Strategic reserve can ensure supply of electricity at low cost

UBA study critical of current capacity markets

A new study carried out on behalf of the Federal Environment Agency (UBA) has determined that the current electricity market, which is designed as “energy only“, is ideal for the transformation of the energy supply system and will ensure secure supply of electricity. Capacity markets, in contrast, do not need to be introduced at this time as they harbour great risk of inefficiency, in part because they create too little incentive for congestion management. However, it is important that congestion management be expanded to make the electricity market reliable in the long term and to use wind and solar power efficiently. “Greater security in a new energy supply system could be provided by a strategic reserve. This reserve would be useful under absolutely exceptional conditions - for example if a number of power plants fail during a period of extreme cold. It is comparable to the strategic petroleum reserve“, says UBA’s President Jochen Flasbarth. It could be rapidly replenished, if necessary, with a number of new gas turbine power plants or through the continued operation of some of the gas and coal-fired power plants that are due to be decommissioned.

The authors of the study by the Ecofys consultancy group are very sceptical of the introduction of a broad-ranging capacity market. Such a scenario would create a new market for power plant capacity in addition to the existing electricity market that would increase revenues from construction and operation of power plants. The current energy only market for electricity compensates operators of power plants for the volumes of energy they make available. In contrast, there is no direct compensation for the provision of production capacity. On a capacity market, power plant operators would gain revenues - in addition to those from the electricity market - for guaranteeing a certain output. The costs of the capacity market would be passed on to all consumers. According to the Ecofys study, this new market harbours great risks of inefficiency, and its introduction would be virtually irreversible. It might also encumber the integration of renewable energy into the electricity production system in the medium or long term as it tends to give less incentive to resort to congestion management, which means adaptation of demand for electricity to fluctuating supply.

The study shows that capacity markets are not needed at present because the current energy only electricity market is the appropriate framework for the transformation of the energy system and guarantees secure electricity supply. The public debate about additional revenues from capacity markets, however, might delay investment in new power plants. To ensure that the electricity market operates reliably in the long term and that wind and solar power are used efficiently, UBA recommends the expansion of congestion management. It will allow more consumers than ever to react more flexibly to fluctuating supply and to reduce their consumption when prices signal power shortages. Industries such as aluminium, steel and cement production or cold storage warehouses are currently in a position to do this. On the other hand, feed-in peaks owing to solar and wind energy make electricity cheaper and create an incentive for customers to shift their use to these times.

The restructuring of the energy supply system could also be secured through a strategic reserve that can be compared to the strategic oil reserve. In comparison to capacity markets, a strategic reserve is considerably less risky. It can be established very quickly as necessary with a few new gas turbine power plants or through continued operation of several gas and coal power plants designated for decommissioning. The power plants in the strategic reserve serve solely as security for absolute extreme events - severe cold periods occurring parallel to outages at a large number of power plants, for example - and would not be on the electricity market. The efficiency of the electricity market therefore remains unaffected, and it provides more incentive to practice congestion management than in capacity markets. This is especially important for the integration of renewable energy. “With a strategic reserve capacity of about four gigawatts (GW), total costs for keeping it on standby would be between 140 and 240 million euros per year. The consumer would have to absorb very moderate costs of under 0.1 cents per kilowatt hour,“ says UBA President Flasbarth. The strategic reserve is an efficient solution that provides speedy security of supply and unlike capacity markets, it keeps all options open for designing the market optimally to adapt to future challenges.

Strategic reserve differs from the reserve power plants of the Federal Network Agency (BNetzA) and serves to alleviate episodes of scarcity in southern Germany, notably in Bavaria and Baden-Württemberg. This is not as a result of lacking power plants but rather of bottlenecks in the power grid. Overall, Germany currently has sufficient power plant capacity. These bottlenecks in the power grid can be alleviated in the medium term by the planned grid expansion foreseen in the Power Grid Expansion Act (Energieleitungsausbaugesetz - EnLAG). In the meantime, the Federal Network Agency of Austria and southern Germany can relieve the power grid with the reserve capacity at power plants in the region. This solution is a similar approach to that of a strategic reserve but serves a different purpose: the strategic reserve is intended primarily as a means of long-term security of supply in the electricity market. The BNetzA reserve power plants could be developed to provide a strategic reserve that meets the dual purposes of providing long-term security of the electricity market as well as building new reserve power plants in southern Germany in order to relieve the power grid when necessary.

Additional background information:

Energy only market:the current electricity market is a so-called ‘energy only’ market. Power plant operators are compensated only for the volume of energy they supply. There is no direct remuneration, however, for the provision of production capacities (by power plants). On a capacity market, power plant operators would receive remuneration for providing secured output (production capacity) - in addition to revenues from the electricity market.



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