The German government mentions for the first time in the plans for the Power Plant Safety Act and for the development of the electricity market, a changeover to a technology-independent Capacity market. Capacity markets are gaining in importance in Europe, which is increasingly switching to sustainable energy sources. But what exactly is a capacity market? Put simply, it is a mechanism designed to ensure the reliability of the electricity grid by ensuring that there is always enough capacity available to meet demand - whether from conventional power plants or renewable energy sources.
The need for such a market arises from the fluctuations in energy generation, particularly from renewable energy sources, and the ever-increasing demand for electricity. In addition, the situation in Germany will be exacerbated by the nuclear phase-out in 2023 and the planned coal phase-out. So far, the short-term stability of the German grids has been ensured by Control energy markets and other mechanisms such as the Grid and capacity reserve ensured.
Definition and principles of the capacity market
What is a capacity market?
A capacity market is a specific market design in the electricity sector that serves to ensure the reliability of the electricity supply. In a capacity market, energy producers and other capacity providers receive payments not only for the actual supply of electricity, but also for the Provision and Retention from Generation capacities. They are remunerated financially for being able to supply electricity at certain times or in emergencies, even if this electricity is ultimately not called upon.
Function and objectives of a capacity market
Electricity producers undertake to provide a fixed amount of energy at certain times, particularly during peak load periods. They receive remuneration for this supply, known as Capacity paymentregardless of whether the capacity is used to generate electricity. These financial incentives are intended to ensure that sufficient capacity is available to cover peak loads. This applies in particular to times of high demand or when the availability of other energy sources is limited.
Differences between the capacity market and the energy-only market
The capacity market is conceptually similar to the Energy-only market in contrast. In the energy-only market, producers are only paid for the energy actually supplied, i.e. the electricity produced. This is therefore a pure remuneration system. This market design means that investment and operating costs must mainly be covered by the sale of the electricity produced. In contrast, the capacity market enables a Refinancing the Investments (capex) for the construction of power plants and the Operating costs (Opex) via the capacity payments. This is independent of their actual electricity production. Such a system promotes investment in new power plants and supports the stability of the electricity grid.
History and development of the capacity market
Historical background
The development of capacity markets in Europe was largely driven by fluctuations in energy generation and the rising demand for electricity. In particular, the increasing integration of renewable energies into the electricity grid posed challenges for traditional energy markets. As part of the "Clean Energy for all Europeans Package" (CEP), the European Union laid down specific rules for the introduction and design of capacity mechanisms in 2019. Among other things, these included a Upper limit from 550 grams per kWh (g/kWhel) or to 350 kg per kW and year, which corresponds to the Exclusion from Coal-fired power plants had the result.
Political discussions and reform processes
Capacity mechanisms have been intensively discussed in the EU in recent years. The legal framework introduced by the CEP was aimed at creating an open and transparent market. competitive Award process off. These regulations required that renewable energy sources, storage and demand-side management be taken into account alongside conventional power plants. Countries such as Italy adapted their mechanisms accordingly by introducing the CO₂ cap in June 2019. Other countries that already had active capacity markets, such as France, the UK, Ireland and Poland, had to adapt their future auctions to the new requirements.
European models & experiences
The capacity markets in the other European countries are generally characterized by central annual Auctions organized in which a fixed amount of capacity is in demand. Suppliers can be operators of power plants, storage facilities or load control systems. The auctions take place four years (T-4) or one year (T-1) before the start of the contract term, and the contracts have different terms depending on the type of investment. For the auction formats, a distinction is made between "Pay-as-bid" (bidders receive the price of their bid) or "Pay-as-cleared" (all successful bidders receive the same price).
The T4 contract terms on the various European capacity markets vary between 10 and 17 years. During this period, suppliers receive a fixed remuneration per megawatt and year, but must also meet certain availability requirements. Emission limits exclude plants with high CO₂ emissions from participation and promote the switch to more environmentally friendly technologies.
Requirements for a German capacity market
Based on the existing European models, other aspects are important for a successful capacity market design in Germany. The rating factor plays an important role, as it adjusts the capacity ratings based on the availability and reliability of the plants. It is also essential to ensure plant availability and refinancing so that the plants are actually operational and can be financially secured.
