29 May 2015 | Sven Egenter

Germany, neighbours agree to ban price caps in power market

Germany and its neighbouring countries have agreed to let the market determine wholesale power prices even if this means soaring prices at times of high demand, Germany's state secretary for energy Rainer Baake said. He also stressed that the Energiewende had to be closely interlinked with European energy policy and reiterated the commitment to meet 2020 greenhouse gas reduction goals.

The energy ministers of Germany and eleven of its "electrical" neighbours will sign an agreement on June 8, in which they pledge to avoid price caps in wholesale power markets, Baake told the Berlin Conference on Energy and Electricity Economics in Berlin on Friday. This would ensure that price signals set the right incentives for future investment in power generation capacity.

"We are committed not to interfere into the price mechanism in the wholesale market," the state secretary at the Federal Ministry for Economic Affairs and Energy said. The agreement was an important step towards more efficient markets at a time when the European Union was moving to closer cooperation in order to ensure energy supply.

His ministry's proposal for a German power market reform also favours a system under which soaring prices during times of high demand would give power companies the incentive to hold some capacity on stand-by, even if plants are only used a few times each year.

German utilities have urged the government to introduce a capacity market with separate payments for such stand-by plants. The new power market design is the next major step in the country's Energiewende, the simultaneous phase-out of nuclear power and move into renewable energy. As the share of solar and wind power increases, utilities argue they lack the financial security to build or maintain plants that will be needed when wind or sun are in short supply.

But Baake reiterated his ministry's view that a capacity market would be costly to consumers and was not necessary if investors trusted politicians' promise to allow big profits at times of high demand. "I am convinced that if we let the market work there is going to be investment," he said. The government is due to publish a white paper in June with a suggestion for a draft law.

Close European cooperation

The agreement, which is among countries with whom Germany is already connected or soon will be, would exclude indirect price caps. These could arise, for example, from capacity reserves if stand-by plants were activated at times of high prices, Baake said. France would be included in the agreement despite its plans to introduce a capacity market, as this plan does not include such a price cap.

German officials have been keen to stress that the country's energy policy must be enacted in close cooperation with neighbouring countries and the European Union. People who believed "that the Energiewende would be an act of re-nationalisation of energy policy could not be more wrong," Baake also said. "The future of our Energiewende lies in the European market."

Asked about the ongoing debate about a climate levy for old coal plants, Baake stressed the government's commitment to reduce greenhouse gas emissions by 40 percent by 2020 compared to 1990. Missing this goal would be a blow to Germany's credibility, as chancellor Angela Merkel's pledge for Germany had been crucial to swaying other Europeans to agree on climate targets, he said.

There were now several proposals on the table to secure a bigger reduction of CO2 emissions from the power sector, Baake said. However, the alternatives to his ministry's proposal were "all more expensive."

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