Those prepared will profit: Capacity mechanism changes Czech energy market rules

The Czech electricity market is facing a fundamental change. Alongside revenue from electricity sales, balancing services or flexibility, a new source of income is to emerge – a payment for capacity availability. In July 2026, the European Commission approved the Czech market-wide capacity mechanism as the first mechanism of its kind under the new CISAF (Clean Industrial Deal State Aid Framework).

Over the summer, Czech preparations moved from European approval into the implementation phase. On 6 August, the Ministry of Industry and Trade (MPO) issued a measure of general application setting out the mechanism’s basic conditions. ČEPS is preparing the detailed rules, and the first capacity auctions are due to take place later this year.

According to ČEPS’s current timetable, prequalification will take place in September 2026, auction bids will be submitted in October 2026, and the auction evaluation is to be completed during October 2026. The first delivery period will run from 1 November 2030 to 31 October 2031.

ČEPS has already published specific de-rating factors for individual technologies, preliminary price caps and the maximum procured volume for the first auction. As explained below, these figures and auction conditions will determine whether it is worthwhile for gas-fired assets, batteries or flexible demand to enter the mechanism.

The problem is not annual electricity generation, but capacity in critical hours

The introduction of the mechanism primarily responds to the expected decline in dispatchable generation capacity. Coal-fired power plants face worsening operating economics, while new flexible resources are not yet being built quickly enough. The market itself may not provide investors with sufficient returns for assets that generate for only a limited number of hours a year, even though they may be crucial to system stability precisely during those hours.

ERAA 2025 results (European Resource Adequacy Assessment) indicate a marked deterioration in resource adequacy for the Czech Republic. According to data used in preparing the mechanism, the LOLE (Loss of Load Expectation) indicator reaches approximately 13 hours a year in 2028, around 18 hours in 2030, and rises to approximately 21.4 hours by 2035. The Czech reliability standard is 6.7 hours a year.

However, LOLE is not a forecast that households will be without electricity for, for example, 13 or 21 hours a year. It is a probabilistic indicator expressing the expected number of hours during which the modelled system may lack sufficient resources to meet demand. ENTSO-E itself notes that ERAA is a risk assessment, not a specific forecast of future blackouts.

ČEPS will procure de-rated capacity

One of the most significant new pieces of information is the specific preliminary parameters of the first auctions. The maximum procured volume is set at 8 580 MW of eligible capacity, but this does not mean that ČEPS will automatically use the full volume sought. A price-elastic demand curve will be used for the main and supplementary auctions, meaning that the volume actually procured may decline as bid prices increase. The final auction parameters will be approved by the MPO only after the prequalification results, which will show in particular the volume of available supply and the expected level of competition.

The basic price parameters are also already known. Net CONE (Cost of New Entry), meaning the reference net cost of bringing new capacity to market, is 2 314 645 Kč/MW of eligible capacity per year for new assets. The auction price ceiling is 2 777 589 Kč/MW/year. For existing assets, the bid cap is 324 971 Kč/MW/year, although an individual operator may apply to the Energy Regulatory Office for an individual exemption if it can justify a higher bid through its specific costs.

These values do not, however, indicate what the actual capacity payment will be. The auction operates on a pay-as-clear basis: all successful assets receive a single clearing price corresponding to the highest accepted bid. The bid cap for existing facilities therefore limits their bid price, rather than necessarily the final clearing price of the entire auction.

De-rating is no longer an unknown

The so-called de-rating factor, or eligible capacity factor, is crucial to the economics of individual technologies. The installed capacity of a facility will not automatically correspond to the capacity for which a project receives a capacity payment. De-rating expresses the expected contribution of a specific technology to resource adequacy.

ČEPS has now published specific baseline values. Combined-cycle gas turbine plants (CCGT) have a factor of 93%, while open-cycle gas turbines (OCGT) and gas engines have 92%. By contrast, photovoltaic plants have a factor of just 2.4% and wind farms 7.3%. The factor is set at 35.4% for demand-side response (DSR) and 43.5% for pumped-storage hydropower plants.

