REMAP Insight 5-2019

Clean Energy Package (CEP): Compromise on Provisions for Capacity
Remuneration Mechanisms
Leigh Hancher (Tilburg University/Florence School of Regulation), Per Ove Eikeland (Fridtjof Nansen Institute) and Berit Tennbakk(Thema)Capacity remuneration mechanisms (CRMs) are designed tosupport new and existing power plants by ensuring adequate
capacity and security of supply. Whereas some regards CRMs asnecessary for maintaining (national) security of supply; others seethem primarily as measures implemented by member states (MSs)to subsidize domestic generation, thereby undermining the IEM.
The debate on CRMs has increasingly centred on the ‘missing
money’ problem and future resource adequacy. Current
overcapacity and falling wholesale prices affect investments in
new capacity – raising concerns that investments may proveinsufficient to provide the back-up capacity needed to deal withintermittent supply of renewables in peak demand periods.
In 2016, the Commission proposed a new EU regulation on theuse and design of CRMs as part of the CEP (addition to theElectricity Regulation). Several of the proposed provisions wereheavily contested, and political agreement was reached only at thevery end of the trilogue negotiations in 2018.
This REMAP Insight provides a summary of the process and an
overview table of the controversial issues. The attached text gives
a more detailed account of the background for the controversies,
the Commission’s proposal, the trilogue negotiations, and theoutcome.

Common principles and rules; CRMs as a last resort
The Commission proposal was aimed at conditioning memberstate use of CRMs. As a general principle, CRMs was to be a lastresort measure, with priority given to market and regulatory reform.
The proposal included principles and common rules for resource
adequacy assessment and reliability standards, to underpin
decisions on CRMs.

Trilogue outcome
The Commission’s proposal implied that MS would be granted thelegal right to introduce CRMs on specific conditions, after
Commission assessment and acceptance of their compatibility

with state aid rules. The Commission’s proposal was retained inmany aspects. Certain principles and procedures were further
specified. However, the Commission’s proposals were not adopted
on the most controversial provisions:▪ Strategic reserves were not adopted as the priority design for
CRMs▪ MS can still base the introduction of CRMs on national
adequacy assessments, complementary to the European
assessment▪ The proposed emissions performance standard (550gC02/kWh) was accepted, with the addition of a ‘grandfathering’clause that protects capacity contracts concluded before 2020.
On other points, the adopted regulation is stricter than theCommission’ proposal: for example, that CRMs may be approved
for a maximum of 10 years.

Assessment
With the adoption of the new Electricity Regulation, clear steps
have been taken towards controlling the distortions that national
CRMs inflict on the IEM. Despite the heated debates, the final texts
are not very different from the Commission’s proposal.
In the Council, the split on CRM broadly reflected the fact that
some, but not all, MSs had already implemented CRMs. The
European Parliament favoured Strategic Reserves as the main
option but failed to convince the Council. The most controversial
issues were the emissions standard and the protection of existing
capacity contracts. Here, the final text is a clear compromise
between the ‘coal lobby’ and the ‘clean power lobby’. Under the
new EU rules, new plants built after entry into force of theRegulation and emitting more than 550 grCo2/kWh cannot be
remunerated by the capacity mechanisms. After June 2025, also
existing plants emitting more than this level will not be granted a
new capacity remuneration contract. However, the ‘grandfathering’clause implies that all contracts concluded before the end of 2019
may be exempted from these rules.

REMAP Insight 5-2019

Overview: Commission’s proposal and outcome of trilogue on Capacity Remuneration Mechanisms

Generalprinciples

Recital 28(and Article
18)

Issue

Commission’s proposal

Outcome of trilogue

Competence ofCommission and legal
rights of MSs

Legal right of MSs to introduce CRM as lastresort measure on specific conditions
Commission with exclusive competence toassess compatibility with state aid rules

Added to the definition of CRMs was that they
were to be a temporary measure.
Article 18 added new detail on conditions: e.g.
that CRMs should be a temporary measure;and that Commission can grant approval to
CRMs for maximum 10 years.

MSs required to assess regulatory distortions
and to prepare plans for adoption of measures
to eliminate such distortions

Retained requirement that MSs prepare nonbinding implementation plans for regulatory
measures and to address market failures.
Specification of a set of regulatory measures tobe considered. MSs cannot introduce CRM
until Commission has delivered its opinion on
the implementation plan.

Assessment ofregulatory distortions

Recitals 26
and 30European resource
adequacy assessment

Introduction of CRM to be based on aEuropean adequacy assessment

Major concession: MSs may complement theEuropean assessment with a national resource
adequacy assessment (albeit with regional
scope). In the case of divergence between theEuropean and national assessment, ACER is toprovide an opinion to be accounted for at
national level (Article 19).

