In the evolving landscape of the European electricity market, capacity mechanisms have emerged as a pivotal instrument, particularly in South-Eastern Europe (SEE). These mechanisms are designed to ensure security of supply by compensating for the availability of energy resources rather than their actual production. However, their implementation raises critical questions regarding their role in fostering a stable energy system or contributing to market distortions.
The resurgence of capacity mechanisms on the policy agenda is largely driven by the challenges faced by energy-only markets. These markets often fail to provide sufficient revenue certainty for essential assets that are infrequently dispatched. As SEE transitions towards an increased share of variable renewable energy sources, the operational hours of dispatchable plants have significantly decreased, while the reliance on these plants during periods of high demand has intensified.
Current data indicates a stark contradiction within several SEE systems, where dispatchable thermal assets now operate at load factors ranging from 25% to 35%, compared to historical figures of 60% to 80%. Despite this decline in operational hours, these assets are still expected to be available during peak price events, which can exceed €300–500/MWh and occasionally reach above €1,000/MWh. This dependency underscores the unpredictability of revenues in an energy-only framework.
Without capacity remuneration, the logical economic response for asset owners may be underinvestment or premature exit from the market. Such actions could lead to heightened adequacy risks and increased volatility within the energy system. Consequently, capacity mechanisms serve as a necessary response to this market failure; however, their design is crucial in determining whether they promote flexibility or reinforce inefficiencies.
South-Eastern Europe approaches capacity mechanisms from a fundamentally different context than Western Europe. Many countries in this region still heavily depend on lignite and coal for maintaining system adequacy. These resources are often intertwined with political sensitivities and social implications, particularly concerning employment and regional development. Thus, there is a risk that capacity mechanisms may inadvertently prolong the operation of these legacy assets rather than facilitate a transition towards cleaner alternatives.
The absence of structured capacity frameworks also leads to its own set of market distortions. State-owned utilities frequently maintain loss-making plants on their balance sheets for security purposes, providing implicit support without adequate transparency or market discipline. This practice undermines financial sustainability and obscures the true costs associated with ensuring security of supply.
From an economic perspective, capacity mechanisms should function akin to insurance contracts aimed at guaranteeing availability during scarcity events rather than subsidizing energy production. Essential design parameters include performance obligations, flexibility requirements, and cost containment strategies.
Recent stress events highlight the importance of such insurance mechanisms. During critical periods in 2024–2026, a limited number of hours accounted for a significant portion of system risk across various SEE markets. In some instances, fewer than 100 hours per year dictated adequacy margins and price spikes. Mechanisms that incentivize assets capable of operating during these peak hours can effectively mitigate volatility and reduce emergency intervention costs.
However, poorly structured capacity mechanisms can produce adverse effects. Excessively generous capacity payments may dampen scarcity pricing signals, discourage demand response initiatives, and hinder investments in storage and flexibility solutions. Furthermore, if these mechanisms lack technological neutrality or flexibility weighting, they may favor inflexible baseload assets over more responsive resources that are increasingly necessary for system stability.
Regional fragmentation poses another challenge for effective capacity mechanisms. Typically implemented on a national basis, these frameworks do not adequately account for cross-border support and shared risks within SEE’s interconnected electricity systems. This misalignment can result in over-procurement of capacity in certain countries while failing to recognize regional flexibility needs elsewhere. In an integrated market context, uncoordinated capacity mechanisms can disrupt cross-border electricity flows and investment signals.
The financial implications of capacity payments are substantial; even moderate payments ranging from €40 to €80 per kW annually can accumulate into hundreds of millions of euros at the system level. Ultimately, these costs impact consumers or taxpayers directly. Without regional coordination, there is a risk that multiple countries may end up paying redundantly for similar insurance coverage.
The strategic imperative for SEE lies in two main areas: firstly, redesigning capacity mechanisms to prioritize flexibility, availability, and emissions performance instead of merely rewarding existing capacities; secondly, ensuring that these frameworks are regionally aligned to prevent inefficiencies stemming from fragmentation.
A mechanism focused on flexibility would emphasize rapid ramping capabilities and reliability during stress conditions. This approach would allow gas plants, storage facilities, hydroelectric reservoirs, and demand response solutions to compete fairly within the market structure. While high-emission assets could still participate under strict performance criteria with gradually declining eligibility over time, it is crucial that all resources contribute effectively to system stability.
Integration with market coupling and balancing markets is equally essential; capacity mechanisms should enhance rather than replace scarcity pricing strategies. They must provide investment incentives while preserving short-term pricing signals—a delicate balance that remains attainable.
In SEE, there exists a political inclination to utilize capacity mechanisms as tools for delay rather than transition. Such an approach risks entrenching inefficiencies and delaying necessary adaptations within the energy system. Conversely, viewing capacity mechanisms as transitional instruments designed to phase out as storage solutions and demand response capabilities mature presents a more constructive path forward.
The distinction between effective insurance and detrimental distortion hinges on governance quality. Transparent, performance-based capacity mechanisms that are coherent across regions can stabilize SEE’s electricity systems during this transitional phase. In contrast, opaque or protectionist frameworks will likely become barriers to both decarbonization efforts and market integration.
