SRU Presents Key Point Paper to Study on the Future of the Electricity Market Due to Appear in November

The German Advisory Council on the Environment (Sachverständigenrat für Umweltfragen – SRU) has presented a key point paper to the special report „Den Strommarkt der Zukunft gestalten“ (“Designing the Electricity Market of the Future”) due to appear in November 2013.

The special report to be published in November will build on the special report presented in 2011 (for more information, please see blog post below), further developing it and addressing issues like the electricity market design. The report is intended to give answers to the current challenges that are at the same time compatible with the long-term goal of a mainly renewable energy supply. The key point paper sums up the most important recommendations.

SRU strives to seek answers to the question how to ensure continued growth of renewable energies so that long-term goals (like the reduction of greenhouse gas emissions by 80% compared with 1990 by 2050) can be reached. Important aspects are energy efficiency, return on investment of renewable power plants, storage facilities and the infracture, most importantly the grids. The key questions therefore are how to create an electricity market that supports the growths of renewables and storage facilities and ensures load management and what additional measures have to be taken.

SRU works on the assumption that wind power and PV will in a few decades be the key pillars of the energy system. Input can however vary greatly, often very quickly and without being always foreseeable, SRU points out. Hence, the whole energy supply system had to become more flexible so as to cope with the new challenges and the market had to send the proper incentives.

The proposal for a market reform contains the following ten aspects:

1. Ensure Continuity in the Transition Period

SRU (again) calls the Renewable Energy Sources Act (EEG) that promotes renewable energy plants in Germany a success story, which was copied by other countries, but says there was a need for reforms. On the one hand conventional power plants had to adapt as quickly as possible to the need for a flexible supply, while renewable power on the other hand had to adapt to market requirements and increasingly be subjected to market forces.

SRU proposes careful reforms that ensure renewable growth at a high level and avoid measures that are not compatible with the long-term climate goal like the support of new coal-fired power plants or the preservation of old coal-fired plants.

2. Align Conventional Power Production with the Needs of (Fluctuating) Renewable Energy

SRU points out that various proposals have been made to provide for enough flexible power to supplement the fluctuating input of renewable energy (for more information, please research the key word “capacity market” and “strategic reserve” in our blog), but says other options like more incentives for a better demand-side management and improved grid connections with the neighbouring countries should be persued first.

Besides it was important to reduce the over supply of inflexible power plants, in particular environmentally unfriendly coal-power plants, to create improved market conditions for flexible gas-fired power plants.

3. Raise CO2 Costs Significantly

Higher CO2 avoidance costs would increase the costs of conventional power plants, but also lead to higher electricity prices at the electricity exchange, from which flexible gas-fired power plants would benefit, SRU says.

SRU recommends that the government takes steps on the EU level to boost the ailing prices for CO2 emission allowances in the EU emissions trading scheme (EU ETS). Besides SRU suggests that Germany introduces a carbon tax modeled on the British carbon tax.

4. Strengthening European Climate Protection

SRU calls on the government to canvass for an EU climate protection goal for 2030 that foresees a reduction of greenhouse gas emissions by at least 45% compared with 1990. Besides renewable energy should account for at least 40% of the primary energy consumption and the energy efficiency potential that allows for a reduction of the primary energy consumption of up to 50% compared with 2010 should fully be tapped.

5. Ensure the Security of Supply with Market Instruments

Under this heading SRU discusses the pros and cons of the proposals made for a capacity market and a strategic reserve and comes to the conclusion that a strategic reserve leads to less market distortion as it consists of power plants that have been shut down for economic reasons, but can supply energy in case of bottlenecks (for more information in German please see here).

6. De-emotionalize Discussion about Electricity Costs

It was a mistake to say a reform of the EEG was needed because the EEG resulted in high costs, SRU says, arguing electricity costs for household customers had doubled within the last decade mainly due to higher costs for fossil fuels. Besides the EEG surcharge was the wrong indicator for the cost of renewable energies. With the EEG surcharge consumers pay for the difference between the fixed feed-in tariffs paid pursuant to EEG for renewable energy fed into the grids and the sale of the renewable energy at the EPEX power exchange by the transmission system operators.

7. Make Market Premium Mandatory

Under the EEG in its current form owners of renewable power plants can choose between receiving fixed feed-in tariffs or the market premium model introduced in 2012. This means that they sell the energy on the market themselves and are entitled to a market premium in addition to the revenue obtained by the sale of the electricity (Section 33g EEG). It is calculated as the difference between the EEG feed-in tariff for the respective renewable energy source and the monthly ex-post average price at the energy exchange plus a management premium that differs with respect to the various forms of renewable energy. The management premium covers transactional costs like the cost for the listing at the energy exchange and other trading related costs as well as the costs for forecast errors regarding the actual amount of energy fed into the grid.

SRU advises to make the market premium model mandatory for new installations (in this respect it is in line with other institutions like BDEW and BDI), but says the premium should be calculated in such a way that producers can expect to receive as much as under the fixed feed-in tariff model. Instead of a 20-year support a maximum of kWh should be introduced. Besides the market premium should reflect the technology costs. SRU recommends that a public authority be made responsible for determining the market premium so as to better follow market and technology developments.

8. Coordination of the Energy Policy Shift by the Chancellary

SRU advises against pooling the competence for the energy policy shift towards a mainly renewable energy supply (Energiewende) in a special ministry, but to set up a special coordination unit in the Chancellary. This had the advantage that the Chancellary could mediate between the various ministries involved and cooperate with the federal states and the EU, SRU points out.

9. Delegate Implementation to Federal Authorities

At the same time, SRU recommends to delegate implementation tasks to federal authorities like the Federal Network Agency (BNetzA) and the Federal Environment Agency (UBA).

10. Climate Protection Act

Lastly, SRU advises to adopt a Climate Protection Act that defines the German climate protection goals up to 2050.

The German Advisory Council on the Environment (SRU) is an expert advisory body whose mission is to describe and assess environmental conditions, problems, and political trends and to point out solutions and preventive measures. SRU submits an Environmental Report to the German federal government every four years. In addition, SRU issues Special Reports in which specific environmental problems are examined in detail.

Source: Sachverständigenrat für Umweltfragen

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