Strengthening Markets, Securing Supply

Conceptual Framework for Implementing a Strategic Reserve in Germany

Report on the Outcomes of the Expert Dialogue on the Strategic Reserve -

May 2013 -

Executive Summary

The energy supply system in

ermany an! Europe is un!ergoing a transformation

process "hich em#races several aspects$ the further !evelopment of the European internal electricity mar%et& the phasing out of nuclear po"er in ermany #y 2022& an!

the increasing integration of rene"a#le energies' Over the coming years& this may "ell lea! to uncertainties for investors& exacer#ate! #y the current !e#ate a#out changes in mar%et !esign' Even in a fun!amentally "ell(functioning electricity mar%et& these uncertainties coul! ) at least for a transitional perio! ) !elay investments in ne" po"er plants an! slo" !o"n the flexi#ilisation of !eman!' *n or!er to ensure a continue! high level of supply security nonetheless& a mechanism %no"n as the +strategic reserve, shoul! #e !eploye! !uring the transition process in or!er to safeguar! the electricity supply' The fun!amental concept of a strategic reserve is that the reserve capacities are a!!itional to& an! stan! alongsi!e& the capacities existing in the normal electricity mar%et& thus increasing supply security' The strategic reserve capacities "oul! only #e activate! in scarcity situations in "hich the po"er exchange lac%s sufficient capacity to meet !eman!' The effect of the strategic reserve is to provi!e security of supply' *t is simple to implement& re-uires little regulation& maintains the functionality of the electricity mar%et& incurs relatively lo" cost an! is highly compati#le "ith the E. internal mar%et' This paper !efines the conceptual frame"or% implementing a strategic reserve in ermany'

Contents
1' *ntro!uction''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''1 2' /ontext$ supply security in a changing energy system ''''''''''''''''''''''''''''''''''''''''''''1 3' 0 mar%et !esign for the transformation''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''1 2' Structuring the strategic reserve''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''3 4' 5enefits of the strategic reserve ''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''13 References ''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''16 -

1. Introduction
The future !esign of the electricity mar%et is currently the su#7ect of intense !e#ate among energy in!ustry experts' One option for ensuring the security of electricity supply is to intro!uce a +strategic reserve,' *n accor!ance "ith this mo!el& a small num#er of reserve po"er plants "oul! #e maintaine! outsi!e the mar%et an! "oul! only #e activate! in exceptional circumstances "hen the electricity mar%et is una#le to meet !eman!' Recently& a num#er of concepts& "hich vary on points of !etail& have #een presente! for !eveloping a strategic reserve' *n or!er to translate these concepts into a ro#ust& "i!ely accepte! an! "or%a#le proposal& the erman 8e!eral

Ministry for the Environment& 9ature /onservation an! 9uclear Safety :5M.; invite! %ey sta%ehol!ers involve! in this !e#ate to engage in a !ialogue process' This paper presents the outcomes of this expert !ialogue "hich involve! the 0ssociation of Energy an! <ater *n!ustries :5DE<;& the erman

erman Rene"a#le Energy

8e!eration :5EE;& scientists Dr /hristoph Maurer :/onsentec;& =rofessor 0l#ert Moser an! /hristopher 5reuer :*nstitute of =o"er Systems an! =o"er Economics& R<T> 0achen .niversity;& Dr Marco 9icolosi :Ecofys;& Mar%us =ee% :r2# energy consulting; an! Dr 8ran% Sensfu? :8raunhofer *nstitute for Systems an! *nnovation Research ) *S*; an! =rofessor Michael Sterner :Regens#urg .niversity of 0pplie! Sciences; as chair'

2. Context: supply security in a changing energy system

The electricity supply system in transition
The energy supply system in ermany an! Europe is un!ergoing a transformation

process "hich em#races several aspects$ the further !evelopment of the European internal electricity mar%et& the phasing out of nuclear po"er in ermany #y 2022 an!

the increasing integration of rene"a#le energies' This may "ell lea! to uncertainties for investors over the coming years' This applies #oth to investment in po"er plants& storage technologies an! loa! management an! to the !evelopment of ne" #usiness mo!els& e'g' smart gri!s an! virtual po"er plants' The current !e#ate a#out changes to the !esign of the electricity mar%et is reinforcing these uncertainties' Even in a fun!amentally "ell(functioning electricity mar%et 1

:energy(only mar%et;& these uncertainties coul! ) at least for a transitional perio! ) !elay investments' The strategic reserve can #e !eploye! to guarantee electricity supply security at its usual high level !uring this perio!'

