The redesign of electricity markets under EU influence: The capacity mechanism in France and Britain

Abstract : The liberalisation of the electricity sector in Europe has led to a decentralisation of investment decisions to economic actors. A key assumption behind this was that investors make their decisions based on price signals. Ensuring that there is adequate generation capacity in place to meet demand therefore became a function of the market, rather than a central planning authority. Nevertheless, in many countries, the risk of supply failure has led to the implementation of an addition to power markets known as the capacity mechanism. This chapter explains how this market reform was implemented in the UK and France, the political motivations behind it, the mobilisation of economic expertise and the process of validation by the European authorities. It highlights the increasing role of State Aid control in the framing of national regulations, defining the standard for electricity market organisation and conditions for legitimate deviation from the standard.