Keeping conventional power plants on life support not the answer to Europe’s overcapacity puzzle

Capacity mechanisms should not be a tool to keep unprofitable and unnecessary power plants online as the European Union continues to grapple with overcapacity, according to a paper released by the European Wind Energy Association.

Capacity mechanisms – instruments whereby governments pay some generators to keep power plants online in order to meet peak demand – can have a distortive impact on wholesale electricity prices, which remain well below pre-2008 levels.

Three key factors have contributed to the depressed wholesale power prices: overcapacity at national level – amounting to an aggregate of 100 GW at European level; a fall in power demand; and the failure of the Emissions Trading System to provide price signals on the wholesale power market.

As a result, investors are unable to justify financial backing for new power generation, which would be uneconomical in the face of low wholesale prices.

Kristian Ruby, Chief Policy Officer at EWEA, said: “The transformation of the European power sector must be driven by private investment and well-functioning markets. We must not keep redundant power plants on life support, particularly at a time when some countries are dealing with too much capacity. Financing conventional power plants to stay online must be a last resort option and only if Member States have gaps in capacity.”

On wholesale power prices, Ruby added: “It is a misunderstanding when renewables are referred to as the main cause for low prices on the wholesale market. The real problem is that some Member States have simply installed too much conventional capacity. The economic crisis and low industrial output have slashed demand and left Europe with stranded coal assets. It is time to get rid of these obsolete plants of the past.”

The EWEA market design paper also outlines the need for a functioning ETS and a high carbon price to deter further investments in carbon intensive and inefficient power plants.

Additionally, cross-border electricity trading should be facilitated and additional revenue streams for renewable energy generators such as grid support services – otherwise known as ancillary services – should be developed to supplement the energy-only market.

Ruby said: “We must create a system that rewards flexibility. Wind energy is capable of providing additional services such as voltage and frequency control, but these elements are not yet adequately rewarded. Not only can wind energy contribute to security of supply but it can also reduce system operation costs.”

He added: “Ultimately, the weight of this market design rests with policymakers in Brussels and in the Member States. Completion of the Internal Energy Market is non-negotiable and the sooner that happens the more efficient, sustainable and profitable Europe’s energy system will be.”