central counterparties and trade repositories, entered into force on 16 August 2012. It translates the commitment made by the EU at the G20 Pittsburgh Summit in September 2009 to trade most standard OTC derivative contracts on exchanges or electronic trading platforms and to clear them through central counterparties by end-2012 at the latest.

The technical standards necessary to implement the Regulation were adopted by the European Commission in December. This gave the European Parliament and the Council until 19 February to exercise their scrutiny rights. While the Council appeared inclined to follow the Commission proposal, the ECON Committee initially expressed some reservations and was expected to recommend that the plenary reject two of the developed technical standards.

These concerns were very much in line with the concerns of EURELECTRIC and other non-financial stakeholders. Since the beginning of the legislative process, EURELECTRIC had stressed that EMIR should recognise the specific hedging needs of electricity companies by imposing proportionate measures, without affecting EMIR’s overall aim of
reducing systemic risk and increasing transparency in financial markets. Commercial and treasury hedging activities carried out by electricity utilities do not pose a threat to the financial system and should therefore be exempt from clearing requirements. We had also highlighted that the ‘systemic relevance’ should be a key criterion to be taken into account when defining this threshold.

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