Potential interactions between capacity mechanisms in France and Germany
Descriptive Overview, Cross-border Impacts and Challenges
This publication aims to provide a better understanding of the adequacy challenges and market design discussion in France and Germany. It describes in depth different proposals currently on the table, and it specifically discusses the consequences of a unilateral implementation of a decentralized capacity market in France for the French and German electricity markets, as well as its cross-border effects. The deeper, underlying question of this paper is to what extent cross-border differences in capacity remuneration matter for the functionality of an internal European electricity market.
Already now, Germany and France are helping each other guarantee security of supply.
Whenever there iscapacity shortage in one country, prices in that country rise, favoring power plants in the other country to export. This is done automatically via market coupling.
A joint German-French shortage situation is currently very rare, but may occur more often.
A cross-border challenge in security of supply arises only during days with very cold weather and very little wind in both countries at the same time. An analysis of historical weather data suggests that after 2023 this might occur about six days in ten years.
The unilateral introduction of a capacity mechanism in France benefits French power generators and German consumers – but the redistributive effects are likely to be small.
Different market designs between Germany and France will generate some redistributive effects, but they are limited by the level of interconnections between the two countries (currently 3 GW) and joint market coupling with other European countries.
The French decentralized capacity mechanism and the proposal developed by the German energy associations BDEW/VKU, though globally based on the same principles, differ in important respects.
The French proposal, while effectively decentralized by nature, relies significantly on regulated components, with a centra lrole going to the TSO. Similar design elements are currently missing in the BDEW/VKU model, leaving the question open as to who would actually supervise, control and sanction this scheme in Germany.
Cross-border participation in capacity mechanisms raises fundamental technical and regulatory questions.
These questions include monitoring and control issues as well as rules for delivering capacities in foreign markets without interfering with market coupling. Addressing these questions requires political and technical cooperation on both sides of the border, especially when it comes to situations of joint scarcity.
Tim Mennel, Christian Engelhardt, Oliver Werner