Decisive developments expected across EU as Europe grapples with prospect of power shortage

Next 6-12 months important for the energy industry.  Cooperation between Commission and Member States required to ensure power supply is secured without risking fragmentation of the European energy market and damage to its economy.

European energy regulators are involved in a race against time to ensure that capacity mechanisms being introduced in many EU member states are designed and implemented correctly, in order to avoid a real risk of blackouts across the region, while also ensuring that the longstanding programme of reform towards a competitive, integrated EU energy market is not jeopardised.

Capacity mechanisms: Reigniting Europe’s energy markets, published today by global law firm Linklaters, examines why a significant proportion of Europe’s power stations – including brand new gas-fired plants – are being mothballed or sold due to a ‘perfect storm’ of simultaneous pressures including collapsing carbon prices, cheap coal and the rise of renewable power; what governments across the EU are proposing to do about it and how the European Commission might respond.

The report identifies the next six to 12 months as being critical for the industry, with a series of developments expected at both EU level and across individual countries across Europe, such as:

  • EU – European Commission currently reviewing the capacity mechanisms of various member states under its State aid powers
  • UK – a full capacity auction scheme due to come into force in the autumn
  • France – implementation of a new capacity market
  • Belgium – the bedding down of a new strategic reserve scheme
  • Italy, Spain, Greece –decisions due on changes to existing capacity mechanism schemes
  • Poland – plans by year end for a new capacity market
  • Germany – a decision on whether the country will join a wider market mechanism with neighbouring countries and what form such a mechanism might take

The report warns of regulatory complexity as capacity mechanisms are deployed on a national rather than pan-European basis, in order to deal with a disparity of local issues affecting individual countries in Europe.   For example:

  • In countries like the UK and Belgium, the issue is to secure more investment in power generation, as many plants are expected to be retired in the coming years
  • In the south of Europe, in Italy and Spain, where there is currently plenty of capacity, the issue is to ensure that as few plants as possible are retired
  • In Germany, the security of supply issue is local and linked to constraints on the network

John Pickett, Linklaters co-leader of the global Energy and Utilities sector and an author of the report, said: “It doesn’t seem as if a pan-European capacity mechanism is likely in the short to medium term and so we think we’ll see an  increasingly complex regulatory environment for power in Europe in the next few decades as governments and regulators try and address the problems.”

Arnaud Coibion, Linklaters co-leader of the global Energy and Utilities sector and another author of the report, agrees: “It is an illusion to believe that one single capacity mechanism can be implemented throughout Europe. The challenge is to ensure that national mechanisms do not create distortions and are not ultimately detrimental to a unified energy market.”

Delays caused by an extended state aid clearance process, will only add to the existing problem of regulatory uncertainty – threatening urgent and much-needed investment in EU energy infrastructure. Equally, too cautious an approach to the state aid clearance process could block schemes that are urgently needed for security of supply.

The report therefore notes the need for a policy balance in order to pave the way for increased coordination and harmonisation between national schemes while also ensuring security of supply but warns that if governments and the EU get this wrong, there could be setbacks to Europe’s competitiveness.

John Pickett added: “How the process plays out in the next six to 12 months matters greatly, as the ramifications of getting it wrong could threaten the prospects for a low cost, integrated energy market in Europe.”

The report concludes that there are signs of a policy balance emerging which could be acceptable to consumers and markets; there may be light at the end of the tunnel. To read the report, click here.

For more information, please contact Surinder Sian on 0207 456 4842 or surinder.sian@linklaters.com