Germany's Revised Capacity Market Plans

In a landmark policy reversal, Germany is set to introduce a capacity market by 2028. This is a significant change of the country’s original plan to build 25 GW of gas-fired power plants by 2030. The planned capacity has now been scaled down to 10 GW, with a mandate to transition to hydrogen by 2040. This development comes after extensive negotiations and budgetary considerations, marking a shift in the nation’s approach to energy security and decarbonization.

Why the pivot?

The original plan was heavily criticised in and outside the country for its high subsidy requirements (€60 billion) and technology bias towards gas peakers. Instead, a more balanced, technology-neutral approach is being adopted, with a focus on incorporating energy storage solutions and reducing dependence on gas plants.

What’s the impact?

The shift towards a capacity market is expected to have profound implications for the energy sector, particularly in boosting the role of energy storage. By 2028, this new market is expected to provide a stable revenue stream for storage, enhancing its contribution to energy security and facilitating the transition to renewable energy sources.

Beyond this, this decision marks an end to decades of discussions about the alternatives to an energy-only market and the extent to which additional remuneration of capacity is needed to ensure future security of supply. A reminder: capacity remuneration is not new in Germany, It has already been applied in the form of multiple instruments such as strategic and capacity reserves at least since 2016. The current decision, however, is the first time that a market-based approach is introduced.

What is a Capacity Market?

A capacity market is a type of electricity market designed to ensure the reliability and stability of the power grid, operating alongside short-term electricity markets remunerating energy, MWh, alone. Unlike the latter, capacity markets incentivise the availability of generation capacity, MW. The key purpose is to ensure system adequacy, i.e. that there is sufficient power generation available to meet peak demand, even during times of stress or unexpected outages.