Electricity market design is back. On the agenda, some of the big questions that need to be addressed as Europe works on delivering its ambitious, legally binding 2050 climate neutrality target, include:
- How do we ensure adequacy and reward flexibility in a decarbonised electricity system?
- How do we make sure that electricity gets to where it is needed as efficiently as possible?
- How do we build a market that minimises system costs whilst staying liquid and investable?
Optimising Europe’s power market now and in the future requires thinking about some of the key, cross-cutting issues facing the sector. In the past week, Eurelectric has positioned itself as a clear thought leader in this space, with the publication of a joint discussion paper with Compass Lexecon looking at the opportunities, risks and enablers of integrating Capacity Remuneration Mechanisms at a regional level. We’ve also shared our thoughts on how to minimise electricity system costs ahead of the forthcoming White Paper from the European Commission on Deeper Market Integration.
This week’s #FridayFeature takes a closer look at these two publications.
Markets are back
A secure, decarbonised power system cannot rely on renewables alone. It also needs flexible, reliable and affordable capacity, available when and where it’s needed.
Enter: capacity remuneration mechanisms (CRMs). CRMs reward generators or demand-side actors for being available during system stress, designed at a national level and in accordance with specific national requirements and policies. Across Europe, CRMs have therefore taken different forms – from market-wide capacity auctions in Poland and Belgium to strategic reserves in Germany and Sweden.
The Clean Industrial Deal State Aid Framework (CISAF) introduces a ‘target model’ for a faster approvals process for CRMs, as these fall under the EU’s state aid rules and therefore must be approved by the Commission prior to implementation at a national level. As Europe’s power market evolves – and an increasing number of Member States consider the implementation of CRMs – then the CISAF target model approach could, in theory, lead to greater alignment of CRM rules across European countries.
Market design day
To facilitate a forward-looking discussion on the future of electricity markets in Europe, last week, Eurelectric gathered over 80 participants, including DG COMP, DG ENER, Member State ministries, regulators, TSOs and market participants, for our annual Market Design Day in Brussels.
This year’s centrepiece? A joint Eurelectric–Compass Lexecon discussion paper exploring the feasibility and benefits of, and roadblocks facing, the regional integration of CRMs.
The takeaway: regional integration on capacity adequacy could, in theory, benefit Europe – but it’s not without its hurdles.
The case for regional coordination
The core idea is simple: just like energy markets, capacity mechanisms could benefit from regional integration. But what would that actually look like?
Our joint paper looks at options for closer integration, from a fully national approach to capacity adequacy at one end of the spectrum, through increasing harmonisation of CRMs and ending in two options for regional capacity mechanisms:
- Market Coupling of CRMs: Countries would continue operating their own national CRMs according to their own (harmonised) methodologies, but auctions would be coordinated or coupled – similar to how electricity markets function today.
- Fully Integrated Regional CRMs: This more integrated model would involve joint adequacy assessments, shared demand forecasts and coordinated capacity procurement across countries.
In theory, both models could deliver cost savings by pooling resources and avoiding over-procurement. The more coordinated the approach, the greater the theoretical benefits from integration.
However, any such move would need to address some fundamental barriers. A regional approach to CRMs would require significant trust between participating Member-States and a great deal of coordination on both methodologies and market functioning, considering issues from agreeing on how to set de-rating factors, to deciding what happens during scarcity events, to figuring out who pays what when capacity flows across borders.
As the paper concludes: moving towards regional CRMs can only happen with political buy-in, trust and much greater harmonisation across borders on issues relating to capacity adequacy. A voluntary, gradual approach to regional integration, starting with the full implementation of explicit cross-border participation in CRMs as mandated in the Electricity Regulation and potentially harmonising methodologies around the CISAF target model, would be the place to start – if Europe is to start moving towards a regional approach on CRMs in the long run.
Deeper integration to reduce system costs
With the European Commission set to release its White Paper on Deeper Market Integration by early 2026, this week Eurelectric set out its thoughts on how to optimise Europe’s electricity market and minimise system costs in a new position paper.
In this, we call for the evolution of Europe’s electricity market to reflect the realities of a decarbonised, decentralised, and digital power system, through:
Investing now to reduce long-term system costs
Minimising system costs in the long-term means prioritising investments in flexibility, digitalisation and electricity network capacity and reinforcement now. Accelerating the electrification of demand should also be a key priority.
Send smarter – not disruptive – locational signals
We foresee a potential role for locational signals impacting investment decisions for new generation and flexible assets. These could be implemented as part of the existing market design through targeted locational incentives included within support schemes, better usage of locational signals in connection charges, or through a better bidding zone review process that fully involves stakeholders and bases its analysis on long-term scenarios and a number of reconfiguration options. Locational signals that impact operational decisions should be avoided. Equally, Eurelectric does not support a shift towards nodal pricing in Europe, which would create significant disruption in Europe’s electricity market and create uncertainty for new and existing assets alike.
Simplify governance, not complicate it
Effective integration doesn’t mean more red tape. Eurelectric advocates for enhanced cooperation among Member States, regulators and system operators. But any new governance framework must remain lean, efficient and transparent. The goal must be faster decision-making, rather than creating additional institutional complexity.
In short, Eurelectric is advocating for refinement with purpose. Europe’s power system is already under pressure from electrification, renewables and digitalisation. Future-proofing our markets means preserving the core strengths of the existing market design while upgrading its ability to handle the evolving structure of the electricity market, attract capital, and deliver on Europe’s legally binding climate neutrality objectives.
Conclusion
As Europe’s power system evolves, Europe’s electricity market must evolve too. Our future electricity system will inevitably be cleaner, more flexible and more interconnected.
Eurelectric will continue working with stakeholders and institutions to shape this evolution from regional CRMs to locational signals, from governance to grid investment. Because as we move toward a smarter, cleaner power system, markets aren’t just back, they’re essential.
This blog post was originally published as part of Eurelectric’s LinkedIn Friday Features. Subscribe here to stay updated and never miss an edition.
Disclaimer: This article is for communication purposes only and may not reflect Eurelectric positions. Any positions taken in this article shall not be attributable to Eurelectric’s official positioning. Official Eurelectric positions are reflected only in position papers published here.