France Proposes Capacity Mechanism Framework to Ensure Electricity Supply

Ensuring a Reliable Electricity Supply in France: The CRE's Capacity Mechanism Proposal

The French Energy Regulatory Commission (CRE) has taken a significant step towards guaranteeing a stable electricity supply in France by proposing a framework for a capacity mechanism. This mechanism is designed to mitigate the risk of electricity supply shortages during peak demand periods, a pressing concern for a country with growing electricity needs. The CRE's proposal outlines a two-auction system, comprising long-term and short-term auctions, to secure the necessary capacity and address the complexities of the electricity market.

The capacity mechanism is a crucial component of France's energy strategy, aimed at meeting its security-of-supply objectives, electrification plans, and expected growth in electricity demand. To achieve this, the CRE has proposed a comprehensive framework that addresses the intricacies of the electricity market and provides a clear roadmap for market participants.

Key Features of the Proposed Mechanism

The proposed capacity mechanism includes several key features that will shape the future of France's electricity market:

• Two auctions: The CRE proposes a two-auction system, comprising long-term and short-term auctions, to ensure a stable electricity supply.
• Timeline: The first short-term auction took place on July 6, 2026, for the winter of 2026-27, while the long-term auction for the winter of 2030-31 is scheduled to take place approximately four years before the delivery period.
• Target volumes: The long-term auction will have a target volume of 82 GW, with 3 GW eligible for multi-year contracts.
• Price caps: The CRE has set price caps at €72/kW (PPG) and €15/kW (PPI) to ensure a fair and competitive market.
• Methodology refinement: The CRE will refine its methodology for future auctions, taking into account initial results and market participant feedback to optimize the mechanism's effectiveness.

Auction Structure and Timeline

The CRE's proposed auction structure and timeline provide a clear roadmap for the capacity mechanism:

Long-term Auction

The long-term auction will be a cornerstone of the capacity mechanism, with a target volume of 82 GW. This auction will secure the necessary capacity for the winter of 2030-31, approximately four years before the delivery period. The 3 GW eligible for multi-year contracts will provide a vital injection of stability into the market, allowing market participants to plan with greater certainty.

Short-term Auction

The short-term auction will be held around one year in advance, with the first auction taking place in 2026 for the winter of 2026-27. This auction will serve as a safety net for the market, ensuring that capacity is available to meet peak demand and preventing potential shortages.

Market Impact and Future Developments

The CRE's proposed capacity mechanism is poised to play a crucial role in shaping France's electricity market. The mechanism is expected to:

• Guarantee security of supply: The capacity mechanism will help meet France's security-of-supply objectives, electrification plans, and expected growth in electricity demand, providing a reliable electricity supply for consumers.
• Promote battery storage: Battery storage will likely play an increasingly important role in providing flexibility and balancing services, ensuring a stable electricity supply and reducing the risk of supply shortages.
• Certify capacity technologies: The CRE has proposed certification parameters for capacity technologies, which will help standardize and ensure the quality of capacity providers, promoting a more efficient and reliable market.
• Assess mechanism effectiveness: The CRE, in collaboration with RTE, will assess the results of the mechanism to ensure its effectiveness and make necessary adjustments, refining the methodology to optimize the mechanism's performance.

Additional Capacity Requirements

The CRE estimates that additional capacity requirements will be between 0-2.5 GW. To meet these requirements, market participants will need to make commitments for 2030-31 before securing contracts for 2027-28 to 2029-30. The demand curve and technical/economic parameters will be determined by the CRE, providing a clear framework for market participants to operate within and plan for the future.

Key Factors to Watch

As the CRE's proposed capacity mechanism unfolds, several factors will be crucial to its success:

• Long-term auction outcome: The outcome of the long-term auction and its impact on the electricity market will be closely watched, as it will determine the level of capacity secured for the winter of 2030-31.
• Battery storage's role: The increasing importance of battery storage in providing flexibility and balancing services will be closely monitored, as it plays a vital role in ensuring a stable electricity supply.
• Mechanism effectiveness: The effectiveness of the mechanism in ensuring a stable electricity supply will be a key metric of its success, with the CRE and RTE assessing the results to make necessary adjustments.
• Methodology refinement: The CRE's refinement of its methodology for future auctions will be essential in ensuring the mechanism's continued effectiveness, allowing for improvements and optimizations as needed.

The CRE's cautious approach to setting economic parameters aims to limit costs for consumers, while market participants will gain valuable experience with the mechanism. The assessment of the mechanism's results by the CRE and RTE will be essential in ensuring its success and making necessary adjustments to optimize its performance.