Germany is working on a new electricity market design

Germany has kicked off a year-long forum to discuss the future of energy trading. In several working groups, the so-called “Platform Climate-Neutral Power system” will collect ideas and information from German power market actors. We follow the process closely and provide advise during the process.

The power sector is crucial in the revamp to a green economy

Germany’s economy is in for a fundamental revamp under the green transition. At the center of this modern industrial revolution lies the country´s power sector. Electricity is in demand to replace fossil fuels in heating, transport, and a plethora of industrial applications. Hydrogen is supposed to be an alternative solution for a lot of these technologies but requires electricity to be produced itself.

This large and rapid change requires quick power supply growth, delivered by a fine-tuned combination of market forces and tailored state support. But how to ensure security of supply? How can a self-sustaining green power supply chain be set up, in Germany and Europe? How can market forces be exploited, while ensuring socio-economic equality and public support for the energy transition?

New German platform on redesign of the power market

To answer these questions, the German government convened the “Platform Climate-Neutral Power system” in February 2023, inviting experts from all energy-related professions to contribute. In short: how to redesign the country´s power market.

THEMA analysis provides insights for the design issues

Split market
In our most recent Continental Price Forecast report we analysed one of the key market design questions discussed across the EU right now: whether to split the power market in two parts, one for capital-intensive technologies, which cost nearly nothing to run (e.g., windmills, solar panels) and one for technologies whose main costs occur during operation (e.g., gas- and coal-fired plants). The first technologies would only receive a fixed price per produced MWh, whereas the second group would receive the marginal production price, just like they do currently.

According to the last design proposal of the EU commission, this split market model is off the table for now. However, some politicians continue to hope that it would alleviate prices for consumers. Yet, our analysis of power prices over the next decade for central European countries shows that consumer prices would decrease only by a few cents per kWh. As more and more renewables enter the market, the price advantage of the new market design would shrink, until around 2030 some countries would even see higher prices under the new model.

The proposed new design would have several other challenges: It would not indicate scarcity or over-production as strongly as the current design, thus muting incentives to develop and invest in flexibility solutions. Also, it is yet unclear how to set a fair price for capex-heavy technologies: should the levelized cost of electricity be used? If yes, an average value for the entirety of Europe? Or local prices? The final decision would strongly impact investment decisions and favor some regions over others.

The new design would also require a lot of administrative capacity, as one entity would likely have to act as general buyer of all electricity. The new design proposals therefore at least require a lot of scrutiny before their implementation is being discussed.

Constraints must be accommodated
While the redesign of the German power sector is oriented along clear-cut goals such as security of supply, affordability, carbon-neutrality and market efficiency, it also should accommodate a number of constraints:

  • It must follow liberalization. Power markets are to remain open to competition and free pricing, and grid companies must remain unbundled from generation activities.
  • It must follow EU state aid rules: The EU Commission will not accept unfair advantages of German power companies in the European market.
  • Carbon costs are high. They will be hard to bear for low-income households and small carbon-intensive businesses without financial means or technical knowledge to change their business models.
  • It must be facilitated for digitization: Dynamic tariffs and consequently smartmeters must be enabled by 2025, reaching one digital meter per metering point by 2032.
  • The certification of renewable energy sources and green hydrogen must be incorporated into the market design, so people know what kind of energy they use.

Working groups to provide advice on pressing issues
The German platform itself is truly a cross-industry project. Members from different federal and regional government institutions, and from trade and civil society associations, power consumers, TSOs, DSOs and of course power producers meet in working groups discussing the most pressing challenges the German power system faces. The working groups will develop regulatory proposals to be fed into the German law-making process.

  1. The first one focuses on accelerating the RES build-out, looking for ways to overcome both local residents´ resistance, environmental challenges, and bureaucratic hurdles. Another question is whether energy-only markets can deliver enough income to drive the renewable expansion, or whether the growing cannibalization will decrease RES operators´ income too much.
  2. The second group works on securing flexibility in the power system. Regarding the large need for flexibility, only a holistic approach will suffice here, considering all potential tools from demand-side management via batteries to new technologies such as hydrogen and electrification.
  3. The third group´s challenge is to find a way to ensure the availability of firm and flexible capacity. Which regulations are needed to secure profitability for such plants´ operators? From capacity markets to subsidies, everything is on the table.
  4. While group three is looking for ways to ensure reliable power supply at all times, group four is to develop solutions to deliver it to all places. The answer lies in local prices to attract localized investments in renewable energy, demand side management, storage, and grid lines. A challenge is to strike the balance between market liquidity (better in larger markets) and local price incentives, while designing an efficient and simple localized market.

Will Germany finally be split into two bidding zones?
To the surprise of a lot of stakeholders, the start of the platform brought an old acquaintance back on the agenda: The question of whether to split Germany into two bidding zones. And this time the discussion is serious. But the issue also needs close and smart alignment with other topics. To present a solution for incentivizing firm capacity without credibly finalizing Germany´s bidding zone configuration will undermine investment certainty.

First report due in Spring 2023

The first report of the platform is due already in Spring 2023: it is supposed to show a way to incentivize the construction of flexible capacity, such as hydrogen-fueled plants. It is thus also dubbed the “power plant plan”. Two other, more general reports are due in June and December 2023. These will showcase the status of the discussions and deliver preliminary proposals.

The EU is running similar processes

Meanwhile, the EU Commission is planning to present its own plans for a revamp of the power market already in Spring 2023. German officials used the German platform for a clear message toward Brussels: There is no need for a rush into a fundamental reform now, although Germany is willing to discuss certain new market design elements like CfDs and even capacity markets.

THEMA experts participate in Norwegian government task forces on similar topics

Germany and the EU are not the only ones looking at new ways to ensure a secure and carbon-neutral power supply in the future. Norway also has set up a process to ensure reliable, green, and affordable power generation. With one of our partners a member of the Norwegian government-appointed power price committee and another one a member of the energy commission, THEMA has ample experience in monitoring and supporting such platforms.

THEMA´s experts are also closely involved in the Norwegian-German energy cooperation, advising both governments and companies to ensure profitability and investment security for flexibility, RES, and nascent technologies like CCS and hydrogen in the future power system. All of these depend on the power market´s design, which therefore is a large part of our work.

If you are interested to learn more about our work on these topics, please do send us an email or call us. We are looking forward to hearing from you.

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