CEEP Report (Q1): Capacity mechanisms in Central and Eastern Europe

The European Council together with the European Parliament and the European Commission will be working out a new European electricity market design, in trilogue negotiations, over the coming months. As a result, the new regulatory design for the EU electricity market is taking shape, but there are concerns in the sector regarding the new rules on the table. One of the main issue discussed in Brussels and all over Europe, it’s the future of capacity mechanisms, a topic that is tackled in extenso in this CEEP Report.

The President of the Management Board, PGE Polska Grupa Energetyczna S.A., Poland and Vice—Chairman of the Board of Directors, CEEP, Henryk Baranowski reminds in an interview that five out of six most populated Member States have introduced capacity mechanisms—resulting in more than 50% of the entire EU population having their security of electricity supply guaranteed in this way. Though he underlines that capacity market is not a ‘perpetual solution’, the predictability of the business and legal environment is of the utmost importance.

At the other side of the spectrum, Latvian MEP Krišjānis Kariņš, member of the European Parliament’s ITRE Committee and the rapporteur on the wholesale and retail market files, describes his vision of a ‘market first’ direction that Europe should be heading to, where countries in Europe should stop thinking that security of supply is a national issue only. His conviction is that markets work when you let them work, while accepting that we don’t find all the prerequisites in all Member States.

In the POLSKIE SIECI ELEKTROENERGETYCZNE S.A. (PSE)’s opinion, the energy-only market as proposed by the Commission is not efficient when it comes to maintaining generation capacities in operation and ensuring capacity reserves necessary for stable operation of the system. Prices of electricity have ceased to effectively stimulate investments in generation capacity or decisions to withdraw them. PSE is aware of problems related to implementing capacity mechanisms, including the lack of assurance that incentives resulting from them will be sufficient to ensure adequate generation. However, PSE is of the position that at the moment this is the best implementable solution and because of this, proposed legal regulations should allow individual countries to freely use them, with due respect for internal market rules. Moreover, regulations should neither infringe the technological neutrality nor reduce effectiveness of capacity mechanisms.

The European Parliament’s position on electricity market design should be reconsidered to avoid discriminating against the energy profiles and plans of some Member States – especially when already approved by the Commission, says Dr. Frank Umbach in his essay. The new European “electricity market design” as proposed by MEPs in February may have a detrimental impact on Poland’s “capacity market” plan approved by the European Commission. Polish plans are designed to ensure both security of supply and cost-effectiveness, further decarbonisation, and a cleaner energy-mix. Due to the proposal by MEPs, these plans are being challenged by double standards and incoherent signals for investors.

Eurelectric’s advisor underlines that given the very diverse approaches of Member States on capacity markets, it is important that the Council and the European Parliament proposals on the Electricity Regulation provide a clear framework for their design and implementation to facilitate a European coordinated approach. Consistency between policies is key. The European power sector is convinced that the cornerstone of EU climate policy is the EU ETS, as it will deliver the right signals for a cost-effective decarbonisation.

According to REKK, the outlook for new generation investments in Central and Eastern Europe is already gloomy. Further, it asks an important question: Can strong interconnectivity in the region counterbalance the effects of weak generation investment incentives?

Ivan Andročec from HEP, Croatia, argues that if we look only nationally, generation adequacy in Croatia is not enough for satisfying the needs of the Croatian power system, especially if we include several scenarios into account (dry hydrology, unavailability of thermal capacity, gas crisis, increased renewable variations, slow realisation of new power plant projects, etc.). There is a need for a regional cooperation and participation in defining a possible cross-border capacity mechanism scenario.

When it comes to Romania, although it does not have a Capacity Mechanism notified to the European Commission to be checked for compliance with 2014 EEAG rules, it uses both regulated and market-based components. Moreover, ROEC’s director argues that there are premises for Romania to build a case for a future Capacity Mechanism involving State aid for traditional power generation, especially for more flexible gas-fired units.

Jędrzej Maśnicki, Legal Expert at PGE S.A., Poland, indicates in his article that the recently approved capacity mechanisms should guarantee the security of supply irrespectively of the trilogues schedule. Therefore, the first contracts may not wait until the final text of the Electricity Market Regulation is adopted. The ongoing political arrangements may not diminish the protection of the legitimate expectations, which are based on the fact that the Commission has approved the capacity mechanism concerned. Regarding the legitimate expectations principle, we should assume that the rights and obligations conferred to the generators before the entry into force of the Regulation should be honoured for the whole contracting period.