The EU Commission’s market design communication focuses primarily on the question of whether and how to intervene in support of investment in needed capacity. However, this issue must be addressed within the context of meeting climate and energy targets for 2030, which will require an increase in the share of low-carbon resources, including a large increase in production from variable renewable sources. This will increase the value of flexible system resources, something the market must do a better job of capturing. Because of the path dependency created by the legacy of past investment decisions, it will also require the retirement of large amounts of existing, high-carbon, inflexible generation. Redesigning the electricity market alone cannot be relied upon to drive the required disinvestments.

This policy brief, developed with the Institute for Sustainable Development and International Relations (IDDRI), ClientEarth, E3G, and Agora Energiewende, highlights the importance of a strategy for smart and managed retirement of old, high-carbon, inflexible generation capacity as a necessary complement to the market design initiative. It makes clear that lack of sufficient demand for new investment in capacity prior to 2030 means that support for new investment in low-carbon resources such as variable renewables will be required for the foreseeable future. This should not be confused with capacity mechanisms, which are intended to serve a fundamentally different purpose. Security of supply will continue to be a priority, but a proper regional approach to resource adequacy assessment will be critical as existing high-carbon capacity is retired, unlocking the cost savings potential of the internal energy market by expanding the portfolio of options for delivering a reliable supply of electricity.