Capacity mechanisms: remedy or placebo for energy suppliers?

goetzpartners study on the Implications of Capacity Mechanisms

Capacity mechanisms are under intense discussion by the German government and announced for the medium term – what form they will take, however, remains unclear. This study examines, whether capacity mechanisms may serve as a remedy for energy suppliers. Selected mid-sized and large energy suppliers were participating in the survey. The goetzpartners study offers recommendations for action for the energy suppliers.

Executive Summary: 

  • Capacity shortfall of around 23 GW in the German electricity market by 2025: The renewable energies expansion cannot compensate for decommissioned nuclear power plants (ca 21.5 GW) and other conventional power plants in the wake of the Energiewende (policy on energy transition). Nonetheless, energy suppliers are holding back on building new power plants and upgrading conventional ones due to declining electricity prices and a growing selling risk.
  • Energy suppliers need investment security: The right incentive for energy suppliers will be instrumental in closing the supply gap through energy suppliers upgrading existing power plants, which means prolonging their useful life, or realising power plants planned.
  • Retention of conventional power plants necessary in the medium term: Alternatives, such as storage solutions or interconnection capacities with other countries are currently difficult to realise in the short and medium term. Conventional power plants are therefore necessary through to 2025.
  • Small comeback of conventional power plants: Depending on how the capacity mechanism is designed, some 10% to 40% of the current conventional power plant fleet could remain operational beyond the year 2025. Installation rates through to 2025 may attain approximately 10% for hard coal and up to 20% for gas (based on today's portfolio).
  • Strategies for energy suppliers as "treatment plan": Energy suppliers are fundamentally willing to expand capacities (many power plants are at the planning stage). However, strategic direction can only be properly ascertained once the legal basis is known. When this happens, scenarios will need to be quickly computed, options evaluated, and competitor behaviour considered by applying business war gaming, for instance.

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