Manfred Ungemach and Markus Przytulski continue their series on the German parties’ profiles with an analysis of the different positions on a new market design and capacity markets.

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In our earlier posts we discussed the concerns resulting from the increase in energy costs following from the “Energiewende“ for consumers, including industry if not exempt from such costs. In this context we already analysed some approaches to cut costs for consumers, industry and the government by amending the regulatory framework of feed-in tariffs, exemptions for certain customer groups, and providing incentives for capacity and demand side management measures. However, by this even more parts of the energy sector become subject to state intervention. In this 5th part of our series we focus on the parties’ positions on whether they support a new market design or not, and how such new market design could be constructed.

Introduction

As renewable energies already constitute a great part of the energy supply, it becomes necessary to integrate them into a market. The current energy market, however, does not seem completely fit to integrate renewable energies in a way it is necessary to limit costs and maximize efficiency. A mechanism for the remuneration for providing capacity and flexibility-options may be necessary in the near future. While constructing such mechanisms in a new market design one will have to be cautious of the interactions between the energy only market and the risks of high windfall-profits.

As the current merit-order system of power plant allocation based on commodity prices only (the so-called “energy-only” market) does not incentivize the investment in back-up capacity with low utilization, it also may be necessary to focus on a capacity market, or adopt other mechanisms to ensure that the necessary back-up capacity is available in power plants, storage facilities and incentivize renewable power plants with a steady output.  In that regard the question has to be addressed whether soon a fundamental change is needed with the introduction of a new market design, or whether it is sufficient to introduce short and mid-term measures.

Additionally, the interaction between a market redesign with the concept of demand-side management is of interest, as an efficient demand-side management could contribute to the making available of capacity. For this it does not only need smart grids, but also a market which makes it profitable to invest in demand side management technologies.

Already for quite a while there has been a debate, and numerous studies and concepts have been prepared on the development of a new or improved design of the energy market, which allows to integrate renewable power generation in the market and possibly also introduces a capacity market, e.g. by EWI on behalf of the Federal Ministry of Economics, by ECOFYS on behalf of the Federation of the German Energy Industry, BDEW, by BET and enervis on behalf of vku (the association of municipal utilities), by BET on behalf of bne (the association of grid-independent energy suppliers), by Frontier Economics and r2b on behalf of RWE, by Consentec on behalf of EnBW, and interim solutions, e.g. by Consentec on behalf of the BDEW.

However, as this requires substantial amendments to the current legal framework, prior to the federal elections there has been no majority to focus on this important task, but most experts agree that it has to be on the very top of the energy policy agenda of the new federal government for 2014. On an interim basis, only restrictions for the shutdown of conventional power plants have been enacted in the German Energy Act (EnWG) by the end of 2012, and an ordinance, the Reservekraftwerksverordnung (Ordinance on Reserve Power Plants), which further specifies these newly-introduced provisions has been adopted in July 2013. As these rules expire at the end of the year 2017, and a stable and foreseeable framework for new investments needs to be implemented well in advance, it will be one of the most important tasks of the new Federal Parliament to decide on the long-term structure of the German energy market.

CDU/CSU (Christian Democratic Union/Christian Social Union)

The CDU/CSU does not propose a complete new market design, and also does not commit itself right away to the introduction of a capacity market. They admit that currently a lot of conventional power plants make losses and that there are no sufficient incentives to build modern, highly efficient power plants; but as these are needed this issue needs to be addressed. In that regard, the CDU/CSU acknowledges the need to adjust the market design, but does not propose a clear vision, but rather states that the advantages and disadvantages of the various concepts developed need to be analyzed, without going further into detail. But the party’s energy spokesman, Thomas Bareiß, underlines that his party does not intend to introduce another support scheme, next to the Renewables Energy Act (EEG), this time for capacity from conventional power plants.

However, CDU/CSU define one major aspect of the new market design which is that it should support the profitability of providing back-up capacity. That goal shows that CDU/CSU ideas of a new energy market tend towards the capacity-market model. However, the flexibility of such a new market is in CDU/CSU’s perspective enormously important to make demand-side management an important and profitable part of the future energy supply and to include in the new market design also the demand side. In addition to that, Thomas Bareiß stresses that any German concept should fit within the European framework for capacity markets which is expected for later this fall, as the existence of 28 separate capacity market models in each member state would endanger the European common market.

SPD (Social Democratic Party of Germany)

In its election program, the SPD proposes first to focus on solutions to regionally solve the problems of a lack of capacity in a pragmatic way, and to improve demand-side management measures, before establishing capacity markets in order to facilitate the financing of back-up power plants.

