Electricity capacity markets
According to Article 2(22) of the Regulation (EU) 2019/943 of the European Parliament and of the Council on the internal market for electricity (recast), capacity mechanism is a temporary measure to ensure the achievement of the necessary level of resource adequacy by remunerating resources for their availability not including measures relating to ancillary services and congestion management (the word: "temporary" in this definition becomes obsolete in the light of amendments made as part of the Electricity Market Design (EMD) Package).
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15 December 2023 ENTSO-E welcomes the Electricity Market Design provisional agreement: “the inclusion of capacity mechanisms as a possible structural element of the electricity markets is welcomed by TSOs as these can be essential to support investments in resources needed to balance and secure the system on the path to carbon neutrality, and not as a last resort”.
14 December 2023 Reform of electricity market design: Council and Parliament reach deal Both co-legislators agreed to make capacity mechanisms a more structural element of the electricity market. In addition, they agreed to introduce a potential and exceptional derogation from the application of the CO2 emission limit for already authorised capacity mechanisms, where duly justified.
Legislative proposal for a Regulation to improve the Union’s electricity market design, ENTSO-E assessment - trilogues supports the European Parliament’s proposal requesting the European Commission to assess the implications of introducing capacity mechanisms as a structural element of the electricity market (Article 69(5)). The ENTSO-E calls, moreover, for the European Parliament to align with the Council text in deleting the "temporary" nature of capacity mechanisms in Article 21(7) and 22(1)(a).
Reform of electricity market design: Council reaches agreement The Council agreed to remove the temporary nature of capacity mechanisms. The Council introduced a derogation from existing requirements regarding CO2 emission limits for generators to receive support from capacity mechanisms, under strict conditions and until 31 December 2028. Member states also concurred that the approval procedures for capacity mechanisms need to be simplified. The Council proposed changes focussing on streamlining the procedure in the current capacity mechanism framework. It also asked the Commission to submit a detailed report assessing further possible ways to simplify the process of applying capacity mechanisms. The report would be followed by proposals for simplifying the process three months after the entry into force of the regulation.
Commission approves modifications to Belgian capacity mechanism
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Annex 2 to the 2020 Report (dated on 14 October 2020) from the Commission to the European Parliament, the Council, the European Economic and Social Committee and the Committee of the Regions on the State of the Energy Union pursuant to Regulation (EU) 2018/1999 on Governance of the Energy Union and Climate Action (COM(2020) 950 final - Energy subsidies in the EU) mentions capacity payment mechanisms received in the EU around EUR2.2 billion subsidies in 2018, and were stable at an average level around EUR 2 billion over the last few years. The difference between energy only markets on the one hand and capacity mechanisms on the other is ofen practically illustrated by the fact that profits under the former are derived from kWh sold while under the latter from kWh and kW. Moreover, for typology purposes, the most-commonly used in this context terms: "electricity system adequacy" and "security of supply" should not be confused.
The document Capacity remuneration mechanisms, Workshop in preparation of Commission review of EU Guidelines on State Aid for Environmental Protection proposed the following discriminant between the said notions:
- adequacy means ability of the system to cover total demand at any time,
- security means ability of the system to cope with a sudden disturbance (balancing, stability).
Capacity remuneration mechanisms (CRMs) may be designed in many different variants, including with respect to:
a) differentiation between different kinds of capacity, and demand side participation;
b) how the eligibility to provide capacity is determined, especially in the case of load;
c) how far in the future obligations are contracted;
d) how the level of (adequate) capacity is determined;
e) how availability is documented or certified;
f) how, in the context of a capacity payments scheme, the payment is determined: whether prices are set administratively, according to auctions or in the market (or how the threshold/strike price is determined);
g) how the costs are allocated; and
The ACER provides the summary of design principles of capacity mechanisms in the document of October 2022 (Security of EU electricity supply in 2021: ACER Report on Member States approaches to assess and ensure adequacy). The overarching rule is that, in order to reduce any distortive effects, capacity mechanisms must be designed to address the specific nature and magnitude of the individual adequacy concern, be competitive and not lead to over-procurement or over-compensation.
