Over the last 10 years Europe has witnessed the growth of capacity remuneration mechanisms (CRMs) — tools intended to provide added confidence of adequate resource when demand is forecasted to peak.

RAP has often documented concerns with certain CRM interventions — forward capacity market auctions in particular. Instead, a more transparent and consumer-focused energy adequacy approach is better suited to the needs of a decarbonising power grid, including implementation of administrative reserve scarcity pricing, a mechanism that values reserves in real-time energy prices equivalently as in operation planning timeframes. As part of a coherent suite of measures, such a mechanism provides confidence that prices and price volatility will adequately reflect the increasing risk of loss of load and the associated opportunity costs of an additional unit of energy demand as resource margins tighten. It thereby incentivises both sufficient security of supply responses in real time and investment by market buyers and sellers in cost-effective additional supply or demand-side measures.

In this Power System Blueprint Deep Dive, we provide insights on drawbacks of and accompanying mitigations for different CRMs since they will likely be an important feature of the European electricity landscape over the next decade. As such, this deep dive highlights six selected drawbacks of interventions to shed light on how these may be mitigated.

Mitigations can help temper the negative effects of various capacity remuneration mechanisms, but they remain largely inadequate in fully overcoming these effects where they pertain to capacity auctions. Overall, this points to the value of implementing the right intervention in the first place, the no-regret nature of reserve scarcity pricing functions and the value in institutionalising in network codes the implementation of administrative reserve scarcity pricing —before resource adequacy becomes a concern.

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