The ‘energy-only’ market, which rewards power plants (and demand-side response providers) for the MWh they produce, is the bedrock of EU internal electricity market design.

It can, in principle, ensure the right balance between the additional cost of capacity and reliability of electricity supplies. However, its ability to do so rests in large part on investors in capacity being able to trust that they will be able to profit from high wholesale prices during times of scarcity. In practice, several market failures, compounded by policy and regulatory uncertainty, may prevent this from happening, resulting in less than the optimal level of reliability being delivered.

These concerns have led several EU Member States to provide additional remuneration via capacity mechanisms, to ensure the optimal level of reliability. These have predominantly been used to support existing fossil fuel and hydro generation capacity. However, as the electricity sector transitions towards Net Zero, designs will need to adapt to accommodate other forms of capacity, including RES, demand-side response, and new forms of storage.

Our chapter examines the challenges of the energy-only market, in particular with increasing shares of (subsidised) renewable plant capacity, and considers the circumstances under which intervention in the form of a capacity market may be appropriate. It appears in the recently published handbook, “Capacity Mechanisms in the EU Energy Markets” (second edition), available for purchase from OUP.

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