There is considerable differentiation among battery storage systems. A one-hour battery has a baseline factor of only 12.9%, compared with 22.5% for a two-hour battery, 37.8% for a four-hour battery and 50.7% for an eight-hour battery. For the capacity mechanism, therefore, not only a battery’s power capacity in MW matters, but also, to a considerable extent, its energy capacity in MWh. The same installed capacity can have eligible capacity, and thus potential capacity revenue, differing several-fold depending on discharge duration.

Technology-neutral mechanism favours availability

Generation assets, battery and other storage facilities, DSR (Demand Side Response), and aggregated portfolios of smaller facilities may participate in the capacity mechanism. The eligible capacity of a capacity market unit must reach at least 1 MW. For an aggregated unit comprising multiple facilities, total eligible capacity must not exceed 99 MW. Cross-border capacity from neighbouring bidding zones will be able to enter the Y-1 supplementary auctions directly.

An important constraint is the emissions limit of 550 grams of CO₂ per kWh of electricity generated, which effectively excludes conventional coal-fired power plants. The mechanism is therefore formally technology-neutral, but its parameters create significantly greater value for resources capable of ensuring reliable availability during scarcity events. Under Czech conditions, gas-fired resources can therefore be expected to play a significant role, alongside batteries, pumped-storage plants and flexible demand.

For some operators, a significant obstacle may be the incompatibility of the capacity mechanism with operating support, such as a green bonus or support for high-efficiency cogeneration. Crucially, the decision to relinquish operating support must be made already in connection with prequalification. If a capacity unit is found eligible and valid auction results are subsequently published, its operating support registration will be cancelled regardless of whether the unit actually participates in the auction or obtains a capacity contract. For some existing assets, merely entering the qualification process therefore represents a major economic decision.

Auctions are intended to create a long-term investment signal

The standard instrument of the Czech system will be the Y-6 main auction, held six years before the start of the delivery period. Its purpose is to provide sufficient lead time, particularly for the construction of new capacity. Each delivery year will also have a Y-1 supplementary auction, allowing the required volume to be adjusted in line with more up-to-date developments in the system and market.

In the mechanism’s first year of operation, two extraordinary additional auctions are also planned. The Y-4 auction targets the period from 1 November 2030 to 31 October 2031, the Y-5 auction the following year, and the Y-6 main auction the delivery period beginning on 1 November 2032. This is a one-off solution for launching the mechanism; thereafter, the combination of the Y-6 main auction and Y-1 supplementary auction is to be repeated as standard.

Financial security for participation is also important for prospective participants. Each capacity market unit must submit a bank guarantee during prequalification. The minimum amount is 2.416 million Kč per CMU. For existing facilities, the guarantee is calculated at 250 thousand Kč/MW of eligible capacity, and for new or modernised facilities at 500 thousand Kč/MW. If successful, the bank guarantee must remain valid until the start of the delivery period, and ČEPS may draw it proportionately if specified milestones are not met.

A 15-year contract is not only for an entirely new asset

The rules for long-term contracts warrant an important revision of the original assumptions. The Czech mechanism provides for one-year and 15-year contracts. A 15-year contract is not defined simply as support only for a “new asset”, but is tied to sufficiently high capital expenditure and demonstrating the incentive effect of the support. It may therefore also be available for a sufficiently extensive modernisation of an existing facility.

To obtain a 15-year contract, capital expenditure must reach at least 9.06 million Kč per MW of eligible capacity. If a capacity market unit comprises multiple facilities, each of them must meet this condition. Eligibility is assessed during prequalification.

A long-term contract may be crucial to the economics of new gas-fired or other capital-intensive flexible resources. An asset with a relatively low expected number of operating hours may be unable to recover its investment solely through electricity sales and balancing services. The capacity payment can therefore address part of the so-called missing-money problem and improve the investment’s bankability.

