What is the energy-only market (EOM)?

The arguments behind the missing money problem are understandable, but they are taken in the context of the old energy market. To guarantee peak-load capacity, this market relies on large power plants that take a long time to build and require correspondingly large and long-term investments.

Investments in a decentralized infrastructure that supplies secured capacity from several smaller assets is much easier and quicker to set up. A CHP or power storage asset can be planned and built in just a few weeks, meaning secured capacity and control reserve is available quickly. This would mean that capacity shortfalls from conventional power plants scheduled to be decommissioned could be compensated in a reasonable timeframe with acceptable financial impact without affecting the guarantee of supply. 
 

On the capacity market, creating supply guarantee is simple: build more power plants. The market design guarantees that the resulting additional capacity will be accepted. In contrast to the energy-only market, it is not the supply that primarily influences the market, but the demand. This is especially attractive for large plant operators, because even plants that are waiting on standby or only used when demand spikes are compensated. Compared to peak-load prices that are allowed to develop freely, fossil-fuel power plants are given unevenly high prices for power that isn’t even needed on the market. The medium and long-term environmental, economic, and climate costs of these plants, with nuclear plants as a prime example, are not reflected.

Switching to the broader European perspective, taking a strictly nationalistic view of the supply guarantee problem leaves the true potential of the pan-European energy market untapped. Sources of renewable energy are spread unevenly across various European countries and could balance each other out. Norwegian hydro power, solar power from Spain and Italy, tidal plants in the Netherlands, and biogas or wind power from Germany would help stabilize the European power grid. 

However, this would require seriously expanding the integrated European grid to reduce trade barriers, such as efforts to increase the capacity of cross-border transfer points. The fact that these are not currently adequate was made clear in a 2017 decision to separate the common German-Austrian power price zone on 1 October 2018. The close-knit network that handles the physical flow of power in Europe therefore leads to a paradoxical problem: With an increasing amount of power that does not cross national borders, the European energy market will continue to be divided against itself as long as an integrated European power market concept is lacking.

On the energy-only market, establishing supply guarantee is more complex, but also more efficient. Supply and demand dictates the prices on the power exchange and, therefore, the utilization of power producers and (increasingly) consumers. 

If supply shortfalls on the market are higher than usual, the price of power goes up on the exchanges. Eventually, power plants – depending on their marginal prices according to the merit order principle – will be activated to balance out the supply shortfalls. As a last resort, peak-load assets such as gas, oil, or pumped-storage plants come online to sell their urgently-needed megawatt-hours at very high prices.

If a power plant operator on an oversaturated capacity market assumes that production capacity can be sold for the foreseeable future at the agreed price, there is little incentive for innovation, since revenue continues without any additional development. Shortfalls are covered by excess production, and large power plants can generate power without regard to consumption because it is the capacity that is being compensated, and not strictly the power produced. The result is a centrally-controlled system that resembles a planned economy, with high economic and environmental costs and little need for innovation.

An energy-only market, however, with its built-in market mechanisms, is capable of directly rewarding market players who contribute innovation and increased efficiency. An operator that can deliver capacity quicker can demand more money – and someone who can flexibly adjust power production according to price developments can earn more per megawatt on the power exchanges.

This market concept is attractive for representatives from the fossil-fuel sector as well, as evidenced by efforts from coal power station operators to make quicker adjustments to their installations based on power price developments. Even in large lignite-fired power plants, equipment is being installed to facilitate quicker acceleration or deceleration of the turbines –at a high technical and financial cost.

Supply guarantee, economic efficiency, environmental friendliness: These three equally important requirements are the cornerstones of a modern and sustainable power supply. Based on these three principles, the energy-only market has become viable on a European scale – although this is not without its complications between the renewable and conventional energy sources. 

Developments in Germany and Europe indicate that many power markets are shifting toward an energy-only market – helped along by long-standing hopes for a more deeply-integrated European power market. But, efforts to introduce capacity mechanisms that extend beyond the mere provision of control reserve also continue. 

Aspects of the energy-only market, such as power exchanges, freely-traded power, and the reduction of network and market access restrictions are also being implemented in countries that have tended to be more skeptical toward a pure EOM. 

Proof that a market-oriented, environmentally-friendly power market does not have a negative impact on supply guarantee can be seen in a European comparison of SAIDI indicators against the percentage of power produced from renewable energies. Countries such as France with capacity markets are not at an advantage, and the percentage of power from renewable energies has no negative impact on supply guarantee.