Putting a Price on Security of Supply – Capacity Mechanisms Stefan Göbel, Head of Trading & Origination, Statkraft Markets GmbH

1. PUTTING A PRICE ON SECURITY OF SUPPLY – CAPACITY MECHANISMS
Berlin, 23 October 2014
Stefan-Jörg Göbel

2. Our two quite opposite experiences
Positive: >10.000 MW European third party RES under management!
Putting a Price on Security of Supply
Negative: 3 digit million EUR write- offs in German CCGTs!
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3. Decline in power price
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Yearly average Spot price for base and peak load at the EPEX-DE
Putting a Price on Security of Supply
01020304050607080901002008200920102011201220132014(implied) EUR/MWh BasePeak

4. Margins for gas units on the term market
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-20-15-10-5051015202530Jan 10Jul 10Jan 11Jul 11Jan 12Jul 12Jan 13Jul 13Jan 14Jul 14 [€/MWh] Clean Spark Spread Peak Cal_11Cal_11 LieferungCal_12Cal_12 LieferungCal_13Cal_13 LieferungCal_14Cal_14 LieferungCal_15

5. Statkraft production decline and CCGT economics in Germany
Capacity utilisation of gas power plant fleet dropped to insignificant levels
1200 MW CCGT´s have fixed operational costs of about 18m EUR/a (15 EUR/kW/a)
Currently however only marginal costs can be recovered
There is no commercial role for gas-to- power!
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0
0,5
1
1,5
2
2,5
3
3,5
2009
2010
2011
2012
2013
2014
Production in TWh
Year
Production of Statkraft Fleet
Knapsack 1
Herdecke
Emden
Robert Frank
Knapsack II

6. Some speculation about capacity development: From overcapacity to a new equilibrium?
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Source: Kurzstudie zur Kapazitätsentwicklung in Süddeutschland bis 2025 unter Berücksichtigung der Situation in Deutschland und den europäischen Nachbarstaaten, 17 September 2014; own speculation
Optimistic Scenario
Demand
Dispatchable Supply
2015
2020
2025
2030
Speculation 1: Bust and Boom
Speculation 2: Steady Fall

7. Generation capacity on its way to a new equilibrium?
Starting point - decline:
•Dispatchable supply is falling because of cash burn of existing generators. Oct 2014: 49 units representing 13500 MW applied for decommissioning.
•No new capacity to come online under existing market framework and conditions.
Break point - stabilising:
•All capacity earns back operating costs (O&M mainly) or believes to do so soon.
•No consensus if this is at a point giving security of supply.
Turning point - increase:
•New capacity or significant plant refurbishment is not only able to recover operating costs but also investments.
•Statkraft believes this point will never be reached under the current market conditions.
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8. In a zero marginal cost dominated system cost coverage must come from very few hours
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hours
price
Price distribution in a renewable dominated world
„Traditional“ price distribution
In theory generators are indifferent if they sell at 400 EUR/MWh in 500 hours or at 40 EUR/MWh in 5000 hours.
But what would set the price at 400 EUR/MWh?
Also in practice generators are afraid of political intervention.

9. Current Interventions in the so called Energy Only Market (EOM) in Germany
Redispatch: Frequent TSO interference for balancing various areas of the grid, marginal cost compensation only
The „Irsching case“: Irsching CCGT run mainly under redispatch and thus qualifying for full cost coverage, no transparency, possibly discriminating
„Netzreserve“: Capacity contracted by TSOs in the south as redispatch potential. Intransparent cost compensation, non-German capacity more generously treated.
„Stilllegungsverbot“: 12 months notice period before a plant may be decommissioned, if TSOs veto decommssioning yearly fix OPEX will be taken over
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10. The Government‘s timeline
Studies on market design
-Results: “The power market works in principle and can provide security of supply”
Green Book: Publication November 2014, Consultation until March 2015
White Book: Publication May 2015, Consultation until September 2015
New energy law until Q3/2016
Consultation with neighboring states in parallel
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11. How would a EOM+CRM look like, what would it cost: An illustration of one of million options
A yearly auction to secure a capacity level which is set by the regulator
All capacity can participate: New, old, all fuels, demand side, no minimum size, domestic and foreign
A capacity price merit order is made and the last unit still needed to cover the targeted capacity level sets the clearing capacity price
All capacity can still participate in the EOM
Existing capacity will thus bid the expected „missing money“ between EOM income and yearly fixed operational costs
This means that in a market without missing money and overcapacity the capacity price will be zero!
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12. Current arguments – some quotes from Frontier Economics‘ study concluding CRM not needed
„Please note: Political control over the level of capacity / security of supply is no economic value as such.“
„EOM can provide security of supply if reforms will take place.“
„EOM can in principle also provide sufficient security of supply without „explicit“ capacity prices.“
„… it takes a clear commitment from the political side and the administration to accept scarcity induced price peaks.“
„Difference between system costs as NPV (2015) over model horizon (2015- 2039) and all regions (Central Europe) compared to EOM: 2.2bn – 9bn EUR.“
Assumed CO2 price 2024: 30 EUR/t, 2034: 50 EUR/t
Assumed demand side management participation 2035: 3.7 – 9 GW
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13. Putting possible CRM costs into perspective
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Frontier Economics additional cost estimate vs. EOM:
0.1-0.4bn EUR/a
Nominal CRM payment if capacity price is set by CCGT yearly fixed operational cost @15 EUR/kW/a and 80 GW:
1.2bn EUR/a
2014 EEG levy:
24bn EUR/a
2011-2014 “savings” effect @15 EUR/MWh price decline and 600 TWh:
9bn EUR/a

14. Recommendations
A well-designed Capacity Market is necessary, to achieve security of supply, climate protection, integration of RES and affordability of energy
Several variants of a Capacity Market can work, as long as these are market- wide and allow for full and fair competition between all capacity providers and cross-border participation is ensured.
A Capacity Market should not aim to keep all overcapacity alive
Fast implementation of Capacity Market is needed to avoid inefficient closure of efficient gas-fired capacity.
Closure would mean capital destruction for society.
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15. Putting a Price on Security of Supply
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Questions? Answers!

16. www.statkraft.com
THANK YOU
Stefan-Jörg Göbel
+49 211 60244-124
stefan.goebel@statkraft.de
Statkraft Markets GmbH
Niederkasseler Lohweg 175
40547 Düsseldorf