European Union: Electricity Capacity Mechanisms: Lessons Learned From Recent European Commission Decisions

Last Updated: 25 April 2018
Article by David Haverbeke, Wouter Vandorpe and Raf Callaerts

The European Commission has recently endorsed – on certain conditions - the capacity mechanisms for electricity supply proposed by Germany, Belgium, France, Greece, Italy and Poland. Some lessons can be learned.

Context

Among the measures aiming to ensure the security of electricity supply, so-called capacity mechanisms have been developed in recent years by many European Member States.

The nature and size of these mechanisms is in principle correlative to the availability of production in the regulation area concerned: in other words, the more intermittent or seasonal production, the bigger the need for back-up production capacity in combination with electricity demand management measures.

The importance of appropriate - i.e. adapted to local and regional circumstances - mechanisms for an efficient energy transition cannot be underestimated by the markets, as the European Commission recently confirmed.

Decisions of the Commission

On 7 February 2018 the Commission decided not to raise any objections to state aid rules with regard to the capacity mechanisms proposed by Germany, Belgium, France, Greece, Italy and Poland, while imposing in each of its decisions specific conditions related to the mechanism concerned.

The Commission's analysis of each of the proposed mechanisms is based in particular on its 2014-2020 Guidelines on state aid for environmental protection and energy, and on the results of the sectoral surveys it conducted. This common framework of analysis is all the more important as the mechanisms developed by the Member States are substantially different.

Belgium and Germany, for example, have opted for a so-called 'strategic reserve' scheme to use specific units at predetermined volumes and circumstances in order to temporarily address identified supply disruptions. One of the requirements for endorsement by the Commission concerns the establishment of equality between actors on the production and demand management side in the selection and actual participation in tenders. As for Italy and Poland, these countries opted for direct payment mechanisms to selected suppliers of production capacity or demand management. The Commission considers that these mechanisms are justified by the risks of electricity supply disruption, as was the case in the decisions taken in the past concerning the British and Irish markets.

In France, as in Greece, the latest mechanisms put in place focus on measures relating to demand management, considering that these measures allow greater responsiveness in the event of shortages than measures on the production side, and this at a lower cost and with lower environmental impact. As with the other notified mechanisms, the Commission requires that these measures be temporary – i.e. in line with the identified supply disruption and the recommended solutions - and based on objective and transparent allocation rules.

Future prospects

Beyond the implementation of the specific conditions imposed by the Commission, the decisions of 7 February 2018 confirm the trend of greater intervention by political and regulatory authorities in the functioning of electricity (production) markets. However, as the Commission clearly points out in each of its decisions, these measures cannot replace the general rules (stemming from the successive European Directives) governing the functioning of the markets and are therefore by definition temporary and subject to the evolution of the regulation zones concerned.

In addition, these measures necessarily interact with other related markets such as those relating to energy carriers, e.g. natural gas and heat, or those relating to the protection of the environment. In this respect, one of the questions that remains to be answered is whether, beyond the mechanisms already in place at European level such as the carbon trading system, capacity mechanisms should integrate other environmental criteria such as those aimed at limiting other types of emissions.

Finally, as stated by the Commission, in particular in the decision on the strategic reserve in Belgium, national measures cannot be adopted without taking into account the capacities present in the neighbouring Member States. Greater integration of networks by strengthening of interconnection capacities is only to reinforce this requirement.

All of these developments are to be closely monitored by the market players and practitioners concerned.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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