New rules for the future electricity market

The BMWK divides the tasks for restructuring the electricity market into four fields of action. The proposals for the new electricity market design are now up for discussion for a short time before the system change is to be heralded with new laws.

06.08.2024 – A paradigm shift is imminent for the electricity system – the previous system of inflexible demand and static generation must be transferred to a system with cost-effective variable power generation from wind power and photovoltaics, coupled with storage, flexible demand management and flexible power plants as a back-up. The Federal Ministry of Economics has now made proposals for this, which will be discussed until the end of August. After that, the electricity system is finally to be redesigned to suit the renewable generation types.

The "Options for the future electricity market design" contains the description of four fields of action, for which various design options are proposed. The options for action are essentially based on the discussions in the Platform for a Climate-Neutral Electricity System.

Further development of the EEG – incentivising investments in renewables differently

There are several reasons to reform the existing incentives for the construction of new renewable energy plants. On the one hand, the state-guaranteed minimum price – the sliding market premium or the EEG remuneration – is only permissible under European law until the end of 2026. In the past, the EEG remuneration offered investors and banks a high degree of security. From 2027, an additional repayment instrument (claw-back) must be installed in accordance with the EU Internal Market Electricity Regulation. This is intended to skim off revenues that go beyond the funding required for the investment. On the other hand, the existing system now entails revenue risks that the investor himself cannot influence. In times of high generation of wind and solar power, prices fall, sometimes even negative, which also means less income for the operators.

In the growth package, the federal government had already announced a change to investment cost subsidies. The proposals for the future electricity market design now outline four feasible ways to achieve this: two models that are based on the generation of the respective plant and two models that are to have a generation-independent effect. However, each of the options must be further examined and its specific design still found, because the system change must be well prepared.

In the growth package, the German government had already preferred one option – a capacity payment with a production-independent refinancing contribution. In this case, the plant operator receives a payment for the installed capacity stretched over a longer period of time as investment protection, i.e. a fixed remuneration per kilowatt of power. In addition, a production-independent refinancing contribution would be due. The BMWK sees this approach as the best chance of efficient plant use and a system-friendly design of the systems. The new funding approach, which has yet to be determined, is to be tested in pilot tenders via a real-world laboratories law before it applies nationwide.

Simone Peter, President of the German Renewable Energy Association, had warned against replacing the proven protection system of the EEG with insufficiently discussed models.

Regardless of which of the four options ultimately comes into play, the following applies: In the future, renewable energies will no longer receive subsidies as soon as the electricity market is sufficiently flexible and sufficient storage facilities are available.

Incentivising the construction of controllable capacities

In addition to the investment incentives for many decentralised renewable plants, the new electricity market system requires a sufficiently high generation capacity that is available at short notice when generation bottlenecks occur. The question of how these capacities are remunerated or investments in their creation are supported is another element of the new electricity market. It is important to find a capacity mechanism that is as efficient as possible, i.e. ensures security of supply and avoids unnecessary costs. The BMWK is also opening up four options for this. European law requirements must also be observed.

The BMWK's preferred proposal is a mix of state-controlled central elements and decentralised elements that result from a market-oriented nature. Annual capacity counts are to be paid to plant operators via tenders and thus the creation of these capacities is to be incentivised. In addition, decentralised players are to secure their peak load with capacities by buying certificates or keeping reserve power plants or large-scale storage facilities available themselves.

The Association of Municipal Enterprises welcomes such a combined capacity market. This creates a great diversity of actors, the integration of decentralised systems and increases the overall stability of the power supply.

Dealing with grid congestion

Local electricity price signals or dealing with grid bottlenecks is the third field of action on the BMWK's agenda. It is expressly committed to the preservation of the uniform German-Luxembourg bidding zone. The division of the bidding zone and thus the creation of smaller electricity markets had attracted supporters and critics in recent weeks. A joint appeal by BEE, the Federal Association of Energy and Water Industries, the Association of Municipal Enterprises, the Federation of German Industries, the Association of the Automotive Industry and other associations had summarized many arguments for the preservation of a uniform bidding zone.

Nevertheless, the electricity market design must be supplemented by the dimension of locality, according to the BMWK. Three paths are discussed in more detail: grid charges differentiated over time and region, regional control via subsidies, and flexible loads in congestion management. The BMWK announces a flexibility agenda to play out these options efficiently.

Incentives for flexible electricity demand

Finally, the fourth lever is demand-side flexibility. While a continuous demand for electricity was optimal in the fossil electricity system, it is now necessary to flexibly adjust the demand for electricity and shift it to the hours when wind and PV generate cheap electricity. This means that grid expansion measures can be reduced and flexible consumers can also benefit from the low prices. But even those consumers who are not flexible themselves benefit indirectly, because the average electricity prices and system costs also fall if demand decreases during the expensive electricity hours and is made up for at cheaper hours.

Flexibility results from a mix of technologies: flexible power plants, flexible demand, storage and high-performance power grids. The pace generator in this dynamic interplay is the price signal. High prices provide an incentive to reduce consumption and make up for it later at
lower prices. At low prices, the mechanism of action is exactly the opposite. The basis for demand-side flexibility is dynamic and innovative tariff models.

However, there are currently still obstacles to this, and price reactions have so far only been possible for a few consumers due to a lack of digitization (smart meter expansion). Therefore, it is important to clear the way for dynamic tariff models. The smart meter rollout and the monitoring of the new tariffs are central tasks.

In addition to dynamic electricity tariffs, grid charges can also be designed to control action. The Federal Network Agency's determination of Section 14a EnWG, which stipulates that grid operators must also offer a time-variable grid fee for end customers with controllable consumption devices such as heat pumps or e-mobiles from 2025, is intended to remedy this.

Last but not least, it is important to leverage the flexibility potential of industry and to change behavioural patterns and production processes. In sectors where this is not possible, competitiveness should nevertheless be maintained, i.e. companies should not be burdened too much with high electricity or grid charges.

The BEE welcomes the announcement of a flexibility agenda and addresses previously blocked flexibility options for renewable generation – bioenergy and hydropower. Petra Franke