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Research Report

The Rise of Capacity Mechanisms:: Are They Inevitable in the European Union?

Tania Zgajewski
Copyright Date: Sep. 1, 2015
Published by: Egmont Institute
Pages: 38
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Table of Contents

  1. (pp. 5-6)
    Tania Zgajewski

    In recent years, the EU has seen the proliferation of Capacity Remuneration Mechanisms in many Member States. These mechanisms are employed to ensure that the electricity system has sufficient capacity¹ available to meet the electricity demand at all times in the national markets. They depend on medium- to long-term projections of peak demand and the long-term projection of supply.²

    Capacity Remuneration Mechanisms (hereafter CRMs) are a complex but not a new topic. They already exist in other regions of the world (e.g., the United States or South America) and even in Europe (e.g., Russia). In the EU, however, they have...

  2. (pp. 7-13)

    The Member States’ general distrust of markets stems from different developments that appeared in the wake of the growth of electricity generation from renewable energy sources (RES) that benefitted from support mechanisms (subsidization⁷ and priority dispatch); the stagnation of electricity demand (due to the economic crisis and the implementation of energy efficiency policies); and last but not least the insufficiently flexible power plant fleet. They reveal why market actors have not been inclined to invest in generation capacity while remedies or solutions have not been brought forward.

    The first development is linked to electricity trading on power exchanges. The latter...

  3. (pp. 15-19)

    The CRMs put in place, planned or considered by Member States vary strongly. These variations often result from the specific context of the country concerned (energy mix, political sensitivity, power generation industry). Given the different characteristics of Member States’ energy markets, there is thus no single fix to the problem that CRMs are intended to address.16 Consequently, their classification is difficult. According to the Agency for the Cooperation of Energy Regulators (ACER), there are broadly three major categories of CRMs: Capacity Payments, Strategic Reserves and Capacity Markets (i.e., the ‘capacity auction’ model regarded as a centralised mechanism, or the ‘capacity...

  4. (pp. 21-24)

    Many criticisms are made of CRMs. The following ten counterarguments are presented without distinguishing between the three categories of CRMs introduced.

    First, capacity is encouraged on the basis of uncertain forecasts for various conditions made several years in advance.28 Deviation between forecasts and the electricity demand – and therefore the capacity requirements – can result in distortions of the electricity price formation. More crucial in the development of the single energy market, generation adequacy is increasingly difficult to ensure on a purely national basis.29 Yet Member States have so far continued their own national forecast.

    Second, the cost of CRMs...

  5. (pp. 25-29)

    A few years ago, the Commission was clearly considering that the single market was the pillar of electricity security of supply (including generation adequacy). Consequently, Directive 2009/72/EC46 on the internal market in electricity affirms that ‘the security of energy supply is an essential element of public security and is therefore inherently connected to the efficient functioning of the internal market in electricity and the integration of the isolated electricity markets of Member States’ (Recital 25). For that reason, according to Article 3.2 of the same Directive, ‘Member States may impose on undertakings operating in the electricity sector, in the general...

  6. (pp. 31-31)

    European countries have taken another step towards enhancing EU energy security via regional cooperation.

    On 8 June 2015, 12 European countries (Austria, Belgium, the Czech Republic, Denmark, France, Germany, Luxembourg, the Netherlands, Norway, Poland, Sweden and Switzerland) signed a ‘Declaration for regional cooperation on security of electricity supply in the framework of the internal energy market’. The signatories want to start considering energy security as a European issue rather than a purely national one, commented Sigmar Gabriel, the German Energy Minister. The declaration sets out an initial series of joint steps to be taken as part of the cooperation.


  7. (pp. 33-37)

    Currently, as we have seen, electricity prices are low on the wholesale market in Europe for many reasons. The deep economic recession after 2008, and the reduction of potential growth, have played an important role (See Figures VI, VII and VIII). Meteorology has also led to a lower level of consumption. Furthermore, the electricity intensity of growth has also diminished, notably because energy efficiency has progressed. Additionally, the huge subsidies offered to wind and solar during the last decade have brought a lot of new near-zero marginal cost capacity onto the market. Overall, there is currently too much capacity, coinciding...

  8. (pp. 39-41)

    One should not underestimate the huge changes undergone by the electricity system in Europe during the last ten years. The introduction of renewables, especially solar and wind, has made the system much more complex, since it relies now on a greater number of primary energy sources, quite different in technical and financial aspects. Additionally, the capital needs of producers are extremely diverse. Some have very high fixed costs. Others have much higher variable ones. In any case, the arrival of many new renewable electricity producers with very high fixed costs requires more previsibility in a changed context that generally provides...