Cross-Border Participation in EU Resource Adequacy Mechanisms: Understanding the Contribution 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 economic 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 proposes a generalized methodology for understanding the contribution of foreign market agents and eventually 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. Although the current EU market design applies a single harmonized price cap across all bidding zones, the paper adopts an intentionally asymmetric cap as a theoretical abstraction that isolates the role of price signals in cross-border scarcity situations. Through stylized case studies, this paper evaluates the effects of interconnection capacity, resource availability uncertainty, and market price caps on de-rating factors. The results indicate that disparities in the definition of the maximum price between interconnected markets and interconnection congestions significantly influence the firm capacity recognized to cross-border resources. In addition, the results show that resource complementarity, while beneficial for overall system reliability, may paradoxically reduce the incentives for cross-border CRM participation.

Capacity Remuneration Mechanisms (CRMs) in the European Union (EU) are designed to ensure the adequacy of electricity supply by providing economic 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 proposes a generalized methodology for understanding the contribution of foreign market agents and eventually 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. Although the current EU market design applies a single harmonized price cap across all bidding zones, the paper adopts an intentionally asymmetric cap as a theoretical abstraction that isolates the role of price signals in cross-border scarcity situations. Through stylized case studies, this paper evaluates the effects of interconnection capacity, resource availability uncertainty, and market price caps on de-rating factors. The results indicate that disparities in the definition of the maximum price between interconnected markets and interconnection congestions significantly influence the firm capacity recognized to cross-border resources. In addition, the results show that resource complementarity, while beneficial for overall system reliability, may paradoxically reduce the incentives for cross-border CRM participation.