The capacity question in European power markets 2035: SGEM WT 7.2 FP5 Report D7.2.4

The report is the deliverable D7.2.4 of the Working Task 7.2 in the 4th and 5th funding periods in the Smart Grids and Energy Markets (SGEM) research programme. This study approaches the power capacity question from various viewpoints. In the report, we first look at the related question of investment under uncertainty from theoretical viewpoint. The market price of electricity must stay for long periods on a much higher level than the average production cost before we can expect it to induce any new purely market-based investments. We secondly look at different capacity mechanisms and especially at Britain's new capacity mechanism, which we analyse. Practical arrangements and numerical market data present added value to the more theory-oriented discussions on capacity markets in our previous SGEM report. The Nordic market is one of the most advanced, if not the most advanced, power markets in the world. The wholesale market is mainly energy based, with special arrangements for reserve power (capacity). Our third focus lies on the question of how will new and especially adjustable regulating power capacity be induced to the Nordic market and what is the role of smart endusers? The profitability of condensing power plants is seen as a key question related to need of capacity solutions. According to our simulations of the Nordic electricity markets, assuming the increase of electricity from renewable energy sources goes according to national plans, we see that condensing power production in the Nordic market in 2035 will dwindle to 4 to 6 TWh in a normal year, 1-2% of the demand. The market price of electricity in 2035 will not either support investments in condensing power capacity. If new condensing power capacity is needed for the short term management of intermittent wind power, and that is a big and interesting if, it has to be reimbursed otherwise. However, the alternative to new capacity, and capacity mechanisms, is Smart Grids and end-user flexibility. The Nordic countries have great opportunities for flexibility with a high heat demand and widespread district and electric heating, and vehicles might to some extent be electric by 2035.