An easy fix to streamline capacity markets

Abstract

Following the EMD reform of 2024, the Commission is tasked to publish a report on the ‘possibilities of streamlining and simplifying the process of applying for a capacity mechanism’ by January 2025. One approach to streamlining is to relax burdensome requirements that are not particularly beneficial. In this policy brief, we explore one such requirement which is today critical for capacity markets: explicit cross-border participation. Our short-term recommendation is to relax this requirement because 1. it is particularly burdensome for Member States to implement, and 2. it can be temporarily replaced by implicit cross-border participation, which is easier to implement and achieves comparable results. The EMD reform of 2024 moreover promoted capacity mechanisms as a “structural element of the electricity market design”. However, they remain conceived and operated at the national level. Having national capacity mechanisms in an international electricity market leads to costly problems, which cannot be properly solved by any form of cross-border participation. Our long-term recommendation is therefore to reflect on alternative European solutions.