On the 5th of June 2015, the Czech Republic issued a change in its law on green energy levies that might prove to be a watershed piece of legislation. Traditional payments of the levy in Czech Crowns per MWh – now at 495 CZK or 18,31 EUR per MWh - has been replaced with a capacity-based payment. End consumers will no longer contribute to the payment of subsidies to green power production per MWh that they produce. Their contribution will be based on the capacity that they have booked. We believe that the idea of electricity levies based on capacity rather than consumption is interesting for several reasons:
As capacity tends to be more stable than consumption, you reduce the fluctuation in overall income on these levies. If the overall consumption drops, as we’ve seen recently, the overall amount of money that is collected from the energy consumers drops, so the levy per MWh needs to be increased to make sure sufficient money is available to cover for the amounts that are being subsidized. Capacity-based contributions could make the overall amount of money coming in more stable.
One of the consequences of an increased usage of renewable energy is a lower efficiency of the grid usage. This is in the first place due to the low utilization rates of wind and solar power, and that will not be solved. But if the demand size capacity offtake is more stable, with less peaks, you reduce the size of the demand peaks that could coincide with a period of low wind / solar output, thus increasing the efficiency of the grid usage. Capacity payments inspire end consumers to apply peak shaving and stabilize their loads, contributing to a higher grid usage efficiency.
High non-commodity costs have caused many to fret over the impact on the competitiveness of energy-intensive industries. As such energy-intensive users tend to have higher load durations, they will be less impacted by the cost of the green energy levy than less intensive energy users. Levies based on capacity rather than consumption hence create a natural protection for energy-intensive industries against high non-commodity costs.
Because of these clear advantages, it is not unthinkable that more countries will follow the Czech example. Will we see a broader “return of the capacity term”? Will other non-commodity parts of the bill also increase their capacity-based component? In the Netherlands a decision has been taken to have grid fees 100% based on capacity term.
If the importance of capacity increases, end consumers will have an increasing interest in traditional peak shaving, reducing peaks by switching off non-essential equipment when production equipment is causing peaks in capacity offtake. This comes on top of increased interest in capacity management activities such as demand side management and the marketing of interruptible capacity. Finding a good balance between the economics of these different possibilities of cost optimization will be primordial.