Capacity mechanisms have recently gained the attention of policymakers in Europe. The discussion in Member States is driven by various concerns, including resource adequacy constraints, the often-misunderstood “missing money” issues raised by utilities, and attempts to limit peak demand. In 2014, the U.K. government introduced legal provisions for a capacity market in Great Britain as part of a larger market reform aimed at mitigating falling capacity margins and a lack of investment in electricity generation. Many countries—including Poland—have since followed these developments. A review of the first capacity auction in December of 2014 revealed that, with 65 GW of capacity bidding for a notional required procurement of 48.6 GW, the capacity market was potentially introduced prematurely. Authors Philip Baker, Edith Bayer, and Dr. Jan Rączka analyse Great Britain’s capacity market and power market reform, drawing lessons for Poland.

While the initiatives undertaken in Great Britain are not being promoted as solutions for Poland, the issues facing the two countries seem similar in many respects, and an understanding of the response by Britain to these issues will hopefully assist in identifying the most appropriate way forward for Poland. The authors recommend that decision-makers consider all resources when assessing resource adequacy—demand-side, cross-border interconnections, and plant availability. Before introducing a capacity mechanism, it is critical to identify the problem and select measures that can solve it at lowest cost to consumers and the economy. If a capacity mechanism is needed, demand-side resources (DSR) should be treated on equal footing with generation capacity. DSR can significantly reduce system costs, and can introduce new technologies and increased competition to the market. Policymakers should be forewarned, however, that a capacity mechanism can adversely affect cross-border flows of energy by depressing energy prices during times of system stress.