Designing an
Electricity Market for
Energy
Transition
As far as technology goes, the German energy transition can be
­successful. However, it requires a market model that ensures
­cost-­efficiency, rewards innovation, and is socially fair. All power
­producers should play their part in social and economic account­
ability if the progress of the energy transition is to continue.
Text: Claus Peter Müller von der Grün Illustration: Mariela Bontempi
Power Market Design
ccording to Michael Suess, the
key elements for a prosperous
national economy are humans,
capital, resources, and energy – ener­
gy that is reliable, affordable, and
sustainable. “The transition to a new
energy system will not be for free,”
says the CEO of the Siemens Energy
Sector. “Nevertheless, electricity
must be affordable for consumers
and industry alike. What we need is
world-class solutions, not mediocrity.
Germany’s next moves will be watched
closely by other countries.” The Ger­
mans are pursuing ambitious goals.
As part of what has been termed the
“energy transition,” they want to
abandon nuclear power by 2022, in­
crease the overall share of power
­generated by renewable sources from
23 percent of national consumption
today to 80 percent by 2050, and si­
multaneously reduce greenhouse gas
emissions by 80–95 percent against
1990 figures.
There is little doubt that this indus­
trial and engineering nation will be
able to master this transition in tech­
nical terms. However, is it also pursu­
ing that goal appropriately in terms
of cost efficiency and burden shar­
ing? This question is still being de­
bated in Germany. Critics say that
tapping into renewable energy sourc­
es is too expensive and will lead to a
redistribution of money from the bot­
tom to the top; moreover, they say
that it also accelerates greenhouse
gas emissions. And Suess puts it
bluntly by saying: “It would be irre­
sponsible to continue the current
subsidy scheme – we would burden
the power customers and the indus­
try for decades to come.”
To Understand the Energy
Transition, One Must Understand the Germans
To comprehend Germany’s approach
to the energy transition, it is neces­
sary to understand the Germans
themselves. The country’s drive to
liberalize the electricity markets in
line with 1990s European directives
has been exemplary. The state in­
creasingly withdrew from the busi­
ness of supplying power. Energy com­
panies were privatized and sold off
the grids, while a regulatory agency
was established to ensure free access
to these networks. At the same time,
The Climate Scientist
“Rising emissions are by
no means the result
of the ­energy transition.”
Rising emissions are not due to the energy turnaround, but mostly to
other economic and political factors, and they would increase (probably
even more strongly) even without this transition. This is why we need
­integrated approaches including capacity markets, investments in lowemission backup systems, and flexible load management, enabling a
­reform of the remuneration scheme for renewables and an overhaul of
the European emissions trading system.
Felix Chr. Matthes is the Research Coordinator for Energy and ­Climate
Policy at the Oeko-Institut in Berlin, Germany, as well as a member of
the European Commission Directorate-General for the Energy ­Advisory
Group on the Energy Roadmap 2050.
16 Living Energy · No. 8 | July 2013
Germans are generally environmen­
tally aware and extremely skeptical
towards nuclear power. In 2011, follow­
ing the Fukushima disaster, German
Chancellor Angela Merkel announced
an even more rapid exit from nuclear
power than was originally foreseen in
2002. It has been ­decided that by 2022,
all German ­nuclear power stations
will have been taken off the grid.
Meanwhile, Germany has already
been actively encouraging solar,
wind, and biomass energy since 1990,
thanks to its so-called “Energy Feedin Law,” which guarantees that re­
newable sources can feed into the
networks at a politically predeter­
mined price. Ten years later, a more
robust Renewable Energy Law (Er­
neuerbare-Energien-Gesetz, EEG) was
passed that entrenched this obliga­
tion even more effectively. However,
as more and more renewable energy
capacity was created by the EEG, it
­became increasingly apparent that
there was a disparity between the
benefits of the energy transition and
its costs as well as its redistributive
effects. It is expected that in 2013,
providers of renewable energy will
earn revenues of €6.6 billion, and be
reimbursed a total of approximately
€20.3 billion. If one-time effects are
taken into account, the shortfall to
be covered is about €16.1 billion.
