German Federal Ministry for Economic Affairs and Climate Action publishes options paper on the electricity market design of the future - the role of energy storage systems

On 2 August 2024, the German Federal Ministry for Economic Affairs and Climate Action (“BMWK”) published the options paper "Electricity market design of the future - options for a secure, affordable and sustainable electricity system" (“options paper”). It has been developed since March 2023 by the Climate-Neutral Electricity System Platform (“PKNS”), which was set up by the coalition parties. The PKNS consists of various interest groups from the energy sector, consumers, industry and civil society and was supported by representatives from the scientific community. The options paper serves as the basis for a discussion within politics at European, national and federal level and with the various stakeholders. The public is invited and encouraged to participate in a written consultation on the options paper until 6 September 2024 by visiting here.

The following newsletter presents the options paper and focuses in particular on the role and importance of energy storage, which is of great significance for the electricity market design of the future.

The options paper identifies the following four areas of action for the electricity market of the future:

1. Investment framework for renewable energies

In order to realise massive investments in the area of renewable energies with sufficient certainty and speed, an investment framework is required that reduces the current uncertainties of market revenues in an environment of transformation. Market premiums will provide security until 2026, while the EU Regulation (EU) (2024/1747) on improving the electricity market design and climate, environment and energy subsidies guidelines require a support system with a repayment instrument. Four options have been discussed for this, with the option of capacity payments in conjunction with a refinancing contribution independent of production currently coming closest to the resolutions of the German government in its growth initiative from July 2024.

2. Investment framework for controllable capacities

A flexible technology mix with new "back-up" capabilities is required to balance out the variable electricity generation from wind turbines and solar plants. In addition to flexible loads and power plants, storage systems are considered particularly suitable for balancing out short-term fluctuations. For long-term flexibility, hydrogen power plants with long-term storage are envisaged, among other things. As the current market environment is not sufficient to incentivise investment in these new technology mixes, there are plans to introduce a technology-neutral capacity mechanism. This means that not only the electricity produced, but also the secured capacity of electricity producers will be remunerated. Of the four options discussed, the BMWK is in favour of a combined capacity market with elements of a central capacity market and a decentralised capacity market. The latter transfers the responsibility for securing the electricity supply through capacity to the suppliers. Suppliers have the choice of acquiring capacity certificates from operators of controllable capacities such as storage systems, maintaining their own capacities or creating incentive models to reduce customer consumption at peak load times. The central component provides a defined demand to tendered by auction. This is particularly suitable for capital-intensive capacities with long refinancing horizons and offers long-term investment security thanks to long contract terms.

3. Local signals

Due to the proportion of volatile renewable energies and the increasing number of flexible electricity consumers, it is becoming increasingly important to know when and where electricity is generated and consumed and how this can be intelligently coordinated with the electricity grid. Up to now, grid expansion and redispatch measures have been the main means of dealing with grid bottlenecks. As it does not make economic sense to upgrade the grid up to the highest generation peak and the increase in redispatch measures is increasingly posing operational challenges for transmission system operators, so-called local signals are to be used to incentivise producers, consumers and storage facilities to voluntarily consume electricity locally where there is a lot of green electricity in the system and to do so at times when a lot of renewable energy is available in the region. The following three options have been discussed: The first option is time and regionally differentiated grid fees. This means that grid fees are temporarily reduced in the event of grid bottlenecks in surplus regions in order to increase the demand for electricity there. As new storage facilities are exempt from grid fees for 20 years, this potential mechanism is more likely to become relevant in the future. The second option envisages regional control of projects through funding programmes. New demand-side projects would be subsidised locally where a lot of electricity is generated and generation projects in regions with a high demand for electricity. The third option is the integration of loads into redispatch. This option appears unlikely to be realised by the end of the decade, partly because the measurement, control, communication and forecasting capabilities of the distribution grid operators are not yet sufficient and partly because it is still difficult to objectively calculate the costs of reducing individual loads and the subsequent compensation from the grid operator.

4. Flexibility

A paradigm shift is taking place in the greenhouse gas-neutral electricity system. Flexible consumers on the demand side and flexibly controllable electricity generators on the supply side will optimally utilise and balance the variable electricity generation from wind and PV. Storage systems, flexible power plants and high-performance grids are particularly suitable as flexibility options. There are technical, regulatory and economic barriers to the integration and utilisation of demand-side flexibility. Three complementary fields of action have been identified to reduce these barriers. Firstly, dynamic and innovative tariff models from 1 January 2025 not only for industrial consumers, but also for households. Secondly, adapting the grid fee structure to supply and demand on the electricity market. Thirdly, enabling industrial flexibility and further developing individual grid charges. A reduction in the fee is currently linked either to the condition of even grid utilisation or atypical grid utilisation. The potential to utilise storage facilities to benefit from price fluctuations and renewable energy generation has not yet been widely exploited.

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