The current French capacity mechanism’s days are numbered. Article 6 of the 2025 Finance Act decided to implement a new capacity mechanism to replace the current one in 2026. There is a more technical reason, which I will come back to.

General information on the capacity mechanism

Under European law, a capacity mechanism constitutes state aid, and this state aid expires in November 2026. So, normally, if France is not behind schedule, we should have switched from the old to the new mechanism by November 2026. Last July, the government published the results of the public consultation that had been launched to ask stakeholders about the desired terms for reforming the current mechanism and building the new one.

Before going into detail, let’s say a few words about capacity mechanisms as such. What is a capacity mechanism? It is a system that contributes to the security of supply of an electricity system.

What is security of supply? It is the fact that at all times, or almost all the time, supply meets demand. So, to think about the security of supply of an electrical system, you need to have an idea of how electricity demand is evolving, you need to know the current and future availability of electricity generation resources, and you need to know, or rather identify, the constraints on the transmission network. There has been a debate, which I won’t go back over, about whether we really need a capacity mechanism. You will see that some European countries have not created one.

France created one, if I remember correctly, in 2016. What we do know, however, and what most experts agree on, is that the development of renewable energies will make capacity mechanisms even more necessary in the future than they are today. What you see here, the graph on the screen, shows that intermittent renewable energies, i.e., solar and wind, are estimated to represent just over 50% of the European mix in 2030, rising to 70% by 2050. So the penetration of renewable energies is problematic, or at least poses a challenge to security of supply due to their intermittency.

How do capacity mechanisms work? The capacity mechanism sees capacity as sentinels. A sentinel is useless as long as there is no danger. But when there is danger, the sentinel springs into action.

It’s a bit the same for means of production from the point of view of the capacity mechanism. The capacity mechanism requires producers or consumers who have load reduction capabilities, or storage system operators, to make their resources available to the electricity system when the conditions for balancing are becoming strained. Traditionally, capacity mechanisms mobilize nuclear, thermal (i.e., gas and coal), and hydroelectric means of production, as well as storage and flexibility resources on the demand side.

The capacity mechanism in other countries

I won’t go back over it, but I’ll say it one last time: from a competition law perspective, capacity mechanisms are considered state aid and must therefore be approved by the European Commission. This means that once France has finalized the details of the new capacity mechanism, it will have to submit it to the Commission for approval. I think we should spend a few minutes looking at this map, which shows not only the European Union, but also a number of neighboring countries. such as the United Kingdom, Switzerland, and Norway. You can see that not all European countries have implemented two capacity mechanisms, with three notable exceptions, or four: the Netherlands, Spain, Portugal, and the United Kingdom.

And the countries that have implemented capacity mechanisms have not necessarily implemented the same systems. I don’t know what color it is, let’s say dark red or pomegranate, Italy, Poland, and Ireland have implemented a mechanism that is described as market-wide with a single buyer. I will come back to what these two terms mean.

Germany, Sweden, and Finland, in orange, have a system based on strategic reserves, and France has gone it alone with a system that we describe as decentralized market-wide.

The French capacity mechanism

So, how would you characterize this mechanism, which was introduced in 2016 and is still in place today? It is market-wide, but what does that mean? It means that it is agnostic about the nature of the capacities used to maintain the supply-demand balance. Therefore, producers, customers who are likely to withdraw, and storage facilities can all participate in capacity auctions, and all these capacities are treated identically, meaning they receive the same remuneration for an identical service rendered.

Secondly, it is a decentralized system. What does that mean? It means that, in the current system, it is the suppliers who assess their capacity needs and purchase the capacity they deem necessary. So, RTE plays a role in the current mechanism, and we will see that it should play a more important role in the future mechanism, but RTE organizes auctions, there are a certain number of auctions, up to 15 auctions ahead of the delivery year, but it is the suppliers who purchase the capacity. And since there are several suppliers, this is what makes it a decentralized system.

Furthermore, something that is perhaps less well known—it is known to producers, but not necessarily to other players—is that the third characteristic of the French capacity mechanism is that it remunerates not only existing capacity, but also future capacity. How? By organizing a call for tenders for capacity that does not yet exist but is likely to be developed within four years. That covers the characteristics of the current system.

How do they work? We’ll go quickly because it’s well known, but once again, we have producers and demand response operators who have capacity and sell it, and suppliers who are obliged by the system to buy it. There are two methods of exchange: auctions organized under the aegis of RTE, but by EPEC, and then over-the-counter purchases. Once again, RTE plays a central role, as it is responsible for certifying and allocating capacity guarantees, calculating suppliers’ capacity obligations, and ensuring the operational management of the system.

