28/03/2013
The German Energiewende targets a 50% share of renewables in the energy system by 2030. Meanwhile flexible conventional power stations are increasingly incapable of generating sufficient earnings to maintain their economic operation, raising generation adequacy concerns for the coming years. Against this background, a new study conducted on behalf of German association VKU[1] this month presented their vision of a sustainable German energy market design. Reaching across all stages of the value chain, the concept aims to guarantee security of supply for customers at acceptable prices, promote a sustainable energy system and establish reliable investment conditions for the energy sector over the long term. Key recommendations include the introduction of an output-based market, promotion of technology-specific cost subsidies, and network regulation that will allow more intelligent investment.
At a time of heated debate about capacity remuneration mechanisms (CRM) at EU level,[2] the report sees the establishment of a capacity market as a cornerstone for ensuring that existing power stations remain in the network and that investment in assured power station and storage continues. Operators who agree to be available in case of shortages would be awarded so-called output certificates, whose price would result from trading in a marketplace set up specifically for this purpose. In addition, consumers able to lower their assured output requirement by reducing their power consumption during periods of shortages would have the incentive to be more flexible and thus achieve cost savings. VKU expects that additional assured output will be needed by the end of the decade and thus calls for establishment of such a capacity market within three years at the latest.
Secondly, renewable energies (RES) should bear appropriate responsibility for the proper functioning of the overall system, which is currently not the case. The authors believe that further support is needed until the respective technologies are competitive. However, future support should be awarded based on tenders. The quantity of renewable energy capacities would be determined by the State according to technologies and regions. In their bids, investors should consider the revenues they expect to generate through the sales of energy over the period of the tender. The support would be granted as an investment cost subsidy spread over the depreciation period of the plant, thereby providing an incentive to keep the plant in operation. By supporting installed output rather than generated electricity, such support could be compatible with the capacity mechanism. The study assumes that RES would respond to price signals on the market in the same way as conventional plants. Plants set up previously should be ‘grandfathered’ and receive the compensation promised under the Renewable Energy Law.\r
Lastly, the report highlights the expected impact of new RES plants on German distribution networks and calls for rapid adjustments to the regulatory framework that would recognise investments in and expansion of the smart grid infrastructure. Network operators need adequate re-financing of these investments within incentivising regulation. In addition to the capital costs, the cost incurred through the operation of the new infrastructures should be recognised. EURELECTRIC has outlined the challenge of integrating distributed generation into distribution networks and reiterated the need for an adjusted regulatory framework in its Active Distribution System Management report published last month.
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[1] Verband kommunaler Unternehmen – association of municipal utilities
[2] For instance EURELECTRIC’s recent response on capacity mechanisms and generation adequacy