Development of power generation capacities

The prevailing vie" is that sufficient generation capacities are availa#le in the European electricity mar%et for the short to me!ium term :i'e' to aroun! 201@;' Aie"e! from a purely national perspective& ermany ) at least on paper ) "ill not

face any short( to me!ium(term capacity pro#lems& even if no ne" po"er plants are #uilt !uring this perio!' *n!ee!& accor!ing to figures from the 8e!eral 9et"or% 0gency& #ase! on current plans& ermany "ill gain an a!!itional 4 < of installe! po"er plant capacity #et"een 2013 an! 2014 !espite the po"er plant closures'1 >o"ever& in vie" of the increasing coupling of national electricity mar%ets in the E.Bs internal mar%et& supply security must& in practice& #e consi!ere! from a #roa!er& i'e' European& perspective' The !evelopment of po"er generation capacities from 201@ on"ar!s is more !ifficult to pre!ict' 8or example& nuclear po"er plants "ith an installe! net capacity of more than 3 < are !ue to #e ta%en off the erman gri! #et"een 201@ an! 2022'

9onetheless& to meet the longer(term po"er plant !eman! ) given the right economic con!itions ) numerous options are availa#le regar!ing generation an! loa! management' The 8e!eral 9et"or% 0gency estimates that conventional po"er plant pro7ects amounting to aroun! 32 < are currently planne! in ermany :inclu!ing pump storage& #ut exclu!ing pro7ects un!er construction;'2 0ccor!ing to information from the 5DE<& pro7ects "ith a capacity of at least 2'1 < have #een approve! an! are not yet un!er construction& #ut coul! #e implemente! at short notice'3 8urthermore& there is generally no fixe! en! to the technical lifespan of existing po"er plantsC instea!& after any upgra!ing that may #e necessary& they can continue to #e operate! for as long as there is sufficient economic !eman!' Doa!

Eraft"er%sliste 5un!esnetFagentur Fum er"arteten Gu( un! RHc%#au 2013 #is 2014& Stan! 01'02'2013 :8e!eral 9et"or% 0gency Dist of =o"er =lants& 0nticipate! *ncreases an! Decreases& 2013(2014& as at 1 8e#ruary 2013;' 2 enehmigung SFenariorahmen 9E= 2013& Stan! 9ov' 2012' :0pprovals& Scenario 8rame"or%& 9et"or% Development =lan :9E=;& 2013& as at 9ovem#er 2012; 3 5DE<(Eraft"er%sliste& Stan! 0pril 2013 :5DE< Dist of =o"er =lants& as at 0pril 2013;' -

management& energy efficiency an! European gri! expansion coul! also help to re!uce the capacity re-uirement' enerally spea%ing& ho"ever& "hen assessing supply security& it must #e #orne in min! that over the coming years& other as yet unplanne! closures coul! occur for economic reasons& in a!!ition to the measures aime! at re!ucing overcapacity' *t is therefore sensi#le to monitor !evelopments very closely an! to a!opt a precautionary approach #y esta#lishing a strategic reserve'

Grid bottlenecks in southern Germany

The sometimes tense situation in southern ermany& particularly in 5avaria an! ermany

5a!en(<Hrttem#erg& is not !ue to a national shortage of po"er plants ) for

currently has enough po"er plant capacity overall ) #ut to #ottlenec%s in the po"er gri!' These #ottlenec%s "ill #e rectifie! in the me!ium term through the expansion of the electricity gri!& as envisage! in the =o"er ri! Expansion 0ct

:Energieleitungsausbaugesetz ) EnD0 ;' Due to these gri! #ottlenec%s& it "ill #e necessary& over the coming years& to ma%e specific a!!itional reserve capacity availa#le for re!ispatch2 at sites that are suita#le in terms of gri! operation' Reserve po"er plants in southern ermany an! 0ustria erman

are #eing %ept availa#le at present specifically for this purpose' The

overnment has also a!opte! legislation :%no"n as the Wintergesetz; to postpone planne! shut!o"ns of systemically relevant po"er plants'

Investment incentives
*t is apparent at present that the current "holesale po"er price level offers virtually no incentives to invest in ne" po"er plant capacity an!& furthermore& that various existing po"er plants are experiencing economic !ifficulties' There are concerns that this coul! put supply security at ris% in the foreseea#le future' One reason for this is that the expansion of rene"a#le energies is changing the resi!ual loa!4 an! hence the re-uirements relating to the composition of the thermal