Article 23

Principle for design of
CRM

Should minimize distortion of the IEM, and bebased on clear and transparent criteria
regarding cross-border trade, DSR anddecarbonization

Principles retained and further specified in
Article 18

Article 18

Participation ofalternative resources in
CRMs

No specifications in the proposal

Clear rules for the inclusion of storage, energy
efficiency and demand response in CRMs

Article 19

Procedures for
European resource
adequacy assessment

Should be based on a ten-year period, on
methodology drafted by Entso-E and approvedby ACER. Entso-E to provide annual updates.

Principles for developing European adequacy
assessment retained.

Article 19

Methodology forresource adequacy
assessment

Including calculation of the value of lost loadand cost of new entry (including DSR);
reliability standard.

Methodology, to be devised by Entso-E andapproved by ACER,for calculating the value oflost load, the cost of new entry for generation or
demand response, and reliability standard, see.
Article 20

Article 20

Reliability standard

NRAs should set a reliability standard based
methodology developed by Entso-E andapproved by ACER

The provision re basing CRM on coherent
reliability standards retained and further
specified for cross-border bidding zones; therelevant authorities shall jointly establish
reliability standards

Article 21

Cross-borderparticipation

All CRM except Strategic Reserves should be
open for direct cross-border participation in linewith domestic capacity

Largely unchanged, but addition that, where
technically feasible, Strategic reserves should
also be open to X-border participation.

Article 23

Emissions standard forcapacity in CRM

Emissions standard of 550 gr CO2/kWh for new
capacity built after entry into force of theRegulation. Pre-existing capacity to adhere tosame limit for five years after entry into force

Art. 23 deleted. Final text (moved to Article 18)
much like the Com proposal; addition: annual
emissions may not exceed 350 kg CO2 per
kWe on average. However, additional
grandfathering clause exempts all contracts
with the government finalised before the end of
2019.

Article 24

Compliance with existingmechanisms

Existing mechanism to be adapted to comply
with Articles 18, 21 and 23.

Art. 24 deleted. Text retained, applying to all
the revised articles under Chapter 4 (18–22)

REMAP Insight 5-2019

Introduction
In 2016, the EU Commission proposed broad reforms of EUenergy legislation (the Clean Energy Package). Included were newprovisions in the Electricity Regulation (European Commission,2017) setting out conditions for Member States’ introduction of
Capacity Remuneration Mechanisms (CRMs): state support tonew and existing electric power plants aimed at ensuring adequate
capacity and security of supply. Several Commission proposals
were highly contested, resulting in changes made after trilogue
with the European Parliament and the Council (Council of theEuropean Union, 2019).

Background
Security of supply is a key dimension of EU energy policy,
enshrined in art 194(1) TFEU as a ‘shared competence’ between
the Member States (MSs) and the EU institutions. As a catch-all
concept, ‘security of supply’ has often served as a convenient label
for protectionist MS policies to mask an array of support measures
for ailing firms. If an MS can convince the European Commission(EC) and ultimately the European courts that it is justified in taking
certain actions in the interests of security of supply (for example,
establishing capacity remuneration mechanisms), that line ofargument will inevitably trump the EU’s plans for a single European
energy market. The EC’s role is often reduced to fire-fighting or
damage-limitation, i.e. ensuring that any national, unilateral action
is as contained as possible and will not unduly undermine trade
among MSs. However, this is not just a matter of single market
ideology: purely national action is probably not as cost-effective as

Figure 1 CM implementation in Europe (ACER and CEER, 2018:71)

mechanisms that allow for cross-border participation in different
national markets.
The rationale for introducing CRMs may not always seemconvincing, as generation capacity in the EU has increased due tothe growth of renewable energy sources (and a decrease of
conventional power), while electricity demand and wholesale
prices have decreased steadily since 2011. The outcome has beena situation of overcapacity in at least parts of Europe. However,
the exponential growth of often heavily subsidized renewableenergy production, combined with the ‘energy-only’ market model,
has introduced a new justification for introducing CMs: the ‘missing
money’ problem: conventional fossil-fuel plants increasingly findthemselves in financial difficulties.
Various CRMs have long existed in the MS as illustrated by Figure
1. In 2014 the EC adopted a set of guidelines outlining the main
conditions it would apply in order to approve a CRM as compatible
state aid. The 16 CRMs have all subsequently been reviewed andcleared under the treaty state aid rules.
April 2015, the EC launched a Sector Inquiry under the treaty state
aid rule to assess the various CRMs implemented and theirconsequences for competition and trade in the internal energy
market, adopted as associated document under the Clean Energy
Package (European Commission, 2016). The inquiry found thatmany MSs had not adequately assessed the need or costeffectiveness of these measures before introducing them. SomeMSs had introduced three or more such mechanisms; many MSs
had not applied a sufficiently rigorous assessment methodology toestablish appropriate level of security of supply before applying aCRM. The Sector Inquiry
also confirmed the use ofdiffering metrics applied
across MSs to set reliability
standards depending on theadequacy
assessment
approach adopted – althoughsome MSs had not evendefined a reliability standard
when introducing capacity
mechanisms. The report ofthe sector inquiry concluded
that capacity mechanisms
should be open to all types ofpotential capacity providers –except for pure demandresponse mechanisms, given
their ability to address market
failures;andstrategic
reserves, as they aredesigned not to promote new

