The Electricity Market Act Bill – A New Electricity Market Design for the German Energy Turnaround?

With its Electricity Market 2.0 project, the German government wants to take an important step towards enhanced integration of renewable energy sources into the electricity market. Renewables in 2015 already constituted about one third of Germany’s electricity consumption. The challenge is to integrate an increasing amount of intermittent renewable energy with feed-in priority into the system, in a secure, cost-efficient and sustainable way.

1. Background

The Ministry of Economic Affairs and Energy (BMWi) sees the electricity market as being in a transition phase. Increasing renewable energy supply, the end of nuclear energy in 2022, a desire to reduce coal, and European electricity market developments are influencing the existing electricity market. The electricity market shall continue to ensure security of supply, synchronising supply and demand at all times. To meet these challenges, the new Electricity Market Act (Strommarktgesetz) will change certain elements of the current legal framework for the German electricity market, mainly in the Energy Act (Energiewirtschaftsgesetz – EnWG).

The Electricity Market Act bill went through a rather unusual process (for German legislative standards), with expert reports, green paper, white paper and now the bill for decision by Parliament. Below, we will summarise some key aspects of the bill.

2. New Electricity Market Act

Key electricity market decisions in the Electricity Market Act include the decision not to establish a separate capacity market, but to rely on new and revised capacity mechanisms. It is more a refinement of the existing market, with in principle free price formation on the electricity market (where there is a market) and patches for areas of particular concern. While the legislative memorandum talks about an “electricity market 2.0”, it does look more like a 1.5 dot release.

a) Free Price Formation (freie Preisbildung)

The government intends to rely on price signals to balance the market. Via electricity prices, required capacity shall be refinanced. As prices send important information to all market players, new measures shall strengthen free competitive pricing and allow price peaks on the electricity market. The price for electricity shall be based on market forces, based on supply and demand, allowing for scarcity pricing.

b) Strengthen Balancing Group Fidelity (Bilanzkreistreue stärken)

As a key tool to guarantee security of supply, regulations to balance group management (Bilanzkreisbewirtschaftung) and the imbalance settlement (Ausgleichsenergiesystem) shall be further developed. Responsible electricity suppliers and traders shall be further commercially encouraged to buy electricity according to demand. This shall ensure that the electricity market 2.0 is able to synchronizes  supply and demand more effectively.

c) Monitor Security of Supply (Versorgungssicherheit überwachen)

Monitoring shall be improved to guarantee security of supply. Contributions of the European internal electricity market to security of supply shall be taken into greater consideration.

d) Revise Reserve Power Regime, Expand Capacity Mechanism Toolbox

To ensure security of supply under the changing conditions on the electricity market, the existing reserve power regime shall be further developed. The current reserve power regime includes balancing power using primary, secondary, tertiary control reserve. The TSOs can also draw on an interruptibility scheme using capacity supplied under the Interruptible Loads Ordinance (AbLAV). Another existing reserve power scheme is the network reserve based on the Ordinance on Reserve Power Plants (ResKV). The Electricity Market Act shall establish a new, additional capacity reserve (Kapazitätsreserve), with a capacity element and a so-called climate reserve (Klimareserve) for lignite-fired power plants.

(i) Capacity  Reserve

The “capacity reserve” (Kapazitätsreserve) shall be established outside the electricity market to ensure security of supply on the electricity market in unexpected situations. It shall consist of two parts: a capacity and a climate part.

The capacity part (in Sec. 13e EnWG-E) shall primarily fulfill the reserve function and ensure security of supply. It shall be established gradually from the 2017/2018 winter, with a reserve power capacity of 1.8 GW. From the 2019/2020 winter onwards, the capacity reserve shall amount to 5% of the average annual peak load in Germany. It shall be deployed only if, despite free price formation on the wholesale market and contrary to expectations, supply does not cover demand at a particular time.

The climate part (in Sec. 13 g EnWG-E) shall cover particularly CO2-intensive plants and shall be established for climate protection purposes. As it only covers lignite-fired power plants, it has also been called “lignite reserve”. This lignite reserve is a successor to the earlier, legally flawed proposal to introduce a climate levy to reduce CO2 emission from the power sector.

