Model-Based Analysis of Possible Capacity Mechanisms until 2030 in the European Internal Electricity Market

This paper uses the PRIMES model, modified to simulate Cournot competition under conjectural variations of the EU Member-State interlinked markets, to assess scenarios that assume the implementation of capacity remuneration mechanisms in the EU electricity market. The analysis begins with identifying the optimum level of investments to the 2030 horizon that ensure capacity adequacy, assuming a Reference scenario of EU energy system developments. We then simulate the operation of a wholesale energy-only market to estimate the ability of these investments to recover their capital cost. We then estimate the amount of capacity remuneration required to covering for the missing revenue margin and we study the implications from hypothetical asymmetric remuneration across the Member-States of the EU. The paper concludes that remuneration of flexibility services by generation units must be the priority in the context of growing penetration of renewables, and that asymmetric implementation of CRM in the EU internal market is likely to imply higher costs and significant market distortions.