Germany's new power market design

The German parliament has approved wide-reaching reforms of the power market and agreements about the transferral of lignite power plants into an emergency reserve before permanent phase-out. This factsheet presents a summary of the plans, as detailed by the energy ministry.

The German Federal Parliament at the end of June 2016 passed three provisions regarding the organisation of Germany’s power system: the power market law, a capacity reserve decree and a law on the digitalisation of the energy transition. Here's an overview of reforms, which were prepared by the Ministry for Economic Affairs and Energy (BMWi) and condoned by the government cabinet in autumn 2015.

Power market 2.0

The new power market law is designed to ensure efficient power station operation at a time when more and more renewables are entering the electricity market, and to ensure security of supply, the government said. “We forego the implementation of capacity markets, which can be expensive and inefficient, and instead rely on the power of the markets,” the document explains. Some key elements are:

  • Free price formation – The government wants to strengthen the price signal in the power market, so that it becomes a reliable entity that investors can count on. More specifically, the law promises that the state will not interfere in the power market even when prices skyrocket at times. Power station operators are meant to benefit from peak prices in times of scarcity, so they invest in flexible power stations, load management and storage capacity.
  • Tougher rules apply to power suppliers and power traders to ensure they buy enough power at the right time for their customers. A power trader who buys less power than he is meant to deliver to his customers – meaning that grid operators have to jump in to secure the balance in the electricity system – has to bear the costs.
  • Competition for flexibility – The government wants to see more market competition of “flexibility options”. Providers of load management, flexible power production or storage capacity will be given access to the power market (for balancing power). In the medium term, electric cars will also become flexibility options.
  • Reducing costs of grid expansion – The government will change the way distribution grids are planned and expanded, scrapping the ideal that the grid has to be able to incorporate every single kilowatt-hour of solar or wind power all year round. Grid fees, which vary considerably from one German region to another, will be distributed across the whole country, reducing regional discrepancies, the government hopes.
  • Extend the network reserve – The “network reserve” of power plants will be extended beyond 2017. Together with the new capacity reserve, the network reserve is necessary to cope with bottlenecks and to ensure grid stability with so-called re-dispatch measures until “important grid expansion projects are completed”, the government explains.

Capacity reserve

As an additional buffer, a new “capacity reserve” is meant to ensure the security of power supply in case of unforeseeable and extreme events. “It secures the ‘power market 2.0’ like suspenders attached to a belt”, according to the document.
“The central feature of the capacity reserve is the fact that it only contains power plants which are not part of the power market. This is how we ensure competition on the power market is not distorted.” The plants in the reserve will eventually have a total capacity of around 4.4 GW – five percent of the average maximum power demand (maximum peak load) of 86 GW forecast for the next five years. They will only be used “when all market-based options on the power market are exhausted”.
Technology-neutral tenders, starting in 2017, will determine which plants enter the reserve and at what cost, as operators will be paid a reimbursement. The first tender will have a capacity of 1.8 GW for a duration until 2019. Because of this process, the total cost of the capacity reserve remains unclear, but the government expects to pay around 130 million to 260 million euros per year. Grid fees will probably rise by an average of 0.028 cent to 0.055 cent per kilowatt-hour.

Security standby of lignite plants

In order to save CO2 emissions in the power sector, the government has agreed with utilities to put old and inefficient lignite plants with a total capacity of 2.7 GW on temporary “security standby”, starting with the first stations in 2016. The plants are mothballed for four years, before being closed down permanently. “The plants will only be called upon as a very last resort, for example in the case of long-lasting, extreme weather events,” according to the document.
The government expects this measure to reduce CO2 emissions by 11 million to 12.5 million tonnes in 2020. Utilities will be reimbursed lost profits while their plants are on standby. The  lignite standby reserve will cost an estimated 230 million euros per year on average and last for seven years, according to the plans. Grid fees for consumers will likely rise by, on average, 0.05 cent per kilowatt-hour.

Digitalisation of the energy transition

The draft law on the digitalisation of the energy transition is intended to shape the framework for an “intelligent grid system”. It provides the legal backdrop for the incorporation of intelligent measuring systems, known as smart meters.

  • Smart meter roll out – The roll out of smart meters will have a price ceiling, the government promises: Installing the devices must not cost consumers much more than what they can save in electricity costs by using them. As of 2017, large-scale consumers with more than 10,000 kWh per year have to get smart meters. After 2020, households and companies with a consumption of more than 6,000 kWh will need the devices (average German household p.a. 3,500 kWh).
  • “Security & privacy by design” – Smart meters collect and transfer a lot of data about consumer behaviour and therefore require a lot of data protection. Several hundred pages of technical guidelines are to ensure that smart meters are secured against hacker attacks, the government said.
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