On 24 November, the incoming German government of Social Democrats (SPD), Greens (B90/G) and Liberals (FDP), also dubbed the “traffic light coalition” according to the parties’ colours, presented a coalition agreement. The text includes a significant increase in Germany’s renewables target, covering 80 percent of the gross electricity demand by 2030, a carbon minimum price of €60/t domestically and an earlier coal phase-out by 2030.
In a model-based impact assessment of the proposed targets, we find that Germany’s import balance can be significantly improved compared to the country’s current targets. At the same time, German power sector emissions are almost halved. Power prices are not strongly affected on average in 2030, though the volatility of hourly prices is expected to increase.
In terms of renewables targets, the incoming government provides a highly ambitious vision on how it sees the increase in demand being met. Current reality is that it takes too long to get the required approvals to follow such an ambitious pathway. The coalition contract states that it removes “all barriers” and provides a RES-investment-friendly environment. In order to get to 200 GW solar capacity by 2030, Germany needs to see 15 GW of solar installed every year as of now. This corresponds to 25% of the entire capacity currently installed. This is not impossible, but nothing less than a mammoth task as it requires not only the facilitation of a smooth planning, approval and construction process but also a significant acceleration of grid infrastructure, as well as a fit-for-purpose market design. Similarly, the build-out of offshore wind generation, to come into operation by 2030, will require rapid action towards planning and permitting. The concentration of offshore generation in the north of Germany further highlights the importance of grid expansions without delays. With the Green party concentrating political power in key ministries related to the energy transition, this seems not completely out of reach but will only be possible without losing much time in political and legislative processes.
Overview of targets in the coalition agreement
Significant increase in renewable energy share
The plan of the incoming government is to drastically accelerate the expansion of renewable electricity. In 2030, renewables are to cover 80 percent of the gross electricity demand of between 680 and 750 TWh annually in order to account for a higher degree of electrification required to bring down emissions faster. All legislative measures necessary to achieve this are to be initiated in the first half of 2022. The expansion target for photovoltaics by 2030 is a doubling to around 200 GW compared to current targets, while the 2030 target for offshore wind power will rise from currently 20 GW to 30 GW in 2030 and to 70 GW in 2045 (previously 40 GW by 2040), according to the coalition agreement. Current installed capacity for solar PV in Germany is at ca. 60 GW and for offshore wind at 7.5 GW.
For onshore wind power, the new government does not set an expansion target. However, they want to reserve two percent of the land area for onshore wind capacities. This compares to currently 0.5 percent.
Coal phase-out by 2030 via carbon minimum price, indirect gas phase-out by 2045
There is no commitment to a fixed coal phase-out in 2030, however it should “ideally” take place by then. This shall primarily be achieved by measures preventing the carbon price from falling below €60/t. This week the European carbon price reached €75/t for the first time. The coalition contract mentions either a minimum carbon price on a European level or, alternatively, either a domestic carbon price of €60/t or the cancellation of allowances as potential measures.
The announcement by the incoming government cements its desire to leave a mark on the Fit-for-55 package and to work towards a high-ambition outcome on a European level. In technical terms, a minimum price will likely make it unattractive for coal-fired generation to run and result in a carbon-price induced phase-out, something the market is expected to do anyway according to our market outlook. That said, a domestic minimum price will not limit power generation outside of Germany. Reaching German emission reduction targets in that sense will likely create additional emissions in neighbouring markets. That results in overall European emissions levels to see only minor changes, a so–called partial waterbed effect. Therefore, a uniform European carbon price will have a more substantial effect.
Natural gas is “indispensable for a transitional period,” the coalition agreement states without naming an end date. Gas-fired power plants are necessary until the desired security of supply is achieved through renewables. However, new gas-fired power plants – including those at existing coal-fired power plant sites – are to be designed “hydrogen-ready,” in such a way that they can be converted to climate-neutral gases.
The goal of phasing out gas in power generation is implicit in the agreement: The text says it wants to negotiate with energy companies how operating licenses can be issued in such a way “that operations can continue beyond 2045 using only non-fossil fuels.”
National ETS for transport and building sees no change, EEG levy to be dropped
In light of the current high energy prices, there is to be no change to the CO2 price path in the national emissions trading system for heating and transport. The renewable energy levy used to finance the build-out of renewable generation is to be abolished by January 1, 2023. It is to be dropped from the electricity bill and financing instead covered by the Energy and Climate Fund, the revenue from auctioning carbon allowances and a subsidy from the federal budget. In addition, levy exemptions and energy tax reductions for companies are to be “reviewed and adjusted”.