According to the Regulation (EU) 2019/943 (recast Electricity Market Regulation), strategic reserves, designed so as to minimise interference with the market, should be the first capacity mechanism under consideration. Member States are therefore required to assess whether a strategic reserve is capable of addressing their identified adequacy concerns, before introducing other types of capacity mechanisms (Article 21(3)).
Article 22 of the recast Electricity Market Regulation sets out the design principles for capacity mechanisms. In particular, Article 22(1) stipulates that capacity mechanisms shall be temporary, proportional and not create undue market distortions or limit cross-zonal trade. The procurement selection shall be transparent, non-discriminatory and competitive, while appropriate incentives to be available at times of expected system stress and penalties for non-availability shall be in place. Article 22(2) defines specific characteristics for strategic reserves, in order to ensure that market distortions are minimised and that price signals and incentives remain broadly unaffected. For capacity mechanisms other than strategic reserves, Article 22(3) requires that they ensure proportionality and reduce overcompensation risks, do not affect optimal operations in the short-term and enhance efficiency by enabling transferability of obligations. Furthermore, Article 22(4) aligns capacity mechanisms with the wider EU environmental targets by defining emission limits for capacity that can be remunerated via capacity mechanisms. Lastly, Article 22(5) also requires that existing capacity mechanisms (i.e., in place when the Regulation entered into force) must be adapted to comply with the above provisions.
High-level information reported by the NRAs confirms that in most cases, the existing capacity mechanisms are broadly in line with the relevant design principles set out in the Electricity Regulation. In some cases, capacity mechanisms have not yet been fully adapted to the current framework. For example, the German mechanism does not have an explicit provision for emission limits in place. The same was true for the Finnish mechanism, that ended in 2021. The penalty system of the Irish scheme appears to dampen the pricing signals to market participants. Also, information collected for Sweden suggests that the activation practices of strategic reserves and imbalance settlement in such periods might still need to be adapted to the current legal framework.
According to Article 3(9) of European Commission Guidelines on State aid for environmental protection and energy 2014-2020 (Aid for generation adequacy - prolonged by 2021) to avoid distortions to the internal energy market the European Commission is conferred the right to approve capacity mechanisms in the EU Member States.
The capacity mechanism is a measure to ensure generation adequacy and security of electricity supply and therefore falls within the scope of Section 3.9 of the EEAG on State aid for generation adequacy.
To assess whether the capacity mechanism can be considered compatible with the internal market, the European Commission assesses whether the design of the measure meets the following criteria listed in paragraph (27) of the EEAG (with more specific details for measures ensuring generation adequacy in Sections 3.9.1 to 3.9.6 of the EEAG):
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(a) contribution to a clearly defined objective of common interest,
(b) need for State intervention,
(c) appropriateness,
(d) incentive effect,
(e) proportionality,
(f) avoidance of undue negative effects on competition and trade,
(g) transparency of the aid.
The CEEAG (the EEAG's successor) also addresses design principles of the recast Electricity Market Regulation. It emphasises that any security of supply measure (including interruptibility schemes and network reserves) must be designed to maintain the efficient functioning of markets and preserve efficient operating incentives and price signals (par. 369 of the CEEAG).
Electricity Market Regulation
The EEAG provisions need to be interpreted in the light of relevant further legislation, including the recast Regulation on the internal market for electricity and in particular the requirements regarding CO2 emission limits, which capacity mechanisms need to incorporate and apply, even if they were already in force and had been deemed as compliant with Union state aid rules.
According to Article 22(4) of Regulation (EU) 2019/943 (recast Electricity Market Regulation), capacity mechanisms must apply the following requirements regarding CO2 emission limits:
a) generation capacity emitting more than 550 gr CO2 of fossil fuel origin per kWh of electricity that started commercial production after date of entry into force the recast Electricity Market Regulation (i.e. as from 4 July 2019) must not be committed or receive payments or commitments for future payments under a capacity mechanism as of entry into force at the latest;
b) generation capacity emitting more than 550 gr CO2 of fossil fuel origin per kWh of electricity and more than 350 kg CO2 of fossil fuel origin on average per year per installed kWe that started commercial production before the recast Electricity Market Regulation date of entry into force (i.e. before 4 July 2019) must not be committed or receive payments or commitments for future payments under a capacity mechanism as of 1 July 2025 at the latest;
c) the emission limit of 550 gr CO2 of fossil fuel origin per kWh of electricity and the limit of 350kg CO2 of fossil fuel origin on average per year per installed kW must be calculated based on the design efficiency of the generation unit meaning the net efficiency at nominal capacity under the relevant standard provided by the International Organisation for Standarisation (ISO).
