A heated discussion among energy experts is emerging after the publication of the Monitoring Report by Federal Minister of Economics Katharina Reiche. Topic: The future of Electricity market design. The prevailing in Germany so far Energy-Only Market (EOM) should change. Wholesale market pricing is determined by the merit-order principle. The cheapest power plants (mostly renewable energy plants) are used first, and the market price is set by the most expensive power plant demanded. This model is prevalent in most EU countries, although it is reaching its limits with the integration of the increasing number of renewable energy plants.
Up to 435 billion euros in additional burden
To ensure security of supply, the Federal Ministry for Economic Affairs and Energy (BMWE) is now planning with additional gas power plants. These are to be supported by new capacity mechanisms German electricity market funded. A central Capacity market with a surcharge of just 2 cents per kilowatt-hour For the end consumer, this should already be sufficient, according to the Federal Minister for Economic Affairs. However, the Federal Association for New Energy Economy (BNE) is now sounding the alarm. It expects Overload from up to 435 billion Euro for over 20 years for consumers and industry alike, warning of perverse incentives. A better alternative, it says, is the so-called. Obligation to obtain coverage.
Which electricity market design is suitable for Germany?
The high costs of a central capacity market, which are now being discussed, are further fueling the current discourse on future electricity market design. The various alternative models to an EOM have been available for a long time and have been discussed in expert circles for quite some time. As is often the case, a combination of hedging obligations and a capacity market with intelligent measures seems to be the solution for Germany's future electricity market design. This is reason enough to take a closer look at the approaches with their advantages and disadvantages.
Reservoir Formation as Key to the Energy Transition
Both the security of supply obligation and a capacity market are intended to cushion the volatile power generation from renewable energy sources and ensure the electricity supply during a Dark doldrums secure. The definition of this reserve already differs in both electricity market designs.
One Capacity reserve (KapRes), as foreseen by the capacity market model, is a off the power market Strategic Reserve. It is intended to secure the electricity supply in very rare, exceptional, and unpredictable situations when the normal electricity market cannot meet demand. Power plants in this reserve are held outside the energy market and are only used in defined exceptional situations determined by the Federal Network Agency (BNetzA). They receive annual compensation for the mere availability of capacity.
The Supply security reserve (VSR) according to the hedging obligation model, active market participant. In contrast to a central capacity market, it is intended to distort the electricity market less and encourage investments in flexibility technologies (such as Large-scale battery storage or promote demand-side management/flexible demand more strongly. To do this, the reserve is only activated at high electricity market prices, thus smoothing out price peaks. It is faster and more flexible and caps prices less severely.
Capacity Market Elements in Electricity Market Design
In capacity markets, operators of power plants or storage facilities not only receive compensation for the electricity actually generated, but also an additional payment for the mere provision of secured capacity. The goal is to enable investments in reserve capacities and to avoid bottlenecks in the power grid. Depending on its design, a capacity market can central or decentralized to be organized. In a central model – as is currently being discussed – a central authority regularly tenders for required capacities. Operators offer their services, and contracts are awarded based on cost.
However, critics see significant disadvantages in this. For one thing, there is a risk of perverse incentives, even if unrentable or climate-harming facilities artificially supported in the market. On the other hand, the additional capacity payments create a significant cost item, which is passed on to all consumers and industry via grid fees or electricity prices. Several studies show that this – depending on the model – can lead to significant additional burdens.
Proponents, on the other hand, argue that only an explicit capacity mechanism guarantees security of supply in the long term, especially as older power plants are shut down and weather-dependent energies are further expanded. International examples – such as those from France or Great Britain – show that capacity markets can prevent supply gaps, albeit at the price of higher market complexity and administrative control.
The obligation to secure as an alternative
The fundamental principle of this electricity market design is: whoever offers electricity must ensure that it is also available when the sun and wind are insufficient. Therefore, suppliers must guarantee that an actual generation capacity with a fixed contract is already assigned, in calculation, to every MWh delivered – well in advance and for every quarter-hour of the year, before they can trade electricity at all. The incentive to procure secured capacity thus arises decentralized through the Market participants themselves – not through state tenders. Lack of security or failure to meet obligations would be subject to compensatory payments or penalties, forcing actors to realistically assess their supply security.
