Major energy companies dominate in Germany’s first backup power plant auction

Germany’s Federal Network Agency (BNetzA) has published the results of a highly-anticipated auction for new backup power plant capacity. The new plants are key to enabling the coal phase out and will ensure the electricity system remains stable amid the country’s transition to climate neutrality by 2045.

The grid regulator awarded 11 projects with a total capacity of over 5.1 gigawatts (GW) in a tender marked by “intensive competition,” BNetzA head Klaus Müller said. While government officials hailed the auction as a success, environmental groups criticised that only fossil gas technology projects were awarded and a dominance by major energy companies over smaller bidders.

Germany is exiting the most climate-damaging form of fossil fuel electricity generation and rapidly expanding renewable energy as part of its efforts to build a climate-neutral society by 2045. To secure supply during so-called ‘Dunkelflaute’ (dark doldrums) periods of little wind and sunshine, it aims to build up the alternative generation capacity.

Germany has decided that gas-fired units will play a major role during a transitional period and new plants must be built so they can later switch to hydrogen. Thus, the first and second round (scheduled for 10 November) focus on “long-term capacity”: technology able to supply electricity on command continuously over an extended period.

Later rounds will also support flexibility options such as large-scale batteries or demand-side management. The government also plans to introduce a broader capacity market for the longer term that rewards plant operators for keeping power plants available in stand-by mode.

BNetzA’s Müller said the auction results are “an important first step for long-term and cost-efficient electricity supply security” in a more volatile power system. The agency originally had auctioned 4.5 GW of so-called controllable capacity in July, with the aim to build the plants “as soon as possible,” Müller said at the time. The grid agency only counts “de-rated” capacity: a measure that adjusts each technology’s capacity for how reliably it can deliver electricity over long periods. Moreover, it allowed the auction to be oversubscribed by the first bid that exceeded the 4.5 GW threshold. BNetzA will announce details of a second 4.5 GW round on 10 November, with bids due on 29 December. 

The maximum subsidy level possible was set at 244,000 euros per megawatt of de-rated capacity per year, but the awarded average was about 155,000 euros, the agency said. The support will be financed through a levy on power customers, to be introduced by 2031. The support scheme could carry a price tag of roughly 12 billion euros over 15 years from the time the facilities are up and running. Most capacity (2.1 GW) was awarded to projects in the western industrial state North Rhine-Westphalia, followed by eastern Brandenburg (1.8 GW) and neighbouring Saxony (0.9 GW). Major energy companies dominated the awards: RWE was awarded three projects in western Germany, while operator LEAG won six projects in eastern states. One more went to a LEAG subsidiary in the southern state of Bavaria and one to a municipal utility in Baden-Württemberg. 

Economy minister Katherina Reiche called the results, the first step of the government’s power plant strategy, “a great success.” According to her ministry, the auction had marked “a decisive step forward towards securing Germany’s electricity supply,” as the country would need the new capacity to be ready by 2031 to offset the closure of coal plants, integrate more renewables and cover the expected overall rise in electricity demand.

The ministry added that winners include so-called “fuel switch projects”, in which lignite power plants slated for decommissioning by 2031 will be retrofitted to run on natural gas. While bidders also submitted battery storage projects as an alternative backup technology, “none of these prevailed in the price competition,” the ministry said. A condition that the new projects must be able to provide 80 percent of their capacity for at least ten hours in a row had made gas plants much more competitive than battery storage projects. 

LEAG CEO Adi Roesch said the awarded fuel switch projects at the lignite plants Jänschwalde and Boxberg “stand for an intelligent use of existing strengths” that saves resources by using existing on-site infrastructure. “These advantages are reflected in the support per megawatt,” Roesch added. In the long-run, he added, the converted plants should also be able to run on hydrogen.

Markus Krebber, CEO of RWE, said that the three plants his company aims to build will strengthen power supply security for North Rhine-Westphalia’s industry. “At the same time, we invest in modern, hydrogen-ready power plant technology,” Krebber said, adding that RWE plans to start work on the first plant within the next weeks. 

The law to set up the auctions, the Electricity Supply Security and Capacity Act (StromVKG), was debated for years, with the government arguing that state support was necessary to incentivise investments. Plans for auctions were delayed several times, also due to the breakup of Germany’s previous coalition government. Economy minister Reiche had to cut down her proposal for 20 GW of new capacity to receive approval by the European Commission under state aid rules. 

Successful bidders receive remuneration once their plant is ready for operation to provide the financial incentive needed to invest in the first place. Operators so far only receive remuneration for the electricity they sell at the market, but the new gas-fired plants are expected to lie idle for most of the year and jump in when wind and solar power alone cannot cover demand, making economically viable operation a challenge.

Environmental group Greenpeace said support of 800 million euros annually over 15 years would “chain the country to fossil gas” by making the plants economically viable. “Modern, clean and cheap alternatives like battery storage effectively were excluded in the first auction round”, said Greenpeace energy expert Noemi Mundhaas. 

NGO Environmental Action Germany (DUH) also criticised the fact that only gas plants were awarded. The decision to allow operator LEAG to retrofit an old coal plant while batteries received no support at all showed that the auction design needs to be changed, DUH said. Awarding the retrofitting of existing lignite plants would run counter to the aim of installing new capacity, an aim repeatedly stressed in the StromVKG, it argued. 

Newspaper Frankfurter Allgemeine Zeitung previously had reported that energy company LEAG aims to retrofit about 3 GW of old lignite plants in the Lusatia region to run on gas. Retrofitting existing plants is about one third cheaper than constructing new ones, Leif Timmermann of LEAG’s owner EPH told the newspaper. This likely allowed the plant operator to offer cheaper prices than their competitors and might explain why the average support level had been lower than expected, DUH said.  

Modern gas plants have an energy conversion efficiency of about 60 percent, making them less carbon-intensive, the newspaper said. The retrofitted coal plants, by contrast, only achieve an efficiency of 40 to 45 percent, meaning they use much more gas and cause more emissions for the same amount of electricity. At the same time, they are less flexible than newly built gas plants and cannot serve as a backup for renewables at short notice. The move would also bring legal uncertainty, as LEAG already is entitled to support of up to 1.75 billion euros for decommissioning its lignite plants. If the company reuses the retrofitted installations, it could end up receiving support twice, the newspaper said.