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European Commission - Fact Sheet

State Aid: sector inquiry into capacity mechanisms – frequently asked questions

Brussels, 29 April 2015

The European Commission has launched a state aid sector inquiry into Member States' measures to ensure sufficient electricity supplies (so-called "capacity mechanisms"). The sector inquiry, the first under EU state aid rules, will examine in particular whether capacity mechanisms ensure sufficient electricity supply without distorting competition or trade in the EU's Single Market.

What is a sector inquiry?

The purpose of a sector inquiry is to achieve a better understanding of a particular sector of the economy or a particular state aid measure. The Commission's State Aid Modernisation initiative launched in May 2012 introduced the possibility of conducting state aid sector inquiries in situations where state aid measures may distort competition in several Member States, or where existing aid measures are no longer compatible with the regulatory framework.

In a sector inquiry, the Commission uses its market investigation tools to obtain the requested information from public authorities and market participants. While several antitrust sector inquiries have been carried out, also in the energy field, this is the first looking at a sector from a state aid perspective.

Why launch this sector inquiry?

An increasing number of Member States are introducing capacity mechanisms to encourage investment in new power plants and/or ensure that power plants continue to operate. Adequate capacity to produce electricity is needed to avoid black-outs and ensure that electricity supply meets demand at any time.

However, depending on how they are implemented in practice capacity mechanisms also have the potential to fragment the EU Single Market, distort competition by favouring certain producers or types of technology, and create barriers to trade across national borders. The Commission has therefore decided to launch a sector inquiry to better understand these measures and ensure compliance with EU state aid rules.

In particular, the sector inquiry will enable the Commission to:

  • collect the views not only of Member State authorities as in standard state aid cases, but also of stakeholders such as electricity generators, suppliers, network operators and demand response providers to inform the Commission of problematic issues;
  • identify design features that may distort competition between capacity providers (e.g. between power generators and demand response operators) and distort cross-border trade;
  • promote competitive and market-based capacity mechanisms that complement the internal energy market rather than divide it; and
  • ensure Member States respect state aid rules when designing and implementing capacity mechanisms.

The sector inquiry will also support future policy and legislative initiatives by providing a clearer picture of issues in this area. In particular, the Commission is considering the development of an EU-wide harmonised framework for assessing the adequacy of the electricity system, and its ability to meet demand.

What is the link between this sector inquiry and the Energy Union strategy?

The Energy Union means making energy more secure, affordable and sustainable. Among its main objectives is the free flow of energy across borders and secure energy supply in every EU country, for all households and businesses. It also aims to put Europe at the forefront of renewable energy production and the fight against global warming.

The sector inquiry aims to consolidate the Energy Union's objectives of secure and affordable energy supplies by ensuring that capacity mechanisms are competitive and market-based, as set out in the 2014 Energy and Environmental State aid Guidelines in the section on generation adequacy.

What is the timeline for the sector inquiry?

The Commission expects to publish a draft report for consultation around the end of the year, and a final report in summer 2016.

What are the different models of capacity mechanisms?

There are various forms of capacity mechanisms. For the purposes of this inquiry, the Commission proposes to distinguish six categories.



Figure 1: Taxonomy of capacity mechanisms

1: Tender

This is a 'targeted' mechanism because it provides support to the additional capacity expected to be required on top of what the market provides, rather than providing support to the market as a whole.

It is a 'volume-based' mechanism because the volume required is determined at the outset.

Typically, the beneficiary of such a tender receives public financing for the construction of a power plant and once the new capacity is operational, he operates in the wholesale market as any other market participant (without a guarantee that the electricity will be sold). However, a long term power purchase agreement to finance new capacity, concluded with the involvement of a public authority, might also fall within this category.

2: Reserve

Another targeted, volume-based mechanism is the 'reserve' model. In this model the capacity contracted is held in reserve outside the market and is only activated to produce electricity when necessary (for example when there is no more capacity available in the market).

3: Targeted capacity payment

A third variant of the targeted approach is the 'targeted capacity payment' model. This is a 'price-based' mechanism because the price of capacity is set by a central body, not by the market. This price is then paid to a subset of capacity operating in the market, for example only to a particular technology type, or only to capacity providers that meet specific criteria.

4: Central buyer

This is a 'market-wide' mechanism because it provides support to all or at least the majority providers of capacity in the market (since there may still be some restrictions on eligibility – for example because some market participants receive alternative support).

The volume of capacity required is set at the outset and the market determines the price at which this volume can be provided through a central bidding process.

5: De-central obligation

This is another market-wide, volume-based mechanism. The difference compared to the central buyer model is that in a de-central obligation model there is no central bidding process to establish the price for the required capacity volumes. Instead, an obligation is placed on market participants (for example electricity suppliers/retailers) to contract sufficient capacity to cover the demand of their customers. They must then make their own arrangements to contract the capacity they require to meet their obligation.

6: Capacity payment

This is a market-wide, price-based model, in which the price for capacity expected to achieve sufficient investment in the market is fixed, and then the market reacts to the price so that the volume brought forward may vary.  

Has the Commission already applied state aid rules to capacity mechanisms?

Based on a staff working document on generation adequacy published in November 2013, the Commission developed assessment criteria for capacity mechanisms for the first time in the 2014 Energy and Environmental State aid Guidelines.

On this basis, the Commission approved the UK's capacity mechanism for Great Britain in July 2014. The Commission is currently also in contact with several other Member States on the state aid assessment of existing or planned capacity mechanisms.

 

How did the Commission choose which Member States to include in the sector inquiry?

The Commission has selected the Member States to include in the sector inquiry on the basis of three considerations:

  • the existence of a capacity mechanism or plans to introduce a mechanism;
  • the need to include the various different models of capacity mechanisms applied in the EU; and
  • the impact of the existing or planned capacity mechanism on competition and cross-border trade.

Therefore the sector inquiry will initially focus on Belgium, Croatia, Denmark, France, Germany, Ireland, Italy, Poland, Portugal, Spain and Sweden.

The Commission may extend the sample of Member States at a later stage if the preliminary results point to relevant developments in other markets.

 

More information on the sector inquiry into capacity mechanisms is available at:

http://www.ec.europa.eu/competition/sectors/energy/state_aid_to_secure_electricity_supply_en.html


MEMO/15/4892

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