2 4

Short(term a!7ustment of the po"er plantsI !ispatch to resolve #ottlenec%s' The loa! remaining after the fee!(in of rene"a#les(generate! electricity "hich is met #y conventional po"er plants an! storage facilities' -

po"er plant fleet1' Most of

ermanyBs existing po"er plant fleet !ates #ac% to a time

"hen fluctuating rene"a#le energies provi!e! only a small proportion of the electricity supply' /ompare! to a cost(optimise! structure& it has too many #ase( an! me!ium(loa! po"er plants an! not enough pea%(loa! po"er plants' 8or that reason& the electricity prices are often set #y po"er plants "ith very lo" marginal costs' *n the long term& ho"ever& the po"er plant structure "ill have to a!apt to mar%et forces an! the price level "ill sta#ilise at an e-uili#rium level :cf' Ecofys 2012#& p' 10 ff';' 0 further cause of the current lo" prices on the po"er exchange is the su#stantial overcapacity in the electricity mar%et' The reasons for this inclu!e the increasing coupling of the European electricity mar%ets& the fact that ne" capacities have come on(stream an! the on(going economic slo"!o"n in Europe' 8urthermore& partly in response to the !e#ate a#out the intro!uction of capacity mechanisms& sche!ule! po"er plant closures in ermany are currently #eing postpone!' *n conse-uence&

more po"er plants are operating in the mar%et than are re-uire! for efficient loa! coverage' This has a !etrimental effect on the economic efficiency of ne" po"er plants& storage facilities an! loa! management& for example' *n vie" of the mechanisms that& generally spea%ing& help to sta#ilise electricity prices& the -uestion is "hether the existing electricity mar%et ) once overcapacity has #een re!uce! an! the structure of the po"er plant fleet has #een a!apte! ) "ill again offer sufficient incentives for investment& or "hether a fun!amental failure of the mar%et is to #e expecte!'

Functionality of the energy-only market

The functionality of the energy(only mar%et is an issue "hich cannot yet #e fully resolve!' *t !epen!s on a num#er of !evelopments that may or may not ta%e place !uring the on(going transformation of the energy system' Over recent years& the !esign of the electricity mar%et has !evelope! further in %ey respects& mainly as a result of the flexi#ilisation of the control(energy mar%et& mar%et coupling "ith a num#er of neigh#ouring countries an! a more flexi#le operation of conventional po"er plants' This has facilitate! the integration of rene"a#le energies into the po"er supply& "ith the rene"a#les share no" amounting to more than 20 per cent'
Due to the rene"a#les expansion& the re-uirement for #ase( an! me!ium(loa! po"er plants is re!uce! an! the re-uirement for pea%(loa! :i'e' pea%ing; po"er plants increases'
1

*n principle& in scarcity situations& a "ell(functioning energy(only mar%et can set prices at a sufficiently high level that they provi!e incentives for investments& for example in a!!itional generation capacity& storage technologies or loa!

management' Eey prere-uisites for a sustaina#le an! "ell(functioning energy(only mar%et are ) #esi!es the avoi!ance of politically motivate! intervention in a competitive mar%et ) sufficient elasticity of !eman! an! a "illingness to accept price spi%es' The impact of price spi%es on final consumer prices is very limite!& #ut they sen! out an important signal an! act as an incentive for all pro!ucers an! consumers to align their investment an! consumption !ecisions to the re-uirements of a future energy supply system "hich accommo!ates a high proportion of rene"a#le energies' *f flexi#le !eman! pushes the price a#ove the marginal po"er plantsB generation costs& all po"er plants ) inclu!ing those "ith the highest marginal costs ) achieve revenue that is sufficient to cover their fixe! costs'

Demand elasticity
Some ma7or electricity consumers are alrea!y a!apting their !eman! to the "holesale price to some extent' /ompare! "ith the theoretical potential& ho"ever& the !eman! elasticity currently #eing achieve! is still relatively lo"& #ut this is mainly !ue to the fact that the current "holesale po"er prices offer little incentive for further flexi#ilisation of !eman!' Due to overcapacity& prices are lo" an! price spi%es are a rare occurrence& so prices offer very little economic incentive to re!uce consumption' >o"ever& it is safe to assume that ma7or electricity consumers are a#le to a!apt their !eman! relatively -uic%ly if mar%et prices #egin to fluctuate more strongly in future' To "hat extent can more !eman! elasticity in response to price signals #e anticipate!J That is still an open -uestion' 0t present& there is a lac% of relia#le !ata on the technical an! economic potential of loa! management' ho"ever& it is clear that the share of loa!(metere! consumption in enerally spea%ing& ermany amounts

to more than 10 per cent an! that this customer group generally has metering e-uipment in place to ena#le them to a!apt their consumption in line "ith their o"n "illingness to pay' *n the me!ium an! long term& smart metering coul! also encourage final consumers "hose consumption is not currently loa!(metere! to #ecome active participants in the mar%ets& "hich "oul! also contri#ute to the further flexi#ilisation of !eman!' 4

