Svenska kraftnät proposes a future capacity mechanism to ensure resource adequacy in the electricity market

On 15 December 2022, Svenska kraftnät and Energimyndigheten received a multi-part government assignment on strengthened security of supply in the energy sector (I2022/02319). In subtask two, Svenska kraftnät now proposes a design of capacity mechanisms to replace today's power reserve.

- Capacity mechanisms mean that, in addition to the regular energy market, you also provide compensation for keeping capacity available. Our current power reserve is a type of capacity mechanism, says Niclas Damsgaard, chief strategist, Svenska kraftnät.

Background

The background to the proposal is that the power balance on the electricity market has deteriorated over time, which leads to periods of high electricity prices and a risk of power shortages with subsequent disconnection of consumption. The energy transition will likely reinforce the trend of shrinking margins in the electricity system, as electricity demand may grow faster than the supply of production, imports and other flexible resources that can balance electricity use during scarcity hours.

According to the latest national adequacy assessments from Svenska kraftnät and at the European level, Sweden risks not meeting its reliability standard of one hour of power shortage per year within a few years.

Conclusions

Svenska kraftnät therefore assesses that, in the long term, Sweden needs to introduce a market-wide capacity mechanism with reliability options to prevent shortage situations arising in the future.

- We estimate that it will take between 5-8 years to introduce a market-wide capacity mechanism. This means that we will be without a capacity mechanism for a number of years, when our current power reserve expires on March 15, 2025. Therefore, we propose a transitional solution in the interim period in the form of a strategic reserve similar to the current power reserve, says Niclas Damsgaard.

Such a reserve requires approval by the European Commission.

Due to the short time frame for the sub-assignment, Svenska kraftnät does not submit a complete proposal for capacity mechanisms, but rather the report contains a proposal for high-level design regarding a future Swedish capacity market.

- Our analyses point to a sharp increase in electricity consumption. Linked to that, we see a need for a new capacity mechanism to counter the risk of power shortages or periods of very high prices. However, there is considerable uncertainty about how much electricity consumption will increase, says Niclas Damsgaard.

If the government chooses to proceed with the proposal, the report can be send out for consultation with relevant stakeholders. In the continued process, a number of design choices need to be made and the report contains a discussion of possible configurations. In a possible continued process, these need to be consulted with stakeholders and an in-depth impact analysis to be carried out.

Uncertainty about future electricity use

Svenska kraftnät makes a number of assessments based on the latest analyses, which unanimously point to a greatly deteriorated power balance within a few years. Possible implications of high electricity prices and increased interest rates have not had time to be fully reflected in the analyses. The conditions may change if the timetables for one or more announced electricity-intensive industrial projects in Sweden are delayed or cancelled. Svenska kraftnät will follow the development and is prepared to reconsider the assessments if electricity use develops at a slower pace.

The report can be read here: A future capacity mechanism to ensure resource adequacy in the electricity market (svk.se) (.pdf) open_in_newOpens in a new window

Svenska kraftnät föreslår att en kapacitetsmekanism införs för ökad försörjningstrygghet | Svenska kraftnät (svk.se) Swedish text