How Sustainable Are Germany's Planned Energy Market Reforms? – "The Planned Shutdown of Brown Coal Power Stations is Completely Ineffective"

The federal government has revealed ambitious plans for new legislation. The electricity market law, the act on capacity reserves, and the law on digitalisation should ensure that the energy transition is achieved and that the German energy market is made fit for the future. Whilst the federal government will first focus its attention on the new electricity market law, the cabinet intends with this trio of regulatory reforms to not only further develop the German energy market, but also to ensure that ambitious climate protection aims are achieved. ZEW environmental economist Nikolas Wölfing, however, considers these laws to be nowhere near as effective as intended.

In Berlin there is talk of "Electricity Market 2.0". What exactly are we talking about?

The proportion of electricity derived from renewable energy sources has significantly increased over the last several years. The most significant sources of renewable energy, solar and wind energy, however, are hardly able to meet market demand. Whether an adjustment in demand, or increased production at power stations, alternative measures must be used to ensure that demand and production are balanced at any time. The federal government has already concluded that price signals shall serve as the primary determinant of actual electricity supply, thereby further enforcing the current design of the "Energy Only Market" (EOM). This dependence on price signals is in itself to be welcomed; with the correct market design, prices can provide efficient shortage signals. In practice, this results in numerous smaller reforms, which should in turn ensure that both the user and producer stick more closely to their planned levels of use or production, and that more energy providers are able to offer energy on the basis of flexible charges or production capacities.

The drafted law foresees reserve capacity as from autumn 2017: brown coal power stations shall be shut down, but reinstated in an emergency. This should secure energy supply and ensure that the German climate protection aims are achieved by 2020.

Securing energy supply and achieving climate protection aims are claimed to be the main drivers behind these regulatory reforms. These claims are, however, insufficiently backed. According to the drafted law, securing energy supply means enabling power stations to be reinstated in the case of a shortage. For the time being, however, power stations are being forced out of the market for political reasons. They are not being replaced by other installed capacities. This is technically unnecessary; the German energy market currently has over-capacities. Energy prices are so low that some power stations have chosen to shut down for economic reasons. It is not these power stations, however, which the drafted law concerns. The planned law forces power stations out of the market, which otherwise would have continued to produce.

And what about climate protection?

In terms of climate policy, the planned shutdown of brown coal power stations is completely ineffective. The first issue is that the national climate protection aim is incompatible with European aims. Since 2005, the emissions trading scheme has determined systemic reductions in greenhouse gas emissions in certain sectors throughout the EU. The overall volume of CO2 produced by industry in Europe will not therefore change, unless the number of traded emission certificates is reduced. If emissions from German brown coal power stations are cut, other sectors or countries will simply be able to increase emissions by the equivalent amount. All participating specialists are aware of this correlation. What's strange is that claims are nevertheless being made that climate protection is a priority here. There may be other reasons as to why the use of brown coal should be reduced, but this legislation will bring very little when it comes to climate protection.

The federal government plans to provide millions in compensation to the operators of reserve power stations. In the future, private households will pay an environmental protection levy of 0.05 cents per kilowatt hour of electricity. How does this match up?

Unfortunately, it doesn't. 0.05 cents per kilowatt hour seems very little. The federal government calculates the annual total costs, however, to be 230 million euros, and that on average for the coming seven years. This should ensure that by 2020, German CO2 emissions will have been reduced by 11 to 12.5 million tons. For 2020, this would constitute costs of around 20 euros per ton. In other years, this value would undoubtedly be considerably higher. To provide a comparison, the market price for CO2 is currently between 5 and 6.50 euros. For between a quarter to a third of the costs, emissions could therefore actually be avoided rather than reallocated.

A further important point in the reform concerns digitalisation. What exactly is planned?

There are plans to increase the use of intelligent electricity counters, and also to determine the necessary security standards for this expansion. The federal government is aiming to implement such smart-meters first and foremost in industry and manufacture, which would certainly make more sense in terms of the cost-benefit ratio and data protection. Large-scale implementation of such electricity counters does not, however, currently seem viable. This is not least a result of the regulated price components such as levies on renewable energy, reserve power stations and network charges. If fixed levies increase and the energy prices on the stock market remain as low as they currently are, there will be little incentive to adjust electricity use to the current situation. In the future, it will become increasingly important to find intelligent remuneration designs, which until now have been based on levies.

For more information please contact

Dr. Nikolas Wölfing, Phone +49(0)21/1235-217, E-Mail woelfing@zew.de