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Capacity mechanisms

Capacity mechanisms are temporary support measures that EU countries can introduce to remunerate power plants for medium and long-term security of electricity supply.

Capacity mechanisms enable power plants to be available for generating electricity when needed. In exchange, the mechanisms provide payments to these power plants. These capacity payments are in addition to the earnings power plants gain by selling electricity on the energy market.

The support measures, in form of capacity payments, are designed to minimise the impact on market functioning and are added to the earnings power plants gain by selling electricity. They can be an issue in the EU’s internal electricity market where systems with capacity mechanisms coexist with systems where electricity producers can only rely on their earnings from sales on the 'energy-only markets'. It is therefore very important that capacity mechanisms are only introduced if necessary. Member States need to ensure that the mechanism is proportionate to the underlying adequacy problem so that the available and expected energy capacity is sufficient to meet demands at all times.

Generation adequacy

More intermittent renewable energy is changing the structure of power generation capacity. Generation adequacy, thus supply-demand balance, is a key tool to assess the security of supply in an electrical system and a rigorous adequacy assessment is crucial for identifying risks to security of supply.

To this end, the EU Electricity Regulation (EU/2019/943) requires an enhanced EU-wide adequacy assessment methodology and annual adequacy assessments conducted by the European Network of Transmission System Operators for Electricity (ENTSO-E). Accordingly, ACER published a Decision on the European resource adequacy assessment (ERAA) in October 2020. It should be based on the latest calculation of future supply-demand scenarios and consider the availability of renewable energy sources, demand side flexibility and cross-border infrastructure in times of system stress. The EU adequacy assessment is required to cover every EU country or bidding zone. In principle, countries with perceived adequacy concerns are required to demonstrate this concern based on the EU assessment.

National implementation plans

The EU Electricity Regulation requires that all EU countries with identified adequacy concerns develop an implementation plan settingout how they intend to address the root causes of their problem through market reforms. This requirement reflects the recognition that markets, if well designed, free of regulatory distortions and sufficiently connected to the EU electricity grid, can provide the right amount and type of capacity to meet any demand. The Commission has published guidance for EU countries for developing their national implementation plans.

Capacity mechanisms should only be introduced to address residual concerns, such as problems or circumstances that cannot be resolved by market reforms alone. Once the residual concerns are solved and market reforms have started to work, adequacy problems are expected to decrease and ultimately disappear. To enable this, regulatory measures that eliminate distortions and reform markets must be effective and credible for market participants.

Annual monitoring reports

All EU countries with identified adequacy concerns are required to monitor the application of their implementation plans and publish the results in annual reports. The Commission provides guidance for preparing these reports.

The Commission’s assessment of the implementation process is meant to ensure that the market reform plans are properly implemented. The first monitoring reports were submitted in 2021 and the Commission reviewed them and issued a formal opinion on the reform process.

The collective opinion on the monitoring reports submitted by Belgium, Ireland, Lithuania and Poland were published on 12 December 2022:

  • Commission Opinion on monitoring reports submitted by Belgium, Ireland, Lithuania and Poland – C/2022/9059 final (EN, FR, DE, NL, GA, LT, PL)

Commission opinions and consultations

The EU Electricity Regulation also requires the Commission to assess whether the proposed market reforms are fit for purpose and to issue an opinion within 4 months from submitting the national implementation plan.

As part of its assessment, the Commission will open the proposed market reforms for consultation. If it concludes that the proposed reforms do not sufficiently address the problems underlying the adequacy concern, it can propose necessary amendments to the implementation plan.

The table below contains links to the opinions and the consultations on the implementation plan, per EU country and language, when relevant.

    Documents

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