Flex›Source - Capacity Mechanisms (EC DG ENER)

Source - Capacity Mechanisms (EC DG ENER)

Overview of EU capacity mechanisms policy from the European Commission’s Directorate-General for Energy. Covers the purpose of capacity mechanisms, the generation adequacy framework (ERAA), the streamlining process, national implementation plans, and annual monitoring. Updated through 2025.

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What capacity mechanisms are

Capacity mechanisms are support measures where EU countries remunerate power plants (or other capacity resources) for being available to generate electricity when needed — in addition to earnings from energy market sales. They take the form of capacity payments and are designed to address a market failure: energy-only markets may not provide sufficient investment signals for dispatchable capacity that is needed only during scarcity periods.

Key constraint: capacity mechanisms are only permissible if they are proportionate to a demonstrated adequacy problem (insufficient supply-demand balance). Member states cannot introduce them preemptively.

EU adequacy framework (ERAA)

Regulation 2019/943 requires:

  • ENTSO-E to conduct annual EU-wide adequacy assessments (European Resource Adequacy Assessment — ERAA)
  • An enhanced methodology approved by ACER
  • Assessment must cover all EU countries/bidding zones
  • Must consider: renewable variability, demand-side flexibility, cross-border infrastructure during system stress

ACER Decision (October 2020): established the ERAA methodology — the binding standard for EU-wide generation adequacy assessment.

Countries with identified adequacy concerns (from the ERAA) may introduce capacity mechanisms. In principle, adequacy must be demonstrated based on the EU-wide ERAA, not only national assessments.

Changes from EMD Reform 2024

Article 69(3) of Regulation 2019/943 (as amended by 2024 reform) introduced several changes:

  • Capacity mechanisms are no longer measures of last resort — the Commission may approve them for up to 10 years
  • Streamlining provisions for faster Commission approval
  • Commission required to submit a streamlining report by 17 January 2025

Commission streamlining report (COM/2025/65)

Published alongside the Affordable Energy Action Plan (COM/2025/79), the streamlining report:

  • Evaluates the existing ERAA methodology and state aid guidelines as applied to capacity mechanism approval
  • Requests ACER to amend the ERAA methodology to streamline approval processes (ACER review ongoing as of early 2025)
  • Accompanied by the Clean Industrial Deal State Aid Framework (CISAF) proposals to simplify approval

Proposals aim to:

  • Set reliability standards based on centralised ACER calculations (reducing member state calculation burden)
  • Allow capacity mechanism need to be demonstrated using ERAA central reference scenarios
  • Simplify the procedure while ensuring compliance with sectoral legislation and state aid rules

National implementation plans

All EU countries with identified adequacy concerns must develop implementation plans showing how they intend to address root causes through market reforms. Capacity mechanisms are a residual tool — only for problems that market reforms cannot resolve.

Commission guidance on national implementation plans has been published. Countries must monitor and report annually.

First monitoring reports and Commission opinion

  • First monitoring reports submitted in 2021 by Belgium, Ireland, Lithuania, and Poland
  • Commission collective opinion C/2022/9059 (December 2022) assessed these four countries’ reform progress

Key principle: market reform first

The EU framework emphasises that well-designed, distortion-free, interconnected markets should provide adequate capacity without support mechanisms. Capacity mechanisms are a residual instrument for cases where:

  1. Market reforms are insufficient to address adequacy concerns
  2. The residual concern cannot be resolved by markets alone
  3. The adequacy problem is specifically quantified via the ERAA

Swedish relevance

Sweden has not been identified with a capacity mechanism as of this writing. The Nordic market historically relies on energy-only markets for adequacy. However, the ERAA methodology and adequacy frameworks are relevant to Swedish security of supply analysis, particularly in the context of the SE1–SE3 transmission bottleneck and growing electrification demands. See Balancing Markets and Svenska kraftnät.

Relevance to wiki topics

  • Electricity Market Design Reform 2024: capacity mechanism changes (no longer last resort; 10-year approval) are part of the 2024 reform package
  • Balancing Markets: capacity mechanisms interact with balancing market design — dispatchable capacity that provides balancing services may also be eligible for capacity payments
  • Flexibility: capacity mechanisms may be designed to remunerate flexible resources (demand response, storage) in addition to dispatchable generation — this is specifically mentioned as an area where current mechanisms could be enhanced