This report introduces capacity mechanisms, a policy instrument for power markets, to a non-expert audience and considers their implications for meeting parallel objectives of security of supply and decarbonisation. It focuses on capacity mechanism developments in the EU and is directed at those who want to advance climate objectives, but who have a limited background in power markets.

Our review suggests that capacity mechanisms risk undermining parallel energy and climate objectives by locking in dependence on high-carbon, inflexible power generation assets. The introduction of these tools is often politically motivated and not based on a rigorous analysis of their need. Finally, the uncoordinated introduction of capacity mechanisms risks undermining wider efforts to integrate energy markets, which, paradoxically, are meant to ensure a more efficient use of resources and improve security of supply.

As a number of EU member states are moving ahead with the design and implementation of domestic Capacity mechanisms the European Commission has launched an investigation into these developments. Its findings will feed into its electricity market redesign proposals for the end of 2016. This is therefore a key moment to influence this process.

Report by the Overseas Development Institute