European security of electricity supply policy in the context of increasing volumes of intermittent generation

Abstract

In response to plans in France and the UK to implement a capacity mechanism and the recent implementation of a small strategic reserve in Germany, we address the question of the cross-border effects of national implementation of a capacity mechanism in Europe’s interconnected markets. We model some of the effects that may arise when different countries implement different types of capacity mechanisms. We draw conclusions with respect to generation adequacy policy in Europe. Capacity markets appear to be more effective than strategic reserve in attracting investment and securing supply in the long run, but may discourage investment in neighboring countries. A strategic reserve is easier to implement and does not have this negative externality, but its dynamic effectiveness is less certain and its effect may leak away across the border. The negative externality of a capacity mechanism may put pressure on neighboring countries to also implement a capacity mechanism. However, the proliferation of different types of capacity mechanisms – every category of capacity mechanism can be implemented in a myriad of different ways – creates a significant risk trade between countries will be increasingly distorted. Considering also the regulatory uncertainty that is brought about by this process and the risk of regulatory failure with implementing the more sophisticated capacity mechanisms such as capacity markets and reliability options, the positive effect on investment is not a given.