REMAP Insight 5-2019

generation capacity1 (Commission, 2016).
In February 2018, during negotiations on the Clean Energy
Package, the Commission (DG Competition) gave state aid
approval for capacity mechanisms in six MSs: Belgium, France,
Germany, Greece, Italy and Poland. The Commission found thatthese measures would contribute towards ensuring security ofsupply while preserving competition in the single
market.

to temporary adequacy concerns because they operate outside
the market. If they are designed to exclude5 new generation and if
the reserve is kept as small as possible, energy market distortions
can be kept at a minimum. Nevertheless, many options have been
adopted at national level and subsequently approved under the
Figure 2 Taxonomy of capacity mechanisms

Typology of CRMs
The Sector Inquiry noted that CRMs can be classified
as volume-based mechanisms and price-based
mechanisms; within these two main categories, CRMs
may have further distinguishing characteristics. In
volume-based mechanisms, the total amount ofcapacity required is determined in advance bypolicymakers or by a designated entity, usually a TSO.
A market-based process is then used to establish theprice to be paid. Volume-based mechanisms can thenbe divided into two subcategories. Market-wide mechanisms
provide support to all market participants that are required to meetthe reliability standard and in principle, reward all capacity.
Targeted mechanisms reward only specific plants or technologies,
i.e., they provide support only to the extra capacity required inaddition to that provided by the market without the subsidies(Hancher et al., 2015). For price-based mechanisms, a price isadministratively set, and investors decide how much volume ofcapacity they are willing to invest for the given price.
The 2018-approved mechanisms included strategic reserves in
Belgium and Germany, two market-wide capacity mechanisms in
Italy and Poland, as well as a demand response 2 (DR) tender inFrance and an interruptibility scheme in Greece.3,4. The
Commission's approval was expressly stated as being without
prejudice to the need for these measures to comply with futuresectoral EU legislation when that becomes applicable. This
standpoint raised important issues of legal certainty: could the EC
approval be withdrawn if the measures did not comply with the newRegulation?
Summing up, the strategic reserve is the most common CRM usedby EU MSs (Belgium, Finland, Germany, Poland and Sweden).
Strategic reserves are viewed as the most appropriate response

treaty state aid rules given that the EC has also recognized thatmarket-wide capacity mechanisms are likely to be more
appropriate for addressing long-term adequacy concerns. Thesemechanisms guarantee a regular income stream, thereby boosting
investment certainty.

The Commission proposal
As the Commission powers under existing treaty state aid rules are
essentially reactive to MS adoption and design of CRMs, theserules could not guarantee that specific national CRMs would becompatible with internal market objectives. They could not force a
MS to choose a particular category of CRMs; would not ensurethat the CRM had been chosen on the basis of transparent andharmonized EU criteria for assessing the resource adequacy
problem; and would not regulate terms on which to ensure crossborder participation in national schemes. Only legislation could
deal with those issues (Hancher and Reichmann, 2018).
Therefore, as part of the 2016 Clean Energy Package, theCommission proposed changes to the Electricity Regulation,
introducing various proposals to condition the choice of CRMs.
Included were CRM design principles as well as common rules for
European resource adequacy assessments and reliability
standards to underpin decisions on CRMs (Chapter IV, Articles

1 According to the EC (2016b), ‘market distortions can be kept at a

4 ‘Interruptibility schemes’ are mechanisms ‘in which industrial customers

minimum if the reserve is kept as small as possible’. Strategic reserve isdesigned not to promote new generation capacity.
2 DR operators can choose between certification of DR as capacity, andreduction of consumption as supplier obligation.
3 3 Press Release IP/18/682, http://europa.eu/rapid/press-release_IP-18682_en.htm

are asked by the network operator to reduce their demand in scarcity
situations, are also considered a form of "reserve", as they provide
capacity that is only activated when a supply shortfall occurs’ (European
Commission, 2016)
5 Based on Hancher and Reichman (2018)

