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Spain’s capacity market largely fails guidance published by the European Commission to help countries judge whether extra national support for coal, gas and hydropower plants is good value or needed.

I published on Tuesday a report with the Institute for Energy Economics and Financial Analysis (IEEFA), which highlighted how various reforms could boost value for money under Spain’s capacity mechanism, which pays out around €1 billion annually, to gas, coal, hydropower generators and to energy-intensive industries.

Under capacity mechanisms, countries are increasingly supporting coal and gas-fired power plants through payments regardless of whether or not these generate electricity, to ensure they remain economic, and so can back up renewable power when wind and solar are unavailable.

Our main finding was that Spain desperately needs a more independent energy regulator, to end unneccesary handouts to certain industries and support grid investment which boosts flexible supply.

Spain can improve the efficiency of its capacity mechanism by shifting to competitive tendering, and widening participation. It can go further by strengthening regular power markets, for example to reduce over-capacity and loosen or eliminate price caps.

Spain reads a little like the European Commission’s check list of how not to run a capacity market. Here is some of the Commission’s guidance, published in its capacity mechanisms enquiry on Nov. 30, alongside our findings on Spain, as published in IEEFA’s report “Spain’s Capacity Market: Energy Security or Subsidy?”  –

  1. “The Commission therefore requires that the need for capacity mechanisms be underpinned by a robust generation adequacy assessment.” – Spain’s system operator, Red Eléctrica de España (REE), does indeed have an adequacy assessment. When calculating security of supply, REE considers that aggregate de-rated capacity for nuclear, gas, coal and renewables should be at least 1.1 times expected peak demand. This margin was achieved in 2008, and has since risen to more than 1.4 times.
  2. “DSR (demand-side response) schemes may be appropriate to encourage flexible demand in the longer term, but at the same time, they must not become a subsidy for energy-intensive users.” – DSR schemes pay energy users to be ready to reduce consumption if called upon at times of system stress.  Spain’s DSR scheme is entirely limited to energy-intensive users; it is not available to smaller or aggregate DSR units. Spain’s industry minister even stated in 2015 that one goal of the country’s DSR scheme was to maintain jobs in energy-intensive industries.
  3. “The price paid for capacity must be determined in a competitive process. The inquiry confirmed that prices set through an administrative procedure are not appropriate, since they risk over-compensating the beneficiaries or failing to deliver security of supply.” – The price for Spain’s availability and incentive payments to conventional generation are all set administratively. Only DSR capacity is tendered by competitive auction.
  4. “Capacity mechanisms should also be open to providers in other Member States.” – Spain’s scheme is closed to generation in other countries; in addition, cross-border interconnection capacity is not allowed to participate.
  5. “(Many) concerns (meant to be addressed by capacity markets) could be removed by implementing market reforms proposed in the Clean Energy for All Europeans Package. This includes the removal of low electricity price caps.” – Spain has a price cap in its day-ahead power market.
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