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German Government May Be Cooling on Power Capacity Market

July 3 (Bloomberg) -- The German government may be losing its enthusiasm for the idea of paying electric utilities to ensure there’s enough capacity in the grid to support variable flows from wind and solar power plants.

A study commissioned by the Economy Ministry says that introducing a capacity market carries “risks” and that the current system should be made more flexible. Nina Scheer, a lawmaker for the Social Democrats, Chancellor Angela Merkel’s junior partner in government, said she agrees.

“We may not need capacity markets if we fully exploit the current system’s possibilities and reduce existing barriers,” Scheer said in a phone interview in Berlin yesterday. “The deeper we venture into capacity market systems, the more it may cost.”

Germany, Europe’s biggest power market, is debating how its energy policy should adapt to accommodate renewables as it phases out nuclear reactors by 2022. While the government has supported cleaner forms of energy, it also needs to ensure utilities such as EON SE and RWE AG make enough money to maintain fossil fueled generators that will work at night or when the wind doesn’t blow.

Renewables provided almost a third of Germany’s power in the first half of the year, though they don’t work around the clock like nuclear plants do. Paying utilities to maintain that capacity -- a capacity market -- is one of the proposals under consideration in Berlin, and the U.K. is adopting such a plan.

Market Interference

Capacity markets “interfere strongly with the power market and entail significant regulatory risks,” according to the study published yesterday by the Economy Ministry. It was drafted by consultants Connect Energy Economics GmbH. It found that a capacity market may drive up costs from regulatory intervention as setting it up is “prone to errors.”

The BDEW utility lobby, which represents EON, RWE, Vattenfall Europe AG and EnBW Energie Baden-Wuerttemberg AG, said last week that Germany faces power shortages from 2017 and needs a program to underwrite spare capacity in the system. Bavaria and Baden-Wuerttemberg, the home states of Siemens AG and SAP AG, urged Merkel in January to introduce a capacity market next year to ensure supplies.

The government intends to set out its program for supporting back-up power by 2016. It hasn’t yet given more details. Germany needs about 4.8 gigawatts of reserve capacity for the winter of 2015 and 2016. The grid regulator, the Bundesnetzagentur, expects it to sign contracts for that capacity with the utilities.

Consumer Impact

A capacity market financed by consumers that steers such payments beforehand “can only be the last resort,” because it would favor plants run by the country’s four main utilities and therefore reduce competition, Andreas Mundt, president of the Federal Cartel Office, told the German news service DPA last month. The government should instead wait to see how markets develop after the clean energy law is amended, he said.

It’s possible that Germany can avoid the issue. Utilities are poised to start units fired by natural gas and coal with a combined capacity of 6.9 gigawatts by the end of next year. It’s Germany’s biggest program of new power plant construction since 1985, according to Bundesnetzagentur data.

The new units can supply 13.8 million German homes, about a third of the total. Retiring power plants will take 4.5 gigawatts out of the system, the data show.

To contact the reporter on this story: Stefan Nicola in Berlin at snicola2@bloomberg.net

To contact the editors responsible for this story: Reed Landberg at landberg@bloomberg.net Tony Barrett

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