Photos: Öko-Institut – Institute for Applied Ecology, EXX/Studioline Leipzig
A
Power Market Design
The Energy
Exchange CEO
“Market and competition
as guiding principles.”
What we need is a regulatory framework with the market and competition
as its guiding principles. Cross-border trading of electricity within the
­European market is the key to success in the energy transition. We have to
strengthen the energy-only market price signal and integrate renewables
more closely into defining market pricing.
Peter Reitz is the CEO of the European Energy Exchange (EEX)
in Leipzig, Germany.
Renewables Already Taking
the Place of Nuclear Power
The exit from nuclear power has fur­
ther increased the challenge of the
energy transition. Until 2010, Germa­
ny’s nuclear power facilities generated
22 gigawatts – covering around a
quarter of the maximum load of
80 gigawatts, at an overall ­national
gross installed capacity of 174 giga­
watts. About 9 gigawatts of nuclear
power capacity was immediately tak­
en off-line in 2011. The remaining
13 gigawatts will be gradually phased
out by 2022. At the same time, the
share of electricity generated from
renewable sources, including hydro,
increased to 23 percent in 2012, up
from just 16 percent in 2009.
This rapid growth in renewable ener­
gy exceeded expectations, and the
government had to reduce genera­
tion subsidies for new facilities. Given
that these feed-in tariffs are differen­
tiated by renewable energy source,
the size of the installation, and other
factors, a highly complex regulatory
system has evolved. Today, suppliers u
Living Energy · No. 8 | July 2013 17
Power Market Design
Power Market Design
Suggestions from Business
Germany’s Distinct Path
Ends at the Border
In order to cope with the electricity,
grids must be expanded and modi­
fied. However, expansion cannot keep
up with planning and requirements
because approval procedures are
cumbersome and citizens will not tol­
erate new power lines in their neigh­
borhoods. However, if even the Ger­
mans themselves won’t accept the
technical consequences of the energy
transition, why should their neigh­
bors? Poland, for example, doesn’t
want to transport wind power from
northern Germany through its transi­
tion grids to Bavaria, just because the
grids within Germany are stressed.
In addition, cheap renewable power
from Germany has a negative impact
on the margins of Polish generators.
18 Living Energy · No. 8 | July 2013
Regardless of its renewable energy
expansion, Germany still requires
conventional power stations to cover
its energy needs on days when there
is little sun or wind. Gas turbines
would be especially suited for ramp­
ing up to balance out fluctuations in
renewable power. However, modern
and efficient gas turbines are shut
down as it is currently more economi­
cally attractive to use cheap but CO2intensive lignite as a fuel for power
generation. For the price of certifi­
cates permitting CO2 emissions in
31 European countries has fallen to
less than €5 per tonne of CO2, although
the EU had expected the price to rise
to €30 per tonne of CO2 by 2020.
The economic crisis has contributed
to the devaluation of certificates in
some countries, but so has the
growth of renewable energy in Ger­
many and other countries, which
freed up excess emissions certifi­
cates. There is no question that the
EEG legislation, with its economic
­incentives for investors, has allowed
Germany to become a leading nation
in the application of renewable ener­
gy. However, today, it is not just for­
mer critics of green energy, but also
wind and solar pioneers who are call­
ing for moderation and a redesign of
the market rules.
The Industry Manager
“Siemens is going
in the right direction.”
The current design of the electricity market does not provide a suitable
framework for the energy transition. One of the reasons is that ­operators
are not reimbursed for the cost of keeping power stations on standby, so
they can step in when wind and solar energy are lacking. The solutions
proposed by Siemens are a step in the right direction.
Ewald Woste is the Honorary President of the German Federal Association
of Power and Water Suppliers, a group of public utilities, and Chairman
of Thüga, a holding group with shares in 100 German energy and water
utilities.
In contrast, the Dutch are happy to
accept excess electricity from Germa­
ny for a low or even a negative price,
which means they are paid for reliev­
ing their German neighbors of their
excess power production. Ultimately,
if nothing goes because wind farms
are producing more electricity than
the grid can handle, they are
switched off. The energy providers
are reimbursed for 95 percent of the
electricity they would have been able
to supply.
