Impact of Electricity Market Designs on Investments in Flexibility Options

Against the background of several European countries implementing capacity remuneration mechanisms (CRM) as an extension to the energy-only market (EOM), this chapter provides a quantitative assessment of the long-term cross-border effects of CRMs in the European electricity system. For this purpose, several scenario analyses are carried out using the electricity market model PowerACE. Three different market design settings are investigated, namely, a European EOM, national CRM policies, and a coordinated CRM. The introduction of CRMs proves to be an effective measure substantially shifting investment incentives toward the countries implementing the mechanisms. However, CRMs increase generation adequacy also in the respective neighboring countries, indicating that free riding occurs. A coordinated approach therefore seems preferable in terms of both lower wholesale electricity prices and generation adequacy.