In the evolving landscape of the European electricity market, capacity mechanisms have emerged as pivotal instruments, particularly in South-Eastern Europe (SEE). These mechanisms are intended to secure energy supply by compensating for availability rather than the actual production of energy. However, their implementation in SEE has sparked debate, as they navigate the complexities of decarbonization, legacy asset protection, and market integration.
The resurgence of capacity mechanisms on the policy agenda is largely due to the challenges faced by energy-only markets. As these markets transition towards a higher integration of variable renewable energy sources, the operational hours for dispatchable plants have significantly decreased. Despite this decline, the reliance on these assets during peak demand periods has intensified, highlighting a critical contradiction within the system.
Recent data indicates that dispatchable thermal assets in several SEE countries are now functioning at annual load factors between 25% and 35%, a stark drop from historical levels of 60% to 80%. This situation is exacerbated during extreme price spikes, where electricity prices can soar above €300 to €500 per megawatt-hour (MWh) and occasionally exceed €1,000/MWh. Consequently, these assets are essential precisely when revenue from energy sales becomes unpredictable.
Without appropriate capacity remuneration structures in place, there is a risk of underinvestment or premature exit from the market. Such scenarios could lead to significant adequacy risks and heightened volatility within electricity systems. Thus, capacity mechanisms serve as a necessary response to these market failures; however, their design must prioritize flexibility over inefficiency.
In contrast to Western Europe, SEE’s approach to capacity mechanisms is influenced by its heavy reliance on lignite and coal for energy adequacy. These resources are deeply embedded in local economies and employment structures. As such, there is a concern that capacity mechanisms may inadvertently extend the operational lifespan of these high-emission assets rather than facilitate a transition toward cleaner alternatives. In instances where capacity payments are based solely on installed capacity without stringent performance or emissions criteria, investment in innovative technologies may be stifled.
The lack of a cohesive capacity framework also leads to distortions within the market. State-owned utilities often maintain unprofitable plants on their balance sheets for security purposes, providing implicit support without transparency or accountability. This practice can undermine financial sustainability and obscure the actual costs associated with securing energy supply.
From an economic standpoint, capacity mechanisms should be viewed as insurance contracts aimed at ensuring resource availability during critical scarcity events rather than subsidizing production directly. Key design elements must include performance obligations and cost containment measures that align with system needs.
Evidence from recent stress events underscores the importance of such frameworks. During tight supply periods projected for 2024-2026, it has been observed that fewer than 100 hours annually could dictate system adequacy margins and price volatility across various SEE markets. Mechanisms that incentivize asset performance during these crucial hours can help mitigate emergency costs and stabilize pricing.
Conversely, poorly structured mechanisms may inadvertently suppress necessary pricing signals and hinder investments in storage solutions or demand response capabilities. If designed without consideration for flexibility requirements, they might favor inflexible baseload generation over more responsive technologies essential for modern grid management.
A significant challenge lies in regional fragmentation; while capacity mechanisms tend to be national initiatives, electricity systems across SEE are increasingly interconnected. National assessments often fail to recognize cross-border support dynamics which can lead to inefficiencies such as over-procurement in some regions while neglecting regional flexibility needs elsewhere. Uncoordinated approaches can disrupt cross-border electricity flows and investment signals.
The financial implications are substantial; even modest capacity payments ranging from €40 to €80 per kilowatt (kW) annually can accumulate into hundreds of millions of euros at the system level—costs ultimately borne by consumers or taxpayers. Without coordinated efforts across borders, there is a risk that multiple countries may end up compensating for identical resource needs.
The path forward for SEE involves two critical strategies: firstly, redesigning capacity mechanisms to prioritize performance metrics that foster flexibility and emissions reductions; secondly, ensuring regional alignment to prevent fragmentation and inefficiencies within interconnected markets.
A mechanism focused on flexibility would emphasize rapid response capabilities while allowing diverse resources—including gas plants and demand-side management—to compete equitably. Participation criteria could permit high-emission assets but would necessitate stringent performance standards with declining eligibility over time.
Integration with existing market structures such as balancing services is equally vital; capacity mechanisms should enhance rather than replace scarcity pricing frameworks while maintaining investment incentives without dampening short-term market signals.
As South-Eastern Europe navigates these complex issues, there exists a political inclination towards using capacity mechanisms merely as stopgap measures rather than transformative tools. To avoid entrenching inefficiencies within energy systems, it is essential that these mechanisms are treated as transitional solutions designed to evolve alongside advancements in storage technology and cross-border cooperation.
The effectiveness of capacity mechanisms hinges on governance quality—transparent systems based on performance metrics can stabilize electricity markets during transitions; however, opaque frameworks risk becoming barriers to decarbonization efforts and deeper market integration.