Photo: Thüga/Mierswa Kluska
are reimbursed according to more
than 4,000 different subsidy rates.
Furthermore, discussions about im­
posing a brake mechanism for elec­
tricity prices or waiving the EEG con­
tributions for electricity-intensive
industries were disconcerting for po­
tential investors, who then brought
forward their investments in order to
benefit from the old rules.
On top of this, because prices for pho­
tovoltaic modules have fallen faster
than the planned decline of feed-in
tariffs for renewable generation,
there was an added benefit in doing
fast business. Although politicians
had only reckoned on photovoltaic in­
stallations increasing by a maximum
capacity of 2 to 3 gigawatts a year,
there was a record expansion of 7 to 8
gigawatts a year.
Renewables Success Distorts
Emissions Trading
The corporate sector has its own
views on the matter. Suess sees an ur­
gent need for a fundamental shift in
the power market design that inte­
grates the renewables into the com­
petitive market, and creates a level
playing field for fossil and renewable
power generation. “Germany needs a
power market design that is oriented
towards the future. The guiding prin­
ciple must be to achieve the objec­
tives of the energy transition as costefficiently as possible.”
The German association of munici­
pally determined infrastructure un­
dertakings and economic enterprises
(VKU), for instance, is in favor of an
integrated market model in which the
state sells the rights to build wind
power and photovoltaic facilities by
means of auctions. The winning bid­
der would then receive a subsidy for
investment costs. In return, the com­
pany would offer its energy produc­
tion on the energy market at margin­
al costs. At the same time, operators
of conventional power stations would
receive a fee for making their capacity
available.
Technology and M
­ arket
­Design Must Succeed
Siemens has also developed a model
for shaping the energy transition:
“For the transition to be a success,
u
“The energy transition
must be achieved as
cost-efficiently as possible.”
Michael Suess, CEO, Siemens Energy Sector
Living Energy · No. 8 | July 2013 19
Power Market Design
1. “Feed-in Responsibility
for Electricity Providers”
He recommends a “feed-in responsi­
bility” for providers of renewable en­
ergy. The priority feed-in for renew­
able energy is abolished. Operators
of wind, solar, and biomass power
plants should sell their product on
the open market and carry the risk
for providing a safe, predictable elec­
tricity supply. To compensate for fluc­
tuations in their production during
conditions of intermittent sun or
wind, they should purchase supple­
mental capacity options. Operators
of wind and solar power facilities will
have to forecast their generation and
hedge their risk with reliable power
from flexible sources, renewable or
conventional. Niehage expects that
options and preferential pricing will
create a sensible mix of volatile and
flexible energy supply. Cost pressure
will serve as an incentive for innova­
tion and drive interest in smart grids,
for example. For suppliers of renew­
able energy providers can ensure
­security of supply, for instance, by
purchasing additional electricity or
com­pensating customers for reduc­
ing their demand in times of power
scarcity.
20 Living Energy · No. 8 | July 2013
2. “Technology-Specific
­Renewable Support”
Niehage recommends that initially,
politicians must bring about a con­
sensus on the path for expanding re­
newables, including their geographi­
cal location. In the future, support for
renewables can be differentiated by
technology. Very mature technolo­
gies, such as photovoltaic, are left to
compete without subsidies. For tech­
nologies that are on the road to matu­
rity, such as onshore wind, there are
mechanisms that steer their build-up,
including by geographical criteria.
These mechanisms should also en­
sure that windfall profits are avoided,
e.g., by introducing competition be­
tween different sites. Niehage be­
lieves that this would be an incentive
for cost-efficiency. Very early-stage
technologies such as power-to-gas
storage still need a regulatory envi­
ronment that minimizes risks, e.g.,
through guaranteed feed-in tariffs,
preferential feed-in, and the exemp­
tion from grid costs. However, all
technologies must follow a clear path
towards free competition on the
­market.
3. “Refocusing on Climate
Protection“
In order to not lose sight of the goal
of climate protection in the course of
the energy transition, Niehage calls
on German and European policy mak­
ers to reform the European Union
Emission Trading Scheme (EU ETS).