REMAP Insight 5-2019

18–24). MSs were granted legal right to introduce CRMs on
specific conditions; and the exclusive competence of theCommission to assess the compatibility of any form of state
support under its treaty state aid rules was explicitly stated. As ageneral principle, the Commission proposed that CRMs should bea solution of last resort; priority should be given to the adoption ofmarket reforms to address resource adequacy (energy-only
solutions).

apply at least the following indicators: ‘expected energy notserved’, and ‘loss of load expectation’; and identify the sources ofpossible resource adequacy. A draft methodology for calculating
the value of lost load, the ‘cost of new entry’ for generation, or
demand response, and the reliability standard expressed as‘expected energy not served’ and the ‘loss of load expectation’should be developed by ENTSO-E after prior consultation andsubmitted to ACER for approval.

As per Recital 28 and Article 18, prior to introducing capacity
mechanisms, MSs should assess regulatory distortions
contributing to the related resource-adequacy concern. MSs
should be required to adopt measures to eliminate the identified
distortions, including a timeline for implementation (Art. 18).

According to Article 20, MSs shall base capacity mechanisms ona reliability standard, indicating their desired level of security ofsupply in a transparent manner to be set by the national regulatory
authority based on methodology developed by ENTSO-E andapproved by ACER, on similar terms as for the European
adequacy assessments. Parameters determining the amount ofcapacity procured in the capacity mechanism were to be approvedby the national regulatory authority.

Recital 30 stated that the decision to introduce CRMs should bebased on a European Resource Adequacy Assessment. If thisassessment should reveal no adequacy concerns, no new
capacity mechanism should be established and no new capacity
commitments under mechanisms already in place should be
made. If the assessment showed that capacity mechanisms werenecessary, such mechanisms should be designed to minimise
distortions to the internal market. Clear and transparent criteria forminimising distortions of cross-border trade, maximising the use of
demand response, and reducing any impacts on decarbonisation
should be defined, to avoid the risk of fragmented national capacity
mechanisms creating new market barriers and undermining
competition (European Commission, 2016, p. 5-6).
Article 19 provided principles and procedures for developing theEuropean resource adequacy assessment. The assessment
should cover a ten-year period and be based on a methodology
drafted by ENTSO-E and submitted for approval by ACER.
ENTSO-E should carry out annual assessments based on data to
be provided by national TSOs. Important principles were outlinedin §4. The European assessment should be carried out on biddingzone level; be based on appropriate scenarios of projecteddemand and supply; account for the contribution of all resources(including existing and future generation, energy storage, demand
response, and import/export possibilities and their contribution to
flexible system operation); anticipate the likely impact of themember-state implementation plan for measures to remove
regulatory distortions (Art. 18(3)); be based the flow-based
approach (where applicable); apply probabilistic calculations;6

6 Adequacy assessment may follow two approaches: a deterministic

approach and a probabilistic one. The deterministic approach assesses
the generation adequacy level via the capacity margin, which is therelation between peak demand and the reliably available supply, as apercentage. However, due to the increase in renewable energies inelectricity systems, this approach does not give a reliable picture of theadequacy situation. The probabilistic approach, in turn, considers
variations in demand over the years. Generation adequacy can bemeasured by calculating the loss of load probability (LOLP); in many

Article 21 proposed measures to ensure cross-border participationin capacity mechanisms. For all mechanisms other than strategicreserves, capacity providers located in another MS had to beallowed the opportunity to compete in bidding processes forcapacity contracts, in line with domestic capacity. For eachbidding-zone border, new proposed Regional Operational Centres(ROCs) would annually calculate the maximum entry capacity
available for foreign capacity. The MSs (national regulatory
authorities) would be obliged to ensure allocation of entry capacity
to eligible capacity providers in a transparent, non-discriminatory
and market-based manner. Any difference in the cost of foreign
capacity and domestic capacity should be shared as revenues
between the relevant transmission system operators. Methodology
for calculating the maximum entry capacity for cross-borderparticipation and for sharing revenues would be developed by
ENTSO-E and approved by ACER. A registry of eligible capacity
providers should be developed by ENTSO-E.
Article 23 provided important design principles for CRMs. The
proposed CRM should not create unnecessary market distortion
or limit cross-border trade. Member states should consult
electrically connected neighbouring countries on the proposed
CRM. To prevent CRMs from obstructing parallel transition policies
aimed at curtailing climate change, an emissions standard was
proposed for generation capacity eligible for participation in acapacity mechanism: new capacity (built after the entry into force

cases, LOLP is expressed as a loss of load expectation (LOLE). Neither
LOLP nor LOLE can measure the shortfall in capacity that arises when
there are disconnections, and neither LOLP/LOLE nor capacity margins
can measure the unmet demand. To obtain the economic value of
adequacy, it is necessary to quantify the Value of Lost Load (VOLL) – thisis crucial to implement a cost-effective adequacy level. The probabilistic
approach is gradually replacing the deterministic one in some MSs aselectricity systems become increasingly complex.

