Coupling Europe's Capacity Markets

Abstract

European Member States are increasingly introducing national capacity mechanisms (CMs) to manage growing adequacy risks. However, isolated national CMs are inefficient in highly interconnected electricity systems, such as the European system. While progress has been made in facilitating cross-border participation by generation capacity in CMs, existing arrangements are prone to under- or over-investment and do not properly value the contribution of interconnection capacity to Member States' adequacy targets. In this paper, we propose a novel conceptual design for a coupled European capacity market that utilises the logic of flow-based market coupling. In a comparative analysis of different market design scenarios in an illustrative multi-zone case study, using a bespoke long-run equilibrium problem, we show that the proposed flow-based coupling of capacity markets reduces system costs by harnessing available capacity in neighbouring market zones while ensuring deliverability with respect to network constraints in all scarcity situations.

Figures (5)

• Figure 1: The proposed capacity market design features two layers: a national capacity market for long-term contracts and a coupled annual capacity mechanism allowing secondary trade of long-term contracts.
• Figure 2: Left: The annual, coupled capacity auction (zones $A$, $B$, and $C$) clears capacity offers $y^{\mathrm{cm}}_{i,z}$, produces capacity market prices $\lambda^{\mathrm{cm}}_{z}$, and net cross-border capacity obligations $p^{\mathrm{CO}}_{z}$ subject to the flow-based network constraints. Firm capacity may contribute to adequacy in different zones depending on the scarcity conditions and transmission constraints. Right: A joint assessment of the scarcity events across zones determines the maximum coincidental system capacity requirement, lowering zonal capacity demands compared to isolated national assessments. "Scarcity at A" represents a scarcity situation in zone A and the state of other zones within the coupled region during A's critical scarcity event.
• Figure 3: Capacity markets restore investment levels in peaking units but risk over-procurement without coordinated cross-border participation; our proposed flow-based coupling (CM-FBMC) limits total build compared to CM-NTC. CM-NoCBP, CM-FBMC and CM-NTC reallocate investments across zones compared to CM-implicit.
• Figure 4: Net cross-border capacity trade by zone.
• Figure 5: Average consumer cost by zone, decomposed into energy, capacity, and ENS (€/MWh). “System” represents the average cost of all zones and enables comparison of total system costs.