The climate protection law shall account for a “cross-sectoral and, analogous to the Paris Climate Agreement, multi-year” approach. That means the incoming government aims for a carbon budget approach, rather than the annual sector-targets as currently in place.
Electricity market design needs a facelift
The aim to “develop a new electricity market design” remains vague and leaves a more detailed proposal to the yet-to-be-installed platform “Climate-neutral electricity system” in 2022. When it comes to incentivize required capacities to balance a renewable-dominated power system, existing instruments are to be evaluated, and “competitive and technologically open capacity mechanisms and flexibilities” are to be examined. Gas-fired power plants are mentioned as an option. Market prices are to be taken into account “appropriately” in CHP subsidies, without being more specific.
Hydrogen capacities to be doubled
By 2030, twice as much domestic generation capacity is to be created for hydrogen as was specified in the previous National Hydrogen Strategy: ten GW of electrolysis capacity instead of five. Priority is given to domestic generation based on renewable energies, a clear deviation from the import-heavy strategy of the outgoing government. However, the coalition partners assume that some hydrogen imports will be necessary. Flexibility is desired in the color of hydrogen by stating a “technology-open design of the hydrogen regulation” in the coalition agreement.
More renewables in heating sector
The coalition aims for a share of 50 percent of heating in a climate-neutral way by 2030. From 2025, every new heating system is to be based on 65 percent renewables. The coalition partners want to support the EU Commission’s plans for the building sector. Here, binding minimum standards for the buildings with the worst energy performance are on the agenda.
Model-based impact assessment of the new targets on the power market
To assess the impact that the ambitions in the coalition agreement have on the German and wider European power system, we have modeled a scenario in which newly set targets are achieved (New Targets) and compare it to a scenario that reflects previously set targets (Existing Targets).
The Existing Targets scenario is in line with THEMA’s Best Guess scenario which assumes that the ambitious EU-wide climate targets set by the European Green Deal and the recently published Fit-for-55 package are achieved through large RES investments, decommissioning of thermal generation, and increased demand for power and hydrogen. The New Targets scenario uses the same assumptions plus the targets from the German coalition contract.
Table 1 shows the assumptions for generation capacity in the Existing Targets and New Targets scenario for 2030, compared to the currently installed capacity in 2020. It is assumed that coal and lignite plants are phased out entirely by 2030 in the New Targets scenario. Gas takes on the role as bridging technology and new installations, to replace are expected towards 2030, with similar assumptions for capacity in both scenarios. For renewables, the 200 GW solar PV target from the coalition agreement is reflected in the New Targets scenario, as is the 30 GW offshore wind target. The assumed onshore wind capacity in the Existing Targets scenario is the result of modelling market-based investment within the constraints of technical potential. The technical potential assumptions reflect available area constraints and are in line with two percent of land area (Based on EU ENSPRESO). Thus, onshore wind capacity is the same in both scenarios. For hydrogen production an additional 5 GW of electrolysis capacity is assumed in the New Targets scenario.
All other assumptions are held constant across scenarios. Note that both scenarios assume 620 TWh power demand excluding demand for hydrogen production by 2030. The total demand amounts to 660 TWh for the New Targets scenario and 646 TWh in the Existing Targets scenario, which is slightly below the assumed 680 – 760 TWh mentioned in the coalition agreement.
Table 1: Installed capacity in 2020 and modelling assumptions for installed capacity in 2030
|2020*||Existing Targets 2030||New Targets 2030|
|Coal||24 GW||8 GW||0 GW|
|Lignite||20 GW||9 GW||0 GW|
|Gas||31 GW||26 GW||26 GW|
|Solar PV||54 GW||133 GW||200 GW|
|Wind Offshore||8 GW||20 GW||30 GW|
|Wind Onshore||55 GW||80 GW||80 GW|
|Electrolysis||0 GW||5 GW||10 GW|
*Source: Energy Charts: https://energy-charts.info
Germany could improve supply/demand balance and achieve 80% RES
The New Targets scenario shows that the ambition of 80 percent renewables in power demand can be achieved through the rapid expansion of solar PV and offshore wind capacity, alongside decommissioning of coal and lignite capacity, as shown in Figure 1. The large volumes of renewable generation more than compensate for the decommissioning of coal-fired capacity. However, the increase in electrolyser capacity results in additional power demand, making Germany a net importer. Nonetheless the country’s supply/demand balance is strongly improved compared to the Existing Targets scenario.
