As of: February 28, 2024, 9:54 p.m
By: Matthias Schneider
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Solar parks and wind turbines are currently reducing market prices with their cheap electricity.
However, the implementation of the power plant strategy will determine the costs.
© Karl-Josef Hildenbrand / dpa
German electricity should be green and also affordable.
After the federal government set the framework with the power plant strategy, Bavarian industrial employers are now making a proposal.
Munich – The situation on the wholesale electricity markets has eased significantly: the high proportion of renewables in the network is currently pushing electricity prices on the wholesale market down to a bearable six cents per kilowatt hour.
The Bavarian Business Association (vbw) also welcomes the cost-cutting effect of renewables and calls for a rapid expansion of power plants and networks.
In the future, however, electricity prices will be significantly cheaper in some hours and significantly more expensive in others than they are today.
Both are a problem.
The vbw has therefore commissioned Prognos AG to carry out a study that is intended to show the most cost-effective path for the energy transition.
Capacity market
Due to the expansion of wind turbines, solar parks, electricity storage systems and networks, there is enough green, sometimes extremely cheap electricity in the system for more and more hours of the year.
Through tariffs with flexible prices, consumers such as electric cars and heat pumps will increasingly be able to cover their needs during these hours.
As a result, flexible power generators such as gas power plants are needed less and less.
Paradoxically, this can become a problem: in order to continue to have guaranteed power for the dark doldrums, new, flexible power plants must be built.
So far in Europe only the electricity generated is paid for.
New power plants would therefore have to generate their investment costs in just a few hours per year.
This means that there would be extremely high capital cost surcharges per kilowatt hour generated in addition to the fuel costs.
That would have a fatal effect on the free electricity market: on the European electricity market, the most expensive power plant, which is used for a quarter of an hour, sets the price for all other electricity producers - the so-called merit order principle.
This mechanism ensures competition very efficiently for comparable types of power plants and reduces electricity prices.
In the future, the effect threatens to turn negative: the expected high costs of the new gas power plants would also make all other types of power plants unnecessarily more expensive.
According to its power plant strategy, the federal government wants to add ten gigawatts of hydrogen-capable gas power plant capacity by 2030.
If these investment costs had to be covered through electricity sales, Prognos expects annual costs of up to 7.6 billion euros.
The government has recognized the problem and therefore wants to develop a capacity mechanism by 2028 that decouples the capital costs of the new power plants from the electricity market.
The operators receive a fixed sum whether the power plant is running or not.
But the details are still unclear.
The vbw suggests only considering the new power plants.
That would limit the costs to one billion euros per year.
Electricity market
The new gas power plants would drive up the price of electricity not only through the capital costs, but also through the use of hydrogen from the mid-2030s.
The new hydrogen power plants will only generate three percent of the total amount of electricity in 2035.
Through the market mechanism of the merit order, hydrogen costs could increase exchange electricity prices from an average of 6.8 to 11.1 cents, according to Prognos' calculations for 2035. The additional annual costs compared to natural gas power plants: around 37 billion euros.
The vbw does not want to abolish the merit order, but is proposing a mechanism that subsidizes the fuel costs for hydrogen: The operators should therefore only pay as much as natural gas and the necessary European CO₂ certificates cost.
The annual costs here: only five billion euros.
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Wind and sun
According to Prognos, the second problem is developing with onshore wind turbines and solar parks.
Because they produce more cheaply than fossil power plants, they can currently finance themselves on the free market and at the same time reduce electricity prices.
However, due to the ever-increasing supply of renewables, market prices will fall in the future.
While the cheapest wind and solar parks will continue to function on the free market at four and two cents respectively in the 2030s, power plants in poor locations will continue to need funding.
Here too, the vbw is essentially proposing a decoupling: the current EEG funding only forms a lower limit.
But if electricity prices are high, like in 2022, there will be random profits.
Instead, the vbw proposes a model with contracts for difference.
They already exist in Great Britain.
The state specifies a price corridor for a technology.
If the market prices are lower, the electricity producer is compensated.
If they are above that, the producer gives the additional profit to the state.