Capacity payments to secure electricity supply? On the future of Germany’s power market design

Abstract

Although the objectives of the Energiewende (energy transition) are broadly accepted in Germany, the practical ways of achieving them remain highly contentious. In particular, the question of whether and how security of supply can be guaranteed over the course of this profound transformation of the energy system is currently the subject of controversy in the scientific and public debate. Recently, calls for additional payments to power plant operators for providing generation capacity have grown increasingly loud. But the introduction of capacity payments of this sort could have far-reaching consequences for the future organisation of Germany’s electricity supply. Therefore, the political decision on this issue - which is scheduled for this year - should not be made without a sound scientific analysis. Basically, measures aimed at guaranteeing security of supply must address the possible causes of capacity shortages as broadly as possible. When designing such measures, besides security of supply, additional objectives such as cost-effectiveness and the environmental and social acceptability of electricity supply should also be taken into account. Capacity payments only partially meet these requirements. Moreover, once introduced, they are difficult to adapt, or revise even, to suit changing framework conditions. This is particularly problematic in view of the current lack of clear evidence for future security of supply problems. Therefore, introducing capacity payments at this point in time would not appear to be constructive. It would make more sense to introduce instead a mix of measures which would strengthen the electricity market, create conditions for feeding in electricity from renewable energy sources as and when required, and set incentives for the expansion of grid capacity, storage systems and demand side management. Should security of supply still appear uncertain under these changed framework conditions, the introduction of a strategic reserve, which would be held by the regulatory authority or the transmission system operator, is recommended - not, however, the creation of an entirely new, additional market segment in the form of a capacity market.