REMAP Insight 5-2019of the Electricity Regulation) emitting 550 gr CO2/kWh or more
would not be eligible for support. Five years after entry into forceof the Regulation, also pre-existing capacity emitting 550 gr
CO2/kWh or more was to be removed from the CRM. This would
effectively exclude coal-powered plants from participating.
Article 24 proposed that existing mechanisms applied by the MSs
should adapt and comply with Articles 18, 21 and 23.

The Regulation adopted after trilogue
The Commission’s proposals sparked intense debate on the roleand design of CRMs and on methodologies and procedures forassessing resource adequacy and determining reliability
standards. The chapter on CRM was not agreed upon until a final
trilogue dedicated to it in late 2018. The final Regulation retained
many of the Commission’s proposals. Some were given more
specific content by the addition of new provisions; others weresignificantly changed.
The proposed principle of capacity mechanisms as a last-resort
solution was retained, but more specific details added in the formof conditions for introducing capacity mechanisms. For example,
the definition of capacity mechanisms in Art2(2)(u) added that
CRMs should be ‘a temporary measure to ensure the achievementof the necessary level of resource adequacy by remunerating
resources for their availability not including measures relating toancillary services and congestion management.’7 According to Art
18a(6), capacity mechanisms ‘shall be approved by theCommission for no longer than 10 years.’ Also added was aprovision allowing for efficient administrative phase-out of capacity
mechanisms: they shall be either phased out or the amount of thecommitted capacities shall be reduced on the basis of theimplementation plan now required by Art. 18.

the Regulation adds further specifications on design principles withregard to availability payments and capacity obligations. Notably,
Art 18b(3) states: ‘capacity obligations are to be transferrable
between eligible capacity providers’.
Despite resistance from several MSs, Art 18 retained therequirement to prepare non-binding implementation plans forremoving regulatory energy market distortions as a preliminary
step to assessing the necessity of CRMs. Art 18(3) requires thatMSs ‘publish an implementation plan with a timeline for adopting
measures to eliminate any identified regulatory distortions and/or
market failures as a part of the state aid process.’ In addition, whenaddressing these regulatory distortions and market failures, MSs
shall take into account the principles regarding the operation ofelectricity markets stated in Art 3 of the Regulation. Art 18(3)added specificity to the set of potential regulatory measures thatMSs shall also ‘consider’.8 Objections from some MS that these
conditions were complex and excessive and would not necessarily
solve the core adequacy problems were finally overruled. MSs
must submit their implementation plans on an annual basis to theCommission for its review and opinion, but they are not bound to
take account of that opinion. However, the Regulation prohibits a
MS from introducing a CRM before receiving the EC’s opinion.
A major concession given to the MSs concerns how adequacy
problems are to be assessed. A majority of MSs maintained that,
although the development of regional and European adequacy
assessments is an important step towards greater energy security
and closer cooperation among MSs, they should not replacenational adequacy assessments. According to the Commission’s
proposal, resource adequacy concerns must now be identified
against common reliability standards, in line with the European
and/or the national resource adequacy assessment.

The Commission proposal saw strategic reserves as the mostappropriate response to temporary adequacy concerns, as they
operate outside the market. The adopted Regulation gives nopriority to any type of mechanism (e.g., strategic reserves) overother designs. The final text includes specific design principles forstrategic reserves in a new Article 18b (2). Their potential is to beassessed as the first option by the MS in question. The reserve
shall be dispatched only if TSOs are likely to exhaust theirbalancing resources. The strategic reserve’s output after the
dispatch shall be attributed to BRPs through the imbalancesettlement mechanism. For CRMs other than strategic reserves,

Many principles and procedures proposed by the Commission andaimed at developing European resource adequacy assessment
were retained: to be based on current and projected demands forelectricity for every single year within in the Union’; to cover the
relevant MSs in the region concerned, for each MS and for eachbidding zone; to span a ten-year period with annual assessments
to be conducted by ENTSO-E based on data provided by national
TSOs and approved by ACER. MSs may complement theEuropean assessment with a national resource adequacy
assessment, introduced as an option by the Council in thetrilogues. National adequacy assessments are to have a regional

