With the continued deployment of intermittent zero-marginal-cost generation technologies such as wind and solar, Europe’s power systems are undergoing a fundamental transformation. This deployment, together with the reduced energy demands brought about by the recent economic recession, has led to a situation of overcapacity and low energy prices. In turn, this has led to a reduced appetite for investment in the new conventional resources that will ultimately be necessary to replace aging, carbon-intensive generating capacity, raising concerns over future security of electrical supply.
These concerns have resulted in a number of Member States introducing, or planning to introduce, capacity mechanisms that supplement revenues obtained by generation from the energy markets. However, because of concerns that capacity mechanisms will distort wholesale energy prices, thereby undermining competition and the development of an integrated European energy market, the European Commission has launched a sector-wide inquiry into the nature of these mechanisms. The findings of the inquiry will ultimately support the development of a legislative proposal for a new European electricity market design. In April 2016, the inquiry published an interim report for public consultation, setting out initial findings and tentative conclusions.
There is much to agree with in both the body of the Commission’s interim report and its tentative conclusions. In particular, it is helpful that the interim report correctly sets out the real reasons for the current lack of investment incentives, the need for coherence in the delivery of European energy policy, and the importance of a harmonized approach to reliability standards and a collective approach to resource adequacy assessment. However, in some instances the Commission’s tentative conclusions do not adequately reflect the sentiments expressed elsewhere in the interim report. Furthermore, the preference shown for the widest participation in capacity markets in the interests of increased competition seems at odds with the requirements of Europe’s decarbonisation goals, a conflict that needs to be resolved.
More broadly, the interim report fails to frame the relevant challenge fully—to ensure security of supply at lowest reasonable cost—and thus overlooks certain critical considerations, such as the importance of adequately capturing the value of investment in capacity resources with the best mix of operational capabilities. In this response to the interim report, RAP provides a rationale for strengthening the inquiry’s recommendations in these and other areas in the final report.