The phase-out of existing power plants like coal and nuclear together with an increased variability of electricity generation from variable RES-E and a tremendous rise in electricity demand (e.g. from electrifying the industrial and domestic heat market) are major challenges to the German power system adequacy.

One crucial element to secure generation adequacy in a fully decarbonised electricity system will be having sufficient availability of reliable backup capacity to provide power in times of peak demand and/or low generation from renewables.

In a study commissioned by GE Power, Frontier Economics assesses the risk of ensuring generation adequacy and looks at the medium and long term need for controllable thermal backup power plant capacity. Moreover, we have analysed the factors that currently hamper investment decisions and provide recommendations for the development of a Power Market Design for System Adequacy.

Additional thermal power plants urgently needed to ensure generation adequacy

Our study finds that the urgently needed backup capacities in Germany will largely consist of thermal power plants which can provide capacity, flexibility and (in the long-run) carbon neutral power generation. Under different scenarios of the future power system in Germany, estimates on the requirement of additional thermal power plant capacities in addition to many (large and small) batteries, Pumped Hydro Storages and Demand Side Management (DSM) vary between 14 to 42 GW by 2030/2035 and 26 to 88 GW by 2045/2050. With currently less than 4 GW of thermal capacity under construction, it is evident that a lot needs to be done to ensure the timely availability of urgently needed thermal backup power plant assets. While batteries and DSM can help to bridge shorter scarcity periods of several hours, backup power capacity is urgently needed to allow a reliable power supply when RES-E availability is low for several days or even weeks in a row.

Uncertain market conditions hamper investment decisions

• Getting the capacities into the market on time is a challenge that requires a suitable power market design. To ensure the right level of investment, regulation needs to be adequate, clear and sound. To reduce uncertainty and facilitate investment, regulators need to provide clarity especially on the following three aspects:
• The participation rules in the future European and German power market – The design of the future power market needs to be determined as soon as possible (e.g. whether or not a possible deep reform of the power system is planned which in some form will still be based on the merit-order principle, technology agnosticism, support schemes for hydrogen power plants, visibility of locational scarcity and bidding zone configurations,…).
• The remuneration mechanism for flexible generation technologies - Decision makers need to provide clarity on the envisaged remuneration mechanism for backup capacity as soon as possible. One guiding principle should be that all services provided by backup capacity are paid for, i.e. there is a fair remuneration for (a) power generation, (b) capacity availability and (c) ancillary services.
• The availability of infrastructure and fuels – Lean and streamlined regulation must ensure that the availability of all required (network) infrastructures in electricity and hydrogen generation, and transmission are synchronised. Also a plannable access to sustainable fuels is important for backup power plant investors.

We are about to enter one of the most dynamic decades of change for our power system in Germany - providing clarity on the rules, remuneration principles and access to fuels will be of utmost importance so that companies can act and invest into the urgently required backup plants.

You can read more about our findings in our study for GE Power here.

Frontier regularly advises clients on EU energy policy, market design questions on the green energy transition. For more information, please contact media@frontier-economics.com or call +44 (0) 20 7031 7000.