Climate groups slam Germany’s ‘pro-gas’ capacity market design as European Commission grants state aid approval

“Based on the legislation adopted by Germany, we do not see how the Commission could conclude that this measure complies with its own State aid rules.”

“We will need to see the published decision before understanding how the Commission reached its conclusions. But these rules are crucial to ensuring a level playing field, for the benefit of consumers and a clear path towards a cleaner energy system.”

The capacity mechanism, which ClientEarth said is effectively a gas subsidy plan, will cost anywhere between estimates of €15.6 billion (US$18.11 billion) and €35.2 billion. Initial costs of the first auction are expected to be around €1 billion to €3 billion, with annual costs in future auctions for 2032 to 2045 years ranging from €900 million to €2.3 billion.

“Sinking up to €35.2 billion into new gas generation takes a woeful step in the wrong direction, towards worsening climate effects and rising costs for consumers, who will be paying for these plants until 2045, the same year they are finally supposed to be climate neutral,” Nieuwbourg said.

Transmission system operators (TSOs) will remunerate capacity required to meet the reliability standard that ensures security of electricity supply.

Resources will compete for 15-year contracts and all capacity benefiting from these long-term agreements must operate in a climate-neutral way by 2045, while gas plants must be shown to be adaptable to hydrogen generation.  

While the auction is intended to be open to all technologies, both ClientEarth and the environmental group Beyond Fossil Fuels slammed the market design in statements sent to media, including Energy-Storage.news, yesterday.

Batteries not included

Two auctions, each seeking 4.5GW of resources, are taking place this year, with the submission deadline for the second auction closing on 29 December.

Beyond Fossil Fuels argued that the auctions for 9GW of long-term capacity this year will be closed to batteries and demand response, and the claim that the auction is open to all technologies is therefore untrue.

Plants must be technically capable of feeding electricity into the public grid without interruption for at least 10 consecutive hours at 80% of installed capacity. For batteries, that means supplying 80% of installed capacity continuously over that time and discharge to go again within three hours.

Furthermore, gas-fired combined cycle gas plants (CCGTs) receive an 85% capacity credit for participation, but battery energy storage systems (BESS) just 58%. Beyond Fossil Fuels argued that EU Electricity Regulation explicitly states that energy storage and demand response must be included in capacity mechanisms open to all resources that could meet the required technical performance.

The auction’s design, favouring just a small subset of resources, the group said, goes against those regulations.

Energy-Storage.news has similarly heard from industry voices that participating in the auctions will be challenging for battery storage assets.

Regulatory affairs manager for independent power producer (IPP) Grenergy, Nina Schmüser, told the site that the “initial design strongly favours gas-fired generation.”

“The first 9GW of tenders are unlikely to be accessible for today’s BESS projects,” Schmüser said.

“This not only adds costs that will ultimately be borne by electricity consumers but also locks in gas capacity for many years while reducing merchant revenues for storage assets.”

Anselm Eicke, partner at consultancy Neon Neue Energieökonomik, told ESN Premium that the 9GW of tenders are designed in a way that excludes batteries, noting also that a requirement for battery cells to be from European or associated countries is a further barrier.

Better luck next year?

ClientEarth lawyer Stéphanie Nieuwbourg highlighted the lateness of the EC approval coming just “days before the first tenders under the scheme are to close,” while the German government and regulators only adopted the StromVKG legislation in July.

“Further, because the decision has not been published, the public has no way of scrutinising the Commission’s reasoning before the first auction round closes,” Nieuwbourg said.

The silver lining of hope for the BESS industry comes with the introduction next year of “duration-neutral” auctions, with 2GW of capacity contracts expected to be up for competitive solicitation.

The StromVKG framework gives battery storage an opportunity to “shape the technology-open tenders from 2027 onwards,” Grenergy’s Nina Schmüser said in a recent interview.

“These should give BESS a fair opportunity to compete as a carbon-free and increasingly cost-effective source of flexibility.”

Batteries are expected to be the “main participants” in the auctions running from next year, according to Philipp Hesel, senior associate for Aurora Energy Research, interviewed alongside Anselm Eicke for ESN Premium.

Hesel said derating factors are expected to still be “quite harsh, leading to longer battery durations being more competitive,” although at this stage it remains speculation as the derating factors are not yet known.

Hesel did note that, with Germany’s large-scale BESS market currently thriving, it is likely the government will “want to avoid subsidising 4-hour assets that will be built anyway,” meaning that shorter-duration BESS would struggle to compete with gas even in those future auctions.

Warning to rest of Europe

The EC found the German capacity mechanism design to be “necessary and appropriate” to meet the objectives pursued and in line with the EU Electricity Regulation, and the level of financial aid involved is appropriate to meet those aims, it said yesterday.

ClientEarth said it will now examine how the scheme was approved, questioning the scale of the mechanism, its potential market-distorting effects and the approval of the up to €35.2 billion cost burden on consumers.

The law group also argued that gas plants are only required to be climate neutral by 2045, the final year of their obligation, meaning consumers will be subsidising their continued existence. This seems incompatible with EU climate objectives, ClientEarth said.

Both ClientEarth and Beyond Fossil Fuels sounded a warning that with several other EU Member States considering new capacity market mechanisms, the EC decision could have serious repercussions across Europe.

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