Spain Creates an Electricity Capacity Market

Regulatory Background

In May 2026, the European Commission approved Spain's proposed electricity capacity mechanism, authorising an estimated budget of up to €9 billion over a 10-year period.

Following this approval, Spain's Ministry for the Ecological Transition and Demographic Challenge approved the Ministerial Order TED/966/2026, of 15 September 2026, establishing the Order. The Order entered into force on 18 September 2026 and created Spain's first market-wide capacity mechanism: a peninsular centralised capacity market open to generation, storage and demand-side resources, structured around sealed-bid, pay-as-bid auctions.

How the Spanish Capacity Market Works

General framework. The Order establishes a centralised capacity market (as distinct from a strategic reserve). The procured product is firm capacity in MW. The offer variable is the price per MW of firm capacity per year (€/MW/year, no decimals).

Settlement is sealed-bid, pay-as-bid: each successful bidder is paid its own bid price, not the marginal clearing price. This contrasts with the pay-as-cleared mechanisms used in Great Britain, Italy and France; Belgium is the principal European precedent for a pay-as-bid capacity mechanism.

The firm capacity is procured through competitive auctions. The Order creates two auction modalities, together with a transitional auction regime:

• Main auctions: procure the system's firm-capacity needs. Delivery starts within a maximum of five years from award (or up to nine years for qualifying new investments allocated to a specific investment quota). Contract duration varies by technology:

In addition to a possible confidential maximum price cap on the required-firm-capacity curve, a confidential lower reserve price may be set for existing installations other than demand. However, existing generation or storage installations planning a new investment may request that it not apply. 

• Adjustment auctions: annual, with 12-month delivery starting within 12 months of award. Only installations already in service may participate. Designed to resolve unforeseen or residual adequacy gaps.
• Transitional auctions: held from entry into force of the Order until the first main-auction delivery period begins. One per calendar year, annual delivery.

Institutional architecture. The administrator of the market is Red Eléctrica de España, S.A., acting as system operator and auction administrator. The supervisor is Comisión Nacional de los Mercados y la Competencia, as auction supervisor, validating objectivity, transparency, non-discrimination and competitiveness of each auction. The convening authority for auctions is the Secretaría de Estado de Energía, although results are resolved by the Dirección General de Política Energética y Minas.

Eligibility requirements. The market is open to: (i) electricity producers; (ii) storage owners; (iii) final consumers; (iv) demand-aggregation providers (including suppliers); and (v) aggregators of electricity production and storage. Offer blocks must be at least 1 MW of firm capacity.

Firmness coefficients (ranging from 0 to 1) are applied to installed capacity to derive firm capacity. These perform a function broadly analogous to the de-rating factors used in other capacity markets. Only technologies with a defined firmness coefficient can participate.

Additionally, new investments participating in the main auction are limited to renewable generation, storage and demand-side resources, reflecting the mechanism's decarbonisation orientation; whereas existing generation installations must satisfy a maximum emissions intensity of 550 g CO₂/kWh.

Existing non-renewable generation must additionally meet a flexibility-coefficient threshold―the ratio of energy mobilised through manual-activation balancing markets to energy produced―set by reference technology in each auction call.

Remuneration. Successful bidders receive a fixed monthly payment equal to (1/12) × awarded firm capacity (MW) × award price (€/MW firm/year). Payments commence from the start of the delivery period, settled monthly. The award price and awarded capacity are not indexed or updated.

Competition safeguards. Each auction call may also set a minimum ratio of bids received to the firm capacity procured and a maximum share of total awarded firm capacity attributable to any single company or corporate group.

Environmental criterion. Exceptionally, a main-auction call may set a maximum emissions threshold that awardees may not exceed. To that end, CO₂-equivalent emission levels may be defined for each emitting reference technology so that, taken together, the CO₂ emissions of the successful installations remain below that threshold. In the selection of offers, bids from the highest-priced emitting technologies that would cause the threshold to be exceeded are discarded. For hybrid installations, the CO₂-equivalent emission level is the average of each participating module's emissions, weighted by its firm capacity.

Testing. Availability may be tested at least annually, with up to three successive tests: a first failure costs one month’s remuneration plus 20%, a second costs a quarter’s remuneration plus 20%, and a third costs the annual remuneration plus 20% and disqualifies the installation. Additionally, failure to comply with the obligation to provide firm capacity when required may lead to payment obligations.

Financing. The annual cost of the mechanism is funded by electricity suppliers, including suppliers of last resort, and by consumers purchasing directly in the wholesale market, through unit prices comprising an energy term, differentiated by tariff segment and time period.

Secondary market. The Order contemplates a secondary market to enhance liquidity: capacity rights and obligations may be ceded or transferred to third parties, subject to prior approval to verify that the transferee meets all eligibility requirements. The transfer must be requested at least two months before the first affected calendar year, and must comprise all the firm capacity awarded to the transferor for a natural year. This does not preclude participation in later auctions.

Cross-border participation. Installations in zones bordering Spain may participate once TSO coordination agreements and compliance conditions are approved.

Next steps. The Secretary of State for Energy must approve by resolution the operating procedure for the capacity service (covering technical, documentary and operational requirements, qualification, provider obligations, verification and testing, settlement, etc.) as well as the auction call.

How Spain Compares: European Capacity Markets

All European capacity mechanisms share a common regulatory backbone: EU State aid rules and the capacity-mechanism provisions of Chapter IV of Regulation (EU) 2019/943. Most are centralised, TSO-administered schemes. However, Spain's design incorporates distinctive features that differentiate it from the models prevalent elsewhere―notably pay-as-bid settlement and a multi-track (main, adjustment and transitional) auction structure.

Spain's choice of pay-as-bid settlement is relatively uncommon in Europe. Belgium is the principal European precedent for the pay-as-bid model. The Great Britain, Italy and reformed French mechanism use pay-as-cleared pricing, which is generally considered to promote price discovery and reduce strategic bidding. Under Spain's pay-as-bid design, each successful bidder receives its own bid price rather than a uniform marginal clearing price.

Also, Spain's design goes beyond the minimum EU emissions framework in two respects. First, existing generation must comply with a standalone 550 g CO₂/kWh emissions-intensity ceiling. Second, new investments participating in main auctions are restricted to renewable generation, storage and demand-side resources. Together, these requirements give the Spanish mechanism a comparatively strong decarbonisation orientation.