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More changes in Germany

By Dave Elliott

Germany  is pushing rapidly ahead with renewables, aiming to get 80% of its electricity from them by 2050.  The nation briefly obtained 78% of its electricity from renewables in the summer. But that was obviously a one-off event. Even so, averaged annually, it’s over 30%: http://energytransition.de/2015/07/renewables-covered-78percent-of-german-electricity/

There have been some criticisms from those unhappy with Germany’s approach, but within Germany it remains popular and the country’s overall nuclear phase-out and renewables ramp-up programme met with approval in this LSE study: http://blogs.lse.ac.uk/europpblog/2014/10/27/germanys-decision-to-phase-out-nuclear-power-is-fundamentally-sensible-from-an-economic-perspective

For the next phase Germany has developed a new electricity market system, with the emphasis on market competition rather than state intervention. But, unlike the UK, it is not setting up a capacity market, which it says might just lock existing fossil plants into a backup role. Instead it wants to stimulate flexibility and new developments, including balancing imports/exports, although it will keep 4 GW of reserve capacity as a “belt and braces” system-reliability guarantee. 2.7 GW of this will be old lignite coal plants, kept offline unless needed and eventually closed entirely, this helping to reduce emissions substantially.

The plan for the so-called “Electricity Market 2.0” emerged, following a consultative Green Paper in 2014, in the new White Paper in the summer from the German Federal Ministry for Economic Affairs and Energy. The summary says it is “particularly important to make sure that pricing on the electricity market is not interfered with and that electricity suppliers are compelled to meet consumers’ energy demand at all times”. It goes on “a point has been made to not create a capacity market, because this would introduce a separate market remunerating the maintenance of capacity”.

Although there was some support for a capacity market in comments received during the consultation, the White Paper comes down firmly against: “Capacity markets would have negative effects on the market and system integration of renewable energy, would increase carbon emissions, would not be ecological and would delay the energy transition and the renewal of the power plant fleet. They would weaken the price signals of the electricity markets and thus impede the necessary flexibilisation of the electricity system”. Don’t tell DECC: the UK has now contracted around 50 GW of mostly conventional plants to be available under its new capacity market system.

The German White paper clearly does not see this idea as wise: “Capacity markets are susceptible to regulatory failure and make it more difficult to transform the energy system. An electricity market 2.0 does not require any intervention in the market mechanism and is thus less susceptible to regulatory failure. A competitive system will bring out the cheapest solutions for the integration of renewable energy sources. As a result, the electricity market 2.0 creates incentives for new fields of business and sustainable solutions”.                                                

Will market-driven flexibility, plus a reserve, be enough? In a preface to the White Paper the Minister noted that “we do not necessarily need more power stations, but rather flexible capacity. Flexibility is the answer to the weather-dependent renewable energy sources. By introducing the electricity market 2.0, we are permitting fair competition between all flexibility options. These include flexible power stations and flexible consumers, CHP, storage and European electricity trading. And we are making it possible for these flexible capacities to be financed by the market. Further to this, the White Paper sets out key elements for a capacity reserve. This is to provide additional ‘belt and braces’ security for the electricity market 2.0.”

The White Paper points out that “this reserve is made up only of power stations that do not participate in the electricity market and therefore cannot distort competition”. These plants will be used “only if, despite free price formation on the wholesale market and contrary to expectations, supply does not cover demand at a particular time”. The capacity reserve is directly connected to the government’s agreement to build on the energy transition and to meet climate mitigation targets, since “2.7 gigawatts of the capacity reserve will come from especially climate-damaging lignite power stations whose emissions will be reduced to close to zero as a result”.

Overall, it’s a radical proposition that, if all goes to plan, will be implemented next year. It represents something of a shift to the right politically, or at least to a more market-orientated approach. The White Paper says it’s “making an explicit commitment to the liberalised, European electricity market”, and offers three justifications for its national policy: “Electricity market 2.0 firstly ensures security of supply, secondly is cheaper, and thirdly enables innovation and sustainability”.

We shall see! Can price signals and competition really hold it all together, and ensure that enough balancing capacity, including demand management, is available? The devil may be in the detail e.g. there are some fudges/interventions on combined heat and power: the government will provide state aid to CHP plants whose economic viability is at risk, and promote the conversion from coal-fired to gas-fired CHP. And in all the talk about flexibility, energy saving gets short shrift – will markets make it happen? And also reduce imports?

The new policy also sets a new context for the deployment of renewables. Whereas at one time guaranteed-price Feed In Tariffs provided the main support mechanism, the Renewable Energy Sources Act, amended in 2014, now requires new installations to sell electricity from renewables directly to the market. At present, the White Paper says, approximately 70% of electricity generated from renewables is sold directly to the market. By 2020, this share will rise to approximately 80%, according to current estimates. That will clearly help renewables fit into the proposed new market system, but there are many details yet to be sorted. Some projects, like offshore wind farms, are to be subject to contract auction processes. So it is hard to say how well they will fare. One of the government’s main concerns has of course been to reduce the cost to consumers. Much as in the UK. Slowing down and removing the Feed In Tariffs will have done that, at least in the short term. Again, as in the UK. Whether the new competitive market in Germany will achieve that long-term remains to be seen. And in the UK we await Energy Secretary Amber Rudd’s new energy market “reset” proposals.

Summary: http://www.bmwi-energiewende.de/EWD/Redaktion/EN/Newsletter/2015/07/Meldung/white-paper.htm

The full paper: www.bmwi.de/EN/Service/publications,did=721538.html

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