Capacity is no longer a reason for subsidies to fossil power

Check the national regulation regarding extreme power shortage situations, and educate either the regulator or the balance responsible power companies. Do not accept capacity arguments for subsidies to fossil fuels.

Electricity market regulation introduced in recent decades in many countries to facilitate competition varies remarkably between countries, even within the European Union.

Experience has shown that simple regulation is the most efficient approach. Exceptions and exemptions introduced into regulations – with good intentions to solve problems – often create more problems. Worse, complicated regulations make it difficult for actors to understand enough to behave rationally.

The fundamental rule for any competitive electricity market is that actors who want to trade electricity via the grid must have a party that assumes responsibility for economic balance. This party tries to achieve physical balance, using a day -ahead spot market often combined with intraday trading until the last hour before delivery. During the final minutes or seconds the System Operator (sometimes called Transmission System Operator) will ensure real-time balance in the system as a whole using a balancing market – a market that always involves power producers and sometimes also consumers willing to adjust consumption.

After managing the system balance at some cost, the System Operator checks measured production and consumption data, and invoices those balance responsible parties that have failed to achieve physical balance. Usually the marginal cost of balancing is low, and balance market prices are close to the spot-market prices, often a day-ahead market that decides which power generators can provide the lowest-cost power during the day.

This is also the case when there is a lot of solar and wind power in the system, as generation can be predicted with the same precision as the prediction of consumption. Instances when the balancing market shows prices well beyond the spot market occur when unexpected events require the System Operator to make large corrections in the balancing market, typically failures of large thermal power plants or extreme weather conditions that raise consumption.

Those who do not understand the importance of this balance responsibility and talk about the need for a “capacity market” in addition to the regulation described above are dangerous if they have influence on the market. They do not understand that they are already required to provide capacity to match the possible power demand they have granted their customers the right to use.

However there may be shortcomings in the regulations that allow them to escape their responsibility if they create damage. If a lot of thermal power is shut down, there is a possible scenario in which there is little wind, no sunlight, and low temperatures that raise power demand to the extent that the System Operator cannot find generating capacity or voluntary demand reduction in the balancing market. Instead the System Operator has to disconnect unwilling customers in order to maintain balance in the system.

Several countries have regulations that do not define how balance responsible parties who fail to achieve physical balance in such a situation should be treated. Electricity companies may believe they can get away with promising their customers to deliver power under any condition without having the means to supply it.

When properly regulated, there is a predefined “disconnection price”. In Sweden it is €5,000/MWh. This is high enough for any actor to understand there is value in having capacity available, or other less costly options such as voluntary demand-side opportunities, to avoid ending up off-balance during extreme situations. Some companies in Sweden have learned that a failure can eat up total net assets in hours or days.

With this complete balancing responsibility defined, there is no reason to call the market an “energy only” market, as capacity is valued as well. As a result there will not be an uneconomically high risk for power system failure.

Regarding the economic consequences of such real market regulation it is worth noting that the largest economic risk appears to be the failure of large thermal power plants and high-capacity power lines. The risk of thermal power creating balance problems makes the idea that large old thermal power plants deserve subsidies for capacity reasons even less convincing.

So check the national regulations regarding extreme power shortage situations, and educate either the regulator or the balance responsible power companies. Do not accept capacity arguments for subsidies to fossil fuels!

Tomas Kåberger