Capacity Remuneration Mechanisms: if climate-aligned, a valid tool to invest in a decarbonised energy system

Hi Jacopo, thank you for accepting this interview with us. Let’s start with the basis. Can you clarify us how does energy storage contribute to the decarbonization of the European energy system, and what are the key benefits it brings to the table? 

Energy storage is an essential enabler of the energy transition. As more renewables are introduced into the system, the need for backup supply will increase. The energy system must become much more flexible, with solutions capable of energy shifting to accommodate high shares of wind and solar generation. Energy storage provides a solution to this, guaranteeing energy independence by maximising Europe’s own renewables utilisation in line with climate targets, minimising curtailment and ensuring critical system flexibility and energy shifting services over different timescales. Additionally, energy storage allows for industry decarbonisation by replacing polluting technologies.

Thanks to its vast membership base, EASE has a privileged observatory over the challenges energy storage providers face when deploying new projects. Can you explain us, why a better financial, legal, and political framework is needed to facilitate the deployment of energy storage technologies across Europe? 

More than ever, energy independence, security of supply, sector integration, and decarbonisation are guiding policymakers’ actions. The electricity market design needs to do justice to consumers and reap the benefits of low-cost green solutions. It is key to leave behind polluting fossil fuels, whose influence is dominating the price of electricity. Most system flexibility is currently provided by fossil gas, which has led to an insecure energy system and forced the European Union to depend on energy imports. There needs to be a change in paradigm, with the Clean Energy Package as a foundation, where energy storage becomes a critical part of the energy system. 

In this context, the scope of Capacity Remuneration Mechanisms, which still allows financial support to fossil fuel generators, needs to be tackled. 

What are Capacity Remuneration Mechanisms, and why are they important?

Capacity Remuneration Mechanisms (CRMs) are measures used by some Member States to temporarily publicly finance the reservation and construction of additional capacity in order to maintain sufficient resource adequacy in their electricity systems. This is done by paying generators, demand-side response aggregators, energy storage facilities, etc. to have capacity available for when demand peaks. The European Union minimises Member States’ ability to subsidise fossil generation through a carbon emission limit of 550 g CO2/kWh.

Does every European country have its own Capacity Remuneration Mechanism – and which technologies participate in them?

Less than half of the European Union Member States have a capacity market, but this includes some of Europe’s largest Member States, including Germany, France, Spain, and Italy, Unfortunately, most CRMs in Europe are dominated by fossil fuels, which subsidises both the operations of existing fossil generation and also the construction of new fossil generation.

In general, CMs across Europe heavily skew towards fossil gas, which have won over 80% of capacity bids in Italy, Ireland, and Belgium and nearly 95% in Germany. Notably, in Italy, Ireland, Belgium and Poland, their TSOs are awarding capacity contracts to construct new fossil gas power plants, which locks in the use of fossil fuels anywhere from an additional 10-15 years. All-in-all, green and non-fossil solutions, such as energy storage, play a very small role in Europe’s capacity mechanisms.

EASE Capacity Mechanism Assesment: Capacity Mechanism Allocation in Member States by Technology (%).

How are Capacity Remuneration Mechanism addressed in the Electricity Market?

The Electricity Market Design reform, proposed by the Commission in March 2023, envisions an increased role for Capacity Remuneration Mechanisms. Unfortunately, at the current state of negotiations, there are no provisions to significantly incentivise non-fossil participation in Capacity Remuneration Mechanisms. The European Parliament compromise text does not address decarbonising Capacity Mechanisms and the Council is discussing allowing derogations from the C02 emission limits set in the Clean Energy Package, which would allow capacity mechanisms to subsidise coal and squeeze out non-fossil solutions from accessing this source of public investment.

What is your recommendation for the EU policymakers?

Policymakers should not allow any derogation to the Capacity Remuneration Mechanism carbon emission limit. On the contrary, it is key to try to lower the carbon emission limit with the aim to ultimately phase out fossil fuel capacity providers completely.