Generation capacity adequacy in Europe: economic rationale for capacity remuneration mechanisms

Fears that the lights might go out raise strong political sensitivities. They have generated a lively debate on the appropriateness of policy measures aiming to reward generators in addition to the income obtained from the sale of electricity and ancillary services in the market.

In its recent Guidance for state intervention in electricity, the European Commission acknowledges complexity of capacity adequacy assessments and recognises the possibility that public intervention might be necessary to ensure security of electricity supply. However, the Commission stresses that market forces should be primarily relied upon to ensure appropriate investment.

This CERRE Energy & Climate report has been prepared before the release of the Commission guidance document. It not only investigates the theoretical foundation for generation capacity remuneration schemes but also assesses alternative policy options. As such, it should provide a significant, timely contribution to the on-going discussions on this topical issue.