This report aims to enrich the debate by increasing the understanding of this complex topic among Environmental NGOs. The report analyses existing and potential capacity remuneration mechanisms (CRMs), a policy instrument capable of altering the energy market by creating additional revenue streams for capacity. Although some member states in Europe are already using certain forms of capacity mechanisms under what we call a ‘traditional approach’, this report builds the argument that a ‘modern approach’ to CRMs could be proposed.

Europe faces a great challenge: cost-efficiently decarbonizing the power sector in by 2050, while remaining to ensure security of electricity supply. In line with the decarbonisation goal, European member states aim to significantly increase the share of variable renewable energy in Europe’s overall energy mix. In order to reach these goals, investments are not only needed in low-carbon technologies, but also in the flexible resources that help deal with the expected increase in supply variability.

However, EU governments pursue additional objectives (EU energy goals: sustainability, security of supply and affordability) and adequate investments to satisfy all three are missing. Which market design can deliver these investments, and simultaneously help to reach all the abovementioned goals most effectively is hotly debated.

The report describes the characteristics of a ‘modern approach’, which is more likely to improve the current market model and would help to achieve all energy policy goals, by better taking into account the electricity systems’ needs that arise as more variable renewables are integrated. It is stressed in this report that modern capacity mechanisms should not be seen as a replacement of other measures to improve the investment framework, like improving the functioning of the Internal Energy Market. Rather, we focus on the current situation in Europe, which is that CRMs are increasingly being implemented, and point to ways in which this process can be improved upon. In other words, while taking different measures (next to modern CRMs) to improve the European investment framework for low carbon technologies is certainly important, that would in itself will not solve the problems caused by the increased prevalence of traditional CRMs in Europe.

Download Towards a functioning low-­carbon investment framework in Europe: the need to modernize increasingly prevalent traditional capacity remuneration mechanisms (July 2014)