Coupling Europe's Capacity Markets

TL;DR

This paper proposes a flow-based coupling design for European capacity markets, improving efficiency and coordination across interconnected zones by reducing costs and better valuing interconnection contributions.

Contribution

It introduces a novel flow-based market coupling approach for capacity markets, addressing inefficiencies and investment issues in existing arrangements.

Findings

Flow-based coupling reduces system costs.

Enhanced interconnection capacity utilization.

Ensures deliverability under network constraints.

Abstract

European Member States are increasingly introducing national capacity mechanisms (CMs) to manage growing adequacy risks. However, isolated national CMs are inefficient in highly interconnected electricity systems, such as the European system. While progress has been made in facilitating cross-border participation by generation capacity in CMs, existing arrangements are prone to under- or over-investment and do not properly value the contribution of interconnection capacity to Member States' adequacy targets. In this paper, we propose a novel conceptual design for a coupled European capacity market that utilises the logic of flow-based market coupling. In a comparative analysis of different market design scenarios in an illustrative multi-zone case study, using a bespoke long-run equilibrium problem, we show that the proposed flow-based coupling of capacity markets reduces system costs by harnessing available capacity in neighbouring market zones while ensuring deliverability with respect to network constraints in all scarcity situations.