Electricity market: fit for the 21st century

The new Electricity Market Act will strengthen market mechanisms and ensure security of supply.

Winter landscape with power poles and sunset. © BMWi/Holger Vonderlind

Even if we are still enjoying beautiful autumn weather, winter is just round the corner. The weather services are already reporting freezing temperatures in some regions. And the further the temperatures drop, the cosier we feel at home: our heating systems are turned up higher, our TVs are on for longer, and our lights go on earlier. Thank goodness we can rely on a dependable source of electricity and warmth - whenever we need it. And more and more of it is coming from renewable energy sources like wind and solar power.

Renewables already cover around a third of our electricity consumption - the figure for the first half of 2015 was 32.5 per cent. However, the greater the share of our electricity supply which derives from weather-dependent renewables like the wind and the sun, the greater the fluctuations in the amounts generated. When there’s no wind, there’s no wind power, and at night or on cloudy days there is no solar energy. So how will we safeguard our energy supply in the future? The answer was provided by the federal cabinet today in the draft Act on the Further Development of the Electricity Market.

"The core element of the energy transition"

"The cabinet has adopted the core element of the energy transition in this legislative period, and ensured that we will have a stable policy framework in the coming years," said Sigmar Gabriel, Federal Minister for Economic Affairs and Energy. "The Act on the Further Development of the Electricity Market puts a thoroughly market-based regulatory framework in place for the electricity market of the future. This is the largest reform of the electricity market since the energy markets were liberalised in the 1990s, and it will make the electricity market fit for the 21st century. We are taking a European approach to energy security and are achieving optimal integration of renewable energy into the market."

More flexibility and fair competition

The electricity market of tomorrow - also known as "electricity market 2.0" - will strengthen market mechanisms and aims to tackle several challenges at once: it needs to maintain an efficient supply of electricity in the face of growing shares of renewables, whilst maintaining energy security. A secure supply is quite simply crucial for a highly developed industrial country like Germany. To make this happen, the electricity market 2.0 intends to let market forces deliver the most cost-effective electricity supply. An important aspect here is the "competition between the flexibility options": this refers to power stations which can generate electricity flexibly and to consumers who can adapt their electricity demand to the supply, as well as to storage facilities.

In the past, the amount of electricity generated has been driven by the level of demand; in the energy system of the future, this will also work the other way round. In other words, electricity will be deliberately consumed at times when there is a lot available. Also, variable tariffs will mean that consumers can benefit financially from adapting their consumption.
There will be a sophisticated system to synchronise electricity supply and demand in response to the weather-dependent feed-in of eco-electricity, and a role will also be played by combined heat and power generation facilities, storage and European electricity trading.

Power stations can step in where needed

It’s better to be on the safe side: the new Electricity Market Act will introduce a "capacity reserve" to make sure that the supply remains secure in extreme situations. Specifically, this means that several power stations with a total capacity of approx. four gigawatts will always be ready to step in. They will not form part of the normal electricity market, and will only supply electricity in exceptional situations where the demand could not be met in any other way.

And, as winter nears, it is good to know that the Electricity Market Act will regulate not only the capacity reserve, but will also change the rules for the "grid reserve". The grid reserve guarantees a secure grid operation and relieves congestion. Congestion will remain a problem until key grid expansion projects have been finished. The grid reserve is particularly important in winter since the grid generally has more to cope with in the colder months than in the summer.

Secure power, lower carbon emissions

Another key element of the draft legislation is that the electricity sector should contribute more to the fight against climate change. To this end, particularly old and inefficient lignite-fired power stations in North Rhine-Westphalia and the Lausitz region will be placed on "security stand-by" and decommissioned after four years. The reduced operation and closure will cut harmful carbon emissions and thus help Germany to meet its national climate targets. By 2020, the goal is to reduce carbon dioxide emissions by 40 per cent compared to 1990 levels. To meet this goal, the heads of the governing coalition decided in the summer to cut emissions in the electricity sector by a further 22 million tonnes of CO2. Switching off the lignite-fired power stations alone will save up to 12.5 million tonnes.

The scheme will start next year. Lignite-fired power plant units owned by Mibrag, RWE and Vattenfall will gradually be removed from the market and provisionally closed down. But for four years each, they can still serve as a last resort in order to maintain the power supply. After that, they will be finally decommissioned. The companies will receive payment for maintaining the stand-by capacity and decommissioning the plant. The total costs will be approx. 230 million euros per year over seven years.

The Electricity Market Act will also improve the monitoring of security of supply, in order to safeguard energy security in the new regulatory environment. The monitoring will no longer focus solely on the national output levels, but will give greater consideration to the contribution to security made by the European internal market in electricity. In other words, the electricity market 2.0 is to take a thoroughly European approach. This will also reduce the cost of maintaining capacity in Germany.

Blackouts rarer than ever

Whilst all these precautions are being taken, we can already say that the high proportion of renewable energy in electricity generation in Germany has not made our electricity supply any less reliable. In fact, the opposite is the case: last year we had the shortest average interruption to supply ever seen in Germany. This is also reflected in the most recent surveys by the Federal Network Agency: in the whole of 2014, people only had to go without electricity for an average of 12 minutes and 17 seconds across Germany. That is roughly three minutes less than in 2013, when the average period without electricity amounted to 15 minutes and 19 seconds.

And this is important. Security of supply is about more than delivering lighting and convenience. We need an uninterrupted electricity supply if many industrial processes are to be able to function at all. Blackouts can cause high costs to businesses and can indirectly impact on the performance of the entire economy. To make sure that the energy transition is a success and that our supply remains secure, we will have the electricity market 2.0 in future. So the winter can come - not just this year, but every year.