Electricity Market Design Needs Overhauling

The German government has agreed on a new power plant strategy, focusing on the construction of new hydrogen-ready gas-fired power plants. The total power plant capacity is targeted to reach ten gigawatts and plants are to be converted to hydrogen operation between 2035 and 2040. Professor Achim Wambach, president of ZEW Mannheim, explains:

“It is to be welcomed that the German government has agreed to tender new gas-fired power plants with a capacity of up to ten gigawatts. This will help prevent blackouts even during periods without wind or sunshine (‘dark doldrums’). However, this should only be seen as a first step, as the electricity market design in Germany needs to be fundamentally overhauled.

At least as important as new gas-fired power plants are storage operators and demand-side flexibility to ensure that the required energy is available, or that consumption is curbed, during dark doldrums. However, this must also be compensated, for instance through capacity markets or improved futures markets where long-term electricity contracts are traded. It is therefore positive that the German government aims to include capacity markets into the new electricity market design. 

It is to be hoped that the new electricity market design, planned for this summer, will allow for this form of pricing. To further minimise the risk of grid congestion, new power plants should be located where they enhance grid stability. Consumers can also contribute to preventing grid congestion. However, this will require a temporally and regionally differentiated pricing.”