There is, however, an important economic condition: the clearing price achieved in the auction remains nominally unchanged throughout the capacity contract and is not automatically indexed to inflation. For a 15-year contract, therefore, not only the absolute level of the auctioned price will matter, but also the expected development of fixed operating costs and inflation over the following years.

Capacity payment can supplement other revenues, but is not risk-free

The capacity mechanism is explicitly designed as a complement to other energy markets. A provider may continue selling electricity and, under specified conditions, also provide balancing services. When assessing a project economically, it therefore makes sense to view capacity revenue as an additional component of the revenue stack, rather than a replacement for other revenues.

Success in the auction, however, also means a long-term availability commitment. Each capacity unit will undergo an availability test at least once per delivery period, notified no more than 24 hours in advance. Each failure of this test is penalised by a fine equal to 10% of the availability payment for the relevant delivery time. Penalties also apply for unavailability during actual scarcity periods. The total cap on contractual penalties for unavailability is set at twice the capacity payment for the given delivery time.

Another significant component of the economics is the balancing amount repayment mechanism, a form of clawback. If, during a scarcity period, the day-ahead market price exceeds the relevant balancing threshold, the provider returns to ČEPS part of the exceptional market revenue calculated under the mechanism’s rules. ČEPS states that the payment reduction including the balancing amount is not capped.

For battery storage and DSR, a threshold of 124.6 EUR/MWh is used, and the difference between the reference minimum and maximum electricity prices during the relevant day is monitored. The methodology is adjusted to the duration for which the given facility is able to provide capacity. For batteries, discharge duration therefore affects not only the de-rating factor but also the method for calculating the potential balancing amount.

Consumers will bear the mechanism’s costs

The European Commission estimates the total cost of the Czech mechanism at approximately 75 to 150 billion Kč, or 3.09 to 6.19 billion EUR. The actual amount will, however, depend on the volume of capacity procured and the prices achieved in individual auctions.

The costs will be passed on to electricity consumers through regulated charges. At least 90% of costs are to be allocated according to consumption during the 1 to 5% of trading intervals with the highest electricity prices in a given year. In addition to financing available capacity, the mechanism’s design thus creates a further economic signal to reduce or shift consumption during the most expensive periods. This may have a significant impact on the economic value of flexibility for large industrial consumers.

The key issue is no longer the mechanism’s design, but the price in the resulting auctions

The capacity mechanism has now reached a stage where most parameters needed for an initial economic assessment of projects are known. The maximum procured volume is 8.58 GW of eligible capacity, and de-rating factors, preliminary auction price parameters, financial security requirements, and the basic contractual and penalty regime have been published. These are still preliminary auction parameters, however. The final design will only be approved after market prequalification, meaning that the final demand curve and other parameters may yet respond to the actual scale of supply.

For potential participants, the question is therefore shifting from “what will the capacity mechanism look like” to “at what bid price does it make sense to enter it”. For gas-fired assets, CAPEX, expected operating hours, generation margin, balancing-service revenue, de-rating of around 92–93%, the price of the capacity product and the value of a 15-year contract will need to be modelled together, while recognising that the capacity price will not be indexed. For batteries, the crucial combination will be de-rating, storage capacity, arbitrage and balancing-service revenue, and the balancing amount repayment mechanism.

The time for entering the first round is short, with prequalification applications required by 20 September. However, this is more of a practical challenge for prospective participants than the capacity mechanism’s main significance. What will matter is how strong competition becomes in the first auctions and at what level the marginal price settles. The results of the first auctions will show whether the market can trigger sufficient investment in dispatchable capacity while also creating space for batteries and flexibility. Only then will it be possible to assess more precisely what technology mix the capacity mechanism will actually deliver for the Czech Republic in the post-coal period.