WIREDGOV

The European Commission has published the final report of its capacity mechanism sector inquiry. It concludes that Member States need to better assess the need for such mechanisms and gives guidance on how to make their design deliver on security of supply while minimising competition distortions.

The report concludes that Member States have often failed to adequately assess the need for a capacity mechanism before introducing one. Furthermore, many Member States have yet to implement market reforms that are indispensable to deliver on security of supply issues. Where a capacity mechanism is necessary the report gives practical guidance to Member States on which types of capacity mechanisms may be most suitable to solve the problem identified.

The capacity mechanism sector inquiry has provided input to and complements the Clean Energy for All Europeans Package presented by the Commission yesterday to create modern, better working, more integrated electricity markets in the European Union.

Commissioner Margrethe Vestager said: "Capacity mechanisms need to match a problem in the market and be open to all technologies and to operators from other EU countries. They must not be backdoor subsidies for a specific technology, such as fossil fuels, or come at too high a price for electricity consumers. The sector inquiry report will help the Commission and Member States introduce better targeted capacity mechanisms, and only if there is a genuine need for them.

But even if capacity mechanisms are well designed, they can't replace essential electricity market reforms. That's why the sector inquiry complements the Commission's important Clean Energy for All Europeans package of proposals to make European electricity markets more integrated and work better."

The main conclusions of the report are:

Capacity mechanisms must be accompanied by appropriate market reforms

Although there is generally overcapacity in the European electricity markets and power shortages are extremely rare, many Member States have concerns that in the future they may not have enough generation capacity to meet electricity demand. Some Member States have therefore decided to introduce capacity mechanisms that remunerate electricity generators and other capacity providers for being available in case needed. The Commission found a total of 35 previous, existing or planned capacity mechanisms in the 11 Member States covered by the sector inquiry (namely Belgium, Croatia, Denmark, France, Germany, Ireland, Italy, Poland, Portugal, Spain and Sweden).

The inquiry has found that in many Member States market and regulatory failures prevent the price signals necessary to maintain appropriate levels of security of supply. Many of these concerns could be removed by implementing market reforms proposed in the Clean Energy for All Europeans Package. This includes the removal of low electricity price caps, enabling the participation of demand response in the market and matching bidding zones to network congestion. However, most Member States have yet to implement appropriate market reforms to reduce or even eliminate the need for a national capacity mechanism.

Therefore, when Member States plan to introduce capacity mechanisms, the Commission will require them to first implement necessary market reforms.

The need for a capacity mechanism must be demonstrated

The inquiry has found that many of the capacity mechanisms introduced in Europe were not designed to solve a clearly identified security of supply problem. Member States' assessments of the security of supply situation are insufficiently thorough and not always based on an economically justifiable target for security of supply. The Commission therefore requires that the need for capacity mechanisms be underpinned by a robust generation adequacy assessment. Yesterday's Clean Energy for All Europeans Package proposes a European resource adequacy assessment, which will provide an increasingly reliable basis for determining the need for capacity mechanisms.

Capacity mechanisms must be fit for purpose and open to all capacity providers

The inquiry has found that the design of most capacity mechanisms could be significantly improved.

First, the mechanism chosen must match the problem identified. On the one hand, for long-term adequacy problems a market-wide mechanism is likely to be the most appropriate. On the other hand, temporary adequacy concerns are better addressed through more transitional measures such as a strategic reserve. Strategic reserves keep certain capacity outside the electricity market for operation only in emergencies. Where the generation adequacy issue is constrained to a limited area, improved grid connections and the definition of more appropriate geographical boundaries of bidding zones are likely be better suited to solving underlying adequacy concerns.

So-called "interruptibility schemes" pay electricity consumers to reduce their energy demand at times when electricity is scarce. The inquiry concluded that such schemes may be appropriate to encourage flexible demand in the longer term, but at the same time, they must not become a subsidy for energy-intensive users.

Second, the price paid for capacity must be determined in a competitive process. The inquiry confirmed that prices set through an administrative procedure are not appropriate, since they risk over-compensating the beneficiaries or failing to deliver security of supply. Competitive price-setting processes, together with open eligibility criteria that allow for participation of all potential capacity providers, ensure the price paid for capacity is as low as possible. This is important in order to keep electricity prices low for consumers.

Third, capacity mechanisms should also be open to providers in other Member States. This will provide incentives for investment in interconnectors and generation capacity in other Member States, and reduce system costs.

Next steps

Since the inquiry has found that a number of existing capacity mechanisms have major shortcomings, the Commission will continue to work with the Member States to bring these schemes in line with State aid rules. In addition, any new plans of Member States to introduce capacity mechanisms will be assessed in light of the insight gained from the sector inquiry.

Background

Please also see Factsheet on the Final Report of the sector inquiry and the Sector Inquiry website.

In April 2015 the Commission launched a sector inquiry into the financial support that EU Member States grant to electricity producers and consumers to safeguard security of electricity supply (capacity mechanisms). It had concerns that capacity mechanisms may unduly favour particular producers or technologies and may create obstacles to electricity trade across borders, in breach of EU state aid rules.

To assess these concerns, over the past year the Commission has collected information from market participants and public bodies on existing and planned capacity mechanisms in 11 Member States. In April 2016, the Commission published an interim report and invited the public to comment.

Press contacts:

• Ricardo CARDOSO (+32 2 298 01 00)
• Yizhou REN (+32 2 299 48 89)

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