Lobbies, experts disagree over ideal power market redesign

The consultation period for the government's green paper on power market reform is over and submissions reveal stakeholders' different ideas and priorities for a redesign.

Germany’s electricity market faces a major revamp to deal with a power mix defined by the transition to fluctuating renewables and the phase-out of nuclear energy. A new design must answer the question where power comes from when the sun is not shining and the wind not blowing enough, and how owners of conventional power stations make money and keep investing if their plants are only needed irregularly.

The Ministry for Economic Affairs and Energy started the process at the end of last year with a green paper, titled “An Electricity Market for Germany’s Energy Transition”. The document presents options ranging from an "Energy Only Market 2.0", where price swings ensure that utilities can earn a lot in times of scarce supply from renewables, plus a strategic reserve, to various forms of capacity markets with payments for back-up power plants. (See CLEW's Dossier on the power market and a factsheet on the different power market options).

During the consultation process that ended at the beginning of March, more than 300 businesses, organisations and private individuals commented on the green paper. Taking account of these submissions, the German government will present a white paper proposing a concrete reform plan by early June. According to the ministry website, consultation on the white paper will last until September, and the government will then initiate the legislative process by presenting a draft law in autumn 2015.

CLEW presents excerpts from statements from selected key stakeholders.

 

European Electricity Exchange Epex Spot

“In favour of a strong price signal”

“Price signals play a fundamental role in the short- and long-term development of the power system. High prices during shortages, as well as negative prices, are an integral part of an efficient and functioning electricity market. Products that compensate for flexibility are necessary to attract investment in flexible capacities that offer sufficient security for the system and supply in a strong and liquid German Energy Only Market. Also, European coordination should be intensified to guarantee efficient use of existing cross-border infrastructure and avoid market distortions by purely national energy policy decisions.”

See the statement in German here.

 

German Renewable Energy Federation (BEE)

“Capacity markets are superfluous”

“Given large overcapacities in Germany and Europe, we share the scepticism of the federal government over capacity markets,” said BEE-head Hermann Falk in a statement. The BEE argues that an enhanced power market secured by a capacity reserve should be the long-term basis for supply security and a capacity market is simply unnecessary. Additionally, subsidising old coal-fired power plants with capacity payments would needlessly increase power prices, Falk said.

See the statement in German here.

 

German Association of Energy and Water Industries (BDEW)

Green Paper ignores risks of Energy Only Market

“Weighing up an Energy Only Market (EOM 2.0) compared to an additional capacity market, the green paper one-sidedly emphasises possible regulatory risks and extra costs of a capacity market. Possible risks and extra costs of a not fully functioning EOM 2.0 including a capacity and net-reserve are ignored (…) The paper hardly tackles the question whether a higher risk of blackouts is acceptable (…) The green paper pins too much hope on the contribution from demand-side flexibility in the short and medium term, especially regarding the technically and economically achievable volume of flexibility potentials.”

See the full BDEW statement in German here.

 

Fraunhofer IWES

“Energiewende requires integration of power, heat and transport”

“To achieve the government’s long-term climate goals, wind and solar power will have to become the central pillars of energy supply. This translates into a stronger electrification of the entire energy system and requires the intelligent integration of electricity, heat and transport,” said Clemens Hoffmann, head of Fraunhofer IWES. “This would create new flexibility options, keep supply and demand better in balance and therefore increase supply security and system stability. Additionally, this combination will allow synergies and optimise the system economically. The targeted modernisation of power market design must pave the road for this today.”

See the statement in German here.

Steel Industry Association

Capacity market would lead to additional costs

“Steel companies require a high level of supply security for reliable planning and failure-free production processes. Because of its high energy intensity, our industry is also dependent on competitive energy prices. Therefore, the aim should be to achieve the necessary supply security at the lowest possible cost. From the point of view of the steel industry, this can be achieved best with a functioning power market (…) The introduction of capacity markets would mean additional costs which would be transferred to consumers and could affect the competitiveness of energy-intensive industries like steel.”

See the full statement here.

 

Hard coal association (GVSt)

Green paper does not address conventional power’s woes

“We strongly criticise the government’s suggestions following the publication of the green paper regarding the additional phase-out of coal-fired power plants and the additional reduction of 22 million tonnes of carbon dioxide emissions from power generation, which is in fact one-sidedly aimed at coal.” The green paper does not explain how to deal with the urgent problems conventional energy generation faces from under utilisation and low market prices while a new market design is yet mature, the association argues. On the fundamental choice between an Energy Only Market and a capacity market, the association suggests prioritising the optimisation of the existing power market but supplementing it, at least temporarily, with a capacity reserve.

See the submission in German here.

 

Industrial Union of Metalworkers (IG Metall)

New power market design must take into account social consequences

“Additional burdens for energy intensive industries should be avoided. Flexibility options such as the transferral of peak electricity demand to other times must take into account social consequences such as effects on employees’ working hours (…) Action is needed on the capacity market to overcome the current wait-and-see attitude regarding investments and to give companies’ technological abilities another chance on the market (…) We need to determine steps for the introduction of capacity mechanisms – a first step is the design of a capacity reserve. We fear insecurity will persist and high peak prices will lead to more extreme boom and bust cycles in the investment goods industry, with negative consequences for stable employment.”  

See the submission in German here.

 

TenneT

Optimised Energy Only Market and capacity reserve for safety

Transmission grid operator TenneT favours a market-oriented approach to capacity mechanisms, i.e. it would like “the current Energy Only Market to remain the central instrument steering the short-term and cost-efficient dispatch of renewable and conventional power, storage and flexible capacity”. To improve the Energy Only Market, regulatory interventions by the government or state agency should be minimal, TenneT says in its statement on the green paper. This includes accepting extreme short-term price peaks so that undistorted price signals enable efficient dispatch and investment decisions. In times of scarcity, flexible power consumers as well as producers should set the price, thereby giving even expensive power stations a chance to earn money. If the Energy Only Market does not function right away, a capacity reserve could work as a temporary safety net to ensure security of supply, TenneT suggests. This reserve would remain separate from the power market. The transmission grid operators would buy and deploy the necessary reserve capacity.

See the TenneT statement in German here.

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