Energy minister locks horns with utilities over capacity markets

Sigmar Gabriel has made strong statements against capacity markets, with the utilities once again insisting they are needed to ensure investment in the power sector. The state secretary for energy said that with current overcapacity, there is still time to decide on the long-term future of the German electricity market.

Energy minister Sigmar Gabriel has emphasised that he does not support the introduction of capacity markets in Germany, echoing comments from Chancellor Angela Merkel and locking horns with representatives of the utilities.

Top managers from the industry were quick to reiterate their view that payments to conventional power plants were essential for supply security as the country increases its renewable power generation. Gabriel’s top official stressed that while capacity markets were not currently needed, the final decision on the future market design was still open.

In an interview, Gabriel told the German business paper Handelsblatt that capacity payments to fossil-fuelled power stations were the "the opposite of rational energy policy.” The minister showed support for a model of an energy-only market, plus a “stability reserve” of capacity that would only be used in emergencies.

But Johannes Teyssen, CEO of Germany’s biggest utility, E.ON, insisted that “well-designed capacity markets in Germany and Central Europe” were a must. “Conventional power plants will stay for a long time. Supply security needs a fair market and a fair price,” he said, speaking at the Handelsblatt Energiewirtschaft 2015 event in Berlin.

The Federal Ministry for Economic Affairs and the Environment published a green paper in October, outlining possible reforms to the power market as the next major step in the Energiewende or energy transition. The paper includes various models for capacity mechanisms that would pay conventional power plants to ensure that capacity is available for times when power from fluctuating renewable energy sources fails to meet demand.

The green paper was immediately interpreted as leaning towards keeping the current energy-only market – meaning that power plants are only compensated for the power they produce and sell – plus a stability reserve, but it was also clear that a final decision had yet to be taken.

Now, Gabriel’s attack on capacity markets, which follow comments made by Merkel last week that she was also “sceptical” of the idea, have been seen as putting an end to the debate.

“There are considerable overcapacities in the German market. Some of those who demand a capacity market are only hiding their real interest in conserving existing overcapacities at the consumers' expense,” Gabriel told the Handelsblatt.

State Secretary at the Federal Ministry for Economic Affairs and Energy Rainer Baake insisted that the consultation is still underway. "There is no pre-emptive decision,” he said speaking at the Handelsblatt event.

Baake said that while overcapacity in the market meant that a capacity mechanism was not currently needed, there were still questions over the design of the market in the longer term.

“We don't have a capacity problem in Germany in the next two – or in the next five – years. We have large overcapacity, which will not be kept in the market. The discussion will be over what our power market design will look like during the following decade, once overcapacities have been reduced,” Baake said. “Luckily we have time.”

Baake also pointed out that the German debate was closely linked to ongoing talks with other European countries and the European Commission.

Price spikes

Utilities have argued that the low price of power – driven down by overcapacity and the growth of renewables that have close to zero production costs – means the market requires an added mechanism to drive investment in the sector.

Otherwise, E.ON CEO Teyssen said, supply security in one of the leading industrial nations would be put at risk. "Wind and solar cannot replace conventional power plants, they can only complement them," said Teyssen, speaking in Berlin, adding that this might change once solutions have been developed to store renewables power when generation is high, “but we are still far from that."

Gabriel told the Handelsblatt that high prices at times of scarcity would ensure that conventional power plants would remain profitable and attract investment. “Because there is a risk of peak prices, companies will start to buy power through long-term contracts.”

Compared to the current situation where many companies operate on the day-ahead market, long-term contracts would provide security and ensure investment for power plants, Gabriel said. A capacity reserve would be a “belt and braces” measure, which would not be used to absorb peaking prices but only to contribute power when there was a real threat of supply shortage.

But Teyssen warned that dramatic prices spikes would be problematic: "This will lead to problems with acceptance with citizens and customers and to incomprehension of our European partners.”

Rolf Martin Schmitz, deputy chairman of executive board of RWE– Germany’s second biggest utility – took a similar line, saying that Gabriel’s concerns over the cost of capacity markets were misplaced. “The real costs for a capacity market are rather small. The prices for volatile power markets could be much higher," he told the Handelsblatt conference.

Henrik Maatsch, energy expert at environmental organisation WWF, told the Clean Energy Wire that the current debate failed to clarify which of the proposed capacity market models Gabriel rejects.

“The WWF criticises technology neutral capacity markets (such as the decentralized capacity market) as they threaten to conserve the current structure of the generation portfolio and do not help a consequent energy transition. One must consider that the capacity reserve mentioned by Gabriel comprises capacity payments to conventional power stations and could potentially lead to windfall profits for emission intensive power plants,” he said.

Stadtwerke dissatisfaction

Despite Gabriel reassuring municipal utilities that it was not in his interest to make life difficult for the operators of highly efficient combined heat and power (CHP) plants, Germany’s local municipal utilities (Stadtwerke) remained sceptical, with the president of the German Association of Local Utilities (VKU) reiterating the sector’s concern that even modern installations cannot currently be run at a profit.

Sven Becker, executive director of Trianel, a company that is owned by several of the Stadtwerke and organises among other things their energy trading, said: “The market is not providing the right signals for investment anymore.” He echoed Teyssen’s scepticism over scarcity prices as a driver for investment: "Who should invest in such a market? Who invests in an unstable cash flow?"

The VKU and the German Association of Energy and Water Industries (BDEW) have put forward a proposal for “decentralised capacity markets”.

A future free of state intervention

Following his announcement in December 2014 that the power sector must cut an additional 22 million tonnes of CO2 emissions from their fossil fuelled power stations, Gabriel used the Handelsblatt interview to express hope that with a decision on the power market and combined heat and power plants, a consensus on coal could be reached. “If we succeed with that, the government will not have to commit itself to any further interventions. With that we would finally have long-term reliability.”

E.ON’s Teyssen said the European emissions trading scheme should be the sole mechanism used to reduce emissions from fossil fuelled power stations. “We don’t need national attempts such as the debate over coal.”

Teyssen said politicians must come to terms with the fact that they can no longer manage the Energiewende on a national level, as global forces including a rapid digitalisation were now drivers of change in the industry and the reason behind E.ON’s decision to split its conventional power business off.  “What’s needed are reliable long-term frameworks with ambitious goals which leave utmost flexibility to market participants.”

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