3. A market design or the trans ormation

*n or!er to safeguar! the transformation of the electricity supply system& the electricity mar%et shoul! #e !evelope! further on a progressive #asis' The concept consists of t"o pillars$ firstly& optimisation of the electricity mar%et& an! secon!ly& the intro!uction of a strategic reserve as a safety net for the electricity mar%et'

Optimising the electricity market

5y optimising the electricity mar%et over the coming years& it is possi#le to create stronger incentives for investment in ne" po"er plants& storage facilities an! loa! management systems' 8urthermore& it is #ecoming increasingly important to ensure that consumption an! generation respon! -uic%ly an! flexi#ly to the changes in supply that result from increase! fee!(in of electricity from fluctuating rene"a#le sources' *n their report to the erman /hancellor& energy in!ustry sta%ehol!ers

#elonging to the Rene"a#le Energies =latform set out numerous options that have the potential to increase flexi#ility in the existing electricity supply system'7 To!ayIs electricity mar%et provi!es incentives for the expansion of elasticity of supply an! !eman!& !oing so through increase! volatility of po"er prices an! through the control(energy mar%ets' >o"ever& it is crucial to ensure that this incentive reaches as many electricity pro!ucers an! consumers as possi#le "ithout !istortions an! that all mar%et actors have e-ual opportunity to generate revenue #y mar%eting these more flexi#le options' 0t present& ho"ever& regulatory impe!iments continue to hamper this flexi#le response #y mar%et participants in some cases' 5y removing these o#stacles& the functionality of the electricity mar%et can #e optimise! for supply security an! rene"a#les integration' Examples of potential measures are liste! #elo"$

=lattform Erneuer#are Energien& 5ericht !er 0 3 *ntera%tion an !en Steuerungs%reis !er =lattform Erneuer#are Energien& !ie 5un!es%anFlerin un! !ie MinisterprKsi!entinnen un! MinisterprKsi!enten !er DKn!er' 14'10'2012 :"""'#mu'!eLp21@1; L Report #y <or%ing roup 3 on *nteraction #et"een Rene"a#le Energy Supply& /onventional Energy Supply an! Deman! Si!e to the Steering /ommittee of the Rene"a#le Energies =latform& the 8e!eral /hancellor an! the Minister(=resi!ents of the DKn!er& 14 Octo#er 2012 :http$LL"""'#mu'!eLfilea!minLDatenM5M.L=oolsLDo"nloa!sLp!fLReportMrene"a#leMenergiesMplatform M#f'p!f;'

The further strengthening of the E. internal mar%et through mar%et coupling an! European gri! expansion can increase supply security an! efficiency through large(scale compensatory effects'

8urther flexi#ilisation of the control(energy mar%ets ma%es it easier for loa! management& storage options an! rene"a#le energy systems to ma%e a contri#ution'

8urther !evelopment of regulatory an! remuneration structures can remove o#stacles to loa! management& particularly for in!ustrial customers'

*mplementation of smart metering stan!ar!s an! alternatives to procurement processes #ase! on a stan!ar! loa! profile can provi!e incentives for the use of loa! management #y small(scale consumers'

The strategic reserve as a safety net

The #asic concept of the strategic reserve is that a specifie! amount of generation capacity shoul! #e ma!e up of capacity procure! centrally through a ten!ering proce!ure& #ut shoul! not #e !eploye! in the regular electricity mar%et' These capacities are then availa#le as a reserve an! are a!!itional to the capacities existing in the electricity mar%et& thus increasing supply security :ensuring electricity supply;' The strategic reserve capacities are only activate! in situations in "hich the electricity mar%et cannot meet !eman!& i'e' "hen there is no mar%et clearance' This coul! occur& for example& if& in exceptional situations& high !eman! coinci!es "ith a large num#er of unsche!ule! shut!o"ns of generation facilities in neigh#ouring countries' The reason "hy the strategic reserve is not !eploye! in the mar%et is #ecause the aim is to avoi! fee!#ac% effects on the electricity mar%et' *f strategic reserve capacities that receive special support "ere to participate regularly in the mar%et& other po"er plants an! loa! management systems "oul! #e s-ueeFe! out to the !etriment of supply security' *t "oul! also put investments in the mar%et at ris%& potentially increasing the nee! for a!!itional capacity' The intro!uction of the strategic reserve !oes not constitute a ra!ical reform of the current mar%et !esign& #ut merely a!!s to it' The pricing mechanisms an! efficient incentives existing in the energy(only mar%et are fully retaine!' The incentives for 6 ermany an!

