Security of supply is a key prerequisite for a functioning economy and society, and to ensure this, the German government plans to support the construction of gas-fired power plants with billions of euros as financial aid. However, European regulations currently require that state-initiated capacity support mechanisms are deemed necessary and suitable to ensure guaranteed security of supply.
A new study by Connect Energy Economics, commissioned by bne, DIHK, EEX, and VEA, shows that such financial support does not meet European requirements. Security of supply can be achieved more effectively and efficiently by strengthening the market through a hedging obligation instead of state planning.
The newly published study analysed the capacity support mechanisms planned by the German government and their compatibility with European regulations from a regulatory and economic perspective. The result: Centrally planned capacity support mechanisms intervene deeply in the market, entail significant economic, regulatory, and environmental risks, and contradict principles of sound economic policy. Information asymmetries between the state and investors create a high risk of false incentives. This leads to rising costs, weakens incentives for innovation, reinforces long-term path dependencies, and burdens businesses and private households. Furthermore, a capacity levy slows electrification and thus counteracts climate and energy policy goals.
The study also identifies shortcomings in European regulations for capacity support mechanisms. Key indicators show extreme discrepancies between countries and technologies. For example, the cost for new gas turbines in Germany is on occasion set at only half the level observed in actual auctions in other European countries. At the same time, innovative and potentially cheaper technological alternatives, such as flexibility, are excluded or discriminated against. This is likely to result in avoidable cost increases.
“The study makes it clear: The assumptions used to justify capacity subsidies are built on shaky ground. Demonstrating technological and competition neutrality cannot be achieved based on such flawed assumptions, which are more akin to wishful thinking. It is therefore highly questionable whether power plant subsidies can even be introduced in a legally sound manner. One thing is already clear: This has absolutely nothing to do with market economics,” says Robert Busch, Managing Director of the bne (German Association of Energy and Water Industries).
According to the study, an effective alternative to government subsidies is a hedging obligation. This can guarantee security of supply in a market-based, cost-efficient, and technology-agnostic manner by specifically developing the market design and introducing a legal requirement for hedging supply obligations, which is currently lacking. This would be comparable to mandatory car insurance. Electricity suppliers would then be obliged to hedge their sales volumes long-term, for example, via futures markets or their own generation, and to manage the associated risks responsibly.
“To date, supply and demand in the electricity market have always matched, and we see no risk of a power shortage. A hedging obligation can set off a positive chain reaction: it strengthens the electricity market, dampens price spikes, and leads to lower electricity prices,” comments Peter Reitz, CEO of the European Energy Exchange (EEX).
“Government technology control increases price risks due to geopolitical events, stifles innovation in the electricity market, and makes it more difficult for companies to achieve climate neutrality. Ultimately, this leads to further cost increases for companies and exacerbates the competitive disadvantages for Germany as a business location,” says Dr. Sebastian Bolay, Head of Energy, Environment, and Industry at the German Chamber of Industry and Commerce (DIHK).
“Low electricity prices are essential for electrification and the competitiveness of businesses. However, a state-organised capacity market inevitably leads to higher electricity prices due to the capacity levy. The current crisis also demonstrates that a focus on gas in electricity production — as envisioned by the power plant strategy — is likely to unnecessarily increase electricity and gas prices for the entire industry. Technological diversity, on the other hand, strengthens security of supply and price stability,” says Eva Schreiner, head of the Berlin office of the VEA German Association of Energy Consumers.
Private households are also heavily burdened by capacity levies. The Federation of German Consumer Organizations therefore supports the study's findings and explains: “Consumers already pay some of the highest electricity prices in Europe. An additional electricity surcharge would mean a further burden, while making switching to electricity-based technologies less attractive. Instead of centralised capacity targets, incentives are needed to encourage the flexible use of electric vehicles, heat pumps, and storage systems. This way, private households can also contribute to security of supply,” says Ramona Pop, Executive Director of the Federation of German Consumer Organizations.
In conclusion, study author Dr. Marco Nicolosi of Connect Energy Economics summarises: “Instead of promoting capacity expansion, security of supply could be efficiently guaranteed through an effective hedging obligation: Electricity suppliers would guarantee the contractually agreed-upon electricity deliveries to their customers. This would create incentives based on the polluter-pays principle, enabling the organisation of security of supply in a technology- and innovation-neutral, and therefore efficient, manner.”
The study by Connect Energy Economics builds on previous studies by the participating organisations on the topic of security of supply. It was commissioned by bne, DIHK, EEX, and VEA.
The study, "Necessity and Appropriateness of Capacity Mechanisms" is available for download here
Please find the full volume report in English and German below.
Initiators and supporters of the study
About BNE
The Bundesverband Neue Energiewirtschaft (BNE) has stood for market, competition and innovation in the energy industry since 2002. The association represents companies that are active at all competitive stages of the energy industry value chain and develop pioneering business models for electricity, heat and mobility. www.bne-online.de
About DIHK
The 79 Chambers of Industry and Commerce (IHKs) are united under the umbrella of the German Association of Chambers of Industry and Commerce (DIHK). Their shared goal: the best conditions for successful business. At the national, European, and international levels, the DIHK advocates for the interests of businesses. The DIHK and the IHKs consolidate the diverse concerns of companies into common business positions and contribute to shaping economic policy. Furthermore, the DIHK coordinates the network of approximately 150 German Chambers of Commerce Abroad, delegations, and representative offices of German industry in more than 90 countries. https://www.dihk.de/de
About EEX
The European Energy Exchange is a leading energy exchange which builds secure, successful and sustainable commodity markets worldwide – together with its customers and partners. As part of EEX Group, it serves international power, natural gas, environmental, freight and agricultural markets, and provides data, reporting and registry services. EEX is an enabler of the energy transition and decarbonisation, advancing renewables integration through dedicated products and services, including those related to guarantees of origin. More information: www.eex.com
About VEA
The German Association of Energy Consumers (VEA) represents the energy-related and energy-policy interests of its more than 5,000 member companies from the energy-intensive SME sector. As energy experts, the VEA, with its more than 150 dedicated employees, handles all aspects of energy consulting and advocates for the energy policy interests of energy-intensive SMEs. The VEA is convinced that its expertise will help many other companies in Germany on their path to climate neutrality.
About vzbv
The Federation of German Consumer Organisations (vzbv), as an umbrella organization, unites the expertise of 16 consumer centers and more than 30 consumer policy associations – including over 2,000 organizations and seven million individual members – to ensure strong consumer protection in Germany. We fight for comprehensive consumer rights, fair markets, and safe products and services.
