France-Germany Study. Energy transition and capacity mechanisms. A contribution to the European debate with a view to 2030

In most countries of the world, the electricity sector is undergoing a structural transition, driven by requirements of efficiency and sustainability: renewable capacity is witnessing a continuous growth, making the need of flexibility increase, while electricity market prices tend to decrease. In the medium-term, the power system will have to deal with increasing levels of risk, which will take different forms in France and Germany, which are the two countries this study focuses on. In France, the risk is related to the thermo-sensitive power demand, whereas in Germany the risks are related to the high penetration of intermittent renewable power generation. Both of these facets of risk lead to a high volatility of the residual demand from one hour to the next, and therefore require the power system to be more flexible. In this context, the question of whether the current market design will be able to ensure a satisfactory level of security of supply through an adequate remuneration of it actors is open. Market design is therefore a crucial point whose appropriate treatment could ensure the sustainability of the current and future power systems. An inadequate market design could in contrast lead to a massive decommissioning of power plants, including the most flexible ones, which will directly impact the security of supply in both France and Germany. The security of supply at the European level could also be at risk since France and Germany host the two largest power systems in Europe. To face these new challenges, several solutions are being planned or implemented in different countries. These solutions all involve combinations of the following ingredients: - improvements of the energy-only markets, without price caps and with higher demand-response capacities, to let the system send more accurate price signals during times of scarcity, - capacity reliability mechanisms, among them capacity mechanisms based on a targeted level of security of supply at a national level, or other mechanisms such as strategic / capacity reserves where the system operator puts aside some capacity to ensure security of supply in exceptional circumstances. As will be discussed in this study, a crucial ingredient that highly influences the effectiveness of mechanisms aimed at ensuring security of supply is the level of international coordination. In this context, this study focuses on assessing the impacts in 2030 of different market designs in France and Germany on the security of supply and on social welfare, evaluated through a modeling of the investment behavior of market participants. This study has been commissioned by UFE and BDEW, two major European institutions bringing together the main actors of the Franco-German power system. Section 2 is devoted to the description of the power system model for France and Germany. Section 3 analyses investment risks in new capacity for the different studied market designs. Actor behavior modeling, along with the resulting supply mixes are presented in Section 4