German draft power market law sticks to lignite reserve

A leaked draft of the new electricity market law shows the German government is sticking to its rejection of a general capacity market, in which all providers of capacity would compete for compensation, as a back-up for renewable sources to avoid power shortages. It clings, however, to its controversial plan to pay for a number of old brown coal power plants, which will be taken off-grid to serve as an emergency reserve.

In its proposed law, the government spells out details of a reform the Ministry of Economics and Energy outlined in a white paper in July (See CLEW factsheet here). The 127-page bill would come into effect in early 2016, but it must first meet cabinet and parliamentary approval. It amends over half a dozen laws and regulations.

One of the most contentious elements of the bill has been the introduction of a "capacity and climate" reserve, starting in 2017. The reserve would ensure that stand-by power is readily available if the regular energy market, increasingly dominated by fluctuating renewable power like wind and solar, cannot meet demand (See CLEW factsheet here).

The reserve is partly made up by lignite coal plants, which is why the scheme has been lambasted by environmental groups as a subsidy for particularly dirty power stations. Greenpeace Germany’s energy expert Tobias Astrup was one of the first to comment on the new draft: “Energy minister Gabriel did right when he opposed ‘unemployment benefits’ for power stations. But now this approach proves to be duplicitous, as he is introducing billions in subsidies for climate-damaging and superfluous lignite power plants.” Greenpeace warns the reserve could become a life-support system for old coal plants and would cost power consumers up to two billion euros.

In the draft law, the government argues that this "climate reserve" will "reduce carbon emissions in the electricity sector and hence support reaching the climate policy targets."

While an expert opinion by the Scientific Service of the Bundestag (German parliament) had raised doubts about whether the proposal is in accordance with EU competition law, Minister Gabriel said last week that he believed the coal reserve was compatible with EU state aid rules.

Another important change to the German energy landscape will be that for the first time, renewable power plants could be shut down more easily to reduce the necessity for grid extensions. The grid operators will be allowed to cut production by three percent over the year. Power producers would receive financial compensation for this "peak capping", but it still would be a stark change in policy. Until now, renewable energy had "right of way" in the grids, except in critical situations.

A constitution for the power market

The draft bill also spells out what the economics ministry has called a new "constitution" for the electricity market. Other countries, notably France and the UK, have recently introduced capacity mechanisms, which support fossil fuel power plants financially even when they are not producing electricity. This aims to incentivise investment in the sector and ensure there are no power shortages in the future.

By contrast, Germany will only introduce an emergency reserve, also including the brown coal plants, which emit more CO2 than other conventional power plants, but will otherwise rely on market prices to guide investors. In the view of the government, investors still need assurance that it will not tamper with prices. The new bill includes a passage stating, "the price for electricity is based on competition and forms freely on the market. Wholesale power prices will not be limited by the regulator." However, law experts say that this is no guarantee future governments will not change the bill again.

Read a CLEW dossier on the power market and the energy transition here.