Key Official of Ministry of Economics Open on Capacity Markets in Germany, but Rejects Need to Subsidize Existing Thermal Power Plants

The second key presentation on the first day of the Handelsblatt Annual Energy Conference was from Rainer Baake, Secretary of State in the Federal Ministry of Economics,  an influential aide to Minister of Economics, Siegmar Gabriel. He explained the Ministry’s position regarding the potential introduction of capacity markets in Germany, but refused efforts to use this as an instrument to subsidize unprofitable thermal power plants.

Mr. Baake summarized the main energy policy objective for the year 2015, which is to develop a new market design for the power market which takes into account the increasing share of renewable power generation. In that regard the Ministry took the unusual step to publish a Green Paper last fall, as the positions of industry associations as well as expert opinions are rather diverse. The Ministry therefore wanted to invite a broader public discussion on this important topic. He also rejected any interpretations that the ministry is not open to also implement a capacity market model. However, it is clear that the ministry will not adopt any model just for the purpose of subsidizing unprofitable thermal power plants.

At the outset he refused the common assumption that the problems of low profitability and utilization of conventional power generation is due to the increasing share of renewable power generation. Rather, this foremost is the consequence that most generation capacity was built up prior to liberalization of energy markets. Hence, it comes to him as no surprise that with the UK and now also France two markets adopted capacity market concepts who are not known to be among the leaders in renewable energies.

If no capacity market is implemented, he admitted that energy policy then has to make clear to market participants that no instruments will be employed to cap power prices at times of severe capacity shortages, otherwise markets will not work. Such price peaks will highlight the need for all market participants to contract any power sold, and show the risk of having a short position. But indeed, he admitted that marginal pricing creates problems for the market integration of renewables as well, and no stable environment for long-term investments in conventional power plants anyway.

However, Mr. Baake also rejected the assumption that the introduction of a capacity market model is needed and could be helpful for power plants which currently are not profitable and might be mothballed or even finally shut down, irrespective that they might be needed in the future. Rather, he made it clear that for the next two and even five years, there is sufficient capacity available. Thus, a capacity market, if at all, only would be needed in the medium term and there is no need to implement this in a hurry.

Rather, it might be entirely sufficient, at least in the short and possibly also mid term, to amend the current system of acquisition of reserve power by the TSOs based on the Reserve Power Plant Ordinance (Reservekraftwerksverordnung) and redispatch rights of TSOs, to ensure security of supply. In that regard Mr. Baake repeated the position taken by Minister Gabriel in a Handelsblatt interview which rather bluntly rejected the broad support in the ManyElectronics industry for the introduction of capacity markets. However, apparently he tried to keep the debate more open and to avoid the impression that there already has been a final decision on the approach. He stated that a concrete proposal will be outlined in a White Paper which the Ministry of Economics will prepare and publish this spring.

In any case, Mr. Baake stressed that any capacity market or alternative market design can only be introduced in Germany by taking into account the situation in the neighboring countries. This is first because German capacity may be contracted by foreign customers and energy companies, and vice versa. Further, Germany – as a large country – could risk to pay not only for security of supply within Germany, but also for the security of supply of its neighboring countries. To avoid this and discuss common approaches, over the last few months he held bilateral meetings with ministers in charge of energy policy from all these countries (including those linked by maritime cables, as Norway). This is not seen to replace any EU initiatives, rather the European Commission participates in and is updated on this process.

In addition to that, it is necessary that the potential of demand side management shall become an element in a future capacity market. And it is well understood that also industrial companies need long-term signals in order to justify according investments in facilities which are capable to participate in demand side management. Mr Baake also acknowledged that the current network usage fee system has to be amended for that purpose, as this currently prefers a stable utilization and results in increased network fees as soon as demand is increased even if this helps to balance the system.

In the discussion round with conference participants, Rainer Baake stressed that cogeneration needs an environment which allows them to participate in the market. Whereas it was not possible to reach a final agreement on this within the energy state aid proceedings with the former European Commission, and a reevaluation for 2017 had to be accepted, the German Minister of Economics already had a first round of discussions with the new EU energy commissioner, which showed the possibility for a more flexible approach. In the first place, it has been agreed to commence the reevaluation earlier, and continue discussions on the basis of these results. He therefore showed a lot of confidence that there will be positive developments for cogeneration rather soon.

[amended]

Source: Handelsblatt Jahrestagung Energiewirtschaft 2015

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