German energy market design
vbw – Bavarian Industry Association
2024
The withdrawal from nuclear energy use and the envisaged withdrawal from coal energy by the end of 2030 means that new power generation plants will have to be built in the coming years. The plants in question concern above all renewable energies, but they will also include flexible gas power plants that can be used to bridge the gap when there is no available power from renewable sources. But how can the necessary investments in new power plants be refinanced? Which incentive instruments can policy set for these extensions without driving energy prices up further?
In a short study on behalf of the vbw – Bavarian Industry Association, we assessed the suitability of various political instruments.
It is not possible to finance the building of so-called residual power plants – that can assist if power from renewable sources is not sufficient – through energy sales alone. We compared the different incentive instruments for the building of these flexible gas power plants.
The “selective capacity mechanism” seems to be the most well suited to this and means that a power plant is refinanced in the way that is most cost effective for energy customers: The power plants receive payment for the provision of their capacity, in addition to their earnings for delivering electricity to the energy market.
So that the additionally built gas power plants can be operated in a way that is greenhouse gas neutral in the long term, they must also have the technical capacity to use hydrogen. However, the implementation of additional instruments will be required to avoid the rises in electricity prices that would otherwise result from the higher costs of converting hydrogen to electricity.
Renewable energies should continue to be subsidised.
In the EU, discussions are under way about Contracts for Difference, which could be used to refinance the subsidies for renewables. The Contracts for Difference guarantee renewable energy plants a minimum price for their supplied energy. The difference between the minimum price and the market price is taken care of through state-guaranteed mechanisms.
At the same time, price caps will also be established. If the price lies above these agreed price caps, the proceeds are skimmed. Our short study concludes that this instrument should be implemented imminently.
The division of the uniform electricity price area results in theoretical cost advantages for the energy system, which, however, are counteracted by macroeconomic disadvantages in the practical implementation. In order to decide in favour of this or another solution political and economic aspects also need to be examined.
The imminent implementation of the grid expansion is, however, a fundamental condition for the preservation of the universal electricity price area. Already today there are cost differences relevant to network charges, which tend to be higher in the regions with a high share of electricity generated with renewables. A reform of network charges could possibly achieve much bigger incentives for system efficiency than a division of the universal electricity price area.
Our short study examines political instruments that could drive the energy market transformation forward. For this purpose, specific aspects of these instruments were collected and quantitatively assessed. The electricity price forecasts for summer 2023, compiled on behalf of the vbw, was used as a basis. The current expansion goals of the Renewable Energy Act were taken into consideration in the modelling of energy prices.
To the study (PDF, in German)
More information on the vbw website
Project team: Sven Kreidelmeyer
Last update: 27.02.2024
Senior Project Manager
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