The capacity mechanism was adapted in 2020 to maximise its contribution to security of supply in the winter of 2020

The goal in implementing a capacity mechanism in France is to guarantee security of supply over the medium term by covering risks during peak demand periods in winter. It was approved with conditions by the European Commission on 8 November 2016, and the market rules drafted for it were approved by the French Ministry of Energy and the Energy Regulatory Commission on 29 November 2016.

The functioning of the capacity mechanism rests on two pillars. First, it creates a requirement for obligated parties – mostly electricity suppliers – to obtain capacity certificates to contribute to the security of supply of their customers. Holding suppliers responsible in this way is notably a means of containing peak demand growth by creating an economic incentive to limit their customers’ consumption.
Second, RTE certifies the capacity of operators that agree to make their capacity available when demand peaks in winter. The capacity mechanism allows them to realize value on the availability of generation and demand response capacity by selling capacity certificates.

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How the capacity mechanism works

Actors trade capacity certificates through organised market sessions or OTC transactions. During the delivery year, RTE notifies them of the peak days when they must uphold their individual commitments (“PP1” days for suppliers, “PP2” days for generators and other capacity operators). The calendar of these days can be found here
After the delivery year, RTE informs suppliers of their final obligation level and calculates the actual availability of their capacity. Differences result in financial payments.

Certified capacity

Certified entities and their technologies are defined at the site level. They may be generation or demand response capacities. Certified volumes totalled 80.8 GW for 2020 and 83.5 GW for 2021. This figure does not include the capacity certified by RTE at interconnections: 6,700 MW for 2020 and 9,000 MW for 2021.

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Explicit participation of cross-border capacities

From the beginning, the French capacity mechanism was designed to take into account the interconnection between the country’s power system and those of other European countries, and the contribution the latter can make to security of supply in France. Initially, for delivery years 2017 and 2018, this contribution was accounted for implicitly, by deducting it from the capacity requirements of suppliers via the so-called security factor, but it was not explicitly valued. The security factor was 0.93 in 2017 and 2018.

Since 2019, contributions from EU Member States directly interconnected with France have been accounted for explicitly. A country’s contribution is based on the electricity France can expect to import from it when a shortfall is identified in the Generation Adequacy Report scenarios.

For delivery years 2020 and 2021, the contribution of the five countries explicitly taken into account was calculated at 6,700 MW and 9,000 MW, respectively, with a security factor of 0.98.

A mechanism designed to generate a signal when security of supply is tight

Capacity certificates can be exchanged over-the-counter or through auctions. Details of these transactions are published in the capacity certificates register. When auctions are involved, in the interest of transparency, exchange volumes and prices (€/certificate) are published on the EPEX SPOT website.

Prices on the capacity market reflect supply and demand of capacity certificates. Logically, RTE’s announcement during the summer of a tight situation for the winter of 2020 affected the balance on the capacity market for delivery years 2020 and 2021, reducing surplus capacity certificates and resulting in a clear deficit for the year 2020.

This increased tension drove up the auction price of capacity certificates in the second half of the year, for delivery years 2020 and 2021. The imbalance settlement price (formerly the reference market price) for delivery year 2021 worked out to €39.1k/MW. This was the highest price on record since the mechanism was launched.

A sharp increase in capacity prices, together with rising energy futures prices following the first lockdown, encouraged capacity operators to maximise the availability of their capacity during the winter of 2020. And the combination of this increased availability, and a modification of mechanism rules that eased certain regulatory constraints for operators seeking to boost their availability, drove up certified capacity levels for several technologies, notably demand response and cogeneration.

Year of delivery Market or PREC Reference Price
2017  €9,999.8/MW  
2018  €9,342.7/MW  
2019  €17,365.3/MW  
2020  €/MW 16,583.9  
2021  €39,095.4/MW  

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Adapting the capacity mechanism to maximise its contribution to security of supply

Given the stakes for security of supply in 2020 and 2021, RTE wanted to allow the capacity mechanism to generate stronger signals by exceptionally adapting certain modalities and by easing certain regulatory constraints. These modifications involved eliminating fees for upward rebalancing for delivery years 2020 and 2021, eliminating fees for late certification of new demand response sites during the year for 2020 and 2021, and simplifying certain procedures when a generation sites enters/leaves the purchase obligation mechanism. Lastly, two market sessions were added for delivery year 2020 in October and December.

Long-term tenders

A long-term tender (appel d’offres long terme – AOLT) is a tender for new capacity compatible with the Multiannual Energy Programme (meaning capacity relying on fossil fuels is not eligible). Tenders are organised four years prior to each delivery year by the Ministry of Energy if a benefit for society is identified. The goal is to offer visibility on stable revenue from capacity, and thus encourage new investments that will boost security of supply.

A guaranteed price is set at the conclusion of each tender. Candidates that submitted offers below the guaranteed price are selected and awarded contracts for difference, ensuring they will receive steady remuneration equal to the guaranteed price for a period of seven years. If the guaranteed price is above the market price over the course of the period covered by a contract, the selected party will obtain the difference. If it is below the market price, the party will pay the difference into a dedicated fund.
Once the scheme is fully established, each tender will be organised four years ahead of the delivery period and remain open for a period of six months.

The first tenders were conducted in 2019. Transitional measures were put into place for their organisation, to secure capacity for periods starting over the next four years. As such, four tenders were organised late in 2019, for the following periods:

  • 2020 – 2026
  • 2021 – 2027
  • 2022 – 2028
  • 2023 – 2029

The winners of these tenders were demand response and battery storage capacity:

Security period 2020 – 2026 2021 – 2027 2022 – 2028 2023 – 2029
Volume of batteries retained 0   MW 93   MW 159.7   MW 0   MW
Erase volume retained 0   MW 58.1   MW 66   MW 0   MW

The tender for the 2024-2030 period has not been launched as of today. French authorities are in the process of drafting an Implementation Plan they will submit to the European Commission teams, which will need to issue their opinion before any new long-term tender is launched.

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