Integration of European Capacity Remuneration Mechanisms: In Search of a Harmonised Regulatory Framework

Summary

ABSTRACT

Liberalisation of electricity markets in Europe produces challenges for ensuring generation adequacy. There are rising concerns in Europe regarding the capability of energy-only markets to provide adequate security of supply. Accordingly, some European governments have introduced or are contemplating the introduction of capacity remuneration mechanisms (CRMs) in their jurisdictions with a unilateral approach. It is known, however, that fragmented and uncoordinated capacity mechanisms in integrated electricity markets, as in Europe, might cause inefficiencies and distort cross-border trade. These developments raise the controversial issue of creating a regulatory framework to integrate CRMs in Europe.

Integration of European CRMs, in this study, is defined as accepting foreign capacity resources (i.e. allowing cross-border participation where physically possible) to national CRMs. Justifications for integration are put forward from both legal and economic perspectives. Consequently, the study proposes minimum regulatory requirements to harmonise, and thus integrate, national CRMs in Europe. These regulatory requirements include the following: Harmonised Generation Adequacy Assessments; Respecting Contracted Capacity Obligations; Allocation of Interconnectors ‘ Capacity; and No Double Counting.

BACKGROUND TO THE DISCUSSION

Recent years have witnessed a sea change in the governance of the European Union (EU) energy market. While the basic motivation behind energy market reforms in most Western countries during the last two decades has been that liberalisation will establish efficient energy markets and, hence, promote security of supply, the current paradigm leads to the creation of a market model dominated primarily by governments. The root cause of this paradigm shift is that liberalisation of electricity markets in Europe produces challenges for ensuring generation adequacy. The term ‘generation adequacy’ refers to the ability of the electricity market to meet the total demand of all consumers at almost all times. In this regard, there are rising concerns in European countries concerning the ability of energy-only markets to provide adequate revenue for generation investments. The fundamental problem remains the ‘missing money’. Traditionally, the missing money problem is defined as a revenue gap which prevents the attraction of new adequate capacity investment and keeping existing capacity resources online to ensure generation adequacy. The reason behind the missing money problem is that spot prices in energy-only markets cannot increase enough during scarcity times because of several regulatory and market failures.