investment an! for generation an! consumption !ecisions continue to #e create! #y the energy(only mar%et' The strategic reserve thus acts as an a!!itional safety net for electricity supply' *t can increase security of supply an! ) !espite the existing uncertainties in the electricity mar%et ) can provi!e sufficient po"er plant capacity in a cost(effective manner in line "ith mar%et economic principles' ermany alrea!y has reserve electricity plant capacity ) %no"n as the net"or% reserve& or the "inter reserve' <ithin the net"or% reserve& reserve po"er plants are hel! rea!y in southern situation in southern ermany an! 0ustria in or!er to alleviate the tense gri! ermany' 8urthermore& systemically relevant po"er plants

cannot #e close! !o"n #ut must remain on stan!#y as part of the net"or% reserve "ith appropriate remuneration #eing pai! for this service' This arrangement is vali! until the en! of 2016' The strategic reserve propose! here has features in common "ith the net"or% reserve& #ut !iffers from it in t"o respects' 8irstly& the strategic reserveBs primary purpose is to guarantee supply security in the event that the electricity mar%et cannot incentivise the re-uisite capacity at all& or -uic%ly enough& "hereas the net"or% reserve mainly a!!resses regional gri! security pro#lems in southern ermany'

Secon!ly& the strategic reserve capacities are procure! through a mar%et(#ase! ten!ering proce!ure& "hereas the net"or% reserve relies on a regulatory approach :an! in some cases inclu!es man!atory components;' The strategic reserve can #e en!o"e! "ith a regional component for southern ermany so that it progressively replaces the net"or% reserve over the coming years' This "oul! facilitate the transition a"ay from the present highly regulate! approach to the procurement of reserve capacities to"ar!s competitive procurement of these capacities for gri! support' The strategic reserve is a means for achieving the follo"ing o#7ectives$ *t guarantees security of supply& 0 reversi#le an! flexi#le mar%et !esign can #e further !evelope!& The ris% of mar%et an! regulatory failure is minimise!& @

The current !elays affecting the sche!ule! !ecommissioning of po"er plants are en!e! an! overcapacity is re!uce!&

The net"or% reserve for southern into the strategic reserve'

ermany can #e progressively integrate!

!. Structuring the strategic reserve

The strategic reserve can #e intro!uce! very -uic%ly' The reserve capacities can #e progressively !evelope! over the coming years through a competitive procurement process on the #asis of existing plants sche!ule! for !ecommissioning as "ell as ne" plants' The follo"ing parameters must #e esta#lishe!$

Deployment of the strategic reserve in the electricity market

The strategic reserve capacities "ill #e activate! solely in exceptional circumstances "hen the !eman! cannot #e met #y the !ay(ahea! mar%et on the po"er exchange :E=EN S=OT;' To that en!& the capacity of the strategic reserve coul! #e offere! to the mar%et in a secon! auction at maximum permissi#le prices :currently O3&000LM<h; in or!er to ma%e mar%et clearance possi#le'

Deployment of the strategic reserve as network reserve

Strategic reserve capacities can also #e !eploye! #y transmission gri! operators& if necessary& "ithin the frame"or% of re!ispatch@& e'g' to ease a !ifficult gri! situation in southern ermany' 0s "ith the net"or% reserve& they are only activate! "hen the

po"er plants operating in the mar%et are not generating sufficient output for re!ispatch' >ere too& activation of the strategic reserve is therefore li%ely to #e a fairly rare occurrence :as compare! "ith the current !eployment of the net"or% reserve;' The activation of the strategic reserve an! the remuneration for this service "oul! ta%e place in accor!ance "ith the rules normally applica#le to re!ispatch an! have no fee!#ac% effects on the regular electricity mar%et'

Use of the strategic reserve by transmission grid operators

The plants are procure! as a systemic reserve #y the transmission gri! operators an! are activate! #y them alone' >o"ever& the transmission gri! operators !o not
@

Short(term a!7ustment of the po"er plantsI !ispatch to resolve congestion :#ottlenec%s;'

o"n these po"er plants #ut contract them to provi!e reserve capacity' The gri! operators shoul! perform this function un!er the strict supervision of the 8e!eral Ministry of Economics an! Technology :5M<i; an! the 8e!eral 9et"or% 0gency' The o"ners of plants contracte! to provi!e strategic reserve capacities shoul! not #e a#le to re!eploy them in the electricity mar%etC this is to avoi! negative fee!#ac% effects on the energy(only mar%et ) such as investment restraint or scarcity situations'

elationship between strategic reserve and network reserve

Strategic reserve an! net"or% reserve can co(exist an! even reinforce one another' The procurement of the strategic reserve ta%es prece!ence over the net"or% reserve& in or!er to ensure that reserve capacities are procure! on a competitive #asis as far as possi#le' The net"or% reserve is then procure! solely to cover the resi!ual !eman! for reserve capacities to support the gri!& i'e' to meet the !eman! not alrea!y covere! #y the strategic reserve' This re!uces regulatory interventions in the mar%et #y the net"or% reserve' Over the next fe" years& the net"or% reserve for southern ermany can #e fully integrate! into the strategic reserve'

