Europe is opting for a market in which only energy that is actually produced is rewarded, and that is a positive development.

Since the electricity markets were liberalized, the so-called “energy-only” market has taken the lead. In this model, producers are paid only for the energy they actually supply. This contrasts with the capacity market, where producers also receive compensation for their ability to supply energy. The “energy-only” approach is now the norm throughout most of Europe.

To ensure that we always have enough energy, we are improving the energy-only market with flexibility solutions, such as the balancing power market, and introducing additional reserve models inspired by the capacity market.

What makes the energy-only market different from the capacity market? In the energy-only market, we pay only for energy that has actually been generated. This energy is sold on the electricity market or through direct agreements between parties. The market trades in megawatt-hours that flow from the producer to the end user.

In the energy-only market, having capacity available is indirectly rewarded, for example through contracts that guarantee supply within a certain period. This means that the necessary capacity must be available.

Since 2017, France has been using a capacity market in which capacity certificates are traded. These certificates require producers to have sufficient capacity to supply energy at specific times, without any guarantee that the energy will actually be produced.

There were doubts as to whether energy-only markets could ensure sufficient energy security, particularly due to concerns about financing reserve capacity. However, experience—such as in Germany—shows that this model can ensure a reliable energy supply.

Energy security in the energy-only market also comes from the reserve capacity market—a type of short-term capacity market—which helps keep the grid frequency stable. Grid operators can quickly bring capacity online to temporarily stabilize the grid.

To ensure long-term energy security, energy-only markets have additional reserves, such as grid and capacity reserves. These are similar to the capacity market and provide support for power plants that are temporarily not in use.

The energy-only market uses the principle of supply and demand to make the electricity market more efficient. It encourages innovation and makes production more flexible by allowing prices to be determined by supply and demand.

Critics point to the problem of “missing money,” where it is difficult to find investors for facilities that are only used for a short time. Political decisions aimed at preventing high prices can exacerbate this problem.

Decentralization—for example, through virtual power plants—is seen as a solution that allows for rapid investment in small-scale facilities. This helps replace traditional power plants without jeopardizing energy security.

In the capacity market, certainty is created by building more power plants, because capacity is guaranteed to be purchased. This is particularly attractive to large power plants, which are paid even when they are not in operation.

A European approach offers opportunities by combining various renewable sources to ensure grid stability, provided that the capacity of cross-border interconnections is expanded.

In the energy-only market, efficiency and the “merit order” principle determine how energy security is achieved. During periods of shortages, prices rise, prompting more power plants to contribute to the grid. This model promotes rapid adjustments and rewards efficiency, which even encourages the fossil fuel sector to become more flexible.