Remuneration schemes in the electricity sector – the European Commission wants to know how exactly do they work

Remuneration schemes in the electricity sector – the European Commission wants to know how exactly do they work

The European Commission is planning to launch a comprehensive inquiry into national remuneration schemes in the electricity sector. Such schemes have been introduced, or are being considered, by several Member States in order to ensure investments into flexible generation capacities, which are needed to balance out the increasing amounts of variable renewable electricity coming into the grids. In 2013, the Commission published a set of state aid guidelines, saying that capacity mechanisms should only be introduced where there is a clear system adequacy need that cannot be solved through other measures.

However, as an EU source remarked, and reportedly, - on condition of anonymity – the Commission does not have comprehensive information on how the different capacity schemes operate or about their impact on the internal energy market. Therefore, the Commission plans an inquiry on the issue. The Commission’s Directorate-General for Competition stated that he could neither confirm, nor deny the news.

Most European electricity markets are currently mainly organised as energy-only markets in which the market prices should, in theory, provide sufficient incentives for new investments in production capacity. The current markets, however, are characterised by increasingly intermittent capacity, low margins on supply, and in varying degrees, by overcapacity and lower load factors for thermal plants. Energy companies, subsequently, are confronted more and more with a lack of funds. The revenues on electricity supplies are simply all too often insufficient to cover the total costs.

Naturally, the majority of politicians fear the risks of supply disturbances, along with the risk of black-outs, and of course, high peak prices. Many stakeholders advocate that establishing capacity remuneration markets is, therefore, the solution to this problem. There are concerns, however, regarding the impact of these national reforms on the existing, and further integrated, European electricity markets. Others also emphasise that capacity remuneration schemes should not become a support mechanism for gas and coal plants. In the ideal situation, the optimal organisation of the electricity market would start its balancing efforts on the demand side.

The Commission plans to launch, this year, a broad consultation on reforming the electricity market’s design, with a view to identifying ways to solving the stated problems. The public consultations will be followed up by legislative measures in 2016.

Marek Orzechowski, Journalist, Adviser at CEEP