Advisory Committee to Economics Ministry in Favour of Capacity Market in the Long-term

The Scientific Advisory Committee to the Federal Ministry of Economics and Technology (BMWi) submitted a report on the long-term management of the security of supply, in which it highlights the current positive situation, but recommends to introduce a capacity market to provide sufficient flexible power in the long-run.

The Scientific Committee points out that presently the security of supply in Germany was higher than in most other countries. However, the committee expresses doubts as to whether the current electricity market design can provide for sufficient capacity for a secure supply in the long-run. Due to the fact that electricity cannot efficiently be stored, conventional power plants are needed (to supplement the growing supply of intermittent renewable energy), the Committee stresses.

The growth of renewable energy generation, which is promoted by the Renewable Energy Sources Act (EEG), however, leads to a declining readiness to invest in conventional power plants, and could endanger the operation of existing (conventional) power plants, the Committee adds. Therefore the Scientific Committee recommends with the majority of its members to create a competitively organised central capacity market in order to ensure the long-term security of supply, whereas the Committee is opposed to a so-called strategic reserve and other “selective” capacity mechanisms, saying they would result in higher electricity costs (regarding the dissenting vote, please see the source).

Under a strategic reserve scheme as described by the Scientific Committee, secure power plant capacity would be procured by the competent public authority by holding tenders in times of low supply (and high electricity prices). Reserve capacity could be provided by existing and new power plants that act apart from the regular market and are only invited to tenders if electricity prices exceed a certain (high) price. Supply is thus incentivised by the price of electricity.

In a capacity market as described by the Scientific Committee, the competent public authority ensures that enough secure capacity is available by defining the amount of capacity needed to attain security of supply. The capacities are put up for tender with a lead time of 5 to 7 year. Operators of existing as well a new power plants and customers, who can reduce demand, can submit bids. Tenders are technology-neutral as long as the plants can provide flexible energy. Bidders who are awarded contracts agree to provide generation capacity. Besides, they will be obliged under a separate contract to deliver electricity once the electricity price exceeds a certain predetermined strike price (Ausübungspreis) and pay the difference between the actual price and the strike price. As long as the electricity price is lower than the strike price operators can freely manage their generation capacities.

The committee stresses that despite its recommendation in favour of a capacity market in the long-run, it was worried that its introduction might delay necessary complementary reforms regarding the promotion of renewable energy, efficient use of grids and investments in national and cross-border grid expansion, cross-border interoperability and the regulation of non-discriminatory grid access, regulation and optimisation of operating reserve and real-time markets.

The detailed discussion of the pros and cons of the concepts for the long-term security of supply clearly and the Committee’s warning show that one public intervention, i.e. the promotion of renewable energy by feed-in tariffs that are higher (partially much higher) than market prices, creates problems for the electricity market that require further intervention, the consequences of which are not clearly foreseeable.

At the end of September, the Federal Association of the Energy and Water Industry (BDEW) presented a proposal for an energy market reform, which also included the creation of a decentralized German capacity market. To have time to prepare for the new regulatory framework, BDEW suggested to introduce a Strategic Reserve Model, it had already proposed in the past (for more information, please see here) for a transitional period.

A secure electricity supply was of fundamental importance for Germany’s economic performance and competitiveness, BMWi said, welcoming that the Scientific Committee highlighted this aspect. The ministry pointed out that it had commissioned studies on the efficiency of the current electricity market as well as the impact of a capacity market mechanisms, results of which were expected by spring 2014.

The scientific advisory committee to BMWI is an independent body that advises BMWi with regard to economic policy matters. The committee decides itself on the matters in which it provides advice.

Source: Federal Ministry of Economics and Technology

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