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Regulation (EU) 2019/943 of the European Parliament and of the Council of 5 June 2019 on the internal market for electricity (recast), Articles 21, 22
Article 21 General principles for capacity mechanisms 1.To eliminate residual resource adequacy concerns, Member States may, as a last resort while implementing the measures referred to in Article 20(3) of this Regulation in accordance with Article 107, 108 and 109 of the TFEU, introduce capacity mechanisms. 2.Before introducing capacity mechanisms, the Member States concerned shall conduct a comprehensive study of the possible effects of such mechanisms on the neighbouring Member States by consulting at least its neighbouring Member States to which they have a direct network connection and the stakeholders of those Member States. 3.Member States shall assess whether a capacity mechanism in the form of strategic reserve is capable of addressing the resource adequacy concerns. Where this is not the case, Member States may implement a different type of capacity mechanism. 4.Member States shall not introduce capacity mechanisms where both the European resource adequacy assessment and the national resource adequacy assessment, or in the absence of a national resource adequacy assessment, the European resource adequacy assessment have not identified a resource adequacy concern. 5.Member States shall not introduce capacity mechanisms before the implementation plan as referred to in Article 20(3) has received an opinion by the Commission as referred to in Article 20(5). 6.Where a Member State applies a capacity mechanism, it shall review that capacity mechanism and shall ensure that no new contracts are concluded under that mechanism where both the European resource adequacy assessment and the national resource adequacy assessment, or in the absence of a national resource adequacy assessment, the European resource adequacy assessment have not identified a resource adequacy concern or the implementation plan as referred to in Article 20(3) has not received an opinion by the Commission as referred to in Article 20(5). 7.When designing capacity mechanisms Member States shall include a provision allowing for an efficient administrative phase-out of the capacity mechanism where no new contracts are concluded under paragraph 6 during three consecutive years. 8. Capacity mechanisms shall be temporary. They shall be approved by the Commission for no longer than 10 years. They shall be phased out or the amount of the committed capacities shall be reduced on the basis of the implementation plans referred to in Article 20. Member States shall continue to apply the implementation plan after the introduction of the capacity mechanism.
Article 22 1.Any capacity mechanism shall: (a) be temporary; (b) not create undue market distortions and not limit cross-zonal trade; (c) not go beyond what is necessary to address the adequacy concerns referred to in Article 20; (d) select capacity providers by means of a transparent, non-discriminatory and competitive process; (e) provide incentives for capacity providers to be available in times of expected system stress; (f) ensure that the remuneration is determined through the competitive process; (g) set out the technical conditions for the participation of capacity providers in advance of the selection process; (h) be open to participation of all resources that are capable of providing the required technical performance, including energy storage and demand side management; (i) apply appropriate penalties to capacity providers that are not available in times of system stress. 2.The design of strategic reserves shall meet the following requirements: (a) where a capacity mechanism has been designed as a strategic reserve, the resources thereof are to be dispatched only if the transmission system operators are likely to exhaust their balancing resources to establish an equilibrium between demand and supply; (b) during imbalance settlement periods where resources in the strategic reserve are dispatched, imbalances in the market are to be settled at least at the value of lost load or at a higher value than the intraday technical price limit as referred in Article 10(1), whichever is higher; (c) the output of the strategic reserve following dispatch is to be attributed to balance responsible parties through the imbalance settlement mechanism; (d) the resources taking part in the strategic reserve are not to receive remuneration from the wholesale electricity markets or from the balancing markets; (e) the resources in the strategic reserve are to be held outside the market for at least the duration of the contractual period. The requirement referred to in point (a) of the first subparagraph shall be without prejudice to the activation of resources before actual dispatch in order to respect the ramping constraints and operating requirements of the resources. The output of the strategic reserve during activation shall not be attributed to balance groups through wholesale markets and shall not change their imbalances. 