Stranded costs and capacity payments key concepts for embattled power markets

A conference in Prague this week reviewed the exit possibilities from the current energy crisis in Europe. The conclusions were not very positive with major power companies now staring at a scenario where they are undermined by ever increasing amounts of renewable power on one hand and undercut by state payments in some countries to keep costlier power plants on standby.

Photo: Eva OdstrčilováPhoto: Eva Odstrčilová There are two words that are likely to get a lot more airing in the near future and could become quite familiar: stranded costs and capacity payments. They are basically two sides of the same coin.

Stranded costs could be described as deadweight assets; investments that made sense when they were planned a decade or two ago but now are not in the money due to market changes and at best can be mothballed in the hopes of better times or shutdown altogether.

There are quite a lot of these stranded assets at the moment in Germany, gas fired power plants that in some cases have hardly been completed before they are shutdown. In short, they’re just too expensive to operate faced with subsidized wind and other renewable power given priority access to consumers. At the same time though, those plants are still needed to hand around to cover for the downtimes in renewables power production.

Germany’s governing coalition partners have set a goal for renewables to cover 50-55 percent of its electricity needs by 2035 compared with 35 percent by 2020. That means a lot of renewable power coming onto the market and pushing a sizeable chunk of existing power plants and sources onto the margins.

And so as Germany pushes ahead with its energy turnaround targeting an ever increasing volume of renewables the idea is fast developing that power companies be paid for keeping an ever increasing proportion of existing power plants on standby for emergency use, so-called capacity payments. The costs of such payments would probably find their way into electricity bills as special supplementary payments.

With Germany’s big power companies burdened by the retreat from nuclear, low electricity prices, and stranded costs, the roll-out of capacity payments there is regarded as only a matter of time. And if capacity payments make their debut big time in Europe’s biggest single electricity market, then its regarded as almost inevitable that they will have to be copied by neighbouring countries as well to make sure that they are not undercut by the German competition.

One of the main managers at state controlled power company ČEZ warned at the power conference this week that policy makers should already start thinking how capacity payments might be introduced Europe-wide without too much disruption.

The near-70 percent state controlled power company is lucky in that its biggest stranded cost is the soon to be completed Počerady gas power plant though there are a few other coal plants whose operations are already marginal and will look even more unhealthy if electricity prices sink lower.

So, the following writing could be on the wall: consumers and tax payers paying for ongoing subsidies at for renewables in one slice of the power market and then paying again to keep the conventional power plants sidelined by renewable power on standby just in case. It’s true that fact can often turn out to be stranger than fiction.