Regional capacity markets in the EU: Why and how?

As capacity markets are gaining momentum in Europe, attention is turning to their cross-border coordination. To explore the potential for capacity markets’ regionalisation, the FSR hosted an online debate Regional capacity markets: Why and How ?

The session examined recent changes in the EU regulatory framework as regards capacity markets’ coordination, the benefits of integrating capacity markets across borders, as well as the current barriers – and solutions – to further coordination.

Hosted by Leonardo Meeus, the debated started with a presentation of the FSR working paper «Three steps to a regional capacity market in the EU» (Menegatti et Meeus, 2025) by Emma Menegatti. Then, panelists from three key voices were invited to react: Miriam Stallone (European Commission, DG ENER), Marco Foresti (ENTSO-E), and Daniel Ihasz-Toth (ACER). Online participants were also invited to react through live polls.

Why to improve cross-border coordination between capacity markets?

We expect more and more capacity markets, and their role is being recognized as structural, noted Miriam. However, they are still designed and operated at the national level. In this context, a lack of cross-border coordination could unnecessarily increase capacity procurement costs for EU consumers.

In the FSR working paper presented, Emma outlines two main coordination issues. First is the risk of national over/under procurement of capacity, due to, for example, the use of conservative assumptions in the dimensioning of capacity markets demands. Daniel referred to the recent Security of Electricity Supply report, in which ACER estimated that a perfectly coordinated dimensioning can reduce by up to 70% the additional capacity required in the EU. Second is the risk of not selecting the cheapest capacity across borders, due to assumptions made years ahead on future cross-border trade. Reflecting on Marco’s comments, Leonardo added the risk of increasing market complexity and transaction costs, as market participants have to consider multiple and heterogeneous support schemes.

The audience agreed with the arguments: around 80% agreed with at least one. The panelists also agreed, and argued that the current framework does already provide room for cross-border coordination.

Current EU regulatory framework: already room for coordination

First, coordination currently takes the form of explicit cross-border participation. As reminded by Miriam, Member States should allow for foreign resources to participate in their national capacity markets. However, some Member States are still lagging behind in the implementation of this rule, or implementing it in a simplified manner (as we noted in the Policy Brief ‘An easy fix to streamline capacity markets’ published in 2024). Marco commented that indeed, TSOs face difficulties in implementing explicit cross-border participation, seen as one of the most complex requirements. The amount of capacity that should be procured abroad corresponds to the “Maximum Entry Capacity” (MEC). According to Emma, this value has the shortcoming of being defined years-ahead through a modelling exercise prone to important uncertainties. Moreover, MEC values are currently often defined at the national level, rather than at the coordinated regional level (by RCCs using the ERAA scenarios). Daniel reminded that we only had one iteration so far of the RCCs computed MECs, and not yet based on the so called “with CM” scenario (foreseen by the methodology) so we should give the implementation a chance to improve in the future.

Second, the new State Aid framework provides a push for capacity markets’ harmonisation. The Clean Industrial Deal State Aid Framework (CISAF) – referred to by Miriam – was published in 2025 following the capacity markets’  Streamlining initiative introduced in the 2024 Electricity Market Design reform. As noted by all panelists, the CISAF provides a new basis to incentivise more capacity markets’ harmonisation. It includes a “checklist” of proposed best practices design features that Member States should meet for a fast-track State Aid approval. This constitutes a new, crucial, guidance on important capacity market design elements such as contract design and cost allocation. Daniel noted that there are certainly best practices emerging that TSOs could apply, for example as regards de-rating factors and penalty regimes. Marco explained TSOs are already discussing which design features can be more easily harmonised.

Third, the new State Aid framework provides an important push for “Europeanized” capacity parameters. It invites Member States to use ACER benchmark VOLL and CONE values to determine their reliability standard. In addition, it suggests using the ERAA as a basis in their capacity market’s parametrisation: for setting the capacity demand, and the de-rating factors. Relying on reliability standard objectives based on coordinated parameters, as well as capacity demand values set by a single coordinated assessment (ERAA) can limit the risk of capacity over-procurement stemming from the use of individual national assessments and assumptions.

Fourth, the revision of the ERAA methodology is expected to make it more broadly used by Member States.  Past ERAA editions only partially met the European methodology, and only the last edition (2024) was approved by ACER. Although ERAA was , it has not yet been commonly used by Member States to parametrize their capacity markets, and they have preferred relying on complementary national assessments with tailored assumptions. Common adequacy assessments need to be acceptable for all concerned Member States, i.e. seen as realistic enough for their procurement horizon, argued Emma.  According to Daniel, the revision of the ERAA methodology will provide important improvements. This includes the addition of a “Trends and Projections” scenario, to account for the actual pace of the energy transition, complementing the current reference scenarios based on NECP targets.

Should we move beyond the current regulatory framework?

In the FSR working paper presented, Leonardo and Emma outlined shortcomings of the current regulatory framework.

They propose to move from national to regional capacity markets. They outline three “regionalisation” steps: 1. Pooling supply bids at the regional level and select resources with a single regional clearing, 2. Setting the capacity demands at the regional level, and 3. Letting market participants build the capacity demand (decentralized model). Step 1 would help selecting the cheapest capacity across borders; Step 2 and 3 would help limit further the risk of over(or under) procurement of capacity.

The panelists discussed several barriers or prerequisites to the regionalisation of capacity markets. First is the need to agree on a harmonized capacity market design and product. As noted above, progress on harmonization is expected. Marco however argued that some of the current differences in designs stem from national specificities and policy choices, which makes it difficult to agree on a fully fledged harmonized design across Europe. Daniel pointed out that with experience some design choices prove to be better and exchanging on best practices through, for example, regional forums or initiatives, could help with design convergence. Second is the need for Member States to trust the availability of imports during scarcity situations, raised by Marco. How much imports each Member States get during common scarcity periods should be clearer, argued Emma. Third is the need to agree on how to share the costs across Member States, which has proven to be difficult in other processes as noted by Miriam. Finally, regionalisation raises numerous questions in terms of governance and operation (for example: approval of scenarios, parametrization) as pointed out by Daniel.

More concretely, regionalisation could start with a regional initiative. As reminded by Marco, Security of supply remains a national prerogative according to EU treaties. As such, regionalisation of capacity markets can only happen if Member States drive these initiatives because they see more benefits than risks. Miriam pointed out that the current framework neither prescribes nor prevents the integration of capacity markets across borders. So far, we haven’t seen any concrete examples of pilot projects implemented on the ground especially between several interconnected EU countries applying capacity mechanisms and that share highly simultaneous scarcity periods within the same region. Such a regional initiative would help test out the new model, and making progress on the several political and practical barriers. If the initiative proves successful, additional Member States could join, eventually leading to EU-wide integration. This “bottom-up” path was the one followed to integrate wholesale and balancing energy markets.