FEATURE: Germany favors two-step approach to power market reform

With the European Commission due to present final proposals on reforms to power market design mid-March, Germany has signaled it favors keeping things simple for now while it works on reforms specific to its own domestic market -- limiting EU-wide changes to measures supporting price stability and market integration for now and leaving any deeper structural reform to a later date.

"The federal government is committed to a two-step reform of the electricity market," secretary of state in the energy ministry Sven Giegold said Feb. 27 at the informal EU Energy Council in Stockholm.

Simple reforms allowing for price stability and market integration could come without delay, he said, adding that the Swedish presidency was aiming for agreement by June.

A minority of mainly southern EU member states back radical surgery to decouple gas costs from power price formation, while others are generally in favor of the EC's less disruptive ideas to improve forward markets and contracting.

Deeper structural electricity market reforms -- which can "bring a lot of benefits, but also can cause great damage if they are done wrong" -- may take longer to work on, Giegold said.

"We must take more time for a major and comprehensive reform and develop precise analyses," Giegold said, referring to Germany's own process to make its electricity market fit for the future.

Long process

Germany, which is Europe's biggest power market, is unlikely to implement any far-reaching decisions impacting market design ahead of the European elections and the ACER/Entso-e bidding zone review in 2024, energy minister Robert Habeck said Feb. 20 at the opening of the advisory stakeholder forum on market design (PKNS).

"Any fundamental structural reform must improve incentives for investments in renewables, energy efficiency and storage," Giegold said, adding that "we must not fall back into fully regulated markets, not even for nuclear energy."

Lower prices for new wind and solar must filter through faster to industry and consumers, he added.

Germany lifted support contracts for renewables tenders by a quarter to over Eur73/MWh with a record 18 GW to be tendered this year, but permitting remains the bottleneck.

Platts-Pexapark PPA indicators for standard PPAs indicate some scope for subsidy-free projects. Capture prices hits record highs in 2022, but have averaged below windfall thresholds so far this year.

Platts, a unit of S&P Global Commodity Insights, pegged German offshore wind (VWAP) at Eur118.29/MWh in February.

Opinions split

Energy trading association Efet Deutschland said a look at market design from a German perspective was overdue and should not be rushed.

"We do not see an acceleration of the reforms through the platform. It is important to hold such a fundamental debate at the beginning of each process and to take time for it," managing director Barbara Lempp said in emailed comments to S&P Global.

It was vital to "interpolate market-based instruments and the view of wholesale trade" into the platform to "avoid a turn towards 'planned economy' [Planwirtschaft] approaches by the federal government," Lempp said.

"Opinion is split widely on various elements from local flexibility incentives to the status of PPAs and CfDs to finance new renewables," said consultant Hanns Koenig at Aurora Energy Research.

The introduction of a subsidized industrial power price was another point of divergence, said Koenig, who is a member of PKNS.

Location signals

While most work on Germany's market design should be completed this year, delicate issues like price zones may take longer.

Joern Richstein, senior energy researcher at think-tank DIW, hopes the process will "start thinking power market design afresh, and take steps towards implementation of locational marginal prices."

In a white paper on spot market design with European partners, Richstein has argued for a transition to locational marginal or nodal pricing in a single step. First trials on national levels should start as soon as possible.

Regarding the debate on PPAs and CfDs, he said: "The major difference for renewable investors is counter-party risk and standardization."

"CfDs provide in all scenarios the most effective hedge for investors against power prices uncertainty," Richstein said in an interview with S&P Global.

The DIW, one of Germany's leading think-tanks, recommends a CfD pool. For Richstein, the key decision would be between a difficult split into bidding zones, without enough local signals on operation and investment and detrimental impacts on forward markets by political risks of further zone splits, or a move towards much more localized nodal pricing, as in the US.

Price zones

Meanwhile, a government-appointed expert commission recommends to steer away as much as possible from market intervention to create the best framework conditions for investment.

Its report, intended to steer the debate, concluded that while splitting Germany into bidding zones may bring some advantages compared to the current single national price zone, resulting local signals may not be strong enough to justify the move and could be politically controversial.

A spokesperson for the energy ministry told S&P Global in an email Feb. 23 that "no preliminary determinations were made, not even in the question of price zones.