"And if introduced, CRMs should be able to be phased out once the market itself delivers the appropriate investment incentives to ensure the adequacy of the system."

A capacity payment is one of the possible ways of introducing capacity remuneration mechanisms, whereby a fixed amount is paid for available capacity to all generators. Other options are tender for targeted resource, capacity obligation or ticket, capacity auction or reliability option. The introduction of CRMs would foster generation adequacy by remunerating plants not only on the basis of their output (MWh) but partly also on the basis of their capacity availability (MW).

A unilateral introduction of capacity remuneration mechanisms (CRMs), however, might lead to market distortion, Eurelectric warns. CRM should be introduced "ideally at regional level or at least in coordination with neighbouring markets, in order to avoid any competition distortion," Géron said.

Implementing different CRM models on a national level is also likely to have a negative impact on the integration of the European energy market as it may lead to investment distortions with neighbouring countries.

Policy makers in Germany, Spain and in the U.K. are caught up in lengthy discussion with the energy industry over whether to introduce capacity remuneration mechanisms to guarantee a stable rate of return for plant operators with the aim of incentivising investment into new fossil power generation capacity. A key question is who would pick up the bill if a CRM scheme was introduced.

Asked on who pays for CRMs, Géron stressed that "if and where CRMs are introduced, it should be made possible to pass on the costs to the customers in the same way as for other additional costs such as RES schemes and grid infrastructure development."

A previous Eurelectric report, published in 2011, had stated that "when developing CRMs, customers with a baseload profile, who cause less costs to the system, should in principle contribute less (per MWh) than customers with a profile that includes more peak load demand."

In most CRM models, price volatility (price spikes) is reduced because the capacity remuneration guarantees that enough capacity is available in the system. Capacity payments tend to lower financing costs for generation investments thanks to lower uncertainty of plant dispatchment.

Prior to resorting to setting up CRM schemes, Eurelectric calls on policy makers to remove price caps distortions which hinder the demand and supply balance and thus prevent energy-only markets from functioning properly.