European Union: Don't Let The Lights Go Out: The European Commission Provides Guidance On Capacity Mechanisms

Last Updated: 9 January 2017

On 30 November, the European Commission published its final report on its sector inquiry into capacity mechanisms. The report concludes that while these measures may not be the most effective solution to electricity supply shortages, they may be necessary in some Member States until market reforms can be implemented. The report advocates a more coherent approach to assessing the need for such mechanisms and provides guidance on their design. The Commission will also work with Member States to bring all existing capacity mechanisms into line with State aid rules.

The Clean Energy for all Europeans Package

The report forms part of the Clean Energy for All Europeans package of legislative measures, which deals with the transition of the EU to renewable energy sources. These measures have three main goals:

  • position the EU as a leader in the global transition to renewable energy
  • prioritise and improve energy efficiency
  • provide consumers with a fair deal through increased transparency and regulation.

Within this package, the report on capacity mechanisms forms part of the measures aimed at improving the functioning and integration of EU electricity markets during the transition to clean energy and is intended to create a European legal framework for capacity mechanisms.

Capacity mechanisms in the EU

Capacity mechanisms seek to ensure that sufficient generation capacity is available to meet demand by providing additional remuneration to capacity providers, on top of the income they obtain from selling electricity, in return for commitments to maintain or expand existing capacity. The Commission found 35 capacity mechanisms (past, current and planned) in the Member States1 covered by the inquiry, which fall into three main categories:

  • Market-wide capacity mechanisms: providing support to all providers that meet the required standard for participating in the scheme
  • Targeted capacity mechanisms: providing remuneration to a targeted subset of providers for maintaining or investing in additional capacity
  • Demand response schemes: providing financial support to specific demand response operators – for example, interruptibility schemes, which pay industrial customers to reduce their demand when electricity supply is low.

The Commission also identified two main pricing models:

  • Volume-based schemes: where the required capacity is determined upfront and the price established through a competitive bidding process
  • Price-based schemes: where a price is set upfront at a level calculated to generate the required investment.

Do capacity mechanisms have a role to play in the EU?

While the Commission found that electricity shortages in the EU as a whole are very rare and there is generally overcapacity, the report acknowledges that some Member States have legitimate concerns that they may not have enough generation capacity to meet electricity demand. Moreover, Europe's electricity sector is experiencing an unprecedented transition due to market liberalisation and efforts to reduce greenhouse gas emissions. Some Member States are concerned that, without the implementation of capacity mechanisms, existing capacity and expected investment in new capacity may be insufficient to maintain security of supply in the future.

The report notes, however, that Member States that are considering capacity mechanisms should make appropriate efforts to address their resource adequacy concerns through market reforms. The report identifies various market failures that deter investment in electricity generation, including lack of price responsiveness as a result of national measures to control supply and demand during peak times (such as low price caps or penalties imposed on network operators for imbalances).

Compliance with the State aid rules

Capacity mechanisms often involve financial support that may constitute State aid and as such, they have the potential to distort competition. These capacity mechanisms should therefore be notified to the Commission for approval under State Aid rules prior to implementation.

The Commission considers that many capacity mechanisms are not well-designed or based on genuine need for a capacity mechanism. The report recommends that the need for a capacity mechanism should be clearly demonstrated by a robust generation adequacy assessment. The required level of supply should be determined using a cost-benefit analysis in relation to an economic "reliability standard" that reflects consumers' willingness to pay for electricity.

The Commission notes that the potential for capacity mechanisms to distort competition may be addressed by ensuring a high degree of competition within each mechanism. The report therefore provides recommendations on their design:

  • Eligibility: schemes should involve a competitive process open to a broad category of new and existing capacity providers – any exclusions should be justifiable in the circumstances
  • Allocation tools: payments to capacity providers should be determined by a competitive process
  • Obligations: obligations on capacity providers and penalties for non-compliance should be set at an appropriate level
  • Cross-border participation: mechanisms should explicitly be open to participation by providers from other Member States to incentivise cross-border investment and investment in interconnection

The Commission also notes that it is important that the most appropriate type of mechanism is selected to address the underlying concern. For example, long-term concerns about investment in generation capacity are likely to be best addressed through volume-based market-wide schemes. Whereas a targeted measure, such as a strategic reserve that holds a certain amount of capacity outside the market for emergencies, may be appropriate for temporary concerns. The report is also clear that 'administrative' price-based capacity payments that do not allow the market to set the right price for capacity are unlikely to be regarded as appropriate measures.

What does this mean for businesses receiving support from capacity mechanisms?

Significant changes to the structure of most national electricity markets may be expected once the market reforms proposed by the Commission's Clean Energy for all Europeans package are implemented. Until then, capacity mechanisms are likely to continue to play a role but there are likely to be changes made to existing capacity mechanisms where these have not been designed appropriately. The Commission notes that it will work with Member States to bring all existing capacity mechanisms into line with State aid rules. The following changes may also be expected in relation to future schemes:

  • opportunities to participate in capacity building schemes may arise less frequently as higher adequacy assessment standards are applied
  • schemes will need to be made open to a wide group of providers using a range of technologies
  • schemes will need to be made open to providers in other Member States (facilitating cross-border investment and investment in interconnection service capacity).

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Related Topics
Related Articles
Up-coming Events Search
Font Size:
Mondaq on Twitter
Mondaq Free Registration
Gain access to Mondaq global archive of over 375,000 articles covering 200 countries with a personalised News Alert and automatic login on this device.
Mondaq News Alert (some suggested topics and region)
Select Topics
Registration (please scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of

To Use you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions