Council and Parliament agree on capacity mechanism rules: what does it actually mean for the European power sector?

Source: Heren


This story has originally been published for ICIS Power Perspective subscribers on 19 December 2018 at 16:28 CET.  

The EU Council and Parliament agreed in an all-night trilogue session to introduce new rules for plants entering a capacity mechanism. Power plants emitting more than 550 gr CO2 of fossil-fuel origin per kWh, or 350 kg CO2 on average per year per installed kW, will be unable to receive capacity market payments from 1 July 2025, the Commission stated. However, a grandfathering clause was also implemented, which means that contracts for capacity payments signed before 31 December 2019 will be honoured.

We assessed what the rules mean, the quantity of coal and lignite capacity this could have an impact on, and which countries will be most affected.

Agreement The issue over capacity payments to high-emitting plants has been the most contentious issue within the Electricity Market Design regulation trilogues, with the Council and Parliament having significantly different positions at the start of negotiations The rules agreed on Wednesday morning state that plants will not be eligible to receive capacity market payments if their emissions are more than 550 gr CO2/kWh This will rule out all coal and lignite capacity, as well as oil-based plants and some inefficient gas capacity However, there is a second metric of 350 kg CO2 on average per year per installed kW This means that high-emitting plants can in theory continue to receive payments to produce for a limited quantity of time (around 5% of hours for the average coal plant and 3.5% of hours for the average lignite plant) It is not yet clear how this rule effectively limiting a plant’s running hours will apply in practice, but it may benefit strategic reserves designed to be used in emergencies, rather than market-wide capacity mechanisms The rules will apply to new plants from entry into force of the directive (H1 2019) and to existing plants from 1 July 2025 A grandfathering clause was included, meaning that contracts for capacity payments signed before the end of 2019 will be honoured This was a concession to Poland, which is currently reliant on coal and lignite capacity for around 80% of its generation and has recently had a market-wide capacity market approved by the European Commission Analysis EU There is currently 138GW of coal and lignite capacity installed in the EU (86.6GW coal and 51.5GW lignite) We calculate that this will be reduced to around 72GW by the time the rules will apply to existing plants in July 2025 (36.4GW coal and 35.7GW lignite) The steep reduction is due to a mixture of already announced coal phase-out plans and expected closures stemming from upcoming government decisions (Germany) and from the EU Industrial Emissions Directive Western Europe/Nordics The majority of countries in Western Europe will be unaffected by the rules so long as the announced timelines for coal phase-out remain in place France and Sweden are due to close their remaining coal plants in 2022, followed by the UK, Italy, Spain, Ireland and Austria in 2025 The Netherlands will close two plants by the end of 2024, but plans to keep the three remaining plants online until 2029. However, these will likely be unaffected as the Netherlands does not have a capacity mechanism to support these plants The coal phase-out plans in Finland (2029), Denmark and Portugal (both 2030) are for after the rules enter into force in 2025, which means there could be some impact in these countries Germany Germany has the largest installed coal/lignite capacity in Europe with 42GW, though coal phase-out plans are due to be announced in early 2019 While Germany will certainly have plants online post-2025, the rules may not have much impact as the 350 kg CO2 rule will likely mean that the government can continue using a strategic reserve However, the size of the reserve capacity currently amounts to 2 GW, thus covering just roughly 5% of the overall coal and lignite capacity Poland Poland has always been firmly against the capacity market rules as they stand to be most affected given the country’s heavy reliance on coal and on a market-wide capacity mechanism to support producers The grandfathering clause was a concession to Poland and will mean that the government can continue supporting plants beyond 2025: New coal capacity that will have received 15/17 year contracts by the end of next year will be able to continue producing until at least 2035 Existing plants are able to receive 5 or 7 year capacity market contracts if they modernise, which means that some capacity will be able to keep producing to around 2028-2030 (due to contracts starting for deliver years up to 2024 by the time the deadline is reached) In the first capacity market auctions for delivery years 2023 and 2024, around 9GW of coal/lignite capacity received contracts that would allow them to keep producing past July 2025. This is likely to increase in further auctions before the end of 2019 Existing plants that do not modernise are only able to receive 1 year contracts, which means they will be affected by the rules and are likely to close if they do not receive capacity market contracts by the end of 2019 Eastern Europe There is currently 24GW of coal/lignite capacity installed in Czech Republic, Greece, Bulgaria, Romania, Hungary, Slovenia, Slovakia and Croatia Most of these countries currently provide some form of capacity payments to coal/lignite plants, which means that they could be affected by the rules from 2025

Matthew Jones is Senior Analyst - EU Carbon & Power Markets at ICIS. He can be reached at

Matteo Mazzoni is Senior Analyst - Power and Carbon Markets at ICIS. He can be reached at

Our ICIS Power Perspective customers have access to extensive modelling of different options and proposals. If you have not yet subscribed to our products, please get in contact with Justin Banrey (