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Energy Security of Supply Act adopted

On 9 July, the Bundestag adopted the Electricity Supply Security and Capacity Act. It is to secure a reliable electricity supply in Germany from 2031 onwards, even with growing shares of renewables in the system.

The Act is to ensure security of supply as from 2031. There is to be a sufficient supply of electricity, even at times when the weather-dependent solar and wind energies do not generate and feed sufficient amounts of electricity into the grid. In this way, the Act also secures the legally binding phase-out of coal by 2038 and the further expansion of renewables. The Energy Security and Supply Act is to ensure that Germany continues to have a highly reliable supply of electricity for all citizens and for industry, which is an important factor for businesses.

For the first time in Germany, the Act introduces a capacity market. This is based on recent findings from the monitoring of security of the electricity supply at both national and European level which show that failure to take measures could result in a power supply gap after 2030. In a capacity market, operators are compensated for having capacities such as power plants, storage units or flexible loads (electricity consumption points that can delay or adjust their consumption) ready to step in.

Capacity market payments to incentivise investment

Up until now, power plants have only been paid for the electricity volumes they have actually generated and sold (energy-only market). In the future, however, market revenues from the energy-only market will become more volatile and hence less reliable as the electricity system is undergoing a transformation. Remuneration under the capacity market is therefore intended to work as an incentive for investments in new capacities and close the financing gaps that stand in the way of the provision of these additional capacities. This will ensure that sufficient capacity will be available to reliably provide the necessary load at any time and ensure security of supply.

The Act sets out a framework for securing the capacity required in 2031. A full capacity market is to follow from 2032 onwards. This is to ensure that the total amount of electrical power required to uphold the high standard of supply security in the Federal Republic of Germany is available at all times. The necessary demand for capacity will be met by way of auctions. The capacity market ensures that capacities are available, whereas their actual use will continue to depend on the signals from the electricity wholesale market, as is currently the case. Auctions for the capacity market are to take place in 2026, 2027 and 2029. The capacity must be available from 1 November 2031 to 30 October 2032.

Auctions focus on new long-term capacities

Initially, auctions will focus on new long-term capacities. There will be special requirements regarding the capabilities of the installations participating in the auctions. They have to be able to provide electricity over a longer period of time and without interruption. This is to ensure that capacities receiving a contract are able to ensure supply security even at times where there is little electricity generation from wind and solar capacities over several days (known as “dark doldrums”). Gas-fired power plants, in particular, are in a strong position to be successful in this segment of the auctions. Initially, two auctions will each procure 4.5 gigawatts (so a total of 9 GW), which roughly corresponds to 20 power plants. In May 2027, another auction for 2 GW of new generation capacity is planned. This auction is no longer to include the criterion of long-term capacity.

The auctions specify that installations must be “kept operational” for a period of 15 years. Where the successful bids concern new power plants, these must by hydrogen-ready and be operated in a completely climate-neutral basis as of 2045.