3.In addition to the requirements laid down in paragraph 1, capacity mechanisms other than strategic reserves shall: (a) be constructed so as to ensure that the price paid for availability automatically tends to zero when the level of capacity supplied is expected to be adequate to meet the level of capacity demanded; (b) remunerate the participating resources only for their availability and ensure that the remuneration does not affect decisions of the capacity provider on whether or not to generate; (c) ensure that capacity obligations are transferable between eligible capacity providers. 4. Capacity mechanisms shall incorporate the following requirements regarding CO2 emission limits: (b) from 1 July 2025 at the latest, generation capacity that started commercial production before 4 July 2019 and that emits more than 550 g of CO2 of fossil fuel origin per kWh of electricity and more than 350 kg CO2 of fossil fuel origin on average per year per installed kWe shall not be committed or receive payments or commitments for future payments under a capacity mechanism. The emission limit of 550 g CO2 of fossil fuel origin per kWh of electricity and the limit of 350 kg CO2 of fossil fuel origin on average per year per installed kWe referred to in points (a) and (b) of the first subparagraph shall be calculated on the basis of the design efficiency of the generation unit meaning the net efficiency at nominal capacity under the relevant standards provided for by the International Organization for Standardization. By 5 January 2020, ACER shall publish an opinion providing technical guidance related to the calculation of the values referred in the first subparagraph. 5.Member States that apply capacity mechanisms on 4 July 2019 shall adapt their mechanisms to comply with Chapter 4 without prejudice to commitments or contracts concluded by 31 December 2019. |
The EU Member States applying capacity mechanisms on entry into force of the recast Electricity Market Regulation (4 July 2019) had to adapt their mechanisms to comply with the Regulation without prejudice to commitments or contracts, concluded before 31 December 2019. ACER was required to publish by 5 January 2020 an opinion providing technical guidance related to the calculation of the values referred to above. On 24 September 2019 the ACER started the public consultation on CO2 emission limits for participating in capacity mechanisms and the relevant decision has been adopted on 17 December 2019 (ACER Opinion No 22/2019 on the calculation of the values of CO2 emission limits referred to in the first subparagraph of Article 22(4) of Regulation (EU) 2019/943 of 5 June 2019 on the internal market for electricity (recast)).
It is noteworthy that Council General Approach of 17 October 2023 as regards Proposal for a Regulation of the European Parliament and of the Council amending Regulations (EU) 2019/943 and (EU) 2019/942 as well as Directives (EU) 2018/2001 and (EU) 2019/944 to improve the Union’s electricity market design (part of the EMD design) agreed to remove the temporary nature of capacity mechanisms (deletion of the point (a) in Article 22(1) of the Regulation (EU) 2019/943).
Moreover, the Council introduced a derogation from existing requirements regarding CO2 emission limits for generators to receive support from capacity mechanisms, under strict conditions and until 31 December 2028.
On 14 December 2023 Council and Parliament reached provisional agreement to make capacity mechanisms a more structural element of the electricity market. In addition, they agreed to introduce a potential and exceptional derogation from the application of the CO2 emission limit for already authorised capacity mechanisms, where duly justified.
The provisional agreement reached between the institutions on 14 December 2023 “managed to keep the essence from the General Approach making capacity mechanisms a structural element of the electricity market design and envisaging the streamlining of procedures based on the proposals to be presented by the Commission. Concerning the derogation from the CO2 emissions limit for existing capacity mechanisms, the compromise proposal maintains the text from the General Approach, with an assessment and autorhization by the Commission, adding that the request for the derogation shall be accompanied by a report containing and assessment of the impact of the derogation in terms of greenhouse gas emissions and a plan to procure the necessary replacement capacity in line with the indicative national trajectory for the overall share of renewable energy, among other aspects” (see Articles 21, 22, 64 and 69 of the revised Electricity Regulation 2019/943).
ENTSO-E Communique of 15 December 2023 “ENTSO-E welcomes the Electricity Market Design provisional agreement” reads: “the inclusion of capacity mechanisms as a possible structural element of the electricity markets is welcomed by TSOs as these can be essential to support investments in resources needed to balance and secure the system on the path to carbon neutrality, and not as a last resort”.