Ambitious targets post-2020 need to
be defined in order to create a reli­
able long-term outlook, potentially
supported by measures like a floor
price. In addition, Niehage believes
that a sector-specific solution could
be modeled on the example applied
to the automobile industry, where
manufacturers are obliged to reduce
the average emissions of their cars
5. “Strategic Reserve as
Short-Term Solution”
over a period of several years. This
would also be an option for power
producers: “Industry demands in­
vestment security,” Niehage says.
“Regulation in the shape of gradual
mandatory reduction of emission
limits creates predictability; a CO2
price that fluctuates between €4 and
€25 per tonne does not.”
4. “Attributing Costs of the
Energy Transition ­Fairly”
The energy transition has to be de­
signed to be socially acceptable and
economically viable. Therefore, Nie­
hage believes that the process of
“eroding solidarity” in the electricity
market must end. Only about half of
the tariff that German electricity con­
sumers pay per kilowatt-hour actual­
ly goes towards electricity production
and related costs. The other half is
the customer’s share of the fixed
costs of energy supply, such as elec­
tricity tax, contributions to combined
heat and power generation, EEG con­
tributions, or grid costs. Because all
of these expenses are included in
the cost of each kilowatt-hour, selfsuppliers who generate part of their
power consumption themselves (for
instance, from solar panels) can also
reduce their contributions to the grid
costs, even though the entire electric­
ity network still is at their disposal.
This is why fixed costs should be
­separated from actual energy costs.
Customers should pay for the energy
they have purchased as well as their
share of fixed infrastructure costs –
which could, for example, be mea­
sured in terms of the connected load
of their house.
Photo: Grund Grün/Klaus-Peter Kappest
it won’t suffice to simply reach the
targets,” says Udo Niehage, the com­
pany’s management representative
for the energy transition, referring to
the target of a 80 percent share of re­
newables in gross energy consump­
tion by 2050. “The market conditions
must also be a ­success. Otherwise,
other countries won’t want to aspire
to an energy transition of their own.”
Niehage has an ambitious goal: “We
must ­create a new regulatory frame­
work within which the energy transi­
tion can continue to develop further.”
He proposes the following five-point
guideline for a new energy market
model.
Power Market Design
Finally, Niehage believes that security
of supply needs to be taken into ac­
count. On winter days or when there
is little sun or wind, the country needs
a strategic reserve of power stations
that can be ramped up as required.
The Federal Network Agency and the
grid operators would define this re­
serve annually in accordance with the
market and its fluctuations. Capacities
would be auctioned on a regional
­basis to ensure, for example, that re­
gional energy demands are taken into
account in network capacities. This
will provide some breathing space for
the next years. In the medium term,
however, Germany will have to take
a critical decision regarding capacity:
Either it relies on the energy-only
market to deliver the signals for in­
vestments in new, flexible power
plants. This means that power prices
will have to rise and become more
volatile. Or – if the government feels
that this creates too much pressure –
a capacity mechanism will need to be
introduced. However, examples in
other countries have shown that this
is a very complex matter that can re­
sult in significant costs.
The solution for organizing the elec­
tricity market has to be convincing.
Germany doesn’t need integrated
supply networks within the bound­
aries of its constituent federal states
or even smaller regions, he argues;
rather, “at the end of the day, the
rules of the electricity market must
apply to the whole of Europe.” p
The Green Trader
“This proposal doesn’t go
far enough.”
The proposal from Siemens is good; however, it doesn’t go far enough.
­Renewables must take on responsibility, but all the costs of the damage
caused by coal-powered generation or the risks posed by nuclear power
should also be included in the price of electricity. Every power generator
must be able to offer the same fair conditions to end customers.
Eberhard Holstein is the founder and CEO of Grundgrün Energie GmbH,
Berlin, a direct marketing and trading company that brokers green energy
at the energy stock exchange.
Claus Peter Müller von der Grün is the correspondent of Frankfurter Allgemeine Zeitung for
Hesse und Thuringia. He also specializes in issues relating to energy provision, healthcare
policy, and urban development.
Living Energy · No. 8 | July 2013 21