On the way to an electricity capacity market
For a long time, the coalition partners in the traffic light coalition have been wrestling among themselves, and with the EU competition authority, about how to secure the energy transition with the construction of new hydrogen-capable gas-fired power plants (H2 ready). Far too long, if the energy industry is to be believed. However, a rough timetable and expansion plan have now been drawn up, which the German government intends to bundle into a Power Plant Safety Act in the coming weeks.
This plan envisages a two-stage approach. Firstly, there will be tenders from the end of the year –or more realistically from the beginning of 2025– to help decarbonise German electricity generation. In the second step, the tenders will then focus on security of supply.
Different financing models
Even if the power plants will ultimately look similar, the approach is important for the EU Commission's state aid authorisations, the funding conditions, and the funding amount for the companies, as well as for the respective financing.
According to current plans, the decarbonisation package, which will probably be implemented in several tranches, includes around eight to ten new power plants with a total capacity of 5 gigawatts (GW). These can initially run on gas, but must run entirely on hydrogen from the eighth year after launch at the latest. The German government had wrested this condition from the competition regulators in Brussels, who had previously insisted on a complete switchover by 2035.
The package also includes the conversion of 2 GW of existing gas-fired power plants to prepare them for operation with hydrogen. In addition, there are 500 megawatts (MW) of so-called sprinter power plants, i.e. plants that run entirely on hydrogen from the outset. This is intended to incentivise the further technological development of these plants.
These power plants from the decarbonisation package are to receive investment and operating subsidies from the Climate and Transformation Fund (KTF). However, as this will only be paid once the plants are commissioned, the first funds will not flow until 2030 at the earliest – one less problem for the budgeters of the traffic light coalition parties.
Power plant strategy could cost up to 20 billion euros
For the additional 5 GW, which will be put out to tender in the second stage from 2026 to maintain security of supply, only the investments will be subsidised. And this support must then also be financed directly by consumers– presumably via a levy. There is no stipulation as to when these power plants must be fully converted to hydrogen. The only long-term goal is that the plants must generate climate-neutral electricity by 2045.
It is still unclear how much this expansion of new controllable power plants, which are put out to tender with long refinancing periods, will cost in total. The level of funding will also depend on the development of gas prices. According to earlier information, however, it could amount to costs of 15 billion to 20 billion euros. A political agreement in principle has already been reached with Brussels. The final decision on state aid will not be made until after the market consultations that are now underway in the autumn.
Are the power plant plans sufficient?
Then the first cornerstones of the planned capacity market, which will finally become a reality in 2028, could already be decided by the cabinet. The new power plants and electricity storage facilities will be part of this capacity mechanism, which will be used in particular during periods of „dark doldrums“ - in other words, when there is no wind for the wind turbines and no sun for the production of solar energy. The first long-term electricity storage facilities with a volume of 500 MW will be put out to tender in 2025.
In contrast to the energy-only market, in a capacity market, power plant operators do not receive remuneration for the electricity they produce, but rather for the generation capacity they keep available, which can be called up when needed. It is currently still unclear whether Germany will opt for a centralised or decentralised mechanism.
Suppliers await specific tendering conditions
It is currently even less clear whether the 12.5 GW of hydrogen-capable power plants now agreed by the coalition will be sufficient to maintain the security of supply in the course of the energy transition. In a 2023 status report, the Federal Network Agency pointed out that 17 to 21 GW of additional generation capacity will be required by 2031, depending on the model calculation.
The Federal Ministry for Economic Affairs admits that this would be the case if the planned coal phase-out is actually completed by 2030. In reality, however, up to 14 GW of coal-fired power plants could still be operated beyond this date if they are still needed. Furthermore, the power plant strategy is only an additional instrument alongside the promotion of an expansion via the Combined Heat and Power Act.
The new power plants are to be located as close as possible to the planned hydrogen core network and predominantly in the „grid south“. This also includes the Rhenish mining area, which has traditionally produced lignite for RWE. Thus far, the utilities have reacted cautiously to the German government's strategy update. They want to wait for the concrete organisation of the tenders.