7 That CRMs should be temporary and should not create undue market

Governance Regulation; (e) enable self-generation, energy storage,
demand side measures and energy efficiency by adopting measures toeliminate any identified regulatory distortions; (f) ensure cost-efficient andmarket-based procurement of balancing and ancillary services; (g)remove regulated prices where required by Article 5 of the recast
Directive.

distortions is further re-stated in Art 18a(1).
8 (a) removing regulatory distortions; (b) remove price caps in accordancewith article 9; (c) introduce a shortage pricing function for balancing energy
as referred in Article 44(3) of Regulation 2017/2195; (d) increaseinterconnection and internal grid capacity with a view to reaching at least
their interconnection targets as referred in Article 4(d)(1) of the

REMAP Insight 5-2019

scope. Their methodology is similar to the European one describedin Art. 19(4). They may also take account of national sensitivities
by considering the specifics of national power demand and supply,and may use complementary tools and more consistent recent
data than with the European methodology. If there is a divergence9
between the national and the European resource adequacy
assessment with regard to the same bidding zone, ACER shallprovide an opinion on whether the discrepancies are justified.
Although not binding, ACER’s opinion shall be taken into accountby the body governing the national assessment; where necessary,that body shall amend the final assessment.
The principle of avoiding discrimination between different
resources was retained, with more specific wording. The national(and EU) resource adequacy assessments are to ‘take account of
the contribution of all resources including existing and future
generation, energy storage, sectoral integration, demand
response, and import and export possibilities and their contribution
to flexible system operation’. The final text of the Regulation now
provides clear rules for the use of alternative resources, including
storage, energy efficiency and demand response. These are listed
as measures to be considered for eliminating regulatory distortions
that may create adequacy concerns. According to the common
CRM design principles, any capacity mechanism shall be ‘be open
to participation of all resources, including storage and demand side
management that are capable of providing the required technicalperformance’ (Art 18b(h)). These principles are also reflected in
the EC’s 2014 guidelines for assessing the compatibility of CRMs
under the state aid rules. Its failure to apply these principles toensure non-discriminatory treatment of DSR in its assessment of
the UK’s capacity market measures has been the subject of court
proceedings at the European and the national levels.
The Commission-proposed provisions for developing/calculating
coherent reliability standards as the basis for capacity-mechanism
implementation decisions were retained and further specified (Art20). For cross-border bidding zones, the relevant authorities shalljointly establish reliability standards based on the methodology to
be devised by ENTSO-E and approved by ACER [Art 19(5)] forcalculating: (a) the value of lost load; (b) the "cost of new entry" forgeneration, or demand response; and (c) the reliability standard
referred to in Article 20.’ According to Art.20, ‘the reliability
standard shall be calculated using at least the value of lost load
and the cost of new entry over a given timeframe and be expressedas "expected energy not served" and the "loss of load

expectation"’. Having concluded all the steps set out above, theMSs should study cross-border effects, assess the contribution ofstrategic reserves and then examine the suitability of other typesof CMs.
Also largely unchanged from the proposal, the adopted Regulation
promotes cross-border participation in capacity mechanisms, tolimit distortions to cross-border trade and competition as well as
providing incentives for interconnection investment to ensure the
EU security of electricity supply at least costs. Art 21 requires that‘mechanisms other than strategic reserves and where technicallyfeasible, strategic reserves, shall be open to direct cross-borderparticipation of capacity providers located in another Member
State (…).’ This marks a change from what the Commission had
proposed – that strategic reserves should not have to be opened
to cross-border participation. Retained was the provision that‘national regulatory authorities shall ensure that cross-borderparticipation in capacity mechanisms is organised in an effective
and non-discriminatory manner (…).’
While the Commission-proposed ’Regional Operation Centres(ROCs)’ was replaced in the negotiations with Regional
Coordination Centres (RCCs) having no decision-making
powers10, the Regulation re-stated that these RCCs, national
TSOs, the ENTSO-E and NRAs via ACER will be involved indeveloping technical parameters for the participation of nondomestic capacities as well as the operational rules for their
participation in national capacity mechanisms.
Some of the proposed design principles for CRMs were hotly
debated, notably on emissions standards that would exclude coalcapacity from participation. Despite this, the final text is much alikewith what the Commission proposed. Art 18b(4), introduces theEmission Performance Standard (EPS): New generation units11
emitting more than 550gr CO2/kWh ‘shall not be committed or
receive payments or commitments for future payments under acapacity mechanism as of entry into force at the latest.’ Existing
generation units12 emitting more than 550gr CO2/kWh and morethan 350 kg CO2 on average per year per installed KWe ‘shall not
be committed or receive payments or commitments for future
payments under a capacity mechanism as of 1 July 2025 at thelatest.’13

9 A divergence means that the national resource adequacy assessment

11 That is, those which had entered commercial production starting after

identifies a concern with regard to a bidding zone but the European
resource adequacy assessment has not identified a concern.
10 The creation of new Regional Coordination Centres (RCCs) builds onthe framework established by the Regional Security Coordinators in the
CEP.

the entry into force of the Regulation.
12 That is, those which had started commercial production before the entry
into force of the Regulation.
13 These emissions limits ‘shall be calculated based on the design
efficiency of the generation unit meaning the net efficiency at nominal
capacity under relevant ISO conditions.’