!rocuring the strategic reserve

The i!entifie! nee! for a!!itional generation capacity "ill #e met through a pu#lic procurement process' *n principle& this process shoul! #e open to existing an! ne" plants' Due to the gri! situation& ho"ever& ne" plants shoul! only #e eligi#le to su#mit #i!s if they are locate! in regions that are suita#le in terms of the operation of the gri!& "hich at present means southern ermany first an! foremost' 0n auction(

#ase! !esign shoul! #e chosen& as this is a suita#le means of minimising mar%et( relate! ris% an! utilising information on po"er plant closures containe! in the #i!s :see /onsentec 2012a& p' 14 ff';'3 During the initial phase :operational perio! to 2011;& the ten!ering proce!ure "ill #e #ase! on the provision of capacities "ith a lea!(in time of three to six months' 0s ne" po"er plants :"ith the exception of engine(!riven po"er plants; have a longer lea!(in time& it is primarily the existing po"er plants "hich "ill #e a#le to su#mit #i!s
3

8or example& the procurement of the strategic reserve can ta%e place via a +Descen!ing /loc% 0uction,'

10

!uring this phase'

iven the scale of the po"er plant closures anticipate! over the

coming years& it is safe to assume that even "ithout the participation of ne" plants& the procurement process "ill #e sufficiently competitive' To provi!e a!!itional safeguar!s against mar%et forces& a maximum #i! price "ill #e set& correspon!ing to the mar%et entry costs of a ne" plant'10 *n the follo"ing phase :operational perio! from 2016;& the ten!ering process for capacity "ill ta%e place annually "ith a longer lea!(in time :e'g' three years; in or!er to ena#le #oth existing an! ne" plants to participate& "ith the opportunity for #i!!ers to specify an in!ivi!ual contract term& ranging from one year to 10 years' The reason for this is that !epen!ing on the type of plant& !ifferent terms may #e technically an! economically feasi#le' 8or example& ne" plants "ill #e a#le to ten!er for longer terms than existing plants "hich are coming to the en! of their technical lifespan' 0t the same time& #i!!ers must commit to maintain the capacities on stan!#y throughout the specifie! perio!' The contract is then a"ar!e! on the #asis of the service price offere!'11

"olume of the strategic reserve

*n line "ith the precautionary principle& the function of the strategic reserve as a safety net for the electricity mar%et re-uires a reserve #ase :minimum capacity; to #e esta#lishe!' This shoul! #e set at 4 per cent of the annual pea% loa! :i'e' aroun! 2 <;' The 4 per cent reserve capacity is #ase! on the recommen!ation ma!e #y the European 9et"or% of Transmission System Operators for Electricity :E9TSO(E;' *n contrast to the E9TSO(E recommen!ation& ho"ever& the reserve capacity shoul! #e #ase! on annual pea% loa! rather than total installe! po"er plant capacity as the !esire! expansion of fluctuating rene"a#le energies means that the total installe! capacity is far higher than the annual pea% loa! to #e safeguar!e!12' This reserve #ase shoul! #e intro!uce! progressively& rising& for example& to 2 from 2012 an! 2 <

< from 2014' During the pilot phase of procurement :operational ermany shoul! #e

perio! 2012L14;& the regional components for southern

10 11

The comparison is #ase! on annual costs' <ith multiannual #i!s& the contract is a"ar!e! on the #asis of annual costs' 12 8or example& the installe! capacity for ermany in Scenario 5 of the ri! Development =lan is approx' 200 < for 2022& "hereas in a system "ithout rene"a#le energies& the installe! capacity "oul! only amount to aroun! 100 <' -

