German economics ministry proposes new power market design

Laura Raus

30-Mar-2015

A capacity mechanism looks increasingly certain to play no part in the redesign of Europe’s largest electricity market.

The German ministry of economics published what will be the cornerstones of the country’s new power market design at the end of last week. It recommended a modified energy-only market with a capacity reserve – but no set mechanism for compensating generation just for being available.

The decision to opt for a capacity reserve, as opposed to a market that would guarantee an income stream for capacity being on standby, whether it is called upon or not, will disappoint many German utilities.

And it marks a bold move from Germany, which is choosing to diverge from the path that the UK, France and Italy have already chosen to tread in order to safeguard security of supply for electricity systems with a high penetration of variable renewable sources.

The German ministry received more than 700 comments during public consultations about the new power market design which closed earlier this month.

“On the basis of these consultations, a consensus was achieved that allows for the further development of today’s power market towards a sustainable ‘power market 2.0’ and that, in any case, an additional capacity reserve is reasonable,” said the ministry.

The vast majority of respondents to the consultation, most of Germany’s neighbouring countries as well as the European Commission, are against introducing a national capacity market, the ministry pointed out. A capacity market would involve a risk of excessive cost, serious mismanagement and market distortions, it said.

The ministry added that, for the sake investor confidence, a lasting fundamental decision about the new power market design is needed.

“This would not be [the case] if a possible subsequent transfer to a capacity market, for example with a review clause, was kept open,” it said.

This indicates it would not make concessions for those who have said that even though a capacity market is perhaps not needed now, it may become necessary in some years.

Market forces

The ministry outlined measures that it said are needed to achieve the new market design. They point to a fundamental investment of trust in market forces to achieve the desired end of secure supply, as opposed to a state-led intervention.

This includes making power companies and traders explicitly responsible to their customers for purchasing sufficient power, even at times of scarcity when prices can be very high.

Besides, the ministry wants to ensure by law free power price formation on the market, on grounds that price fluctuations send important information to market participants which can be watered down through intervention.

The planned capacity reserve would be made up of plants that are fired up only when, due to unforeseeable circumstances, supply falls short of demand on the short-term wholesale market abruptly. The reserve will ensure that all customers can obtain electricity even in such a situation. Reserve power plants will be selected though tenders and cannot participate on the electricity market to avoid distorting competition.

The government will decide on the final design of the new power market over the next few months. A white book with more concrete proposals is due to be published in early June at the latest.

The union of German utilities BDEW and the union of German municipal utilities VKU have called for the introduction of a decentralised capacity market (see EDEM 3 March 2015). Laura Raus

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