REMAP Insight 5-2019

The Commission draft set the threshold at 550gr CO2/kWh for both
new and existing generation units.14 The distinction between newand existing capacity was introduced during the final trilogues.
Additionally, Art 18(b) include a grandfathering clause that
excluded contracts approved before 31 December 2019 (nowspecified in Art 18(b)5) from these general rules.

Why the changes?
Within the Council, member states were split on the need for
CRMs, broadly reflecting different positions by the MSs that had
already introduced such mechanisms and those that had not. The
list of countries that had received approval of their national CRMs
increased during the negotiations. Essentially, most of the major
MSs had introduced and received approval of their various
schemes. These MSs sought to protect their CRMs by avoiding a
regulatory straitjacket while accepting a certain degree ofCommission supervision as regards the state aid regime (letter of4 September 2018 from EL, FR, HU, IE, IT, PL and UK.15 Only aminority of smaller MSs argued against the adoption of CRMs
altogether. The EP tried to restrict MS choice of CRMs, preferring
the strategic reserve, but failed to change the Council position in
the negotiations. The compromise also included retaining various
Commission-proposed principles, to prevent CRMs from distorting
the energy market – clearly a concession to those member statesthat fought against CRMs.
The emissions limits imposed on subsidies to polluting generation
facilities was one of the most controversial aspects, together withthe protection of existing capacity contracts involving such
facilities. The Council’s negotiating position included an emissions
cap of 500 gr CO2/kWh of energy or a 700 kg CO2 on average per
year per installed kW threshold for new and existing generation.
Existing generation should not receive payments beyond 31
December 2030. This was seen as a stricter approach as it was
based on two independent metrics. Countries heavily dependent
on fossil fuels may be concerned about the EPS provisions.16
The European Parliament, supported by numerous NGOs, heldthat any CRM should contribute to realisation of the EU’s climate
targets. The EP had proposed a different limit for strategicreserves, but this too was abandoned.

14 The proposed threshold would have applied to existing plants 5 years

after entry into force of the Regulation and to new plants immediately on
entry into force.
15 For the text of the letter see: https://www.euractiv.com/wpcontent/uploads/sites/2/2018/09/CRM-position-PL-FR-IT-UK-IE-HU.pdf,
and for further background to the trilogue: https://www.eu2018.at/latestnews/news/09-18-Informal-meeting-of-energy-ministers.html
16
See
Euractiv(2018),
https://www.euractiv.com/section/electricity/news/eu-hammers-deal-oncoal-phase-out-with-special-polish-clause /These proposals sparked a frenzied lobbying campaign inBrussels. Industry, and predominantly coal-rich MS, argued formore suitable performance standards (expressed in terms ofunitary constraints or average limits per year) and a gradualphase-out of existing contracts. This war pitted the electricity
industry in the form of Eurelectric – which has several powerfulcoal-reliant utilities as members – against major gas andrenewable energy-focused companies and associations thatwould benefit from the ‘550 rule’. They were grouped together
under the ‘Make Power Clean’ label.
In September 2017, a Eurelectric-commissioned report claimed
that the early retirement of coal plants and investments in new gasfired power plants as a result of the proposed ‘550 rule’ would leadto additional costs of around €50 billion over the next two
decades.17 Many NGOs lobbying for the phase-out of fossil-fuelplants disagreed with how the research had been conducted. The
objections were numerous: ‘the current spread of capacity
mechanisms runs counter to the EU’s decarbonisation objectives,
distorts price and investment signals, favours fossil fuels andnuclear generation to the detriment of the clean energy transitionand people’s health, interferes with competition, slows down
improvements towards a flexible system, and increases costs for
all Member States. A recent study revealed that capacity
mechanisms are costing European energy customers €58 billion,
with the vast majority of this sum going to coal, gas and nuclear
power plants.’18
Prior to the penultimate trilogue meeting on the Electricity Market
Regulation on 18 October 2018, 31 NGOs from across Europe
urged EU ministers to ensure that CRMs would remain a lastresort solution and would no longer subsidise the combustion offossil fuels, coal in particular.19 However, that plea was notheeded, and the Council and Commission deferred to national
demands to grandfather existing contracts so that coal -fired units
could continue to contribute to meeting national adequacy targets
at least until July 2025. The final text is thus a clear compromise
between the sharply differing positions.

