By: Jakub Malý
August 31, 2026 12 min read
The Czech electricity market is facing a fundamental change. Alongside revenues from electricity sales, balancing services, or flexibility, a new source of revenue is to be established—a capacity availability payment. In July 2026, the European Commission approved the Czech market-wide capacity mechanism as the very first mechanism of its type under the new CISAF (Clean Industrial Deal State Aid Framework).
During the summer, Czech preparations shifted from European approval to the implementation phase. On August 6, the Ministry of Industry and Trade (MPO) issued a measure of a general nature establishing the basic terms and conditions of the mechanism. Detailed rules are currently being prepared by ČEPS (the transmission system operator), with the first capacity auctions scheduled to take place later this year.
According to the current ČEPS schedule, the preliminary assessment will take place in September 2026, auction bids will be submitted in October 2026, and auction evaluation is to be completed during October 2026. The first delivery period will follow from November 1, 2030, to October 31, 2031.
ČEPS has already published specific de-rating factors for individual technologies, preliminary price caps, and the maximum demanded volume for the first auction. As detailed below, these exact figures and auction conditions will determine whether it is economically viable for gas-fired plants, batteries, or flexible consumption to enter the mechanism.
The introduction of the mechanism primarily responds to the expected decline in dispatchable generation capacity. Coal-fired power plants are facing worsening operating economics, while new flexible sources are not emerging fast enough. At the same time, the market alone may fail to provide sufficient revenues for units that will generate electricity for only a limited number of hours per year, yet can be crucial for system stability precisely during those hours.
The results of the 2025 ERAA (European Resource Adequacy Assessment) indicate a significant deterioration in resource adequacy for the Czechia. According to data used in preparing the mechanism, the LOLE (Loss of Load Expectation) indicator reaches approximately 13 hours per year in 2028, around 18 hours in 2030, and increases to approximately 21.4 hours by 2035. The Czech reliability standard stands at 6.7 hours per year.
However, LOLE is not a forecast that households will be without electricity for 13 or 21 hours a year. It is a probabilistic indicator expressing the expected number of hours during which the modeled system may lack sufficient resources to cover demand. ENTSO-E itself emphasizes that the ERAA represents a risk assessment rather than a specific forecast of future blackouts.
One of the most significant new pieces of information concerns the specific preliminary parameters of the initial auctions. The maximum demanded volume is set at 8,580 MW of eligible capacity; however, this does not mean ČEPS will automatically procure the full demanded capacity. For the main and additional auctions, a price-elastic demand curve will be applied, meaning that as the bidding price rises, the actually procured volume may decrease. Final auction parameters will be approved by the MPO only after the results of the preliminary assessment, which will primarily reveal the volume of available supply and the expected level of competition.
Basic pricing parameters are also known. Net CONE (Cost of New Entry), representing the reference net cost of new capacity entering the market, is set at CZK 2,314,645 per MW of eligible capacity per year. The upper limit of the auction price reaches CZK 2,777,589/MW/year. For existing sources, the bidding cap is set at CZK 324,971/MW/year, with individual operators permitted to apply to the Energy Regulatory Office (ERÚ) for an individual exemption if they justify a higher bid with their specific costs.
At the same time, these values do not dictate what the actual capacity payment will be. The auction operates on a pay-as-clear principle: all successful units will receive a uniform clearing price corresponding to the highest accepted bid. The bidding cap for existing facilities thus limits their bidding price, but not necessarily the final clearing price of the entire auction.
A critical factor for the economics of individual technologies is the de-rating factor, or eligible capacity factor. A facility's installed capacity will not automatically correspond to the capacity for which the project receives a capacity payment. The de-rating factor expresses the expected contribution of a specific technology to resource adequacy.
ČEPS has now published specific baseline values. Combined Cycle Gas Turbines (CCGT) have a factor of 93%, Open Cycle Gas Turbines (OCGT) and gas engines 92%. In contrast, photovoltaic power plants have a factor of only 2.4%, and wind power plants 7.3%. For Demand Side Response (DSR), the factor is set at 35.4%, and for pumped-storage hydroelectric power plants at 43.5%.
A significant differentiation occurs in battery energy storage systems (BESS). A 1-hour battery has a baseline factor of only 12.9%, a 2-hour battery 22.5%, a 4-hour battery 37.8%, and an 8-hour battery 50.7%. Consequently, for the capacity mechanism, not only the power output of the battery in MW is decisive, but to a large extent also its energy capacity in MWh. Depending on the discharge duration, the same installed capacity can yield vastly different eligible capacities and, thus, potential capacity revenues.
Eligible participants in the capacity mechanism include generation sources, battery and other storage facilities, Demand Side Response (DSR), and aggregated portfolios of smaller units. The eligible capacity of a capacity market unit must reach at least 1 MW. For an aggregated unit composed of multiple facilities, the total eligible capacity must not exceed 99 MW. Cross-border capacities from neighboring bidding zones will be able to directly participate in Y-1 supplementary auctions.
A crucial restriction is the emission limit of 550 grams of CO₂ per kWh of electricity generated, which practically excludes traditional coal-fired power plants. While the mechanism is formally technologically neutral, its parameters create significantly higher value for sources capable of ensuring reliable availability during scarcity situations. Under Czech conditions, one can therefore expect a prominent role for gas-fired sources, alongside batteries, pumped-storage plants, and flexible consumption.
For certain operators, a major hurdle may be the incompatibility of the capacity mechanism with operational support, such as green bonuses or high-efficiency cogeneration (HEC) support. Crucially, the decision to relinquish operational support must be made in connection with the preliminary assessment. If a capacity unit is deemed eligible and valid auction results are subsequently published, the registration for operational support is canceled regardless of whether the unit actually participated in the auction or secured a capacity contract. For some existing sources, mere entry into the qualification process thus represents a significant economic decision.
