The Ministry for the Ecological Transition and the Demographic Challenge has launched this Wednesday for public consultation a proposal for a Ministerial Order that creates a capacity market in the Spanish peninsular electricity system.
This instrument seeks security of supply, the firmness of the system and the integration of renewables and will allow “avoiding stress situations,” according to sources from Sara Aagesen’s department. It will be articulated through a system of auctions to which, starting in 2025, most generation technologies (including the underused gas combined cycles), storage technologies and demand (consumers) will be able to participate.
The ministry defines it as “insurance that the regulator buys on behalf of consumers so that they have peace of mind” on dates like this, with low temperatures at dusk, high demand and lack of wind due to the presence of winter anticyclones.
The mechanism requires the approval of the European Commission. The objective is that, after six weeks of public hearing, the final version of the ministerial order and the operating procedure is submitted by the most urgent means possible to the different opinions (also of the Council of State) to have it approved “as soon as possible.” within the first half” of 2025 and hold the first auction “before the summer.”
The mechanism will serve to guarantee profitability for thousands of megawatts (MW) of gas that are underused and not viable. A year ago, a report from Red Eléctrica de España (REE) warned that “the Spanish peninsular electricity system could face short-term coverage risks in the event of dismantling a certain volume of combined cycle plants.”
The ministry does not specify the cost of the mechanism because it says it is impossible to determine it now. It will be borne by consumers with the same structure of tension levels as the charges: the greater the contribution to the stress of the system, the more users will pay for the consumption that occurs during the hours of greatest stress.
The capacity objective to be contracted will be given by the system operator (REE) with a methodology established in the procedure. It will be a centralized market managed by this company, which will estimate how much firmness the peninsular system needs under numerous scenarios (wind, sun, consumption, possible failures…) and will be technologically neutral: practically all technologies, both generation and storage, will be able to offer this service. . In principle, nuclear power too, if it demonstrates that it can operate flexibly.
The demand may also participate, offering to reduce load; and independent aggregation, a business model that is now being developed to act in markets by aggregating demand and resources without being associated with marketing and supply, in a separate way.
With this system there will be three types of auctions. The main one will be held every year, whenever it is detected that it is necessary to do so, and will be to contract the service for up to five years for a period that will determine the type of technology. An existing facility (with operating authorization at the time of the auction) can only be used for one year.
For new investments (without exploitation authorization at the time of the auction, but with access and connection to the network) the term may be up to half of the estimated life of each technology, with a maximum of 15 years. In the case of demand that is willing to reduce consumption, the term will be between one and ten years. When it comes to new investments, they can only be renewable, storage or demand technologies.
There will also be adjustment auctions, aimed at resolving specific coverage problems, and other temporary ones, intended to cover coverage problems until the start of the first main auction.
To provide more liquidity to the new capacity mechanism, a secondary market will be created for the rights and obligations awarded in auctions, for example upon the sale of the hosted facilities.
So that the auction is “technologically neutral” and that the technologies can compete on equal terms, coefficients will be used based on the degree of contribution of each one to the security of supply, which REE will calculate based on the real historical availability of each technology.
Existing facilities may participate in the auctions if they have emissions of less than 550 grams of C02 per kilowatt hour, which leaves out fuel-fired plants. For non-renewable facilities, flexibility will be required: they must be able to modulate their production to facilitate the integration of renewables.
Nor will the power plants that still receive the old capacity payments be able to compete: there are still 5,000 MW of which next year will total more than 40 million euros, of which 4,000 are combined cycles. These plants will have to choose whether to continue receiving these incentives or accept the new system.
The same will happen with technologies with regulated payments such as the oldest renewables under the regime known as RECORE. Or the plants that participate in the Active Demand Response Service that REE awards to large consumers in exchange for disconnecting from the grid at specific times.
Necessity and proportionality
Until now, there was no capacity market in Spain with a horizon beyond daily management. Capacity instruments have been provided for in regulations for years, but they have always been made through regulatory payments established ex ante, and as an instrument of last resort.
This instrument, as explained by the ministry, prevents many technologies from leaving the market because they are not able to recover their fixed costs. This does not mean that they can be approved as is, their necessity and proportionality must be justified. And that is why they will need the approval of Brussels.
To determine that this capacity mechanism is necessary, a coverage analysis is carried out with a European methodology (Adequacy Assessment) carried out by ENTSO-E, a group of system operators, with the objectives of the national energy and climate plans (PNIEC). of the member countries, and validates the European association of regulators ACER.
This reliability standard is based on the expected load loss and determines the need for coverage through an indicator that is the quotient between what it costs to increase firmness in one MW divided by what they are willing to pay for part of the demand. If this ratio is greater than 1, it is justified to adopt that mechanism. In the case of Spain, REE calculated a year ago values of 6.26 hours in 2025, 4.76 hours in 2027 and 2.34 hours in 2030, measured in number of hours expected with energy not supplied (LOLE, for its part). acronym in English).
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