In an ideal electricity market, the energy available in the system would fully meet consumers’ power consumption every hour of every day. In the real world, however, there are times when the system’s energy supply is not sufficient to meet demand. When this occurs there are power plants on standby that are activated to generate additional power. To ensure that these plants keep their facilities up and running in case of a supply-demand shortcoming, support schemes are introduced- known as capacity mechanisms (CM).
What are capacity mechanisms?
In more technical terms, a capacity mechanism is a measure designed to ensure resource adequacy, namely, the ability of electricity resources to meet demand, taking into consideration the demand forecast, generator availability and transmission constraints.
Paying facilities just to exist may sound strange, but it is fundamental to ensure a stable flow of electrons and avoid blackouts on the generation side. This is even more crucial for Europe’s evolving energy system. As Europe transitions to net-zero, these mismatches between supply and demand are expected to increase due to a growing share of renewable power generation. By 2030, solar and wind combined are expected to make up nearly 54% of Europe’s total power generation, with a further increase up to 71% by 2050.
When the sun doesn’t shine and the wind doesn’t blow, such mechanisms serve as an insurance for the power system and the European economy as a whole, to better secure power supply and prevent consumers’ disconnections and blackouts – as seen in Eurelectric’s study on energy security.
How do capacity mechanisms work?
Capacity mechanisms remunerate energy resources for their available capacity, typically through long-term contracts. These measures are classified as state aid. As such, they are agreed upon at the national level and require the approval of the European Commission’s Directorate General (DG) for Competition.
Traditionally, the main targets of such measures have been nuclear, gas and coal power plants as they are dispatchable resources. Today these mechanisms have been increasingly extended to hydropower, storage and demand-side flexibility.
What are the benefits of capacity mechanisms?
Today, capacity mechanisms are one of the main tools to:
- Ensure energy security: capacity mechanisms have become crucial tools for Europe’s security of supply as the number of peaking plants – those plants used only to answer peaks in electricity demand – are decreasing vis-a-vis growing renewables.
“The level of dispatchable capacity is expected to decline by 40% by 2050 as we decarbonise the energy system” – said Nicolas Leicht – Energy Economist at Aurora Energy Research at an event organised by Euractiv.
- Address flexibility needs: capacity mechanisms can also provide flexibility to the system by remunerating firm and flexible capacity to balance variable renewable generation.
- Lower cost of capital: having a capacity mechanism in place brings clarity for investors and helps reduce the risk related to the cost of capital.
- Contribute to system resilience: CM can also help the system in limiting the extent, severity and duration of system degradation following an extreme event.
Where are capacity mechanisms adopted?
Capacity mechanisms exist worldwide, and their popularity is growing. The first mechanisms appeared during the early 2000s within the US electricity system as well as the Unified Energy System of Russia. Since then, over twenty countries have adopted capacity mechanisms. In 2020, they covered “around 40% of installed power capacity in the United States, 50% in South America, and 80% in Europe” – shows the Renewable and Sustainable Energy Reviews.
EU power markets have been historically based on the energy-only market design model, but many countries have deemed it necessary to introduce capacity mechanisms to support investment, and to provide the politically desired level of security.
As in 2022, eight Member States had active capacity mechanisms in place in 2023: Belgium, Ireland, France, Italy and Poland implemented marketwide capacity mechanisms, while Germany, Finland and Sweden applied strategic reserves– reports ACER.
Strategic reserves, capacity markets and capacity payments are therefore the main types of support measures adopted in Europe. Let’s look at their differences.
What is the difference between strategic reserves, capacity markets and capacity payments?
Strategic reserves were the first mechanisms introduced by countries to keep traditional power plants – mostly coal and gas – open in case their capacity was needed for adequacy reasons. Such reserves were placed outside of the electricity market and paid for by the central authority.
They were targeted towards specific plants, but there quickly became a risk of countries activating them too often, as they can be used to not only manage resource adequacy but also reduce high prices. This created market distortions and diminished the business case for those energy resources not included in the reserves.
To avoid such misuse, capacity markets were introduced. In a capacity market, all technologies can participate through a competitive auction. Even resources from neighbouring countries are now eligible. The market participant with the best offer receives some remuneration for their firm capacity.
Lastly, capacity payments are administratively set payments where the central authority can pay all or some market participants for their firm capacity.
How has the regulation on capacity mechanisms evolved?
Public opinion on capacity mechanisms has shifted significantly in Europe, especially after the 2022-2023 energy crisis. The EU approach to these support measures has therefore evolved likewise, across three key regulations:
State Aid Law
Capacity mechanisms became more common in Europe a decade ago. In 2014, the EU chose to regulate capacity remuneration through state aid law, under the supervision of DG Competition to ensure that these measures do not pose risks to competition and trade.
According to Article 107 of the Treaty on the Functioning of the European Union (TFEU), “any aid granted by a Member State or through State resources in any form whatsoever which distorts or threatens to distort competition by favouring certain undertakings or the production of certain goods shall […] be incompatible with the internal market”. However, the same article allows for exemptions in case aid is granted to “facilitate the development of certain economic activities to the extent it’s not contrary to the common interest”.
As this exemption remained quite vague, the Commission decided to narrow its definition for the energy sector in the Climate, Energy and Environmental Aid Guidelines (CEEAG) in 2022. Such guidelines apply to state aid supporting the developments of economic activities that also improve environmental protection and support security of power supply, thus including capacity mechanisms.
State aid’s high level of abstraction creates challenges for the harmonisation of these measures beyond the national level. Nevertheless, these rules for a long time were the only means to control the adverse effects of CM designs. The EU Clean Energy for all Europeans Package sought to change this by adopting specific rules on resource adequacy.