The legality of the climate part of this new capacity reserve is also not without doubt but politically very much desired. In preparation for the Electricity Market Act bill, the Ministry of Economic Affairs and Energy in November 2015 reached a “common understanding” (Verständigung) with affected lignite power plant operators on the “transfer of lignite power plant units into security standby” (Überführung von Braunkohlekraftwerksblöcken in die Sicherheitsbereitschaft). These understandings also cover compensation for the transfer. The legal nature of these understandings is somewhat unclear. Back when the first nuclear power exit was decided as part of the “Atom Consensus”, and when the operating times were to be extended, this also included agreements between the government and the plant operators.

Plants covered by the lignite reserve are listed in the bill, naming the individual units (Sec. 13g EnWG-E) that shall stay in a security stand-by mode (Sicherungsbereitschaft) for 4 years. Afterward, they will have to be shut down for good.

(ii) Network Reserve

The (already existing) network reserve was established to ensure security and reliability of the electricity system, in particular to handle grid bottlenecks, maintain voltage stability and ensure black start capability. It is also known as “winter reserve”, and has been regulated in the Reserve Power Plant Ordinance (ResKV) since 2013. The network reserve is based on an annual TSO system analysis to determine the reserve power plant capacity necessary for the future grid stabilisation using additional redispatch potential. Within the new electricity market, the existing ResKV shall be extended as to the End of 2023, as it presently would expire at the end of 2017.

The network reserve consists of 4 different types of power plants (Sec. 13d para. 1 EnWG-E):

  • Currently non operating installations that upon the request of TSO’s have to be made ready for operation due to their relevance for the system;
  • System relevant plants for which their operators have notified temporary or final closure (persuant to Sec. 13b para. 1 EnWG-E);
  • Suitable installations in Europe; and
  • Plants that are to be built (up to 2 GW pursuant to Sec. 13b para. 2 EnWG-E).

From the winter of 2021/2022, the bill sees a need for up to 2 GW of new generation capacity in Bavaria and Baden Württemberg (Sec. 13d para. 2 EnWG-E). The TSOs shall determine the exact need by 30 November 2016, and the Federal Network Agency shall confirm the need by 30 January 2017. The plants shall be procured for 15 years using a competitive bidding process, bid date 30 April 2017.

e) Improve Electricity Market Transparency

In an effort to improve electricity market transparency, a national information platform (Sec. 111d EnWG-E) and a central market master data register (Marktstammdatenregister, Sec. 111e EnWG-E) shall be established. Information on transparent and current market data shall support efficient decision on generation, consumption, and action in general by all market players.

f) Reduce Network Expansion Costs

Network expansion costs shall be reduced by allowing more efficient network expansion planing.  Network expansion planning may include capping the top 3% of PV and onshore wind generation capacity (Sec. 11 para. 2 sent. EnWG-E).

To allocate network expansion costs more fairly, the rather peculiar concept of so-called “avoided grid fees” (vermiedene Netzentgelte) shall be given up.

g) Reduce Entry Barriers Control Power Market

To use existing capacities more cost-efficient and environmentally friendly, entry barriers for the balancing power market for load management providers and renewable energy plants shall be reduced.

h) Electromobility Charging Stations

The revised Energy Act shall also contain a provision making charging stations for electric vehicles part of the electricity grid. This is intended to create further legal certainty, increasing security for needed investment in this part of the energy infrastructure.

3. Additional Legislation

The Electricity Market Act is part of a broader package of current energy law revisions. In particular, the additional legislation includes:

  • Renewable Energy Sources Act (EEG): Being revised, tendering of new capacity for photovoltaics, onshore and offshore wind;
  • Act on the Digitisation of the Energy Tunraround: Rollout of smart metering, deals with the installation and operation of  smart metering systems (intelligente Messsysteme) in the distribution grid; and
  • Interruptible Loads Ordinance (AbLaV): Revision of the demand side response regime for large scale consumers.

4. Next Steps

The Federal Cabinet cleared the draft law to Further Development of the Electricity Market (Gesetzesentwurf zur Weiterentwicklung des Strommarktes) and the Ordinance on Capacity Reserve  on 4 November 2015. The first reading of the bill took place in January 2016. This was followed by a public hearing in the Committee on Economic Affairs and Energy on 16 March 2016. The committee is currently working on its recommendations. The next parliamentary step will be the 2nd and 3rd reading in the Bundestag. Promulgation is scheduled for May 2016.

Sources: BMWi, Draft Electricity Market Act

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