Capacity Remuneration Mechanisms

Climate action| Financing the transition

CAN Europe, in its latest working document “Towards a functioning low-carbon investment framework in Europe: the need to modernise increasingly prevalent traditional capacity remuneration mechanisms”, has analysed existing and potential CRMs, looking at their potential impacts on the functioning of the energy market and future investments. This briefing aims to briefly present the key conclusions, and to increase the understanding of this complex topic among environmental NGOs.

Europe faces a great challenge: cost-efficiently decarbonizing the power sector by 2050, while continuing to ensure security of electricity supply. In line with the decarbonisation goal, European Member States need to significantly increase the share of variable renewable energy (VRE) in Europe’s overall energy mix. In order to reach these goals, investments are not only needed in lowcarbon technologies, but also in the flexible resources that help deal with the expected increase in supply variability. An adequate framework to effectively deliver the required investments, while simultaneously reaching all the above-mentioned goals (sustainability, security of supply and affordability), is missing. Which energy market design would be best suited to incentivise those investments is hotly debated. An increasing number of Member States have introduced, or are discussing the introduction of new regulatory instruments in the form of Capacity Remuneration Mechanisms (CRMs). These policy instruments alter the energy market by creating additional revenue streams for capacity, generally with the goal of securing system adequacy. If wrongly designed, they lead to distortions in the functioning of the market, leading to overcapacity, high prices for consumers, lock-in to high-carbon infrastructure and a high dependency on continuous regulatory intervention.



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