06 Feb 2024, 09:42
Julian Wettengel

Germany to hold tenders for new gas power plants “soon”, promises capacity mechanism

Graph shows plans for hydrogen-ready gas power plant by RWE. Source: RWE.
Companies like German RWE plan to build hydrogen-ready gas-fired power plants across Germany. Image: RWE.

Germany is set to hold auctions to support the construction of new gas-fired power plants in the short term, which would then be converted to run on hydrogen in the mid-to-late 2030s, the ruling coalition said. The plants are considered crucial to guarantee electricity supply security as the share of intermittent renewable energy increases and coal is phased out. By 2028, the government wants to have a capacity mechanism in place, ensuring a business case for the power plants. Energy industry association BDEW welcomed the announcement, but called for clarity on funding volume, the timeline for the auctions and the location of the new gas units. The renewables industry and environmental NGOs criticised that converting the plants to use hydrogen would have to happen much sooner than planned by the government. [UPDATE adds reactions from industry, commentators, NGOs]

Germany's ruling coalition has agreed to speedily set up state support auctions for 10 gigawatts (GW) of new gas-fired power plants which will then be converted to run on hydrogen between 2035 and 2040. It also agreed to develop a capacity mechanism to be operational by 2028.

Chancellor Olaf Scholz, economy and climate minister Robert Habeck and finance minister Christian Lindner agreed "that new power plant capacities of up to 4 x 2.5 GW will be put out to tender as H2-ready gas-fired power plants soon as part of the power plant strategy, which are to switch to hydrogen between 2035 and 2040," the economy ministry said in a press release. The government did not provide any details on the volume of support, or a timeline for the auctions, but emphasised the need for speed. "In order to quickly realise a no-regrets number of power plants, the power plant strategy will promptly incentivise an accelerated addition of power plants," it wrote. According to government coalition sources, the support will be around 16 billion euros over the next 20 years or so, German media reported.

The government considers "hydrogen-ready" gas plants a necessary supplement to intermittent renewables to secure electricity supply as the country weans itself off coal-fired power generation. Germany aims to increase renewables’ share of power consumption from about 50 percent today to 80 percent by 2030. It shut down its remaining three nuclear power plants last year and plans to have a nearly zero-emissions supply by 2035. While gas use is projected to decrease, the power plants would be needed at times of little sunshine or wind, and during peak consumption periods. The term ‘hydrogen-ready’ is contentious, as there is no uniform definition of what that means exactly.

Energy industry association BDEW welcomed the agreement as "a crucial building block for a successful path towards climate neutrality" while at the same time maintaining supply security. "The expansion of new gas-fired power plants is the basis for the coal phase-out," it said.

The association emphasised that the relevant legislative proposal had to follow swiftly to ensure that the first auction could be held this year already. It added that it was now important to make clear how much support would be available, whether the scheme is in line with EU state aid rules, and where the units would be located exactly.

Der Spiegel reported that according to sources, the first auction with 2.5 GW of capacity is to take place in the summer, followed by three further auctions with the same amount of capacity by autumn 2025 at the latest. The magazine wrote that the government wants to subsidise both the construction investments (capex) and the subsequent operation of the plants (opex). During operation, the price difference between hydrogen and natural gas is to be subsidised for a maximum of 800 hours per year. Both green hydrogen from renewable energies and so-called blue hydrogen from natural gas or coal, in which the CO2 is captured and stored, are to be subsidised. All other types of hydrogen, such as those from nuclear power, should be allowed to be burnt in power plants - but they will not be subsidised, Der Spiegel wrote.

The tenders are one of several crucial elements in the promised "power plant strategy," which is meant to create the right investment framework for the new units. As they would only run at certain moments and fuel prices are comparatively high, there is currently no business case for companies to build them. The strategy was initially set to be published in spring last year, but was delayed also because state support is to come from the special budget "Climate and Transformation Fund" — as the government now reiterated — which faces a 4-year funding gap of 60 billion euros after a constitutional court ruling on Germany's debt limit rules.

Today's announcement by the coalition leaders represents a return to the beginning of the debate, said journalist Jakob Schlandt from Tagesspiegel Background in a message on LinkedIn. The agreement "has roughly the same level of detail as the economy ministry proposal, which is almost exactly one year old," writes Schlandt. And there was still a lot to be done: The details must be worked out to a full strategy, the cabinet will have to present it, and then parliament would have to agree necessary legislation, and the European Commission give the green light in terms of state aid rules. "It is obvious that something has gone very wrong, presumably as early as the planning and preparation of the political decision-making process," wrote Schlandt.

The government said that the agreement regarding the power plant strategy would now be discussed with the European Commission in regards to state aid rules. Germany and the Commission had already worked out a “common understanding” for support to build such gas-fired power plants last summer, but with the changed plans this has to be looked at again.

Germany to set up capacity mechanism in the mid-term

The coalition also agreed to draft proposals for "a market-based, technology-neutral capacity mechanism" to be operational at the latest by 2028. It said it would present an agreement "by summer" this year. The new units, which are to receive support through the planned tenders, would eventually be integrated in such a market. However, the tenders were necessary in the short term to ensure speedy construction.

In a capacity market, providers are not merely paid for every kilowatt hour of electricity they produce and feed into the grid, but also for standing ready to supply the electricity, thus for providing medium and long term security of electricity supply.

While providing no details on funding volumes, the government also said it would support the development of new technologies like nuclear fusion, as well as power plants running entirely on hydrogen from the get-go. It said it would abolish all hurdles for the buildup of electrolysers in the country to produce green hydrogen and speed up planning and permit procedures for all new gas power plants.

The government did not reveal whether it would also support carbon capture and storage solutions for gas-fired power plants. It said this would be tackled in the upcoming carbon management strategy.

Agreement leads to "fossil fuel dead end" - NGO

German utility Uniper SE welcomed the gas-power plan, reported Bloomberg. CEO Michael Lewis said that “swift action is urgently needed” because the new plants and storage facilities will take several years to build. “We currently assume that Uniper will build some of the new capacity for Germany,” he said in a statement. “As soon as we have been able to examine the details, we will decide whether and with which investments we will participate.”

Chemical industry association VCI called the agreement "yet another interim solution" and planning security for the necessary investments was still lacking. It said the planned 10GW capacity "is nowhere near enough to guarantee supply." The association welcomed that blue hydrogen use would also be supported.

Several experts criticised that the planned date for the switch from fossil gas to hydrogen is too late. "New fossil gas-fired power plants must be converted to hydrogen by 2035 at the latest," said Simone Peter, head of renewable industry association BEE. "The extension to a switchover date between 2035 and 2040, as envisaged in the power plant strategy, is not compatible with the climate targets."

NGO Environmental Action Germany (DUH) said the agreement "leaves many questions unanswered and leads to a fossil fuel dead end." Germany aimed for a largely climate-neutral electricity system by 2035. However, the proposal postpones the switchover date for fossil-fuelled power plants to hydrogen to between 2035 and 2040, criticised DUH managing director Sascha Müller-Kraenner. "The economic stimulus programme for the gas lobby therefore continues," he said.

The Association of Energy Market Innovators (BNE), which represents the interests of grid-independent energy suppliers and energy service companies, also criticised that the planned switchover date to hydrogen in 2035-2040 is much too late. " It is regrettable that the motto of the power plant strategy is: natural gas first, hydrogen second. By focussing on natural gas, the pace of transformation is being slowed down." In the worst-case scenario, the electricity sector would not be fully decarbonised until 2040.

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