Preview 2026: Germany should use electricity market reform for efficient renewables additions – researcher
***This interview is part of a series with experts to preview energy and climate policy developments in Germany and Europe in 2026. We will publish more in the coming days.***
Clean Energy Wire: What has the government under chancellor Friedrich Merz achieved in its efforts to deliver a clean, secure and affordable power system so far?
Sylwia Bialek-Gregory: In Germany, government policy measures to date have primarily focused on reducing electricity costs, particularly for energy-intensive industrial consumers. Subsidies for network charges worth 6.5 billion euros are set to reduce electricity bills for consumers. Further relief measures target industry: the reduction of the electricity tax and proposals for a subsidised industrial power price of five cents per kilowatt-hour (ct/kWh) as well as for the expansion of the so-called electricity price compensation scheme. At the same time, the new government continues to support carbon contracts for difference (CCfDs) – a mechanism that can lower energy costs for industrial users switching from fossil fuels to electricity. The German federal budget for 2026 allocates around six billion euros to this instrument.
The policy approach has so far been the adjustment of state-imposed price components or the introduction of direct subsidies. However, no substantial reforms of the regulatory framework that governs the power system's functioning have been put forward yet – with the exception of the recently adopted Carbon Storage Act. However, the government has increasingly emphasised cost efficiency and system integration in its public communication. This suggests that more structural reforms – beyond price interventions – may follow.
What needs to happen in 2026 to support Germany’s move to a more sustainable electricity supply – what policies does the government need to get across the line and what milestones should it reach?
To ensure that decarbonisation doesn’t come at the cost of supply security, thus undermining support for climate action, new resource adequacy policies will be needed. The European Resource Adequacy Assessment (ERAA 2024) report by ENTSO-E projected Germany to face one of the highest numbers of hours in Europe where demand exceeds available supply. Particularly noteworthy is the expected increase in scarcity events lasting more than ten hours, signalling deeper and more persistent adequacy challenges. The latest Federal Network Agency (BNetzA) Security of Supply Report concludes that Germany can maintain adequate electricity supply, but only if more than 20 GW of additional dispatchable [controllable] capacity is added by 2035.
And while the need for additional firm capacity is widely acknowledged, there is growing agreement that the market alone is unlikely to deliver the required investments. Policy mechanisms to incentivise the entry of new dispatchable resources [such as gas power plants, storage or demand flexibility] will therefore be of central interest.
Decarbonising the German electricity system is a major undertaking, and its success will depend on achieving the transition in a cost-effective and system-efficient manner. As the government is forced to revise the support scheme for renewable energy (EEG) next year to ensure compatibility with EU state aid law, there is a clear opportunity to improve system efficiency. In particular, introducing some mechanisms that provide more granular locational and temporal signals would better align renewable investment and generation with grid conditions, and system needs. This would ultimately support both reliability and affordability during the transition.
Germany’s government pledged to introduce a capacity market by 2027 – from your perspective, what open questions and priorities still need answering ahead of its implementation?
Experiences from regions with well-established capacity markets show that establishing an effective market design requires a wide range of interlinked decisions. For Germany, additional complexity arises from European state aid regulation, meaning that insights from other markets in the EU might be helpful.
One of the central questions is how to quantify the reliable contribution of different resource types. That is, how to convert nameplate capacity into accredited capacity. Ten megawatts of battery capacity provide a different level of security of supply than ten megawatts of a gas turbine. Additionally, a resource’s reliability value depends on the broader system context, for instance the existing shares of solar and wind.
A second challenge is determining how much capacity to procure in a system with evolving load patterns [changing power demand] driven by changes in industrial production and sector coupling. Another key issue is defining the capacity product. What exactly does a resource commit to when it sells capacity? During which hours or system conditions must it be available? Over what commitment horizon should the contract run – multi-year, annual, or seasonal? And what penalties should be set if the resource clears the market but fails to be available when needed?
While the answers to these questions will determine the efficiency of the system, pondering too long is risky as the system needs additional resources very soon.
