Capacity Markets and European Market Coupling - Can they Co-Exist?
The debate in Europe over the need for ‘traditional’ quantity-based capacity market designs to provide investment is now—appropriately– evolving into discussions over how to reward capacity with sufficient flexibility to reliably operate power systems with rapidly growing shares of variable renewables. The debate is also beginning to evolve away from an exclusive focus on supply-side resources and toward the inclusion of qualifying demand-side resources. As described in several RAP papers and presentations, the new resource paradigm in Europe and elsewhere requires this evolution of thought and market design in order to secure reliability at least cost. Whether one is considering more traditional, quantity-based capacity markets, or mechanisms designed to address the future need for resources with enhanced flexibility or ‘capability’, there remains the question, “Can these arrangements co-exist with the EU vision of creating broad, regional electricity markets by implementing what is referred to as ‘market coupling’, and if so, how?” We examine this question in the attached paper and offer our own observations, with the intent of further stimulating discussion around this topic among European stakeholders and policymakers.