Capacity mechanism unlikely in Germany before 2016 - experts

14 August 2014 09:10 Source:ICIS

The German government is unlikely to implement any capacity mechanism in 2015 as planned since recently three more studies were published that argue strong market intervention is not needed for ensuring electricity supply security.

The studies, commissioned by the German ministry of economics and conducted by four European consultancies, were published at the end of July and said that an optimized wholesale electricity market is preferable to a capacity market. Earlier this year, studies by the German consultancies Connect Energy Economics and E-Bridge had reached similar conclusions.

The German ministry of economics has said it will discuss the results of the studies with relevant stakeholders and will publish a green paper about a new electricity market design in autumn. A white paper with concrete proposals is due to be published in 2015.

Jens Buchner, managing director of E-Bridge, said that any possible capacity mechanism would require legal changes, which could probably come into effect earliest in 2016.

Less than two months ago, the German economy minister said that the government would present its proposal for a capacity mechanism this year and the implementation could start in 2015 ( see EDEM 25 June 2014 ).

Experts do not support the introduction of a capacity market in Germany because it would lead to higher average power prices and crate a risk of mis- and over-investment. According to Buchner, Germany could do without any capacity mechanism if wholesale power market participants accepted to occasionally pay high prices reaching for electricity above €1,000/MWh or to be disconnected from the grid during such price peaks.

In order to make the current energy-only market more acceptable to the public, the government could accompany it with a “safety net” on the balancing market, which would protect buyers form being disconnected from the grid, but yet would make them pay high prices in times of supply shortages, said Buchner.

Other measures

However, the authors of the three studies published recently say that the introduction of a capacity mechanism less intrusive than a capacity market, such as a capacity reserve, could be politically necessary.

Bernhard Witschen, senior advisor for the German consultancy Team Consult, shares this opinion. Marco Nicolosi, CEO of Connect Energy Economics that published a similar study earlier this year, said that a capacity reserve seems to be the most appropriate measure from the viewpoints of regulatory risk management and renewable integration.

The German government has not ruled out the introduction of a capacity market, but considering the broad opposition among experts to such a measure, it is likely to opt for less intrusive measures, say industry sources. “Since the published studies voice serious concerns about the implementation of deep regulatory instruments, such as capacity markets, the government would need very good reasons to choose one of the criticised options,” noted Nicolosi.

After bad experiences with legally fixed feed-in tariffs for renewables, the government is reluctant to open additional areas for intervention, said Witschen. He added that not all energy companies are buying into the idea of a capacity market, for example the Swedish state-owned utility Vattenfall, which is active on the German market, is rather critical of it.

Witshcen also pointed out that the German government sees no need to hurry with deciding whether the country needs some sort of capacity mechanism or not. “The experts state that there will be no problem of supply security by about 2022 given existing excess capacity,” he said, referring to the three studies.

Since Germany is such a big country, its eventual decision in favour or against introducing a capacity market would have a wide impact, according to Buchner. Introduction of a capacity market in Germany would likely be followed by similar measures all over Europe whereas its decision to stay committed to a less regulated electricity sector may stall such measures elsewhere. Laura Raus

By Laura Raus