The standard instrument of the Czech system will be the main Y-6 auction, held six years prior to the start of the delivery period. Its purpose is to provide sufficient lead time, particularly for the construction of new capacities. Each delivery year will also be followed by a Y-1 supplementary auction, allowing adjustments to the required volume based on more recent system and market developments.
Additionally, in the first year of operation, two extraordinary supplementary auctions are scheduled: the Y-4 auction targeting the period from November 1, 2030, to October 31, 2031, the Y-5 auction for the following year, and the main Y-6 auction for the delivery period beginning November 1, 2032. This is a one-time solution for the rollout of the mechanism; subsequently, the standard combination of the Y-6 main auction and Y-1 supplementary auction will recur.
Financial collateral is also mandatory for participation. Every capacity market unit must submit a bank guarantee during the preliminary assessment phase. The minimum amount is set at CZK 2.416 million per Capacity Market Unit (CMU). For existing facilities, the guarantee is calculated at CZK 250,000/MW of eligible capacity, and for new or modernized facilities at CZK 500,000/MW. If successful, the bank guarantee must remain valid until the start of the delivery period, and ČEPS may proportionally draw upon it in the event of failure to meet established milestones.
Rules regarding long-term contracts warrant a significant correction compared to initial assumptions. The Czech mechanism operates with annual and 15-year contracts. A 15-year contract is not defined simply as support exclusively for a "new source," but is tied to sufficiently high capital expenditures (CAPEX) and the demonstration of the incentive effect of the support. It may therefore also be considered for sufficiently extensive modernization of an existing facility.
To qualify for a 15-year contract, capital expenditures must reach at least CZK 9.06 million per MW of eligible capacity. If a capacity market unit consists of multiple facilities, each must fulfill this condition. Eligibility is assessed during the preliminary assessment stage.
This long-term contract can be critical for the economics of new gas-fired or other capital-intensive flexible sources. A unit with a relatively low expected number of operating hours may not be able to cover its investment solely through electricity sales and balancing services. The capacity payment can therefore help bridge a portion of the "missing-money" problem and strengthen the bankability of the investment.
However, a significant economic condition applies: the clearing price achieved in the auction remains nominally unchanged throughout the entire duration of the capacity contract and is not automatically indexed for inflation. Therefore, for a 15-year contract, not only the absolute level of the cleared price will matter, but also the expected evolution of fixed operating costs and inflation over the coming years.
The capacity mechanism is explicitly designed as a complement to other energy markets. Providers may continue to sell electricity and, under set conditions, provide balancing services as well. For the economic evaluation of a project, it therefore makes sense to view capacity revenue as an additional component of the revenue stack rather than a replacement for other income.
Simultaneously, success in an auction entails a long-term commitment to availability. Each capacity unit will be subjected to an availability test at least once per delivery period, announced a maximum of 24 hours in advance. Any failure of this test is penalized by a fine equal to 10% of the availability payment for the respective delivery period. Penalties are also applied 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 important element of the economics is the balancing amount clawback mechanism. If market prices on the day-ahead market exceed the respective balancing threshold during a scarcity period, the provider returns a portion of the extraordinary market revenue to ČEPS, calculated in accordance with the mechanism's rules. ČEPS states that the reduction in payment including the clawback amount is not capped.
For battery storage and DSR, a threshold of EUR 124.6/MWh is applied, tracking the difference between reference minimum and maximum electricity prices during a given day. The methodology is tailored to the duration for which the facility can provide capacity. For batteries, the discharge duration thus affects not only the de-rating factor but also the calculation of potential clawback amounts.
The European Commission estimates the total costs of the Czech mechanism at approximately CZK 75 to 150 billion (EUR 3.09 to 6.19 billion). The actual volume will depend on the amount of capacity procured and the prices achieved in individual auctions.
Costs will be passed on to electricity consumers via regulated fees. At least 90% of the costs are to be allocated based on consumption during the 1 to 5% of trading intervals with the highest electricity prices in a given year. In addition to financing available capacity, this mechanism design creates an additional economic signal to reduce or shift consumption during the most expensive periods. For large industrial consumers, this may have a significant impact on the economic value of flexibility.
The capacity mechanism has now reached a stage where most parameters required for initial economic project evaluation are known. The maximum demanded volume is 8.58 GW of eligible capacity, and de-rating factors, preliminary auction price parameters, financial collateral conditions, and the basic contractual and penalty regime have all been published. Nevertheless, these remain preliminary auction parameters. Final settings will be approved only after a preliminary market assessment, meaning the final demand curve and other parameters may still react to the actual scope of supply.
For potential participants, the question thus shifts from "what will the capacity mechanism look like?" to "at what bidding price does it make sense to enter?" For gas-fired sources, it will be necessary to jointly model CAPEX, expected operating hours, generation margins, balancing service revenues, a de-rating factor of around 92–93%, the capacity product price, and the value of a 15-year contract—while bearing in mind that the capacity price will not be indexed. For batteries, the combination of the de-rating factor, storage capacity, arbitrage and ancillary service revenues, and the clawback mechanism will be crucial.
At the same time, the window for entering the first round is short, with applications for preliminary assessment due by September 20. However, this is more of a practical challenge for applicants than the primary significance of the capacity mechanism. The crucial factor will be how strong the competition proves to be in the first auctions and where the marginal clearing price settles. The results of the initial auctions will demonstrate whether the market can stimulate sufficient investment in dispatchable capacity while creating space for batteries and flexibility. Only then will it be possible to more accurately assess the actual technological mix that the capacity mechanism will deliver to the Czechia for the post-coal era.
This text was originally published on oenergetice.cz
This text was translated by AI.
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