Another important point is the local distribution of installations in order to avoid regional bottlenecks and ensure a balanced geographical distribution. The contract terms and auction horizons should be differentiated and scheduled in good time in order to offer participants sufficient planning security. Finally, plant degradation must also be taken into account in order to incorporate the ageing and decline in output of generation plants into the market design.
Advantages of the capacity market
Promotion of investments
The capacity market provides a solid basis for investment in energy infrastructure. By providing capacity payments, investors are encouraged to invest in new technologies and power plants. This is particularly important in times when the need for reliable energy supply is increasing. The prospect of Stable income through capacity payments reduces the financial risk and thus promotes the willingness to invest in long-term projects. One example of this is the Belgian capacity market, which is seen as an effective model for auctioning the required capacities and invites all operators of secured capacity to participate.
Safeguarding the security of supply
A key advantage of the capacity market is the increase in the Security of supply. Maintaining sufficient capacity ensures that a reliable power supply is guaranteed even at peak load times. This is particularly relevant in an energy market that is increasingly characterized by renewable energies, which are often challenging due to their volatility. Capacity markets help to manage these uncertainties by ensuring the availability of energy sources that can be activated quickly when generation from renewable sources is insufficient.
Supporting the energy transition
Capacity markets play a crucial role in supporting the energy transition towards a climate-neutral economy. They make it possible for renewable energies and innovative technologies such as Hydrogen power plants and Battery storage can be integrated into the system. Thanks to the Competition between different technologies not only promotes the development of efficient and cost-effective solutions, but also supports the integration of renewable energies into the electricity grid. This helps to reduce CO₂ emissions and achieve climate targets.
Taken as a whole, capacity markets offer a robust solution to effectively address the challenges of modern energy supply. They promote investment in future-proof technologies, secure supply in times of high demand and actively support the transformation of the energy sector towards more sustainable practices.
Challenges and criticism of the capacity market
Costs for energy consumers
The introduction of a capacity market is associated with considerable Risks which can have a direct impact on energy consumers. Regardless of the specific model, the Regulatory requirements and the Complexity of capacity markets is high. These factors lead to a significant increase in the cost of electricity supply. Experts commissioned by the Federal Ministry for Economic Affairs and Energy have already identified considerable Additional costs predicted, even under optimal conditions. In view of the complexity and the many risks involved, it seems unrealistic to expect a perfect capacity market design, which could lead to further significant additional costs for consumers in addition to the burdens imposed by the promotion of renewable energies.
Potential overcapacity
Another critical issue is the creation and preservation of Overcapacity. Capacity markets can lead to power plants that would otherwise be withdrawn from the market being kept alive artificially. This prevents the reduction of overcapacities and prevents the market from sending out independent price signals that could otherwise stimulate investment in power plants and other flexibility options. Such Market distortions can lead to inefficient allocations and increased costs in the long term.
Distortions of competition
The introduction of national capacity markets contradicts the goal of a single European electricity market. This contradiction leads to considerable Distortions of competition within Europe. The discussions about capacity markets have shown that none of the models discussed in Germany have so far provided a conclusive concept for Integration in the Internal market contains. The positive economic effects of the integration of the European electricity markets could be achieved through such national mechanisms are at least partially lost. Competition between electricity producers is distorted and competition between national support systems arises, which undermines the idea of the internal market.
Conclusion on capacity markets
In dealing with the complex challenges and opportunities presented by the capacity market, it can be summarized that it plays a key role in the transformation of the energy sector. It not only promotes investment in sustainable technologies and ensures security of supply in times of fluctuating energy production, but also makes a significant contribution to the implementation of the energy transition. This dynamic makes it clear that, despite the challenges and critical voices, capacity markets can be an essential building block of the future energy supply.
Nevertheless, the concerns outlined, such as potential overcapacity, costs for consumers and distortions of competition, should not be underestimated. It underlines the need for careful planning, implementation and continuous adaptation of capacity markets in order to maximize their benefits without neglecting negative consequences. In order to achieve these goals, increased cooperation at European level is just as crucial as the involvement of all relevant players in the energy market. In this respect, the capacity market is likely to remain a central topic of discussion in order to develop and implement reliable, sustainable and cost-efficient energy supply solutions.