It is currently the sponsor of the mechanism, and will be even more so in the future. How is the cost of capacity calculated? For a supplier or a customer, when the supplier passes on the cost of capacity to its customer or customers, we look at the average power demand over a certain number of hours, or rather days, in the year, pp1 days, and so it’s not 24 hours, we look at the average power demand over the time slots 7 a.m., 3 p.m., 6 p.m., 8 p.m., and then we multiply by the capacity price, which is a price in euros per megawatt, formed through auctions or over-the-counter exchanges between producers on the one hand and suppliers on the other. I would remind you that the capacity obligation is a bit like the right to enter the arena: it is the responsibility of the suppliers, who pass it on to their customers, but the suppliers are the ones who are obliged to comply.

If we look at what the mechanism has yielded in terms of price, there are two graphs displayed on the screen. The graph on the left shows the capacity price in euros per megawatt over the period 2020-2026. What we have shown here is the average auction price for each year of delivery: 20, 21, 22, 23, 24, 25, 26, and we can see that the capacity price was €25,000 per megawatt in 2020, approaching €45,000 in 2023, which was the peak price, and in 2026 there is one auction left, but we are at €5,000. So be careful, for each auction, if I take the year 2025, there were several auctions and each time the prices that came out of the auctions were different, so we only kept the average, we only showed the average.

And how does that translate into euros per megawatt hour for customers? It translates into an increase in the supply price, which was around €3 in 2020, exceeded €5 in 2023, and should be less than €1 in 2026, around €0.75. To make this calculation, we did not take AREN into account. As you know, AREN actually included capacity, so customers ultimately only purchased capacity beyond their AREN entitlement. so we put that aside to allow for comparison with 2026 and considered a typical profile where, at peak times during PPI days, people consume 110% of their average power demand. So it is clear that people who would have more concentrated consumption on PPI days would have paid a higher price than the one shown on the screen.

Criticisms of the current mechanism

So, what are the criticisms of the mechanism? I think the criticism is that it is quite complicated. It is quite complicated for all stakeholders. Starting with consumers, there is a difficulty, a lack of basic understanding.

Conceptually, you have to separate megawatt capacity from megawatt hours. That’s not necessarily obvious. Furthermore, what’s complicated for customers is that, ideally, today we know the PPI days 24 hours before they occur.

That’s a fairly short time frame. Responding to tomorrow’s signal is a PPI day, which is not easy. Furthermore, it may be impossible if we have a single price for the year or a seasonal price that does not distinguish PPI days from other days.

So the system is complicated. People—consumers, suppliers, and producers alike—find it difficult to predict the price of capacity. Let’s go back 30 seconds. Can we explain why capacity prices rose from 25,000 to 43,000 and then fell to 5,000? It’s not entirely clear.

For 2026, we know why prices are falling, but why did they vary in the end? We don’t really know how to explain it. So there is a problem of predictability. The problem of visibility, as I said, is that there was a random number of PPIs.

That has changed, but initially, we didn’t necessarily have 15 PPI days in the year. Furthermore, to broaden the criticism a little, there are different competing signals that are not necessarily consistent, which is what I mean. There are PPI days, PPI2 days, ECOWATCH days, and Tempo Rouge days.

What emerged from the investigation announced by the public authorities was the need to unify these different mechanisms in order to increase their efficiency. So we are going to move to the new mechanism. The new mechanism, if I summarize, will give RTE an even more central place in the system.

The outlines of the future mechanism

In fact, what will happen in the new system is that auctions will be abolished. Suppliers will no longer participate in auctions; it will be RTE itself that, within the framework of an auction, will purchase capacity from producers or consumers likely to withdraw or from storage facilities. RTE will contract capacity availability commitments on behalf of the community with the players I have just mentioned.

And then, when it purchases this capacity, it incurs a cost that it will pass on to suppliers or large consumers who buy directly on the market and who are responsible for their own balance. Remember, the current system was said to be decentralized. Tomorrow’s system will be centralized in the sense that RTE will be the sole purchaser of the necessary capacity.

In the new system, some things will not change. Network operators will be responsible for certifying the capacity connected to the service area, as in the current system. Some things will change for capacity operators, but this is quite technical.

The key point is that they will have their capacity certified, or that of third parties for whom they have been mandated. They will sign an agreement with RTE and will be responsible to RTE for the availability commitments of their quarry. Suppliers will no longer be required to cover their capacity needs by purchasing capacity guarantees and will be subject to what has been called a tax, although I’m not sure if that’s the right term. RTE will pass on the cost of the mechanism to them based on their customers’ consumption profiles.

