Combining capacity mechanisms and renewable energy support: A review of the international experience

To ensure sufficient power generation capacity and minimize the risk of blackouts, many countries have introduced capacity mechanisms that provide payments for power plants according to their installed generation capacity. Capacity mechanisms can have different designs, but all have the same purpose—to incentivize sufficient infrastructure investment to meet future electricity demand and, thus, assure mid- and long-term electricity system reliability. Some countries allow renewable energy generators to participate in such capacity mechanisms. Thus, policymakers must choose how to combine capacity mechanisms and renewable energy support. This paper reviews the international experience of combining the two policy types. This is the first review that considers all countries that had some kind of capacity mechanism in place as of 2021. The review reveals a variety of policy mixes. The decision to permit renewable energy producers to participate in a capacity mechanism largely depends on the type of capacity mechanism and the type of renewables support in place. As capacity mechanisms become more widespread and the share of renewable energy in the electricity mix grows, this is one of the largest and most difficult choices that policymakers face. If left unharmonized, the two policies might work against each other, leading to an inefficient and unsustainable scenario, where a rising share of renewables creates a need to increase conventional power generation capacity, undermining cost-efficient decarbonization.