Germany’s first backup power plant auction sparks warnings over costs, market concentration

The results of Germany’s first auction for backup power plants have led to warnings over higher prices and a market dominance by major energy companies. The energy industry heavyweights RWE and LEAG dominated in the tender for about 5 gigawatts (GW) of new capacity, which only awarded gas-fired power plants with support. 

Ingbert Liebing, head of the German Association of Local Utilities (VKU), said the result amounted to “a market concentration that is not good news for competition in electricity generation.” While there had been intensive competition in the auction, the result still would further concentrate influence over the energy market in the long run, Liebing said. Apart from RWE and LEAG, which together account for nine of eleven awarded projects, only a subsidiary of LEAG in Bavaria and a local utility from the city of Karlsruhe were successful with their bids. 

To secure electricity supply in its transition to renewable energy sources during so-called ‘Dunkelflaute’ (dark doldrums) periods of little wind and sunshine, Germany aims to build up alternative generation capacity. Gas-fired power plants that later can be converted to run on green hydrogen are a key instrument for achieving this aim. Bidders also submitted battery storage projects, but the auction’s design effectively excluded these from succeeding in the first round.

High security requirements, possible fines and technical guidelines had deterred many smaller municipal companies from submitting a bid, which ultimately would reduce the power system’s resilience by concentrating power generation with only a handful of operators, VKU said. “Decentralised structures make the electricity system more resilient to crises,” Liebing argued. The local utility association leader said that a reform of the country’s combined heat and power regulation is needed to give municipal suppliers better access to support for necessary investments.

The Federation of German Water and Energy Industries (BDEW) also urged that more diversity among operators is needed in the coming auction rounds. Germany’s grid regulator plans to hold another auction over 4.5 GW before the end of December and an additional one over 2 GW in 2027 with fewer technical guidelines that are expected to make technologies like battery storage more competitive in the tender. “The future capacity market has to be accessible to different market actors,” said BDEW head Kerstin Andreae. 

In an analysis seen by newspaper Handelsblatt, market analyst institute ICIS found that the auction results could lead to higher costs for power customers in the long run. This was due to the fact that several so-called ‘fuel switch projects’ by operator LEAG were successful in the auction. In these projects, existing lignite plants are converted to run on gas rather than building a modern gas plant. This is much cheaper for operators and allows them to submit bids with lower required support levels but also leads to less efficient power plants that require more gas and cause more emissions for the same amount of electricity. 

In a scenario modelled by ICIS in which 9 GW of capacity are solely achieved by retrofitting old lignite plants, the power price in 2032 would be 2.92 euros higher per megawatt hour than under a scenario which assumes most new plants are more efficient combined cycle gas turbine plants (CCGT), and some without an additional steam turbine (open-cycle gas turbines, or OCGTs). “Given the expected demand of 613 terawatt hours, this means 1.8 billion euros of additional costs that need to be covered by all power customers,” ICIS analyst Maike Spilger told Handelsblatt. If only CCGTs were used, the power price could drop by 9 cents per megawatt hour. 

At the same time, ICIS found that a buildout of inefficient retrofits could cause overall emissions to decrease. Because the retrofitted coal plants are less efficient and therefore costlier to run, they would be dispatched far less often than new gas plants under Germany’s merit-order system – meaning the coal-retrofit scenario would actually produce the lowest total emissions of the options modelled, while an all-new-CCGT buildout would emit more than 1.5 times as much in 2035, as those cheaper, more efficient plants run far more often.

However, in that case, “Germany will import even more electricity – and let’s face it: this currently will often mean nuclear power from France,” said Handelsblatt journalist Catiana Krapp in a post on social network LinkedIn. “This might be clean from a climate perspective, but it certainly is not a long-term solution,” she argued.