The Commission approves Spain’s €9 billion capacity mechanism to ensure the security of electricity supply

The European Commission has approved, under EU state aid rules, a €9 billion capacity mechanism for electricity supply in Spain. This aid measure aims to ensure that there is sufficient capacity to generate, store or consume electricity flexibly and that electricity generation meets projected demand.

The Spanish aid

Spain notified the Commission of the introduction of a capacity mechanism to ensure the security of electricity supply. The measure will run for ten years from May 2026.

Under this market-wide mechanism, the transmission system operator (TSO) will remunerate all the capacity necessary to meet thereliability standard, i.e. the maximum acceptable hours of lost load per year that the network must comply with to ensure adequate security of supply. Lost load is the amount of electricity demand that cannot be met due to supply interruptions. The reliability standard has been established on the basis of the national assessment of the adequacy of resources in Spain and has been approved by the Agency for the Cooperation of Energy Regulators (ACER).

The capacity mechanism will be open to all projects, existing or new, that offer to be available during periods of shortage. These projects cover electricity generation, demand response (parties that reduce their consumption in response to reduced supply) and storage (subject to environmental eligibility criteria). Beneficiaries will be selected through transparent and non-discriminatory tendering procedures. The budget for the measure is estimated at around €900 million per year, amounting to a total of approximately €9 billion over the ten-year period, depending on the results of each capacity auction.

The measure will be open to projects located in Spain. Spain will endeavour to allow the participation of all other interconnected Member States as soon as possible. The capacity mechanism will support the development of flexibility services (storage operators and demand response) where necessary, in order to achieve Spain’s national flexibility target in accordance with EU law and the ACER methodology. The capacity mechanism includes features to ensure sufficient net electricity generation to meet the reliability standard.

Commission assessment

The Commission has assessed the Spanish measure in accordance with EU State aid rules, and in particular Article 107(3)(c) of the Treaty on the Functioning of the European Union (‘TFEU’), which allows Member States to support the development of certain economic activities under certain conditions, and the 2022 Guidelines on State Aid for Climate, Environmental Protection and Energy. The Commission has found the following:

• The measure is necessary and appropriate to achieve the objective pursued, in line with the EU Electricity Regulation.
• The measure is proportionate, as its amount corresponds to the actual financing needs. Furthermore, the aid will be granted to projects selected through a transparent and non-discriminatory tender procedure, with safeguards to ensure effective competition. Beneficiaries will compete on the basis of the amount of aid requested per MW of available capacity during a shortage situation. As a result, the measure will have limited effects on competition and trade between Member States.
• The measure is in line with most best practices regarding capacity mechanisms set out in the State Aid Framework of the Clean Industry Pact.

In view of these reasons, the Commission has approved the Spanish aid in accordance with the relevant EU rules.

Background

The 2022 Guidelines on State Aid for Climate, Environmental Protection and Energy provide guidance on how the Commission will assess the compatibility of aid measures for environmental protection, including climate protection, and aid measures for energy that are subject to the notification requirement under Article 107(3)(c) of the TFEU.

The Guidelines establish a flexible and fit-for-purpose framework to help Member States provide the necessary support to achieve the objectives of the Clean Industry Pact in a targeted and cost-effective manner. The rules align with the EU’s key objectives and targets set out in the Clean Industry Pact, as well as with other recent regulatory changes in the energy and environment sectors, and address the growing importance of climate protection. They include sections on energy efficiency measures, support for clean mobility, infrastructure, the circular economy, pollution reduction, the protection and restoration of biodiversity, as well as measures to ensure security of energy supply.

Capacity mechanisms serve the important purpose of ensuring the security of electricity supply. Capacity mechanisms must be well designed to ensure that (i) they do not lead to higher electricity prices for consumers, (ii) they do not confer undue advantages on certain energy operators, or (iii) they do not hinder electricity flows across EU borders.

The EU Electricity Regulation sets out rules to ensure the functioning of the internal electricity market and defines a framework for periodically assessing the expected level of security of supply in the EU. Whenever a risk is identified, Member States must review the functioning of the electricity market and consider removing any distortions that may be causing the risk. Should this approach prove insufficient to address the identified risk, Member States may introduce a capacity mechanism, subject to design requirements to facilitate cost-effective, cleaner and proportionate measures to ensure security of electricity supply.

More information: European Commission.