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Also the ENTSO-E document of 26 October 2023 „Legislative proposal for a Regulation to improve the Union’s electricity market design, ENTSO-E assessment - trilogues” supported the European Parliament’s proposal requesting the European Commission to assess the implications of introducing capacity mechanisms as a structural element of the electricity market (Article 69(5)). The ENTSO-E called, moreover, for the European Parliament to align with the Council text in deleting the "temporary" nature of capacity mechanisms in Article 21(7) and 22(1)(a).
On 14 December 2023 the Council and Parliament agreed the final text of the Regulation of the European Parliament and of the Council amending Regulations (EU) 2019/943 and (EU) 2019/942 as well as Directives (EU) 2018/2001 and (EU) 2019/944 to improve the Union’s electricity market design (see box). Both co-legislators agreed to make capacity mechanisms a more structural element of the electricity market. In addition, they agreed to introduce a potential and exceptional derogation from the application of the CO2 emission limit for already authorised capacity mechanisms, where duly justified.
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Regulation of the European Parliament and of the Council amending Regulations (EU) 2019/943 and (EU) 2019/942 as well as Directives (EU) 2018/2001 and (EU) 2019/944 to improve the Union’s electricity market design - Text of the provisional agreement
(9a) Article 21 is amended as follows: [a] paragraph 1 is replaced by the following: ‘Member States may, while implementing the measures referred to in Article 20(3) of this Regulation in accordance with Article 107, 108 and 109 of the TFEU, introduce capacity mechanisms. [b] paragraph 7 is deleted. [c] paragraph 8 is replaced by the following: 8. Capacity mechanisms shall be approved by the Commission for no longer than 10 years. The amount of the committed capacities shall be reduced on the basis of the implementation plans referred to in Article 20. Member States shall continue to apply the implementation plan after the introduction of the capacity mechanism.’ (13d) In Article 64, the following paragraph is inserted. By way of derogation from Article 22(4)(b), Member States may request that generation capacity that started commercial production before 4 July 2019 and that emits more than 550 g of CO2 of fossil fuel origin per kWh of electricity and more than 350 kg CO2 of fossil fuel origin on average per year per installed kWe may, subject to compliance with Articles 107 and 108 TFEU, exceptionally be committed or receive payments or commitments for future payments after 1 July 2025 under a capacity mechanism approved by the Commission before the entry into force of Regulation 2019/943. 2d. The Commission shall assess the impact of the request in terms of greenhouse gas emissions. The Commission may grant the derogation after having assessed the report under subparagraph 2e and provided that the following conditions are fulfilled: (a) the Member State has carried out, after the date of entry into force of Regulation (UE) 2019/943, a competitive bidding process in line with the provisions of Article 22 and for a delivery period after 1 July 2025, which aims at maximising the participation of capacity providers which meet the requirements in Article 22(4); (b) the amount of capacity offered in the competitive bidding process referred to in letter point (a) is not sufficient to address the adequacy concern as identified pursuant to Article 20 (1) for the delivery period covered by that bidding process; (c) the generation capacity that emits more than 550 g of CO2 of fossil fuel origin per kWh of electricity is committed or receives payments or commitments for future payments for a period not exceeding one year, and for a delivery period which does not exceed the duration of the derogation, and is procured through an additional procurement process which complies with all requirements in Article 22 except for those set out in point (b) of paragraph 4 and only for the amount of capacity that is needed to solve the adequacy concern identified in letter b). The derogation pursuant to this paragraph may be applied until 31 December 2028, provided that the conditions in points (a) to (c) are complied with for the entire duration of the derogation. 2e. The application for the derogation shall be accompanied by a report from the Member State which shall include: (a) An assessment of the impact of the derogation in terms of greenhouse gas emissions, and on the transition towards renewable energy, increased flexibility, energy storage, electromobility and demand response. (b) a plan with milestones to transition away from the participation of generation capacity referred to in the first subparagraph in capacity mechanisms by the date of the expiry of the derogation, including a plan to procure the necessary replacement capacity in line with the indicative national trajectory for the overall share of renewable energy and an assessment of the investment barriers causing the lack of sufficient bids in the competitive bidding procedure referred to in point (a). |
Cross-border participation in capacity mechanisms
According to the recast Electricity Market Regulation (Article 26) mechanisms other than strategic reserves and where technically feasible, strategic reserves, must be open to direct cross-border participation of capacity providers located in another EU Member State.
