This article was originally published in Issue 22 in Energy:2030.
On 12 September, the Belgian Federal Commission for Electricity and Gas Regulation (CREG) issued a note on the implementation of a scarcity pricing mechanism in Belgium. Explaining that renewable generation may cause massive overcapacity in future with difficulties for generators relying on an energy-only market for all revenues, CREG said that it is considering a scarcity pricing regime to bridge the missing money problem. This is intended to support flexible generation to remain on the system to ensure reliability and security of supply.
Belgian market
The Belgian electricity market:
- does not operate a real-time market for reserve capacity
- does not permit virtual trading, and
- facilitates the trading of reserve capacity before the trading of energy.
CREG’s initial proposal on scarcity pricing is based on the Operational Reserves Demand Curve (ORDC) used by the Electric Reliability Council of Texas (ERCOT) rather than more common capacity markets. Generation or demand response units available during times of scarcity will be awarded a “price adder” to the balancing price and two further adders to value reserves in real-time.
Three studies
Two studies have previously been undertaken by CREG in 2016 and 2017 concerning scarcity pricing. The former concluded that, during 2013 and 2014 when Belgian imports were high, there was nonetheless a negative clean spark spread – i.e. Belgian gas generators were losing money by generating additional power, due to high wholesale gas prices. A price adder would close this gap and allow investment in new gas plants or more renewable assets.
The 2017 study concluded that, following the restoration of the nuclear capacity that usually provides around half of Belgium’s power consumption, price adders would have a negligible effect on energy prices. This echoed ERCOT’s experience, where the price adder increased wholesale prices by $0.24/MWh (19p/MWh), less than 1% of the average price – though this was in the context of a generally over-supplied market. This led CREG to the conclusion that, unlike a capacity market (which adds significant costs regardless of functioning), scarcity pricing constitutes a no-regrets option for the improvement of the market.
CREG has therefore conducted a third study, looking in more detail at how a Belgian scarcity pricing mechanism could be implemented – particularly in demand with the expected closure of nuclear plant in Belgium by 2025.
In theory
CREG has two objectives for this revision to market design: short-run efficiency, to make the best use of existing resource; and long-run efficiency, to deliver reliability by providing proper incentives for investment. The nature of the electricity market makes it impossible for sufficient consumers to either respond to price, or to express a preference for reliability, instituting a need for a mechanism to create this. The Texan ORDC market provides this by driving high scarcity pricing, which motivates forward contracting to limit the risk of exposure and in turn supporting investment and inducing investment. However, this is itself underpinned by large industrial demand, which creates a liquid forward market.
In addition, the entry into the market of large amounts of zero-marginal cost renewable generation, which does not respond to wholesale price signals (particularly where subsidies are paid according to the amount of power generated and therefore encourage maximum generation allowed by the weather, under all market conditions), further skews the wholesale markets’ ability to provide investment signals for the construction and retirement of other plant.
Scarcity pricing is intended to reinforce short-run marginal price signals in times of system stress by increasing prices even more radically during these times. This provides an even stronger investment signal than spiking wholesale prices alone.
Turning again to capacity markets, CREG noted the inability of these to deal with the issue of intermittent renewable generation, given that these generators are often given access to technology-neutral auctions, despite the fact that they are unable to guarantee the ability to meet the performance commitments to provide power at times of system stress.
In practice
The proposal set out in CREG’s study includes three price adders, one for the real-time energy price (i.e. the imbalance price), one for automatic frequency restoration reserve (aFRR), and one for manual frequency restoration reserve (mFRR). The latter two would be based on daily, day-ahead auctions, cleared before day-ahead market clearing.
This will effectively result in a real-time market for reserve capacity. It should, according to CREG, reward flexible capacity for being available, even if it is not called on, as well as rewarding flexible resources for responding to imbalance when the system is short of capacity.
The study investigated the effects on the financial returns for the eight Belgian combined cycle gas turbines (CCGTs) active in 2015-16. Under pessimistic models, results indicated that four generators may be unable to recover fixed costs even with scarcity pricing, while other modelling showed profitability for all eight plants to a greater or lesser extent.
CREG also investigated the potential for demand response to participate. Modelling showed additional costs to consumers of not participating in the mechanism of €6.90/MWh (£6/MWh), but potential profits of €75.60/MWh (£66/MWh) if participating. On average, offering 9.1% of load as reserves would allow a consumer to break even.
Implementation
In order to move towards implementation, CREG will need to examine the interaction of the mechanism with its neighbours, particularly with regards to the PICASSO and MARI platforms, which look respectively to integrate automatically and manually activated frequency restoration reserves across European countries.
To further study the mechanism, Elia – the Belgian transmission owner and system operator – began publishing the value of the three proposed adders, one day after real-time. Figure 1 sets out these values over the first few weeks of the mechanism – though only two adders, during the periods 16:30-16:45 at €0.1/MWh and 16:45-17:00 at €0.80/MWh (£0.69/MWh) on 28 October have been set as yet.
Pending the outcome of both investigations and further testing, CREG is considering implementation at the end of 2021.
Scarcity pricing of the type proposed is similar in effect to Ofgem’s reforms to GB imbalance prices – reducing PAR500 to PAR50 to the current PAR1 – which effectively increase the volatility and “spikiness” of imbalance prices in times of system stress.
By reforming the wholesale energy price as well as imbalance prices, the Belgians take an additional step towards providing long-term signals for investment in flexibility.
If you have enjoyed reading this article and want to read about the latest developments from energy markets around the world, please contact us on 01603 604 400 for a free month’s trial.
Energy:2030 is a monthly publication covering relevant and interesting developments including:
- market mechanisms and regulatory incentives
- technological developments and their anticipated impact
- changing policy as it evolves both in the UK and worldwide.