11

sufficiently small in or!er to avoi! mar%et forces coming into play in the procurement process' Expansion of the strategic reserve shoul! ta%e place only if this is 7ustifie! #y an i!entifie! nee! in or!er to meet the !esire! supply security goal' 0 European perspective shoul! increasingly #e applie! "hen !etermining the re-uirement for reserve capacities& "ith more intensive cooperation "ith neigh#ouring countries ta%ing place' *n or!er to !etermine the re-uirement for reserve capacities& transparent monitoring of supply security "ill #e carrie! out on an annual #asis #y transmission gri! operators an! the 8e!eral 9et"or% 0gency for the follo"ing five years' *nformation a#out po"er plant closures containe! in the #i!s su#mitte! in the ten!ering proce!ure shoul! also #e utilise! "hen !etermining the re-uirement for reserve capacities'

e#uirements for strategic reserve power plants

Strategic reserve capacities shoul! #e availa#le on a secure #asis& shoul! have access to a secure fuel supply an! shoul! #e activate! "ith sufficient spee! "hen calle! for' The functionality of a strategic reserve !escri#e! in this paper is #ase! on a re-uire! maximum activation perio! of 10 hours'

emuneration for plant operators

=o"er plant operators "ill receive remuneration :service price; for provi!ing reserve capacity& #ase! on the figures specifie! in their #i! su#mitte! in the procurement process' *f the plants are activate! in the electricity mar%et& the po"er plant operators a!!itionally receive an electricity charge per %ilo"att(hour& "hich is #ase! on actual operating costs' *f& !ue to congestion :gri! #ottlenec%s;& the plants are activate! for the purpose of re!ispatch& this is remunerate! in accor!ance "ith the rules "hich normally apply to re!ispatch'

Funding
The costs of the strategic reserve are recovere! via the gri! charges' The maximum a!!itional costs of the strategic reserve are thus !erive! from the contracte! plantsB service prices' *f the plants are activate! !ue to a lac% of mar%et clearance in the po"er exchange& this "ill create minimal a!!itional costs !ue to the payment of the 12

energy charge per %ilo"att(hour& #ut this "ill #e more than offset #y the revenue increases generate! in the electricity mar%et' The a!!itional revenue is passe! on to the transmission gri! operators& thus re!ucing the strategic reserve costs that nee! to #e recovere!' The a!!itional costs for the use of the net"or% reserve are very lo" as the activation of the strategic reserve for re!ispatch is li%ely to #e a very rare occurrence& as is the case "ith the net"or% reserve to!ay' The re!ispatch costs "ill also #e passe! on& in line "ith the current rules on gri! charges'

". #ene its o the strategic reserve

$ompatibility with electricity market
The impacts of the strategic reserve on the existing energy(only mar%et "ill #e minimal for t"o reasons' 8irstly& it consists solely of capacities "hich& "ithout the strategic reserve& "oul! #e remove! from the electricity mar%et altogether :existing plants; or "hich "oul! not enter the mar%et in the first place :ne" plants;' Secon!ly& the strategic reserve capacities !o not participate in the regular electricity mar%et #ut are activate! solely in exceptional circumstances "hen !eman! "oul! other"ise not #e met #y the !ay(ahea! mar%et :E=EN S=OT;' The strategic reserve "ill not ra!ically alter the current mar%et !esign& #ut "ill simply create an a!!itional reserve mar%et :"holesale an! control(energy mar%et;' The pricing mechanisms an! efficient incentives create! #y the energy(only mar%et& an! hence its innovation potential& "ill #e retaine! in full'

!rere#uisite% no regular activation of the strategic reserve in the market

The prere-uisite for the !escri#e! functionality of the strategic reserve is its strictly limite! activation' 8ee!#ac% effects on the energy(only mar%et are avoi!e! as the strategic reserve is only !eploye! in situations in "hich the po"er exchange cannot meet !eman! an! the input price correspon!s to the maximum permissi#le price on the po"er exchange' Only if capacity scarcity is reflecte! in price spi%es in the mar%et "ill sufficient investment incentives #e create!' 0 lo" price for activating the reserve& on the other han!& "oul! "ea%en the incentive for ne" investments& resulting in a loss of effectiveness an! efficiency an! increasing the nee! for reserve capacity' 8or the same reason& there shoul! #e no possi#ility for the plants contracte! to provi!e strategic reserve capacities to #e re!eploye! #y their o"ners in the electricity mar%et' 13

&upporting the integration of renewable energies

*n or!er to #e a#le to integrate large amounts of fluctuating rene"a#les(generate! electricity into the supply effectively an! efficiently& the entire system must #ecome more flexi#le in future' Through the "holesale price& the energy(only mar%et sen!s out a signal as to "hether electricity is in short supply at any given time& or "hether a surplus exists' *t thus creates efficient an! effective incentives for more flexi#ility in supply an! !eman!& e'g' through loa! management or the use of storage facilities' The aim must therefore #e to achieve security of supply "ithout !ampening or !istorting these price signals' Other"ise& flexi#ility must #e incentivise! through a!!itional support mechanisms an! finance! through levies' *n principle& the strategic reserve allo"s scarcity prices to emerge on the energy(only mar%et an! thus maintains the mar%etBs a#ility to provi!e incentives for the restructuring of the electricity supply system that is necessary to accommo!ate the integration of rene"a#le energies'