In this regard the ACER adopted on 22 December 2020 the Decision No 36/2020 concerning the respective technical specifications (Annex I to the Decision).
It is noteworthy, the said Annex I specifies in particular:
- common rules for identifying foreign capacity eligible for cross-border participation in capacity markets (Articles 26 - 28);
- terms of operation of the registry set up by the ENTSO-E to evidence such capacity providers (Articles 21 - 25).
Practical information on participation in and development of cross border capacity mechanisms can be found in the ACER document of October 2022 (Security of EU electricity supply in 2021: ACER Report on Member States approaches to assess and ensure adequacy) According to ACER such participation is currently limited, yet some progress can be observed. Market-wide capacity mechanisms in Belgium, France, Ireland, Italy and Poland have relevant provisions in place, however, implementation varies. In the Belgian capacity mechanism, foreign capacity can currently participate only in the T-1 auction (T refers to the delivery year; T-4 refers to auctions held four years prior to the delivery year), with the exception of foreign capacity directly connected to the Belgian network that can participate in the T-4 auction as well. No foreign capacity participated in the first T-4 auction held in October 2021. The French capacity mechanism still relies on temporary provisions that enable interconnectors to participate by directly selling the certificates provided by their interconnection's capacity. Foreign capacity was awarded contracts in the Italian capacity mechanism auctions held in 2019.
Obligations and requirements are less stringent for foreign providers compared to domestic ones. For example, the former only have financial obligations while the latter have to prove physical availability by participating in the electricity market. Foreign capacity was contracted for the first time in the T-5 auction of the Polish capacity mechanism held in December 2021. Finally, while the Irish capacity mechanism is currently de-facto exempted from the relevant provisions due to the lack of interconnection with the EU, interconnectors with Great Britain already participate in the capacity mechanism auctions.
For strategic reserves, the regulatory framework stipulates that cross-border participation is mandatory only if technically feasible (Article 26(1) of the Electricity Regulation). None of the strategic reserve schemes in place allow for it at the moment.
To enable cross-border participation, relevant TSOs (and/or capacity mechanism operators if different from TSOs) need to establish effective cooperation between them via bilateral agreements. So far, only the Polish TSO has signed such agreements with its Czech, Lithuanian and Swedish counterparts, while the agreement with the neighbouring German TSO is being finalised. The French TSO is also reportedly in discussions with the Belgian TSO. So far, foreign capacity in the Italian capacity mechanism has solely financial obligations, hence there was no actual need for further agreements between the Italian and the neighbouring TSOs.
Pursuant to Article 26(7) of the Electricity Regulation, regional coordination centres (RCCs) are responsible for calculating the maximum entry capacity available for the participation of foreign capacity providers in a given capacity mechanism and issue a recommendation to the relevant TSOs. The RCC calculation must be consistent with the European Resource Adequacy (ERA) methodology and for this, ENTSO-E must provide the necessary input data used in ERA to the RCCs. The above provisions can only apply once the RCCs are fully operational and ERA results are available. So far, the TSOs have used their own methodologies in order to calculate the relevant maximum entry capacity.
