Germany prepares electricity market reform based on greater flexibility, hydrogen, capacity market

Germany is set to reform its electricity market design as it moves to decarbonise its power sector. In a paper outlining fields of action, the economy ministry (BMWK) presented reform options for the market elements of renewables support, flexible power use, local pricing signals, and generation capacities which can be made available whenever needed. The aim is to ensure the market is cost-effective, to incentivise sufficient investments in new capacity, to coordinate supply and demand with local grid development, and to increase system flexibility.

To meet these aims, the government is considering hydrogen-ready gas power plants to secure electricity supply, as well as the introduction of a so-called capacity mechanism, operational by 2028. This should ensure the business case for power plants, but could also include decentralised elements such as storage facilities and flexible loads. To best coordinate when and where electricity is generated and consumed, the paper also proposes varying grid fees based on time and location, or regional management in funding programmes to influence investment decisions. Innovative tariff models offering cheap electricity when supply is plentiful could incentivise flexible power use. The BMWK will hold consultations until the end of the month.

Industry associations largely welcomed the paper, saying a reform to the electricity market was urgently required, but called for adjustments. Renewables association BEE was critical of proposals to replace Germany's "tried and tested" support mechanism which guarantees remuneration for wind and solar park operators. The current system is authorised under European law until the end of 2026. Energy industry association BDEW echoed this: "There is a lot at stake here: uncertain framework conditions will lead to a slump in the expansion of renewable energy systems," BDEW head Kerstin Andreae said. The lobby group also urged the government to swiftly finalise the details for the capacity market so companies could make investment decisions.

As Germany phases out fossil fuels, the share of decentralised and fluctuating renewable power generation will rise. At the same time, sectors including industry, heating and mobility will increasingly rely on electricity. Flexibility in the future power system – through storage, flexible demand management and flexible back-up power plants – will therefore be essential to achieving the energy transition, and will play a key role in ensuring security of supply as well as in optimising the electricity system's operation. Germany aims to cover 80 percent of its electricity demand with renewables by 2030. In the first half of 2024, renewable power sources covered around 57 percent of Germany's gross electricity consumption.