Industry slams Germany's plans for “H2-ready” gas power plants

The German government’s plans for a so-called capacity market, which would reward power plant operators for providing generation capacity rather than for electricity production, has been criticised for being unsuitable for an electricity system based on renewables. An analysis commissioned by the German Chamber of Industry and Commerce (DIHK), energy market innovator association bne, and energy trading hub European Energy Exchange (EEX), found that “capacity markets lead to misguided incentives, externalities and permanent political intervention”.

“The idea behind this is that supply security can only be achieved through direct support of power plants,” the industry groups said. This would lead to "selective" support for certain technologies, which comes with its own uncertainties through lobbying and reduced competition and innovation, for example in energy storage technologies, as a similar scheme in the UK had shown. The power market should instead be bolstered through market-based mechanisms to achieve a secure supply more cost efficiently, they argued.

The debate about a capacity mechanism arose in the context of Germany’s forthcoming Power Plant Safety Act (Kraftwerkssicherheitsgesetz), for which the government is looking to secure investments into backup capacity in the form of "hydrogen-ready" gas power plants that start operating with natural gas and later switch to renewable hydrogen. The government plans to put a total of 10 gigawatts (GW) of new “H2-ready” gas-fired power plants to tender by 2030. In addition, it plans to auction the modernisation of 2 GW existing gas plant capacity to be fit for using hydrogen and 0.5 GW that run with hydrogen only. The plans are still pending on consent by the European Commission regarding its compliance with state aid rules.

Instead of using a capacity market for triggering investments, the three industry actors argue for relying on a so-called hedging obligation that compels operators to ensure they can deliver supplies agreed on the forward electricity market. This would mean that suppliers who fail to deliver agreed volumes of electricity - as happened, for example, during the energy crisis -, could no longer “free ride” and cause negative externalities when defaulting, for example by declaring bankruptcy. The hedging obligation is part of EU regulation in the context of the internal electriciy market design “and needs to be implemented anyway”, they added. DIHK, bne, and EEX said that this would be a cheaper and more robust option that comes with much less administrative baggage. 

The head of energy company LEAG, which operates coal mines and fossil fuel plants in East Germany, said the government’s proposal for auctioning new plants comes at least two years too late. “This delay is a catastrophe for the energy transition,” said CEO Thorsten Kramer in an interview with business weekly WirtschaftsWoche. An increase of construction costs for new infrastructure of about 50 percent in the past four years would further complicate the transition for the companies that are supposed to implement it, the manager said. Moreover, it would remain unclear where the hydrogen that is needed to fire the new plants is going to be sourced from, Kramer added. “In a certain year, once the conversion has happened, massive amounts of hydrogen will be needed.” The CEO argued that no company would start investing as long it remains unclear how hydrogen supplies and plant construction will be funded. “This needs to be economically viable. We will not build a power plant if it does not earn us money.” Kramer said that the planned 10 GW in tenders would not fill the supply gap, which LEAG estimates to be somewhere between 20 and 30 GW in 2030. Kramer said that he lacked the imagination for a 2035 coal exit under these circumstances.