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Regulation (EU) 2019/943 of the European Parliament and of the Council of 5 June 2019 on the internal market for electricity (recast), Article 26
Article 26 Cross-border participation in capacity mechanisms 1. Capacity mechanisms other than strategic reserves and where technically feasible, strategic reserves shall be open to direct cross-border participation of capacity providers located in another Member State, subject to the conditions laid down in this Article. 2. Member States shall ensure that foreign capacity capable of providing equivalent technical performance to domestic capacities has the opportunity to participate in the same competitive process as domestic capacity. In the case of capacity mechanisms in operation on 4 July 2019, Member States may allow interconnectors to participate directly in the same competitive process as foreign capacity for a maximum of four years from 4 July 2019 or two years after the date of approval of the methodologies referred to in paragraph 11, whichever is earlier. 3. Member States shall not prevent capacity which is located in their territory from participating in capacity mechanisms of other Member States. 4. Cross-border participation in capacity mechanisms shall not change, alter or otherwise affect cross-zonal schedules or physical flows between Member States. Those schedules and flows shall be determined solely by the outcome of capacity allocation pursuant to Article 16. 5. Capacity providers shall be able to participate in more than one capacity mechanism. 6. Capacity providers shall be required to make non-availability payments where their capacity is not available. 7. For the purposes of providing a recommendation to transmission system operators, regional coordination centres established pursuant to Article 35 shall calculate on an annual basis the maximum entry capacity available for the participation of foreign capacity. That calculation shall take into account the expected availability of interconnection and the likely concurrence of system stress in the system where the mechanism is applied and the system in which the foreign capacity is located. Such a calculation shall be required for each bidding zone border. 8. Member States shall ensure that the entry capacity referred to in paragraph 7 is allocated to eligible capacity providers in a transparent, non-discriminatory and market-based manner. 9. Where capacity mechanisms allow for cross-border participation in two neighbouring Member States, any revenues arising through the allocation referred to in paragraph 8 shall accrue to the transmission system operators concerned and shall be shared between them in accordance with the methodology referred in point (b) of paragraph 11 of this Article or in accordance with a common methodology approved by both relevant regulatory authorities. If the neighbouring Member State does not apply a capacity mechanism or applies a capacity mechanism which is not open to cross-border participation, the share of revenues shall be approved by the competent national authority of the Member State in which the capacity mechanism is implemented after having sought the opinion of the regulatory authorities of the neighbouring Member States. Transmission system operators shall use such revenues for the purposes set out in Article 19(2). 10. The transmission system operator where the foreign capacity is located shall: 11. By 5 July 2020 the ENTSO for Electricity shall submit to ACER: 12. The regulatory authorities concerned shall verify whether the capacities have been calculated in accordance with the methodology referred to in point (a) of paragraph 11. 13. Regulatory authorities shall ensure that cross-border participation in capacity mechanisms is organised in an effective and non-discriminatory manner. They shall in particular provide for adequate administrative arrangements for the enforcement of non-availability payments across borders. 14. The capacities allocated in accordance with paragraph 8 shall be transferable between eligible capacity providers. Eligible capacity providers shall notify the registry as referred to in point (a) of paragraph 10 of any such transfer. 15. By 5 July 2021 the ENTSO for Electricity shall set up and operate the registry referred to in point (a) of paragraph 10. The registry shall be open to all eligible capacity providers, the systems implementing capacity mechanisms and their transmission system operators. |
European Resource Adequacy Assessment (ERAA)
The Clean Energy Package (CEP) requires that capacity markets are introduced only where adequacy issues are expected to arise and that justifications are provided in case of discrepancies between the national and the pan-European adequacy studies.
The recast Electricity Regulation sets the framework for the assessing mid-term resource adequacy and provides general principles and design rules for capacity markets (framework for seasonal and short term adequacy assessments is defned in the Regulation 2019/941 of the European Parliament and of the Council of 5 June 2019 on risk-preparedness in the electricity sector and repealing Directive 2005/89/EC).
The recast Electricity Regulation in Article 21(4) forbids the EU Member States to introduce capacity mechanisms unless both the European Resource Adequacy Assessment (ERAA) and National Resource Adequacy Assessment (NRAA), or in the NRAA, the ERAA, identify a resource adequacy concern.
According to Article 21(4) of the recast Electricity Regulation, “Member States shall not introduce capacity mechanisms where both the European resource adequacy assessment and the national resource adequacy assessment, or in the absence of a national resource adequacy assessment, the European resource adequacy assessment have not identified a resource adequacy concern”.
Similarly, Article 21(6) states that “Where a Member State applies a capacity mechanism, it shall review that capacity mechanism and shall ensure that no new contracts are concluded under that mechanism where both the European resource adequacy assessment and the national resource adequacy assessment, or in the absence of a national resource adequacy assessment, the European resource adequacy assessment have not identified a resource adequacy concern […]”.