I don’t know if we will still talk about P-P1 days, but there will be periods of tension. This is the vocabulary of the new mechanism, which will ultimately correspond to the P-P1 days of the current mechanism. The number of days of tension may differ from the number of P-P1 days, but the idea is much the same.

Each supplier will pay according to their contribution to the system’s reserve, and suppliers will effectively pass on the cost of this tax in their selling price and will be free, as under the current system, to pass it on. The way in which the cost of capacity is billed will be at the initiative of the suppliers. However, we expect there to be a change in the way the cost is passed on, and having spoken with a number of suppliers, we know that some players are considering, for customers who want it, a system that reminds them. For those of you who are older and are familiar with J-P, peak shaving, there was a signal sent the day before to customers, who were then warned and had the option of partially shaving their consumption in order to reduce the cost of capacity.

This is already the case for large customers, but for smaller customers who do not set daily prices, the mechanism does not currently allow for this. It is quite complicated to pass on or reward the fact of not consuming during P-P days. Another thing that will change is the auction system. There will still be an over-the-counter market, that will remain, but the number of auctions will decrease. A high number of auctions was perceived by the people who responded to the survey as a mechanism that obscures the process, making it more complicated to set the price of capacity.

Auctions

In the upcoming system, there will only be two auctions, one during year N-5, which is five years before the delivery year, which will be the main auction. You can see what this means: it means that RTE must form as accurate a picture as possible of what the supply-demand balance will be in five years’ time, since it is on the basis of its anticipation of what the supply-demand balance will be that it will purchase more or less capacity. Then, one year before the delivery year, there will be a second auction, the purpose of which will be to allow for an adjustment, but only upwards, of the volumes of capacity purchased.

So, if we follow the texts currently being drafted, if RTE has been too pessimistic, it will not be able to, in quotation marks, make up for it. On the other hand, if RTE has been insufficiently pessimistic and wants to buy back capacity, it will be able to do so in the N-1 auction. So, to sum up, ultimately, formally, there are few changes.

There is one significant change, which is that it is no longer the suppliers who buy at auction, but RTE. The outstanding issues are those that appear in the feedback document, of which there are three. First, under the new mechanism, priority must be given to carbon-free flexibility.

So, let’s come back to the term “market-wide.” Today, once again, we are agnostic. Anyone with capacity can participate in the auctions.

Outstanding questions on the new capacity mechanism

Here, the question is whether decarbonized flexibilities would benefit from a regime that I don’t want to call favorable, but in any case special. The second question raised by the document, by the summary produced by the public authorities, is whether the remuneration of existing capacities should be capped. There is a cap in the current capacity mechanism. The question arises as to whether a cap should be introduced for existing capacity, but not for capacity under construction.

And then there is a third question, a more practical one, which is important: how do we manage the time constraints when moving from the old system to the new one? I would therefore add some questions that are not in the document and that I think are important. The first question, or rather a question that we want to ask ourselves, is whether the future system will ultimately… All other things being equal, will it lead to higher or lower capacity prices than the current system? There is no clear answer, so I’m going to disappoint the participants, but I will share with you the state of our thinking.

Having a single buyer, again, all other things being equal, means that we should have a slightly lower capacity price. Why? It’s a first-year economics lesson: a monopoly that sells can sell at a higher price than 50 people competing, and conversely, a monopoly that buys can, in principle, buy cheaper than when buyers are competing to acquire capacity. So that’s more of an argument for saying that prices could be lower.

A second argument is that, without wanting to take RTE to court, we could imagine that RTE, which is responsible for balancing supply and demand, might be more pessimistic or at least more cautious than the suppliers were. And so, RTE’s risk assessment could be higher than that of the suppliers, and that is something that would tend to drive prices up. The second question is, will we need the Iketnu capacity mechanism? Right now, capacity prices in 2026 are at €5,000 per megawatt, in a system that has significant overcapacity. There is more production in France than demand; demand was not sufficient. In any case, there is an oversupply, which brings us back to the fact that capacity is not a particularly pressing issue.

So, whether we have old mechanisms or new mechanisms, capacity prices should remain relatively low in 2026, probably in 2027, and maybe in 2028. On the other hand, as growth and demand increase, the issue of supply-demand balance will become a pressing issue again, and prices could rise. So, the advantage of changing today is that we will discover the new system at a time when the issue of capacity is not the most important issue of the moment.