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Capacity mechanisms must be accompanied by market reforms

Electricity "capacity mechanisms" that remunerate private providers for providing back-up energy to a country's power supply can distort the market, and will no longer be permitted in the EU unless accompanied by market reforms, the European Commission has said.02 Dec 2016

EU member states need to improve the way that they assess the need for such mechanisms, the Commission said, as it completed an inquiry into the capacity mechanism sector. The Commission launched the inquiry in April 2015, to examine whether capacity mechanisms ensure sufficient electricity supply without distorting competition or trade.

The Commission has also created guidance on how to make the design of mechanisms deliver on security of supply while minimising competition distortions.

Capacity mechanisms must not become a "backdoor subsidy for specific technologies", the Commission said. In many cases countries have failed to check whether the mechanisms are actually needed before introducing them, and have failed to reform their markets in ways that could remove the need for such support, it said.

Any capacity mechanism must match the problem identified by the country, and whether it faces short- or long-term supply issues, the Commission said. The price must be determined through a competitive process, and provision of the mechanism must be open to providers from other EU countries, it said.

The inquiry has found that many of the capacity mechanisms introduced in the EU have not been designed to solve a clearly identified security of supply problem, the Commission said.

"Member states' assessments of the security of supply situation are insufficiently thorough and not always based on an economically justifiable target for security of supply," it said. "Since the inquiry has found that a number of existing capacity mechanisms have major shortcomings, the Commission will continue to work with the member states to bring these schemes in line with state aid rules. In addition, any new plans of member states to introduce capacity mechanisms will be assessed in light of the insight gained from the sector inquiry."

Last month, the Commission approved an amendment to a capacity mechanism in France. The country had been asked to change its original plans to maintain competition in the sector.