Final assessment
The Commission’s DG on energy and climate change, M.A.
Cañete, expressed his satisfaction with the outcome: ‘I am

See report at: http://g8fip1kplyr33r3krz5b97d1-wpengine.netdnassl.com/wp-content/uploads/2017/09/Impact-Assessment-of-an-EPS550-on-CM-by-Compass-Lexecon-Executive-Summary.pdf
18 “Exposed: €58 billion in hidden subsidies for coal, gas and nuclear’,.
Greenpeace EU briefing, 13.09.2018, https://www.greenpeace.org/euunit/issues/climate-energy/1508/media-briefing-e58-billion-in-hiddensubsidies-for-coal-gas-and-nuclear/
19 CAN, joint letter letter to the EC Commissioner for Energy and Climate,availableat:
http://www.caneurope.org/docman/climate-energytargets/3418-joint-ngo-letter-regarding-capacity-mechanisms/file17

REMAP Insight 5-2019

particularly pleased that we agreed on a balanced approach to limit
capacity mechanisms and reconcile security of supply with our
climate objectives. Capacity mechanisms will not be used as a
backdoor subsidy of high-polluting fossil fuels as that would goagainst our climate objectives.’20
Not all would agree with this statement; and as confirmed by recent
events, increased litigation before national and European courts toprevent the EC approving major subsidies to fossil fuels is to be
expected.
Cross-border participation in capacity mechanisms is not yet therule, but the situation is changing. France and Ireland, for example,
are developing plans to allow cross-border participation in theircapacity mechanisms
It remains to be seen how cross-border participation will work inpractice. On the one hand, there is the risk that the rules forparticipation (including e.g., derating and control mechanisms) in
effect constitute a prohibitive barrier to such participation bycapacity located in other control areas. On the other hand, there is
the risk that the supply of cross-border capacity may undermine
prices in capacity auctions if the eligibility of suppliers is notadequately restricted.
In addition to the question of who controls capacity in scarcity
situations – the local or the cross-border TSO – there is a host of
more detailed design issues that must be clarified and agreed. The
Commission has opted for a solution whereby cross-border
generators may offer capacity in capacity auctions. The fact
remains, however, that the supply of capacity in scarcity situations
depends on interconnector capacity between the markets. How
and if the limited interconnector capacity should be allocated andto what extent capacity remuneration will accrue to interconnector
owner are further issues for which solutions must be developed.
Apart from cross-border participation, a crucial question for the
impact on markets and prices is the extent to which CRMs willcontinue to afflict a market with sustained overcapacity. This will
depend on the implementation of capacity adequacy
considerations and the reliability standards adopted by MS, butalso on the principles for derating and the inclusion of capacityfrom different sources. The participation of demand-side resources
and storage and the assessment of their reliability emerges as aninteresting aspect in this regard.

References
ACER and CEER (2018) Annual Report on the Results ofMonitoring the Internal Electricity and Natural Gas Markets in 2017
Electricity
WholesaleMarkets
Volume,20 Commission Press Release, IP/18/6870

https://www.acer.europa.eu/Official_documents/Acts_of_the_Age
ncy/Publication/MMR%202017%20-%20ELECTRICITY.pdf
Council of the European Union (2019). Proposal for a Regulationon the internal market for electricity (recast) - Analysis of the final
compromise text with a view to agreement,5070/19, Brussels 11
January 2019.
European Commission (2016) Final Report of the Sector Inquiry
on Capacity Mechanisms, COM(2016) 752 final, Brussels,
30.11.2016.
European Commission (2017) Proposal for a Regulation on theinternal market for electricity, COM(2016) 861 final/2, correction of
861 final of 30.11.2016, Brussels, 23.2.2017.
Hancher, L. (2015) Capacity Mechanisms and State Aid Control:
A European Solution to the 'Missing Money' Problem?‘ in L.
Hancher et al. (eds), Capacity Mechanisms in the EU Energy
Market, Oxford University Press.
Hancher, L., A. de Hauteclocque and M. Sadowska (eds) (2015)
Capacity Mechanisms in the EU Energy Market, Oxford University
Press.
Hancher, L. and C. Reichmann (2018). ‘Capacity Mechanisms andAuctions’, in L. Hancher, A. de Hauteclocque,. and F.M. Salerno(eds.). State Aid and the Energy Sector, Oxford: Hart.
Interviews with representatives of the Commission, Council,
European Parliament and stakeholder groups, February 2019.
For more information, please contact Per Ove Eikeland(poeikeland@fni.no)