Capacity mechanisms have become a contentious element of European electricity market design, with the debate particularly visible in South-Eastern Europe. In principle, these schemes are intended to secure supply by remunerating availability rather than energy production. In practice, they intersect with decarbonisation, legacy asset protection, fiscal constraints, and electricity market integration.
Policy interest has returned because energy-only markets often struggle to provide enough revenue certainty for assets that are critical but rarely dispatched. As South-Eastern Europe increases its share of variable renewables, dispatchable plants tend to run fewer hours. At the same time, system reliance on those plants during stress periods has not declined.
Revenue uncertainty as dispatchable output declines
In several South-Eastern European systems, dispatchable thermal units now operate at annual load factors below 25–35%, compared with 60–80% historically. Despite lower operating hours, these plants are still expected to be available during extreme periods. Prices in such hours can rise above €300–500/MWh, and occasionally exceed €1,000/MWh.
The mismatch between low dispatch frequency and high availability requirements affects investment incentives. Without capacity remuneration, the economic response can include underinvestment or premature exit from the market. Uncontrolled exit would create adequacy risks and increase volatility. Capacity mechanisms are therefore positioned as a response to this market outcome.
Legacy coal and lignite risk in capacity design
South-Eastern Europe starts from different conditions than Western Europe when considering capacity mechanisms for adequacy. Many systems still depend heavily on lignite and coal to meet reliability needs. These assets are described as politically sensitive and socially embedded, including links to employment and regional development.
The concern is that capacity payments could be used to prolong operations rather than support transition. In systems where payments are based on installed capacity alone, without strong performance or emissions criteria, legacy assets may crowd out investment in cleaner and more flexible alternatives. The same issue is presented as a practical risk rather than a theoretical one.
Implicit support from state-owned utilities
The absence of a capacity framework can also create distortions in other ways. State-owned utilities may be required to keep loss-making plants on their balance sheets for security reasons. This can function as implicit capacity support without transparency or market discipline.
In system economics terms, capacity mechanisms are framed as insurance contracts. Their stated purpose is to ensure availability during scarcity events rather than subsidise energy generation. Key design elements highlighted include performance obligations, flexibility requirements, and cost containment.
Stress periods and the role of scarcity hours
Recent stress events are cited as evidence for the value of availability-focused insurance. During summer and winter tight periods in 2024–2026, a limited number of hours accounted for a disproportionate share of system risk. In several South-Eastern European markets, fewer than 100 hours per year determined adequacy margins and price spikes.
Capacity mechanisms that reward resources able to deliver during those hours can reduce volatility and emergency intervention costs. However, poorly designed schemes can produce the opposite effect. If payments are too generous, they may suppress scarcity pricing signals, reduce demand response incentives, and slow investment in storage and flexibility.
Technology neutrality, flexibility weighting, and national procurement
If capacity schemes are technology-neutral without flexibility weighting, they may favour inflexible baseload assets over fast-responding resources needed as systems change. Another structural issue identified is regional fragmentation because capacity mechanisms are typically national while electricity flows increasingly reflect regional operation.
National adequacy assessments may not account for cross-border support and shared risk. This can result in over-procurement in some countries and under-recognition of regional flexibility in others. In an integrated market setting, uncoordinated capacity mechanisms can distort cross-border flows and investment signals.
Cost levels and consumer or taxpayer impact
The cost implications described are material for system budgets. Even modest capacity payments of €40–80 per kW per year are said to translate into hundreds of millions of euros annually at the system level. These costs are ultimately borne by consumers or taxpayers depending on how schemes are funded.
Without coordination across borders, the region risks paying multiple times for similar insurance coverage. The issue is linked to the lack of alignment among national frameworks even as operational needs become more regional.
Flexibility-oriented criteria and interaction with market coupling
The challenge outlined for South-Eastern Europe is twofold: redesign capacity mechanisms to reward flexibility, availability, and emissions performance rather than mere existence; and align schemes regionally to avoid fragmentation and inefficiency. A flexibility-oriented approach would prioritise fast ramping, low minimum stable output, and reliability under stress.
The resources listed as competing under such criteria include gas plants, storage, hydro reservoirs, and demand response on a level playing field. High-emission assets could still participate if they meet strict availability and performance requirements, with declining eligibility over time.
Governance choices affecting stability during transition
Integration with market coupling and balancing markets is identified as another key element. Capacity mechanisms should complement scarcity pricing rather than replace it. They are described as intended to smooth investment incentives without suppressing short-term signals from scarcity.
A political risk described for South-Eastern Europe is using capacity mechanisms as tools of delay that lock in inefficiency and postpone system adaptation. An alternative presented is treating them as transitional instruments designed to fade as storage, demand response, and cross-border integration mature.
The distinction between insurance and distortion is attributed to governance choices. Transparent schemes with performance-based criteria and regional coherence are described as capable of stabilising electricity systems during transition periods. Opaque approaches that are protectionist and static are described as likely to become barriers to decarbonisation and market integration.