As in many European Countries, the Dutch energy debate has recently focused on security of supply. The Dutch Ministry of Economic Affairs, DTe and TenneT have studied a range of mechanisms that could enhance security by encouraging generators to build or retain capacity. The Ministry has concluded that, if any mechanism is required, the best option is to increase the amount of power that TenneT procures under long-term contracts. Long-term contracts would provide generators with a stable source of income, helping to defer plant retirement and to facilitate the construction of new plant.

Ensuring supply security might require significant increases in the amount of capacity subject to long-term contracts. Consequently, TenneT may need to change the way it acquires long-term contracts. Auctions should replace bilateral negotiations to ensure optimal results, so the Ministry is naturally interested in auction design. The Ministry is also interested in the potential impact of additional contracts on energy prices. The Ministry has commissioned The Brattle Group to examine these, and other, issues, and to design a possible mechanism for implementation. The objective of this study is not to determine what type of additional measures would best enhance security of supply – the Ministry has already decided to focus on long-term contracts. The objective is to design an efficient mechanism that involves long-term contracts.

We begin with a description of the current balancing market (section 1), before discussing the types of reserve products that could support a desired level of supply security (section 2). We then discuss the effect that a support mechanism might have on consumer’s costs and balancing prices (section 3) before going on to consider some detailed issues related to the operation of our recommended contract type (section 4). We conclude with recommendations concerning the optimal auction design for awarding contracts (sections 5 and 6).

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