&imple to implement ' rapid effects

0 further a!vantage of the strategic reserve is that it can #e intro!uce! s"iftly an! its effects are felt very soon' =o"er plants sche!ule! for !ecommissioning in particular can #e integrate! into the strategic reserve "ith a lea!(in time of 7ust a fe" months'

(ow costs
The a!!itional costs of the strategic reserve compare! "ith an energy(only mar%et are lo"& as it only a!!resses the nee! for a!!itional reserve capacity' /onsentec :2012a; has calculate! that a 2 < strategic reserve #ase! on existing po"er plants

an! procure! through an efficient ten!ering proce!ure "oul! entail fixe! costs of aroun! O120 million per year' 5ase! on total electricity consumption :approx' 400 T<h;& this amounts to 0'02@ centL%<h& i'e' aroun! one(thousan!th of the !omestic electricity price' *f only ne" plants are procure!& the fixe! costs "oul! amount to aroun! O200 million p'a' :cf' r2# energy consulting 2012a;' The strategic reserve is thus a cost(effective option for guaranteeing the security of the electricity supply in a "ell(functioning energy(only mar%et'

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(ow potential error rate

The strategic reserve is a comparatively simple mo!el "ith a small num#er of parameters& "hich must #e !efine! #y the regulatory authorities' 0#ove all& the regulatory authorities must !efine the capacity to #e ten!ere! for as "ell as the technical specifications an! the ten!ering mo!alities' overnance of the strategic

reserve is therefore -uite straightfor"ar!' *n vie" of the lo" level of complexity of the mechanism& the ris% of inefficiency !ue to the a!option of the incorrect parameters is relatively lo"'

$ompatibility with the )U internal market

The strategic reserve is highly compati#le "ith the E. internal electricity mar%et& for t"o reasons$ firstly& !ue to the lo" fee!#ac% effects on the regular electricity mar%et& there is no !anger of capacities in neigh#ouring countries simply #eing relocate! to ermany& "hich "oul! merely create the illusion that ermanyBs supply security ha!

#een improve!& perhaps at the expense of other countriesB security of supply' The strategic reserve can therefore #e intro!uce! at national level #y any Mem#er State that consi!ers this necessary& "ithout any !istortion of the E. internal mar%et' 0n! secon!ly& the strategic reserve mo!el can also #e exten!e! "ithout any pro#lems to other E. mar%ets or #e expan!e! into a European strategic reserve' Through the !efinition of core components ) as is the current practice "ithin ermany in procuring

control(energy ) national minimum re-uirements for secure capacity can #e guarantee!'

*arket-based approach
.nli%e the existing net"or% reserve& the strategic reserve mo!el propose! here is #ase! on a mar%et(oriente! approach' This is generally the preferre! option& as oppose! to a regulatory approach& in a mar%et economic system'

)asily adaptable
0 strategic reserve can #e !ismantle! "ithout any a!verse effects if it is no longer re-uire!' *n that sense& it is a flexi#le component of a mar%et !esign "hich can #e a!apte! to ne" challenges' The !ecision in favour of a strategic reserve "oul! therefore not affect !ecision(ma%ing on the long(term !esign of the electricity mar%et' 14

The maintenance of the strategic reserve over the long term is conceiva#le& as is the transition to a ne" mar%et !esign or a reversion to a straightfor"ar! energy(only mar%et'

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$e erences
consentec :2012a;$ =ra%ti%a#el umsetF#are 0usgestaltung einer Strategischen Reserve' utachten im 0uftrag !es 5DE<& 21' Septem#er 2012' consentec :2012#;$ Aersorgungssicherheit effiFient gestalten' utachten im 0uftrag !er En5< 0 & 06'02'2012 Ecofys :2012a;$ 9ot"en!ig%eit un! 0usgestaltungsmPglich%eit eines EapaFitKtsmechanismus in Deutschlan!' Erstellt fHr !as .m"elt#un!esamt& Quni 2012' Ecofys :2012#;$ 9ot"en!ig%eit von EapaFitKtsmechanismen' Erstellt fHr !en 5DE<& Septem#er 2012' r2# energy consulting :2012;$ Giele un! 0usgestaltung einer Strategischen Reserve ( Ec%pun%tepapier& 11' DeFem#er 2012' r2# energy consulting :2012a;$ EinfHhrung einer strategischen Reserve ) Aorschlag Fu Ec%pun%ten einer strategischen Reserve' Aortrag von Mar%us =ee% un! =rof' Dr' 8elix MHsgens in 5erlin am 30'3'2012'

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