Clean Energy Package 2019
The 2019 Clean Energy Package emphasised the need to restrict the abuse of capacity mechanisms by privileging the energy-only market and considering capacity mechanisms as a last resort measure to ensure resource adequacy.
To activate a capacity mechanism, Member States must prove the existence of an adequacy issue through a rigorous assessment. Before resorting to CM, countries are requested to present a plan to address the root causes of their problem through market reforms.
“This requirement reflects the recognition that markets, if well designed, free of regulatory distortions and sufficiently connected to the EU electricity grid, can provide the right amount and type of capacity to meet any demand” – says the European Commission.
If that was not enough, however, countries can then resort to strategic reserves and as a last resort to capacity markets.
Another requirement introduced by the package was to allow foreign resources from neighbouring countries to participate in the capacity mechanism, a concept known as cross-border participation.
Electricity market reform 2023
The 2022-23 energy crisis changed the rules of the game for capacity mechanisms. The price crisis triggered several market interventions, disrupted the business cycle and investments in new capacities. The very foundation of the energy market was questioned. As concerns over Europe’s energy security mounted, scepticism towards capacity mechanisms shifted. Markets with guidance on investments became the preferred option to not having markets at all.
The EU electricity market design (EMD) reform thus turned capacity mechanisms into a structural component of the electricity market and a key tool for ensuring Europe’s security of supply, and called for an acceleration in the approval process.
Clean Industrial Deal State Aid Framework 2025
In March 2025, the Commission took stock of current capacity mechanisms and released a proposal to accelerate the clearance process and harmonise design parameters across European markets. This proposal is known as the Clean Industrial Deal State Aid Framework (CISAF).
Although the CISAF could drive greater convergence across Europe and provide for a faster approval process, the requirements should minimise distortions and account for different system needs. In response to the public consultation on CISAF, Eurelectric proposed to:
- Account for a more granular assessment of the different energy system needs at national the level: The draft CISAF relies heavily on the European Resource Adequacy Assessment (ERAA). However, National Resource Adequacy assessments should also inform design choices, de-rating factors and other parameters, ensuring that national system specificities are fully considered.
- Improve the proposed cost allocation methodology: With the proposed methodology, CM costs could be allocated to hours with high prices without actual stress on the electricity system. Instead, we propose using stress periods defined ex-ante.
- Assess joint procurement of adequacy and flexibility on a case-by-case basis: The draft CISAF might lead Member States to procure flexibility and adequacy jointly by default. Instead, the necessity of a joint procurement should be assessed on a case-by-case basis, reflecting the specific conditions of each national system.
State of play of capacity mechanisms
Today, Europe has one third of capacity markets, one third of strategic reserves and one third of energy-only markets. In 2024 capacity markets secured 1793 GW of capacity with a third of payments going to clean and storage technologies.
To learn more, we will discuss this and more at our upcoming Power Barometer event in September 2025, register here.
Barriers to capacity mechanisms
Today there is no common vision at the EU level on how to ensure security of supply. Many EU countries introduced capacity mechanisms to support investments in firm and flexible technologies, and to provide the politically desired level of security. This, however, has led to a patchwork of approaches across Europe, with limited harmonisation, creating hurdles for an efficient cross-border participation.
Lack of design harmonisation
Even if the EMD reform opened capacity mechanisms to all new and existing technologies, there is not yet a common vision on their design. Several shortcomings remain in the capacity mechanisms implemented so far, such as:
- Barriers to the full participation of all types of capacities in capacity mechanisms in Europe, creating an uneven playing field;
- Hampered cross-border participation in most capacity mechanisms;
- Wrong signals for consumers as CM’s costs are generally passed on to consumers through a ‘flat’ fee over the delivery year, and do not reflect periods of peak demand and scarcity – which correspond to the periods for which assets have been contracted as part of the capacity mechanism.
Forgetting flexibility
Moreover, the current generic capacity mechanism design targets capacities providing adequacy services, without valuing their contribution to flexibility needs. As the need for system flexibility will significantly grow in Europe, contracting mechanisms may need to value capacities’ contribution to these flexibility needs to ensure that they are met. Joint procurement should therefore be assessed on a case-by-case basis though.
Lengthy approval process
State aid clearance is required through a complex and uncertain process which has not yet fostered strong harmonisation and coordination. The current approval process generally lasts at least six months, but the pre-notification period can reach up to two years according to the Commission. The latter includes all the early discussions with Member States where the design of the scheme is still in the making. This includes several rounds of exchanges with national actors and with the Commission’s services to make sure that the CM design aligns with EU legislation.
5 adjectives for a well-designed capacity mechanism:
- Market-based: remunerating capacity should be carried out in a competitive market, for prices to be allowed to move freely without distortive price regulation.
- Technology-neutral: all sources providing firm capacity should be allowed to participate in the market without discrimination. This includes generation technologies but also demand-side response and storage.
- Open to new and existing assets: market-access should be based on a level-playing field between both new and existing firm capacity providers.
- Cross-border participative: capacity mechanisms should be open to cross-border participation to drive regional cooperation, considering regional interdependencies
- Contract-enabling: the outcome of capacity mechanisms should be capacity contracts and not just a regulatory commitment.
Much remains to be done to improve these support schemes, harmonise them across Europe, and ensure that they cover all sources of firm capacity. But one thing is certain: capacity mechanisms are here to stay.
Disclaimer: This article is for informative purposes only and may not entirely reflect Eurelectric official positions. For formal positions, please consult our position papers here.