A comprehensive report commissioned by Clean Air Task Force has outlined strategies for European policymakers to align capacity mechanisms with clean energy procurement to achieve both reliability and decarbonization goals. The Brattle Group study reveals how coordinated approaches to security of supply in European electricity markets can reduce costs, enable cross-border trade, and accelerate the transition to carbon-free energy as the continent rapidly shifts toward variable renewables.
The report, titled “Clean Security of Supply in Europe: Models for Market-Aligned Contracting and Procurement,” examines various approaches to reliability planning and clean energy procurement across the continent. According to the authors, existing approaches have been disconnected at EU and regional levels, risking overlapping support schemes and higher costs for member states.
Coordinating Security of Supply with Clean Energy Goals
European policymakers currently face a critical choice between managing security of supply and the clean energy transition as separate challenges or adopting coordinated approaches that deliver both objectives at lower cost, according to Lea Romm, Associate for Europe Policy on CATF’s Electricity Program. The current disconnect between reliability planning, market design, and clean procurement is costing Europe billions while slowing progress toward building clean and secure energy supplies, Romm said.
Dr. Andrew W. Thompson, a Brattle associate and coauthor of the report, explained that forward-thinking market and clean procurement designs can better support the energy transition. However, he noted that while a single Pan-European approach to security of clean supply does not yet exist, several intermediate steps can encourage cross-border trade and enable demand-side resources to participate in markets.
Current Approaches Create Costly Overlaps
The report identifies that security of supply mechanisms in Europe have tended to support fossil generation, while disconnected clean energy procurement schemes often fail to incorporate reliability needs. This disconnect results in higher overall costs and risks locking in fossil fuel dependency, according to the findings.
Additionally, the report highlights that currently only a third of capacity support payments go to clean technologies, while gas leads in long-term contracts. As gas remains the primary back-up technology for scaling renewables, the costs of capacity mechanisms have more than doubled since 2020, according to European energy regulators.
International Examples Show Promise
The study highlights successful international examples demonstrating the benefits of coordinated approaches. Meanwhile, Mexico’s long-term auctions achieved record-low clean energy prices by co-optimizing procurement of energy, capacity, and clean attributes in a single competitive process, though the program was short-lived.
Strategic design choices such as technology-neutral derating factors that accurately reflect each resource’s contribution to reliability can help capacity mechanisms attract clean, flexible resources while maintaining system adequacy. In contrast, firm clean capacity can be more directly incentivized through a schedule of clean capacity requirements, the report notes.
Four Models for European Markets
The report presents a spectrum of market-aligned contracting and procurement models ranging from competition-driven to policy-oriented planning. Enhanced energy-only markets use price signals during tight supply conditions to attract investment, with clean energy integration achieved through carbon pricing or tradable clean energy certificates.
Capacity mechanisms combine energy markets with forward procurement of capacity resources, complemented by either long-term contracts for government-set clean supply volumes or targeted procurements of clean resources. Multi-product markets feature centralized procurement of distinct products for clean energy, clean capacity, and greenhouse gas reductions on a forward basis.
Furthermore, centralized planning ensures security of supply through integrated policy-driven planning with all-source procurements and market-aligned contract structures. Each model can be tailored to national policy priorities while incorporating best practices for transparency, cross-border coordination, and technology-neutral competition, according to the authors.
Creating Clear Policy Goals
Thompson emphasized that the central idea across all options is to create clear policy and reliability goals that can be translated into well-defined, unbundled products. Once those products are created, both long-term contracts and spot markets can create mutually supportive incentives for the marketplace to identify new, lower-cost solutions.
Member States that aim to decarbonize faster will need market structures that can attract the flexible, clean resources the system requires rather than lock in fossil generation because it is cheapest for reliability alone, Romm stated. The design principles outlined in the report can help ensure Europe’s capacity mechanisms support the transition to carbon-free energy.
CATF and Brattle will present the report’s findings at a webinar scheduled for March 5 at 3:00pm CET, offering further discussion on transatlantic learnings and policy pathways for European electricity markets.
