Europe’s electricity capacity mechanisms need to be better coordinated

Executive summary

A growing number of European governments believe that guaranteeing adequate energy supplies requires specific ‘capacity mechanisms’ to compensate power plants for their availability, not solely for electricity generation. Capacity mechanisms appear set to become a permanent feature of electricity market design across much of Europe.

However, poorly coordinated national capacity mechanisms could undermine consumer gains from the expansion of interconnectors and years of progress in coupling Europe’s power markets. A patchwork of capacity mechanisms developed according to national preferences would erode predictability for market participants, undermine investment efficiency and weaken competition. Improving the design of capacity mechanisms and, in particular, their cross-border coordination is thus important to prevent potential distortions from spilling over to other energy market segments,which would hinder scaling up of efficient solutions for secure, affordable and sustainable electricity supplies in Europe.

Conversely, joint or closely coordinated capacity mechanisms at regional level that allow access to neighbours’ portfolios will increase security of supply and save money for households and industry.

Coordinating or joining up national capacity mechanisms is politically and technically challenging. EU countries prefer to retain sovereignty over their electricity mixes and adequacy levels, and national policymakers baulk at solutions perceived as sending consumers’ money abroad or as financing domestic capacity that ends up addressing adequacy shortfalls elsewhere. Technically, coordinating capacity mechanism design and ensuring confidence in delivery of power across borders in times of scarcity is an important prerequisite. Harmonising the commitments traded in national capacity mechanisms or creating interfaces between very different mechanisms is complex.

Overcoming such inefficiencies requires high-level political commitment to compromise, including on rules for energy sharing during scarcity, cost-sharing, cross-border compatibility of capacity mechanisms and credible institutions that can perform regional adequacy assessments and enforcement. Compromise must emerge through a political process that builds trust among stakeholders. The EU could make approval of national capacity mechanisms conditional on engagement in regional coordination. Done right, this could reduce the cost of securing adequate capacities, reinforce the internal electricity market and strengthen broader energy-policy coordination across borders.

1 Introduction

Electricity generated from wind and solar power is on its way to replacing fossil fuels as the dominant energy carrier in Europe (European Commission, 2024). To accommodate this change, massive investment is required to maintain some existing power plants and to develop electricity storage and end-use appliances. Investment will come, alongside more direct public intervention, primarily from companies and households, which respond to incentives within an administratively designed market framework.

If investment can be directed to building the right amounts of the right assets in the right places at the right time, the cost of the European energy system could be reduced substantially. An integrated energy market, compared to isolated markets, would need less total capacity to ensure adequacy of energy supply. However, ending up with capacity that is inadequate to meet demand would have substantial economic and political costs. Maintaining enough supply capacity for sometimes prolonged periods when the wind is not blowing and the sun is not shining is thus becoming increasingly important.

Against this backdrop, European Union countries are under increasing pressure to decide whether and how to implement a capacity mechanism – a way to pay market participants for a commitment to make electricity generation, storage or demand response available when needed, particularly during periods of high demand or system stress. Many EU countries have already established some form of national capacity mechanism. Several more are debating whether to introduce one or shift to more comprehensive mechanisms (see section 4). The design and development of national capacity mechanisms in EU countries will play an increasingly important role in shaping investment decisions within the EU internal electricity market.

Capacity mechanisms remunerate qualified market participants for their contribution to the maintenance of system adequacy. That is, generators, storage operators or flexible consumers receive remuneration for committing, for one or several years, to offer generation capacity at times when it is needed to maintain the balance of demand and supply in the electricity system. Most capacity payments have historically gone to generators, although in recent years, demand response and storage resources have been awarded substantial capacity payments in some countries. Such payments supplement revenues from selling electricity.

Capacity payments have increased overall in the EU, including an exceptional peak in 2023 related to a nuclear availability crisis in France (Figure 1). In France, for example, such capacity payments now exceed 10 percent of wholesale market revenues (ACER, 2024a). The expected introduction of a capacity market in Germany (Box 2 in section 2) is already affecting discussions on the issue in neighbouring countries.

Figure 1: Capacity payments in EU countries, € millions, 2021-2024*

^{Source: Bruegel based on ACER (2024a). Note: Incurred and expected (for 2024 payouts from capacity mechanisms in the EU). * = see Figure 4 for the status of capacity mechanisms in the EU. SEM = the Single Electricity Market on the island of Ireland.}

In regulatory terms, capacity mechanisms were originally treated in the EU as a temporary measure of last resort to address resource-adequacy concerns (see Article 20 in the original Regulation (EU) 2019/943 on the internal market for electricity). This shifted with an EU-level electricity market design reform finalised in 2024 (codified in Regulation (EU) 2024/1747). Language on “last resort” and “temporary” was removed from the legal texts. Further rules adopted by the European Commission in June 2025 also provide for “fast track” approval of capacity mechanisms that meet specific design criteria (see section 3).

However, notwithstanding the experience and regulation so far, consensus on a single best-practice capacity mechanism has not yet emerged. Mechanisms introduced by EU countries since the early 2000s have been continuously refined and some countries have chosen to change the type of mechanism they employ. About 25 years of academic research into, and practical experience with, a wide variety of capacity-mechanism approaches shows that the trade-offs between different approaches are both complex and context specific. No two European countries have set up similar capacity mechanisms, and there are not yet convincing comprehensive proposals for a single mechanism that could work for all of Europe, given real-world constraints.

In this Policy Brief, we map the national capacity mechanism status quo in the EU, discuss the impact of capacity mechanisms on cost and security in the EU electricity system, and evaluate the potential gains and challenges associated with further coordination of capacity mechanisms at regional and European levels. We set out reasons for the increasing number of capacity mechanisms in recent years. We discuss their variety and major design differences, the needs they cater to and the difficulties that arise from the uneven development of capacity mechanisms in EU countries. Finally, we set out principles to facilitate effective coordination of capacity mechanisms across EU countries, focusing on regional coordination. This relies on agreement and enforcement of rules in an environment that fosters trust and fairness.

2 Reasons for the introduction of capacity mechanisms in Europe

Capacity mechanisms are increasingly seen as a necessary incentive to develop and maintain the capacity needed to meet expected demand (European Commission, 2025; Eurelectric, 2025; ENTSO-E, 2025). Some general points explain the increasing attention paid to these mechanisms.

First, EU countries worry that they cannot ensure their national energy-supply reliability standards based only on a common wholesale market that features a harmonised price cap and wholesale prices that reflect electricity market interventions in neighbouring countries. Investors might not deploy enough capacity to meet its very high reliability standard in one country, if 1) the EU-wide price cap is too low to ensure an expectation that investments will be profitable, and 2) a neighbouring country provides effective support to additional domestic capacity that lowers regional prices in scarcity situations, though this capacity might not be available for consumers in the first country in a crisis. 

Second, capacity mechanisms are a second-best solution (see Box 1) to address a number of market failures that prevent adequate capacity levels, and the relevant issues differ from country to country (Table 1). Third, the desired green transition of the energy system should substantially increase electricity supply, grids and demand, while implying a lower share of variable (fuel) costs in the overall system cost. Capacity mechanisms can be a competitive tool to more efficiently coordinate the required investment, while avoiding politically contentious episodes of very high prices.