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The results of the first Auction of the Belgian Capacity Remuneration mechanism (CRM) are official. Engie Electrabel is the clear winner of the Auction, being granted subsidies to build two new gas fired plants in Awirs and Vilvoorde. What does this mean for the future energy market in Belgium? And what about the denuclearization debate in Belgium? Let’s start with some history: why did Belgium organize a CRM in the first place?

Elia, the Belgian grid operator, is responsible to guarantee our security of supply. It therefore performs a biennial study to assess the adequacy of the Belgian electricity sector. Through these studies, the need for a CRM mechanism was first detected in 2016 after it had been reconfirmed that all nuclear power plants should be gradually closed down, ending nuclear capacity in Belgium in 2025.

This need was translated into law in 2019 and put forward to the European Commission in the same year. At this moment, the design of framework of the CRM began under the responsibility of Elia. The CRM was approved by parliament in 2020 but around the same time, the European Commission launched an in-depth investigation to assess whether the CRM design was not an illegal form of State Aid in disguise. Finally on August 27 of this year –when preparations for the CRM were already in a very advanced stage – the European Commission finally gave the green light to advance with the Auction. The bidding was closed at the end of September and the Auction was “cleared” in the beginning of October. Clearing the Auction meant determining the optimal set of bids that will guarantee Belgian adequacy at a minimal cost.

The Belgian CRM is not the first CRM in Europe (France, Portugal and Ireland for instance already have a CRM). It is however the first CRM under the newer and stricter state aid rules established by Europe. Its design is therefore set to be an example for countries that need a state-aid mechanism in the future.

How does the CRM work?

Before getting to the results of the Auction, let’s dive a bit deeper in the design of the CRM. What can you actually earn participating to the CRM? And which obligations do you have to comply with?

The CRM mechanism is designed to remunerate capacity providers for their available generation capacity rather than what they actually produce. The installed generation capacity is mapped to a capacity representing its contribution to adequacy (through the so called “derating factors”), primarily based on the technology of the unit. This makes sense because for example batteries can only deliver energy for a certain amount of time before being completely drained, whereas for thermal units there are no such restricting factors. Remuneration prices range from maximally €20k/MW/year for existing units to maximally €75k/MW/year for new units. The exact remuneration depends on the bidding of the candidate during the Auction as the current Auctions are pay-as-bid. 

The CRM is a market wide mechanism for which all considerable energy units in Belgium have the obligation to register if they do not receive subsidies. A considerable unit means a unit with a generation capacity that –after derating – exceeds 1 MW. Participation in the Auction is however not mandatory and units that do not wish to participate, can follow a fast-track procedure to limit the administrative burden. Units that already receive subsidies (e.g. green certificates) are free to participate in the CRM but will have to renounce any other form of subsidies. This is generally not beneficial for renewable energy units and they are therefore expected to not participate until other forms of subsidies would expire.

For participating units, there is generally no strict obligation to produce energy at scarcity moments. However, selected units are expected to do so because at scarcity moments, there will be a production incentive through the day-ahead/intraday/balancing prices. Elia will also regularly test (always announced beforehand) whether the production capacity reaches the contracted capacity. Penalties apply when a CRM participant would not be able to show his promised capacity during those tests.

The Belgian CRM has a runtime of 10 years although new built installations can apply for multi-year contracts up to 15 years. The first delivery period for the CRM is 01/11/2025-31/10/2026 coinciding with the closure of the last nuclear plants, Doel 2 and Tihange 1, which are scheduled to be taken out of service in October and December 2025 respectively. For each delivery period, two Auctions are organized respectively four (Y-4) and one year (Y-1) prior to the actual delivery period. The idea behind is that major differences between needed generation and existing production can be covered through the Y-4 Auction. Differences in forecasts or delays in ongoing developments can then be covered through the Y-1 Auction when more detailed information is available. This year’s Auction was thus the Y-4 Auction for the 2025-2026 delivery period.

Engie comes out on top (again)

It seems that Engie have the same probabilities in winning in the Belgian energy context, as the Germans have in soccer. It is remarkable that even more than 20 years after the liberalization of the energy market in 2003, Engie will in 2025 still own and operate more than half of the thermal generation capacity in Belgium. In this first Auction, 1.6 GW of the 1.65 GW of new capacity (discarding Demand side management) was awarded to Engie. In Avertims opinion, the CRM is –at least until now- a missed opportunity for other market players to increase their share and generation flexibility in the Belgian energy market. This could potentially have led to increased competition and therefore decreased prices for the end consumers. It has to be noted that Vilvoorde does not have a building permit yet but we believe that it will be granted soon due to the increased political pressure following the Auction’s outcome.

The first Auction resulted in a total contracted volume of 4.45 GW of which 1.65 GW is new generation capacity. This is in sharp contrast with the volumes of 7.3 GW of total volume to contract and 2.3 GW of new capacity that were widely covered in the press prior to the Auction. What has changed? There are several factors in play but two prominent ones can be distinguished:

  • Several actors have opted to see which way the cat jumps by not yet participating in the Auction. They can still get contracts for the same delivery period in 2024 (Y-1 Auction) and keep therefore their options open. This explains why less volume than expected is contracted
  • Heavy industry companies that have potential to reduce their consumption when prices are high (called Demand Side Management), have already participated in this Auction. They have therefore taken away some of the capacity that was initially thought to go to new generation capacity

Apart from the gas plants, several smaller battery projects were also selected during the Auction. These projects have a combined capacity of less than 50MW derated. They therefore only contribute marginally to Belgian adequacy but increase the technology neutral and green image of the CRM mechanism.