Many experts prefer the aspects that entail a hedging obligation. They see it as a more efficient way to ensure security of supply. Without high fixed costs for reserve capacity, the Competition between different technologies – from flexible gas power plants and large-scale battery storage to load management systems in industry. This promotes targeted, efficient, and innovative investments without centrally planned quantity or technology specifications.
Simultaneously, the security obligation rewards Flexibility and revives the market for Control energy. Storage operators, demand-side management providers, or operators of controllable CHP plants can sell their capacities to energy suppliers who must meet their obligations.
Overall, the administrative burden is manageable, there are no fixed costs, and innovation is encouraged. Any subsidies that could violate EU law are also circumvented. On the contrary, the Hedging Obligation is designed as a requirement for Member States in the current EU Internal Electricity Market Directive (Art. 18a, 2024) and must be specifically implemented by 2027 at the latest.
Hybrid approaches and possible combinations
The current discussion on electricity market design increasingly shows that capacity market elements will lead to high costs and low market transparency in Germany. Therefore, Hybrid models an importance. They combine elements of both approaches to balance security of supply, cost-efficiency, and climate goals.
Targeted Regional capacity mechanisms For areas with grid bottlenecks, new gas power plants, storage facilities, or flexible consumers could be promoted where they have the greatest systemic impact. Time-limited capacity auctions – for example, to bridge periods of low security of supply – are also definitely conceivable as an interim solution. However, elements of the security of supply obligation are indispensable in a sustainable electricity market design.
Decisive for the success of a hybrid model is the integration of flexibility options. Modern battery storage, thermal storage, and flexible industrial loads can react to market prices at short notice and provide grid services. If they are considered in reserve requirements, the need for expensive Reserve power plants considerably.
This also brings the role of industry more into focus: Companies with controllable loads, storage, or their own power generation could in the future become not only electricity consumers but also providers of supply security. The electricity market design of the future must take these potentials into account and create market-oriented framework conditions that promote innovation and competition – instead of hindering them through rigid structures.
Impact of Electricity Market Design on Industry and Energy Projects
Discussions about the future electricity market design do not remain solely on a political or systemic level – they directly affect industry, energy providers, and project developers. For companies that have not yet invested in self-supply or storage solutions, the design of the future electricity market significant economic consequences to have.
A central capacity market, as proposed by Katharina Reiche, will increase electricity prices across the board for all consumers. This means, especially for energy-intensive businesses, that Rising procurement costs and with that declining competitiveness. This is exactly what should be avoided. Companies with their own secured output – for example, through CHP units or storage – can face this scenario with more composure.
In contrast, a hedging obligation creates new roles and opportunities for market participants that have hardly been tapped into before. Companies that already utilize flexible generation or storage systems can actively participate in electricity trading, market ancillary services, or offer grid-supportive services. The market mechanism rewards both innovations and new technologies.
New requirements for planning are emerging for project developers and investors: In the future, the evaluation of projects should no longer focus solely on electricity production, but also on their contribution to supply security. Plants that can operate flexibly, controllably, and in a grid-supportive manner will gain in value.
Conclusion: The course must now be set for electricity market design
The debate surrounding the future electricity market design reveals that there is no simple answer to the question of security of supply and cost-efficiency. While centralized capacity markets rely on predictable reserve power plants, they risk high fixed costs, perverse incentives, and rising electricity prices. The obligation to hedge, on the other hand, promotes market-oriented investments in flexibility technologies, avoids unnecessary bureaucracy, and is already anchored in European law. Hybrid models offer the opportunity to strategically combine both approaches and take regional and technological specificities into account. It will be crucial to create frameworks that strengthen innovation, competition, and system stability equally – as this is the only way Germany can establish a sustainable, climate-friendly, and affordable electricity market design.