Necessity of Capacity Mechanisms

Published: 14/02/2013

Ecofys analysed the necessity of capacity mechanisms in a study on behalf of the German Association of Energy and Water Industries (BDEW). The work discusses the methodology and assumptions of various capacity market studies and elaborates on recent electricity market developments and their fundamental causes. The study demonstrates that the empirical market observations are fundamentally explicable and indicate a functioning energy-only market. In conclusion, currently no far-reaching regulatory interference is necessary. The study also highlights elements of the energy-only market which influence its future robustness and should therefore be refined.

The rapid increase in the share of renewable energies and the integration of the internal EU market have given rise to a state of transition. These processes may entail temporarily lower prices and thus a reluctance in terms of power plant investments. In order to prevent the possible absence of market clearance during this transitional phase, it may be reasonable to safeguard security of supply through an appropriate mechanism. However, such a mechanism should not distort the power market operation nor lead to increasing regulatory risk.

The implementation of a strategic reserve could maintain the efficiency and innovation potential of the energy-only market and simultaneously guarantee security of supply. A tentative attitude towards power plant investments might be prevented by a political commitment to the energy-only market where a strategic reserve with pre-defined deployment prices would serve as a safeguard.