Three steps to a regional capacity market in the EU

The electricity market design reform repositioned capacity markets: they are no longer regarded as last-resort, temporary measures. In practice, their perimeter is also expected to expand, with at least seven additional countries considering introducing one. This shift opens the door for capacity markets to become a key driver of investments and a central influence on the EU electricity mix. Yet, the national nature of these schemes can result in costly cross-border coordination inefficiencies. Against this backdrop, the idea of integrating capacity markets across borders, or “regionalisation”, has attracted growing attention from stakeholders. This paper contributes to that debate by proposing three steps toward the regionalisation of European capacity markets: (1) regional supply pooling, (2) centralized regional capacity demand, and (3) decentralized capacity demand. We assess these steps against two policy objectives: selecting the least-cost generation capacity across borders, and avoiding under- or over-procurement. We moreover discuss prerequisites to their feasibility, and drivers of political acceptability.