Stakeholders in the German power market are divided on how best to implement a capacity market in Germany, or whether it is needed at all, Argus heard on the sidelines of the E-World conference in Essen last week.
Instead of entertaining the "misleading" debate over centralised versus decentralised mechanisms, in which the government tries to "delegate accountability for security of supply", what is really needed is "centralised accountability with decentralised assets", Stefan Joerg-Goebel, senior vice-president for Germany at utility Statkraft, said.
"The market should be centrally organised but technologies bidding into the market should include, for example, decentralised demand-side response and batteries," he said. But "only the state can really secure supply".
Transmission system operator Amprion prefers a centralised capacity segment with a "local component" over the combined capacity market proposal, according to Peter Lopion, consultant in the firm's international regulation management and market development team. He emphasised the importance of knowing "when and where" power plants will come on line. Amprion also stressed that "incentives for grid-serving behaviour" are needed for batteries in particular.
In contrast, a decentralised capacity market — not too dissimilar to that of France — is the "best solution" for Germany, although it would first need to adapt to the "German reality", Davide Orifici, director of public and regulatory affairs at energy exchange Epex, said. Such a system would "better help to integrate flexibility" and "further develop demand response", he said, adding that the impression that a centralised system would be simpler is "false". And a decentralised element is "crucial" to "fully leveraging the potential of the demand side", according to Jan Bruebach, managing director at utility MVV. Nevertheless, the addition of the centralised element would add "long-term security" and thus the German energy ministry BMWK's combined proposal is "fine".
And while not specifying a particular design, "something at least similar to a capacity market" is important for security of supply and to "provide incentives to hold capacity on stand-by" during periods of low renewable generation, said Andre Jaeger, senior vice-president of product management at trading and risk management firm Ion Commodities. Kerstin Andreae of energy and water association BDEW agreed at a press conference that Germany "needs" the transition to a capacity market.
But Peter Reitz, chief executive of energy exchange EEX, does not see the introduction of a capacity market in Germany as being essential. "The same effect can be achieved much more cheaply by introducing the obligation to deliver into the energy-only market," he said, although a decentralised market would "interfere the least with liquidity". And the introduction of a capacity market in Germany would be "costly", Andy Sommer, head of fundamental analysis and modelling at utility Axpo, said. The costs would probably be absorbed by grid operators and the state, and eventually offloaded on to end-consumers, he said.
Energy ministry BMWK in August opened a consultation on the country's future power market system, with four options to finance controllable power capacities: a capacity-hedging mechanism through peak price hedging, a decentralised capacity market, a centralised capacity market, and finally, the ministry's preferred option of a "combined capacity market". Despite the deadline for member states to incorporate the EU-mandated electricity market design having passed on 17 January, the design will "probably" be implemented by the next government, BMWK deputy director Andre Poschmann said at an industry event last month.
The capacity market question is likely to draw the most political attention after the federal election on 23 February, Joerg-Goebel said, adding that the successful continuation of the coal phase-out — which is currently an "uncomfortable issue" for market participants — can be "fixed" only with new capacity. And without a capacity mechanism, it will be "very difficult" to invest in new peak generation plants, Bruebach said, with Lopion adding that the coal phase-out is "dependent on" new capacity mechanisms.
A bidding zone split would harm liquidity
And the decision over whether to split Germany into multiple bidding zones remains a concern, with Argus having heard a general consensus that a bidding zone split would negatively affect liquidity in power trading.
Larger price zones acting as a "larger mass" are better for liquidity, according to Reitz, citing the German-Austrian bidding zone split and subsequent reduction in Austrian power liquidity. A split would cause "disruption" to the entire market, owing to regulatory changes and the loss in liquidity, agreed Joachim Bertsch, senior business development manager at utility RWE, while Bruebach said it would "crush" liquidity, disadvantage smaller market participants and drive up costs for industries in the south of the country.
While BMWK in August rejected the "reconfiguration" of the single German-Luxembourg bidding zone, the "pressure" to introduce multiple bidding zones will intensify if grid expansion does not, according to Joerg-Goebel, while head of trading at utility Alpiq Navin Parasram said he believes "some form of split" will happen.
