Capacity mechanisms for electricity

Concerns about a lack of investment in electricity generation capacity to meet peak demand have prompted several EU Member States to introduce rewards for making capacity available, in the form of capacity mechanisms. Such mechanisms must conform to the EU guidelines on state aid for environmental protection and energy.

However, capacity mechanisms are considered problematic because they risk distorting the internal electricity market. Moreover, purely national mechanisms are not as cost-effective as mechanisms that allow for cross-border participation.

To tackle these issues, the European Commission carried out a sector inquiry, in which it analysed capacity mechanisms in the EU and offered conclusions about the design principles needed to ensure their effectiveness and compatibility with the internal electricity market. It found that many Member States did not adequately assess the need or cost-effectiveness before introducing capacity mechanisms.

Consequently, the Commission's 'Clean energy for all Europeans' package, adopted in November 2016, included a proposal for a recast of the Electricity Regulation, which update the rules for European resource adequacy assessments and set out design principles for national capacity mechanisms.

In several resolutions, the European Parliament has expressed support for market-based cross-border capacity mechanisms, pointing out, however, that they should only be used under certain conditions.

The Council of the EU stresses that ensuring the security of electricity supply is the responsibility of the Member States. Stakeholders have expressed various views about what the appropriate design of capacity mechanisms should be.

Author: Gregor Erbach