When Sisyphus Gave Up: Capacity Markets and State Aid in the EU

Wed Mar 22 16:58:06 EDT 2017
By George Anstey and Soren Christian

The myth of Sisyphus is one of fruitless exertion, in which the eponymous hero rolls a boulder to the top of a hill only to see it roll back down, repeating this futile exercise for eternity. After three packages and repeated efforts to reform the electricity market, one could forgive the European Commission for feeling a little like Sisyphus. In November 2016, the European Commission proposed a further round of market reforms.

The latest measures follow the publication of the European Commission’s report on whether certain policies, introduced by EU member states aimed at ensuring reliable and secure supplies of electricity, constitute state aid and/or are compatible with the internal market for energy. The report concludes that provided that Member States are embarking on those reforms, the Commission may find capacity mechanisms to be compatible aid.

Capacity mechanisms, broadly defined, have been part of international electricity markets since their inception. Formal capacity markets are particularly prevalent in the United States. In this paper, NERA Associate Director George Anstey and Economic Analyst Soren Christian review the European Commission’s proposals for the design of compatible capacity mechanisms in light of that international experience. The authors find that the commission’s proposals risk designing mechanisms only for the perfectly efficient electricity markets in which they would be redundant. In particular, the commission’s proposed approach, which aims to cause minimal disturbance to electricity markets, may be insufficient to correct the market failures that justify the intervention in the first place. Such a design risks imposing all of the potential disadvantages of a capacity mechanism (including government and regulatory failure) without offering the offsetting benefit of higher security of supply.