However, in an interview the energy spokesman of the SPD, Rolf Hempelmann, seems to be more open to the idea of an introduction of a capacity market: In the long run, a new market model needs to be developed, which not only pays for the electricity supplied, but also the capacity made available. However, the SPD does not want to install such a market before experiences have been made with this concept. The SPD also points out that it will be important to harmonize flexibility mechanisms on an European level and expand the market coupling. Thus, it can be expected that the SPD will observe the introduction of a capacity market in France in 2015/16 and use the gained insights for  the benefit of its own concepts.

In the future the SPD wants to make demand-side management available also to midsized companies and consumers at reasonable costs and great efficiency rates. On top of that SPD wants to set up a system in which flexibility options are integrated in a way that storage operators or customers which can switch-off or increase their load can offer their products on flexibility markets.

FDP (Free Democratic Party – Liberals)

In contrast to CDU/CSU and SPD, the FDP denies the need for a capacity market, at least for the near future. However, while this is rather openly admitted in an interview of their energy spokesman, Klaus Breil, the parties’ election program seems to be more open in that regard, as it acknowledges the need to develop a new market design in the mid-term. In conjunction therewith, it wants so create a market framework for the optimal utilization of demand-side management create market incentives for the research and operating of the necessary technologies (smart grids, smart metering etc.).

However, at present the FDP, as it controls one of the relevant ministries, the Ministry for the Economy and Technology, considers its job done, by referring to its success in terms of amending the Cogeneration Act to encourage new investments in local power generation, the German Energy Act (EnWG) regarding reserve power plants, and the passing of an implementing ordinance, the progress of the grid connection between Eastern Germany and Bavaria, and the extension of connections to neighbouring states. The FDP explicitly criticizes the development in France, fearing that the introduction of a capacity market in France will negatively impact the profitability of German conventional back-up power plants.

B’90/Die Grünen (The Green Party)

The Greens endorse the introduction of a focused capacity market which is needed in any case on a mid-term-basis. They believe that such a market design is the only option to get a market which is directed towards renewable energies and not towards conventional production. Accordingly, a capacity market needs to make sure that only power plants, storage facilities and load-control measures generate profits which on the one hand guarantee a steady energy supply and on the other hand do not obstruct the goal of quickly replacing also conventional power plants by renewable energies. Thus, rather than calling for a new market design which also encourages renewables to assume more responsibility for the provision of capacity, as all parties described above, the Greens still seem to believe that this can be accomplished without any such elements.

Die Linke (The Leftist Party)

The Leftist Party demands a fast introduction of a capacity market, as the current merit order system has failed and only results in higher net costs for renewables. According to Dorothèe Menzner – their spokesman on energy matters – the merit order system lead to negative exchange prices in times where high quantities of conventional and renewable energies are fed in. That, combined with the EEG-surcharge mechanism, would result in the collapse of the current “market”.

In terms of demand-side management, the Leftists believe in a more flexible market to procure for the usage of demand-side management on the one hand, and as the Leftists endorse a socialization of the energy supply industry they believe in strong government control on the other hand to procure for the development of necessary infrastructure.

Conclusion

Whether or not the introduction of a capacity market is necessary is a question which cannot be answered at the moment, as there are no experiences to securely rely upon. The conservatives, the liberals and to a certain extent also the SPD agree that a capacity market is presently not necessary. However, they recognize the need to incentivize the availability of back-up capacity and to adjust the market design in the mid-term.

The currently ruling parties, CDU/CSU and FDP all refer to the measures which they took in their position as the current government, and assert that due to these efforts a capacity market as demanded by Greens and Leftists is not necessary. The SPD’s approach is quite neutral, leaving space for compromises with CDU/CSU within a grand coalition on the one hand, and of course with the Greens within a red-green coalition on the other hand. But overall, the SPD seems to be more sceptical of a capacity market, and mindful of the fact that there is no reliable experience with a capacity market. Again, that position opens up the SPD to both sides, the CDU/CSU and the Greens – in terms of potential coalitions.

When it comes to the question of demand-side management, one major difference can be observed: CDU/CSU and FDP do not necessarily support a capacity market, but seem to be prepared to make substantial and detailed market adjustments, whereas the Greens and the Leftists demand a capacity market and propose that such a market reform will solve all problems in terms of a steady energy supply to low costs.

In the next part of the series “2013 Election Energy Party Profiles”, we will analyse the parties’ positions on how to incentivize energy efficient renovation measures and which other concepts for energy efficiency the parties present.

Sources: CDU/CSU, SPD, FDP, B’90/Die Grünen, Die Linke, bne-Kompass 02/2013

This article by Manfred Ungemach and Markus Przytulski first appeared as part five of a multi-part series on German Energy Blog.