“Unnecessary and badly designed capacity mechanisms can distort competition, hinder electricity flows across borders and lead to consumers overpaying for electricity,” that’s the verdict of the European Commission’s interim report of its inquiry into electricity capacity mechanisms.

The report specifically studied the capacity mechanisms operating in Belgium, Croatia, Denmark, France, Germany, Ireland, Italy, Poland, Portugal, Spain and Sweden. The commission found 28 capacity mechanisms, which it categorised into six different types. It said the most common capacity mechanism was strategic reserve, where a state pays specific power plants to become operational in case of need.

The interim report said that many of the capacity mechanisms were ill thought out. In particular, it had the following criticisms: 

• Many existing capacity mechanisms have been designed without prior assessment of whether a security of supply problem existed in the relevant market.
• Almost half of the countries studied have not adequately established what should be their appropriate level of supply security before putting in place a capacity mechanism.
• Methods of assessing security of supply vary widely between member states, making comparison and cooperation across borders difficult.
• Many supply assessments take a purely national perspective and do not take into account possible deliveries from neighbouring countries.
• Without a thorough and more harmonised method to identify problems and calculate risk, capacity mechanisms threaten to use public funds to finance expensive unnecessary capacity leading to higher prices for EU consumers and companies.
• Many member states did not adequately assess what would be the best way to increase the security of supply.
• The price paid for electricity capacity in most member states is not determined through a competitive process but set by the member state or negotiated between the state and the capacity provider, creating a serious risk of overpayment and subsidising the provider.
• Many capacity mechanisms do not allow all potential capacity providers or technologies to participate, which may unnecessarily limit competition among suppliers or raise the price paid for the capacity.
• Power plants from other member states are rarely allowed to directly or indirectly participate in national capacity mechanisms.

The report did not directly look at the UK market, but did say that the market-wide central buyer mechanism encourages the participation of various capacity providers, which helps to avoid over-compensation and to prevent distortions between different capacity providers.

The commission launched its state aid sector inquiry into national capacity mechanisms within the EU in April 2015 to examine whether they ensure sufficient electricity supply without distorting competition or trade in the EU Single Market. The interim report published today is open for public consultation until 6 July 2016. Click here to read the full report and find out how to respond. The commission will publish a final report on the results of the sector inquiry later this year.

Related content:

The real failures on energy security

French capacity mechanism plan falls at EU’s state aid hurdle (members only)

Capacity markets v peaking prices: EU struggles over countries’ different solutions (members only)

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