The cost of the CRM, currently standing at 140M€ for the first delivery period, is considerably lower than previous estimations, mostly ranging from 250-300M€. This is in the first place explained by the fact that less capacity than expected participated to the Auction. The current cost will thus further increase with the capacity contracted during the Y-1 Auction in 2024.

What about denuclearization?

The government has pledged to take a final decision on the prolongation of nuclear capacity in Belgium in November 2021, after the results of the CRM Auction are known and thereby the risk assessment regarding denuclearization can be made. However, Engie has not awaited the final political decision and has already formally announced the definitive closure of its nuclear capacity. It has publicly stated that it stopped all further investments and a prolongation would be technically and regulatory infeasible.

With two new gas plants, all participating battery projects and much more demand side management than expected, the CRM is –at least politically speaking – to be called a success. Adding to this the resentment of Engie regarding nuclear prolongation, it is our opinion that the denuclearization by 2025 is now a fact. Moreover, legally it is almost impossible to combine a CRM with a nuclear extension. Market players have bid regarding their expected missing money, which is dependent on the (expected) electricity price. With nuclear generation naturally placed before gas fired plants in the merit order, the prolongation would alter electricity prices and would therefore have impacted the bidding behavior during the Auction in retrospect.

Our insights

At Avertim, we believe that a CRM has a place within our future energy system. When the penetration of renewables reaches a point where fossil fuel units would only have a very limited runtime per year, it makes sense to reward (thermal) units for their capacity rather than their actual energy production. However, we are not there yet. The current selected gas plants will be used to cover base load rather than peaks during absence of sun and wind. The gas plants will thus essentially replace nuclear units, thereby drastically increasing the CO2 emissions in our country. Nuclear energy is the only reliable, CO2 neutral technology at the disposal of humankind and should therefore be welcomed instead of banned. Concerns about its safety are to be taken seriously but not exaggerated as is nowadays too often the case due to an uninformed public and political opinion. Moreover, the newly contracted capacity -1.65 GW- is less than the “extra” capacity (~2GW) we would have had by extending the youngest nuclear plants (Doel 4 and Tihange 3) by ten more years. Concretely, this thus means that with the CRM, we will have less generation capacity available, emitting more CO2 at a much higher cost. The 140M€/year is –at least for the first delivery period - to be seen as a lower boundary and has to be borne by the people. Whether this will be a direct cost on our invoice or it will be levied through excise duties is to be seen, but it’s a fact that it needs to be paid.

An additional risk is that the price for the end consumer might rise because the electricity price is coupled to the gas price through gas fired power plants. It’s the same phenomenon as we experienced during the last months with gas and electricity prices skyrocketing due to a gas supply shortage. This makes us more susceptible to externalities and limits our autonomy with regard to our energy supply.

Are we sure the lights won’t go out?

The CRM has only been able to contract relatively little capacity during this Auction (4.45 GW instead of envisioned capacity of 7.3 GW). That means that there is a lot of capacity present that is not contracted and can thus freely decide to stop its operations prior to 2025. Moreover, in the Y-1 Auction there was already a volume of almost 2GW reserved for foreign capacity and a further 1.5GW for additional national capacity. In essence, this means that the volume to be contracted in the Y-1 Auction will almost equal the volume of the current Auction. Contracting this amount of capacity this late, poses in our opinion a major risk to adequacy.

Furthermore, it is not very clear how the remaining volume is going to be covered. Of course the capacities that just didn’t participate this Auction but are available, will participate. Apart from that, a lot is expected from demand side management (DSM) even though studies show its potential in Belgium is limited. Furthermore, new battery projects can be built within one year but they contribute little to adequacy due to their unfavorable derating factor. The same cannot be said of thermal units of which the construction takes several years. In our opinion, it will thus be challenging to find enough volume in Belgium to cover the demand for the Y-1 Auction.

Conclusion

Engie Electrabel is the clear winner of the CRM Auction this year. It was awarded contracts for its two proposed gas plants in Vilvoorde and Awirs and thereby maintains its dominant position within the Belgian energy market. Because of the selection of two new gas plants, demand side management projects and new batteries, it is very likely that the responsible political parties will confirm the complete denuclearization by 2025. However, we note that a lot of capacity is shifted towards the Y-1 Auction, thereby increasing the risk of not fulfilling the adequacy requirements when too little new capacity would be interested in participating to this Auction.

From a societal perspective, we at Avertim believe that the CRM came too early and could have been avoided by prolonging the most recent nuclear units by another ten years. This would drastically have reduced the total energy cost to be borne by the end consumer and Belgian tax payer. This denuclearization decision is –in our opinion- the consequence of decades of political incompetence, lacking a long term vision and focusing on winning votes rather than on implementing a consistent, long-term energy policy. It is now however too late to change course and a gas-powered and thereby CO2 intensive energy mix is the future reality of Belgium.

Written by

 

  • Tom C.,  Consultant