Market dynamics
Article 18 of 20 · Energy markets and market dynamicsCapacity markets in Europe: a guide for businesses
Direct answer
A capacity market, also called a capacity mechanism, is an arrangement in which a central buyer pays not only for electricity delivered, but also for available capacity kept in reserve. This keeps enough dispatchable power on standby for moments when solar and wind fall away. The Netherlands has no such market and relies on the energy-only market; countries such as the United Kingdom, France, Poland, Ireland and Italy do have a capacity mechanism.
- Clear definition
- Data-driven assessment
- Risks and opportunities visible
- Practical next steps
Capacity markets in Europe: scattered information versus Energy Intelligence
An electricity system must keep supply and demand in balance at all times, including on a windless winter evening. Solar and wind then deliver little, while demand is high. The question becomes: does a dispatchable gas plant earn enough to stay open, even if it runs only a few days a year? This matters to policymakers and grid operators who safeguard security of supply, and to everyone who depends on a stable power supply.
- In a capacity market a plant is paid for being available, on top of its earnings from selling electricity; in an energy-only market only sold electricity counts.
- The Netherlands has no capacity mechanism and relies on the energy-only market; the United Kingdom, France, Poland, Ireland and Italy have introduced a form of one.
- Under EU rules a country may only introduce a capacity mechanism once an independent assessment shows a shortfall in security of supply.
Insight
Traditional approach
Information is scattered across portals, documents, invoices or separate spreadsheets.
Modern approach
Data, context and interpretation are brought together into a clear decision picture.
Decision-making
Traditional approach
Choices are made based on averages, assumptions or occasional analyses.
Modern approach
Scenarios, KPIs and current measurement data make the trade-off more concrete and repeatable.
Follow-up
Traditional approach
Actions often stay non-committal or disappear into separate reports.
Modern approach
Follow-up actions, monitoring and reporting are linked to the same energy data.
What is a capacity market?
A capacity market separates two things that are often bundled together: delivering energy and being available. In an ordinary energy-only market a plant earns only from the electricity it sells. A plant needed only a few days a year earns little and risks closing. A capacity mechanism adds a second payment: a fee for keeping capacity on standby, whether or not that capacity is actually used. This keeps reserves available for peak moments. Besides conventional plants, storage and demand response, where large consumers temporarily reduce their demand, can also take part in such a mechanism.
- The payment is for availability, not for electricity actually delivered.
- It comes on top of ordinary earnings from the energy market.
- The aim is security of supply: enough dispatchable power when solar and wind fall away.
- Storage and demand response can take part too, not just gas plants.
Which forms exist, and why do countries introduce them?
Broadly there are two forms. With a strategic reserve a country keeps a limited share of capacity outside the ordinary market, used only in an emergency. With a market-wide capacity market all capacity can take part: providers offer their availability, often through an auction years ahead, and those selected receive a capacity payment. The United Kingdom, for example, uses auctions four years ahead plus a top-up just before the delivery year. Countries introduce such a mechanism when they fear the energy-only market gives too little incentive to keep dispatchable capacity open, now that coal and gas plants are closing and the share of weather-dependent generation is rising.
- Strategic reserve: capacity outside the market, only for emergencies.
- Market-wide capacity market: all providers can compete, often through an auction.
- Auctions often run years ahead, so investors gain certainty.
- Reason to introduce one: concern that the energy-only market yields too little reserve capacity.
What does this mean for your business in the Netherlands?
The Netherlands currently has no capacity market and relies on the energy-only market: producers earn from the electricity they sell, and grid operator TenneT safeguards security of supply, partly through reserve capacity for balancing. So you do not deal with a capacity payment directly. Indirectly you do. The debate on security of supply runs at European level, because grids and markets are interconnected. If a neighbouring country chooses a capacity mechanism, this can influence prices and investment in the region. For your business the key point is: understand why security of supply costs money, so you can follow the wider debate about your energy bill.
- In the Netherlands there is no capacity payment; the energy-only market leads.
- TenneT safeguards security of supply, partly through reserve capacity for balancing.
- European markets are interconnected, so neighbouring countries' choices affect the region.
- The security-of-supply debate plays out at EU level, not only nationally.
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