Cross-Border Capacity Remuneration Mechanisms and De-Rating Factors: Determining the Value of Foreign Resources in Regional Markets

Abstract

Capacity Remuneration Mechanisms (CRMs) in the European Union (EU) are designed to ensure the adequacy of electricity supply by providing financial incentives for power generation capacity. While CRMs have been widely implemented at the national level, cross-border participation remains a challenge due to regulatory disparities and the absence of standardized approaches for determining the firm capacity of foreign resources.This paper develops a novel methodology for computing de-rating factors for cross-border resources in CRMs, ensuring a level playing field between domestic and foreign capacity providers. The proposed framework builds on first principles, extending regulatory and economic analysis by integrating interconnection constraints and market price caps. Through stylized case studies and Monte Carlo simulations, this paper evaluates the effects of interconnection capacity, resource availability uncertainty, and market price caps on de-rating factors. Results indicate that maximum price disparities between interconnected markets and interconnection congestion significantly influence the recognized firm capacity of cross-border resources. Additionally, findings reveal that resource complementarity, while beneficial for overall system reliability, could paradoxically reduce the incentives for cross-border CRM participation.