In the Existing Targets scenario, Germany relies heavily on power imports, despite remaining coal and lignite capacity, which has very few operating hours. Generation from renewable sources is not sufficient to close the gap towards growing power demand including domestic hydrogen production. Overall, the share of renewables in power demand amounts to 68 percent in the Existing Targets scenario.
Figure 1: Generation mix in Germany in 2030 by source (TWh)
Power system emissions can be halved in Germany and reduced across Europe
Accelerated decommissioning of coal capacity and increase in renewable generation would significantly reduce power sector emissions, as displayed by Figure 2. German emissions can be reduced by 29 Mt in 2030, a 46% reduction compared to current policy targets. European emissions are reduced by an additional 6 Mt in 2030 due to reduced German imports.
Figure 2: Power sector emissions EU and Germany (million tons of CO2)
Lower power prices and more volatility in a RES dominated system
Moving from a system with a strong import dependency and baseload generation from coal-fired capacity (Existing Targets) towards a more balanced system with large volumes of renewable generation (New Targets) also affects power prices and price structures.
In 2030, targets can be achieved in a way that does not affect average power prices. However, hourly power prices are more volatile in the New Targets scenario compared to the Existing Targets scenario. The larger share of intermittent generation in the New Targets scenario results in more hours of zero prices and more hours of high prices.
Increased cannibalization puts profitability of renewable projects at risk
More simultaneous power generation from renewables will also lead to higher cannibalization and thus reduce the market value of renewable assets. For the case of solar PV, where installed capacity should be almost quadrupled until 2030 in the New Targets scenario, the capture rate could decrease to 48%, compared to 68% in the Existing Targets scenario. This means the average received price for a solar PV asset would be less than half the average power price. Without additional support, the resulting revenues may not be sufficient to cover project costs, especially for existing solar projects. For onshore wind and offshore wind, the effect is less pronounced and the received price is sufficient to cover the cost of new projects in 2030.
Overall, the targets proposed in the coalition agreement outline a pathway towards a more decarbonised German power system, reduced import dependency and increased domestic hydrogen production. Achieving the ambitious targets would increase price volatility while average power price levels remain stable.
Concerning the phase-out of fossil fuel generation, we assume that a carbon minimum price will not be required in order to help phasing-out coal as our modelling suggests a steadily increasing carbon price towards €80/t by 2030. Should the carbon price fall below the envisaged €60/t level and should Germany act in isolation by implementing a minimum carbon price to its power and industry sectors, we see the effect of such measure to be a very costly reduction of German emissions which would at least be partially cannibalised by higher emissions in coal-intensive countries like Poland which would increase power exports to Germany.
The rapid deployment of renewable energy capacity alongside the phase-out of coal and lignite generation also raises questions of security of supply. In the model-based assessment we see that for Germany, the additional renewable volumes are sufficient to compensate for decommissioned coal and lignite generation. However, the geographical distribution of new RES capacity and additional demand alongside possible grid constraints can complicate the situation further. The increase in the number of hours with high power prices is an indicator that points towards the possible need for additional backup capacity in the form of gas-fired capacity, which can later be retro-fitted to operate with hydrogen.
Different expectations for demand developments may aggravate the previously mentioned issues and pose additional challenges. Higher power demand would likely require one or multiple of the following solutions: larger volumes of RES generation, increased gas-fired capacity or more imports of both power and hydrogen. Given the scale of planned RES expansion, the prior seems extremely hard to attain while the latter two would result in higher power sector emissions on a European level. A stronger increase in demand without additional generation capacity would affect power prices, likely resulting in higher average power prices and more hours of peak prices. Consequently, domestic hydrogen production would become more costly and could be outcompeted by imports, making additional electrolysis capacity in Germany obsolete.
It remains to be seen how the newly formed coalition will address the major task(s) ahead of them and how the associated challenges will be navigated. In addition to the announced targets, we see the coalition contract as a statement by the incoming government to put emphasis on the energy transition and to speed-up the build-out of renewable energy sources.