Europe is in the middle of a debate that will reshape its electricity markets. National authorities are gradually implementing EU policy initiatives with the objective of completing the single market in energy and achieving European renewable energy targets. At the same time, growing integration of intermittent generation and a general distrust of markets is prompting governments across the EU to review possible interventions to protect security of supply, foremost among which are capacity mechanisms. The debate about the future of capacity mechanisms is particularly strong in Europe’s largest energy market, Germany, where electricity generators have closed or mothballed a number of conventional plants over the last few years as ever more renewable generation comes on the market. A reduction in supply capacity is a natural consequence of a market marked by excess supply—as is the case at the moment. Yet the question emerges as to what extent the liberalized energy-only market coupled with significant intermittent renewable generation will be able to incentivize efficient investments in conventional generation going forward and therefore to “keep the lights on” in the long-term. In the latest issue of NERA’s Energy Market Insights, Senior Consultants George Anstey and Marco Schönborn describe the recent introduction of a capacity mechanism in Britain and draw out lessons for continental-European markets undergoing a similar process, with particular reference to the German market.

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This article subsequently appeared in IPPSO Facto magazine, published by the Association of Power Producers of Ontario.