24 Feb 2015 | Sören Amelang

Energy ministry wants market forces to secure power supply

The energy ministry does not want to pay utilities to keep conventional power plants on reserve for times of scarcity in a pending redesign of the power market in Germany. “We will propose not to intervene," said Rainer Baake, State Secretary at the ministry. A market-based approach would ensure the most efficient solutions are found to secure a safe and stable energy supply without government intervention, said Baake. This would coordinate the fluctuating generation from renewable energy sources and demand in innovative ways, he explained at a conference organised by the German Association of Energy and Water Industries (BDEW).

Baake’s remarks imply once again that a fully-fledged so-called capacity market will not be included in the ministry’s proposal for a redesign, which is due in the spring. The ministry 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. A period of consultation on the proposals is due to finish by the end of the month and the ministry will publish its proposal between Easter and the summer, according to Baake. Both energy minister Sigmar Gabriel and Chancellor Angela Merkel have expressed scepticism over capacity markets that would mean payments for unprofitable fossil-fuel power stations that can smooth out fluctuating power supply from renewable sources.

At the same event, Hildegard Müller, chair of BDEW, renewed her association's demand for the addition of a decentralised capacity market where security of supply is traded. The BDEW, where almost all owners of conventional power plants are organised, and the VKU, the German Association of Local Utilities, are both in favour of this model. It would introduce "capacity certificates", whose price should rise at times of power scarcity, providing incentives to invest in additional capacities.

Baake said Germany needed to take a landmark decision regarding the redesign of the power market. A market-based approach would only work with a legal guarantee to rule out state interventions – such as a cap to prevent soaring power prices on the market at time of supply shortages – in order to give investors total confidence for investment decisions, explained Baake. Any intervention in the market mechanisms or even insecurity about future policies would block necessary investments to secure supply and thus make a capacity market necessary. The redesign required a clear commitment to one of the two models, according to Baake. “You can’t cherry-pick between the two models.” Faced with the question whether voters would approve of strongly fluctuating electricity prices on the exchange, Baake stressed households would not be affected at all because they would only pay the price stipulated in their contract with their utility.

 A market-based approach would also fit much better to a European-wide energy market than a capacity market, Baake argued. Because small neighbouring countries can buy power in Germany, they could safely rely on a German capacity market to effectively cap prices, which would stifle their incentive to innovate.

Read CLEW’s dossier on power market reform here.

Read CLEW’s factsheet on capacity markets around the world here.

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