Hence, the application of a capacity mechanisms by the EU Member States is to be justified on the basis of the results of resource adequacy concerns identified in the ERAA and/or NRAA.
Capacity remuneration mechanisms in Europe
ACER/CEER Annual Report on the results of the monitoring the internal electricity markets in 2018 (of 11 November 2019, p. 9 - 11) notes that a “variety of uncoordinated capacity markets remained in operation throughout Europe”.
The said Report of of 11 November 2019 makes, moreover, the following observations as regards developments in European capacity markets:
- in 2018 Lithuania initiated the process of introducing a new market-based capacity markets with a view to replace strategic reserves and aiming for the legal acts introducing the new mechanism to be operational by the end of 2020;
- in 2018, the overall cost of capacity markets across the EU reached 2.5 billion euros, which constitutes a 7% decrease compared to 2017 (nevertheless, costs are expected to be higher in 2019 and beyond, based on the available forecasts and the fact that capacity markets will become operational in various EU Member States in 2019 and 2020);
- the substitution of administratively-set capacity payments with competitive schemes, e.g. following the provisions of the Guidelines on state aid for environmental protection and energy 2014–2020, led to significant overall cost reductions in 2018 in Ireland and Northern Ireland, however, capacity payments still account for a large share of total energy costs in this jurisdiction;
- costs also remain significant in other EU Member States, such as Lithuania, Greece, Great Britain, France, Spain and Bulgaria;
- the ACER was concerned about an increasing impact of capacity markets on consumers’ bills in the light of the ENTSO-E’s 2018 Mid-term Adequacy Forecast (MAF 2018), where “seven EU Member States that have introduced or are planning to introduce a capacity markets, i.e. Germany, Latvia, Lithuania, Poland, Portugal, Spain and Sweden, do not seem to face an adequacy problem in either 2020 or 2025”.
ACER/CEER Annual Report of 22 October 2018 on the Results of Monitoring the Internal Electricity and Natural Gas Markets in 2017 refers to the European Commission’s approval of six electricity capacity mechanisms to ensure security of supply in Belgium, France, Germany, Greece, Italy and Poland in February 2018, however, it is noted that the six approved capacity mechanisms adopted three different structures:
- for Belgium and Germany, the European Commission authorised strategic reserves (whereby certain generation capacities are kept outside the electricity market for operation only in emergencies),
- for Italy and Poland, the European Commission authorised market-wide capacity mechanisms (whereby companies are offered payments to generate electricity or reduce their electricity consumption),
- in the case of France and Greece, the European Commission authorised demand response schemes, whereby customers are incentivised to reduce their electricity consumption in hours where electricity is scarce.
In other markets (e.g. in Portugal or Spain), the capacity mechanisms were undergoing a revision.
Analogous ACER/CEER Report for year 2019 refers to Germany's the implementation of the first procurement process for strategic reserves in December 2019, to Italy, where the first two auctions for reliability options were carried out in November 2019 and to Greece (the suspension of the transitory flexibility auction approved in 2018, since March 2019, and the proposal for a new capacity mechanism, which was still under development).
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More updates as regards the developments of capacity mechanisms in the EU are included in the ACER Report of October 2022 (Security of EU electricity supply in 2021: ACER Report on Member States approaches to assess and ensure adequacy). According to the said Report, in 2021, there were some important developments in relation to national capacity mechanisms. The European Commission approved the Belgian market-wide capacity mechanism in August 2021, and the first auction took place in October 2021. This was the first capacity mechanism approval since the Clean Energy Package came into force. In addition, the Bulgarian and Greek capacity mechanisms were phased out.
As of the end of 2021 there were eight Member States with active capacity mechanisms in Europe, namely: Belgium, Finland, France, Germany, Ireland, Italy, Poland and Sweden. While Portugal and Spain do not have an active capacity mechanism in place, legacy contracts are still valid. Five Member States have market-wide capacity mechanisms and additional three have strategic reserves in place.
All but the Finnish and Swedish capacity mechanisms were approved by the European Commission under the State aid rules. The ACER Report of October 2022 observes additional Member States are currently examining the possibility to introduce a capacity mechanism, while plans for the introduction of a capacity mechanism in some cases have at this time been frozen.