A key step toward ensuring supply security and expanding storage capacity
The European Commission has approved Spain’s new Capacity Market mechanism, a system designed to ensure electricity security of supply over the next ten years. Valued at approximately €9 billion between 2026 and 2036, the scheme will provide remuneration to resources capable of delivering firm capacity and flexibility to the power system during periods of scarcity.
This approval brings to an end a regulatory process that began in 2021 and unlocks one of the most anticipated reforms in the Spanish electricity sector.
Why is a Capacity Market Needed?
The energy transition is increasing the share of intermittent renewable generation, particularly solar photovoltaic and wind power. While these technologies reduce costs and emissions, they also create new challenges for maintaining security of supply during critical periods, such as:
- Periods of high electricity demand.
- Night-time hours without solar generation.
- Episodes of low wind production.
- Situations of hydrological scarcity or the unavailability of other generation technologies.
The objective of the mechanism is to ensure that sufficient capacity is available to generate, store, or manage demand whenever the system requires it. The European Commission considers the measure necessary and proportionate to maintain security of supply without distorting market competition.
How Will It Work?
The mechanism will remunerate the availability of resources capable of responding during scarcity situations. Participants will be selected through competitive and transparent auctions.
Eligible participants will include:
- Existing and new dispatchable generation assets.
- Energy storage systems (battery storage and pumped hydro).
- Demand-side response resources.
- Consumers and aggregators capable of reducing consumption when required by the system.
Payments will be allocated based on the capacity committed to remain available during critical periods of system operation.
What Are the Implications for the Market?
The European Commission’s approval sends a clear investment signal for flexibility and firm capacity technologies.
Among the main expected impacts are:
- Improved economic viability for energy storage projects.
- Increased deployment of active demand-side management.
- Enhanced security of supply throughout the energy transition.
- Reduced risk of premature retirement of firm capacity needed to support renewable integration.
- Greater resilience of the electricity system against extreme events.
According to regulatory estimates, the annual economic volume of the mechanism could range between €800 million and €900 million, depending on the outcome of future capacity auctions.
Next Steps
The approval from Brussels does not mean the mechanism will become operational immediately. The Spanish Government must now complete the final regulatory framework and launch the first capacity auctions.
Key design elements—including contract durations, technology requirements, eligibility criteria, and auction structures—will be critical in determining the actual impact on different technologies and business models.
Assessment
The approval of Spain’s Capacity Market represents a significant milestone for the Spanish electricity system. Beyond strengthening security of supply, it provides a long-awaited regulatory signal for the development of storage and flexibility solutions, which are becoming increasingly essential in a power system with a high penetration of renewable generation.
The ultimate success of the mechanism will depend on its final design and on the market’s ability to mobilize new investments in technologies that provide firm capacity, flexibility, and resilience to the electricity system.
