The variation in capacity remunerations requirements in European electricity markets

Hickey, C, Bunn, D W, Deane, P, McInerney, C and O Gallachoir, B (2021) The variation in capacity remunerations requirements in European electricity markets. Energy Journal, 42 (2). pp. 135-164. ISSN 0195-6574

Abstract

This paper provides the first EU wide analysis of the variation in Capacity Remuneration Requirements throughout Europe which aim to resolve the “missing money” problems in various member states. The findings of this analysis point to an asymmetric investment case for gas-fired peaking power plants throughout the EU. Under the assumptions of the European Commission Reference Scenario, pan-European power optimisation and investment models are specified for 2030. The results show that future investment in gas generators will depend on the availability of capacity payments. Capacity remuneration mechanisms can provide this “missing money”, but we show that capacity remuneration requirements vary considerably across countries. We consider and model the impacts of country specific climate policy targets, sovereign risk, capital allowances, corporate taxes and future gas network tariffs on investor returns and therefore remuneration requirements. In the context of harmonised energy trading, this raises questions of how generation adequacy should be achieved, particularly in the context of higher penetrations of renewables.