20 Mar 2015 | Jakob Schlandt

New power market design without capacity mechanism in ministry plans

The German energy ministry has opted for a reformed energy only market (EOM), in which back-up power stations are financed through sharp peaks in power prices. Utilities insisted that a decision on the market's design - either an energy only market or their preference, a capacity market - was still open, saying they needed to be paid for keeping capacity available in the absence of power from renewable sources.

The government has rejected the idea of financial support for fossil-fuel power plants to back up fluctuating power from renewables, a leaked document agreed by the energy ministry and Angela Merkel's chancellery shows. In the paper seen by the Clean Energy Wire, the government argued it was convinced its plan without a capacity market would "guarantee a high level of supply security at low cost."

Reforming the power market is one of the next big steps in the country’s transition to a low-carbon economy, the so-called Energiewende, which combines support for renewable energy with the phase-out of nuclear power. (See dossier on the power market) Until now, the options under consideration were a reformed EOM and various forms of capacity markets, in which power companies would be paid for keeping plants on standby.

The document,  prepared for a meeting with the parliamentary groups of the SPD and CDU-CSU government coalition, said that capacity mechanisms would "carry the risk of costs spiralling out of control" and would be too complex to be steered correctly.

The set of smaller reforms susggested in the electricity sector are mostly aimed at letting the market reign freely. Supply for peak demand should be secured by letting investors in back-up power stations make very high profits in times of scarcity.

The government stressed in the paper that power stations for peak demand would only be built if regulation was long-term and stable. "A clear and unambiguous political decision is therefore necessary," it said. The introduction of a capacity market at a later stage should be ruled out, "because no one will invest on such an unstable basis."

In the paper, the government proposes that legislation include the basic rule that "politics will not interfere in market price mechanisms." Some tweaks in current regulation would support the market design further and help signal scarcity. According to the paper, utilities that deliver electricity to consumers will be legally obliged to buy enough electricity at all times to meet demand.

Formally, the paper is only the basis for further discussions in the parliamentary group. The government had published a green paper on the market design reform last autumn, a white paper is due to be published in May and legislative reform is planned to start in late 2015.

Cut goals for combined power and heat

Energy minister Sigmar Gabriel had already locked horns with utilities over capacity markets, and Chancellor Angela Merkel had also voiced scepticism about such a model.

But according to several sources in the German Bundestag, parliamentarians were surprised by the clear message in the paper and also by the introduction of additional payments for CO2 emissions from old power stations (see separate story). The planned working session was postponed from 21 March to 26 March. Some parliamentarians have already voiced their opposition. Joachim Pfeiffer, member of parliament of the CDU, said that the motto should be that thoroughness is more important than speed.

A spokesperson for Germany's most influential lobby organisation for the power sector, the German Association of Energy and Water Industries (BDEW), told the Clean Energy Wire that they expect the discussion "is still open and a decision has not yet been taken." He added that the BDEW, which has developed a capacity market model on its own together with other industry associations, would stick to its proposal. "We still think it is the most adequate model for the German power market." Germany's largest utilities like E.ON and RWE have also argued in favour of capacity markets. 

According to the paper, the government wants a capacity reserve in order to have a fall-back option if the market were unable to meet demand at crunch times. Then, power stations from this reserve will jump in. Crucially, however, they would not be allowed to compete in the market under regular conditions.

The government proposal also included a setback for investors in combined heat and power (CHP) generation. Instead of aiming for a 25 percent share in general electricity generation in Germany (up from 16 percent according to the latest industry statistics), the share in 2020 should only be 25 percent of fossil and nuclear power generation. Essentially, this means that further expansion of CHP would be stopped, because renewable energy generation will add up to around 30 percent of power generation in 2020. The CHP support scheme, which amounts to 750 million euros today, should only rise to around one billion euros per year. Support should mostly go to CHP power plants that already exist or to those for which construction or planning have progressed far, the paper said.

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