'Electricity market 2.0' is the term that we use for an advanced electricity market. This means that the existing mechanisms of the electricity market are basically maintained and strengthened to ensure that security of supply continues to be guaranteed. An additional capacity market - i.e. an additional market that separately remunerates electricity market reserves - is superfluous. In the electricity market 2.0, the necessary capacities can be remunerated via existing market mechanisms.

Two fundamental mechanisms are essential for the electricity market 2.0: firstly, the free formation of electricity prices on the electricity market must be guaranteed, and secondly, electricity providers are obliged to meet their supply obligations. In addition, further measures contribute to making the electricity market flexible, thus facilitating the inexpensive integration of renewable energies.

The existing capacity on the electricity market is sufficient for the coming years. This is confirmed by the recent report by the Pentalateral Forum and by an expert report by the consultancy firms Consentec and r2b commissioned by the Federal Ministry for Economic Affairs and Energy. These reports look at Germany, France, Austria, Switzerland and Benelux for the period up to 2021 as well as Germany and its 'electricity neighbours' for the period up to 2025.

Furthermore, the electricity market 2.0 provides the necessary electricity capacity on the basis of the fundamental market mechanisms described above. In order to ensure that this refinancing functions via market mechanisms, price formation on the market remains free. Fluctuating prices send out important signals to major players on the electricity exchange (electricity providers, traders, large-scale industry). Prices thus indicate the scarcity of electricity at any given time. Furthermore, there are strong incentives for electricity providers and traders in their function as 'balance responsible parties' to achieve a balance - between electricity supplies and feed-in - and to meet their supply obligations.

A 'capacity reserve' provides additional security of supply. By creating a capacity reserve, we are providing a further back-up for the electricity market 2.0. Unlike the 'capacity market', the capacity reserve consists solely of power stations which do not participate on the electricity market and do not affect competition and pricing.

The expert reports commissioned by the Federal Ministry for Economic Affairs and Energy show that an electricity market 2.0 is cheaper than an electricity market with an additional capacity market. The models for capacity markets that have been discussed in Germany would result in a higher level of electricity capacity and thus in unnecessary additional costs compared with the electricity market 2.0.

Furthermore, capacity markets are susceptible to design error. These errors can result in substantial costs. Errors in the design of the capacity market are almost unavoidable in reality. Also, capacity markets are extremely complex. They represent a greater intervention in the market.

The electricity market 2.0 can provide the required capacities and the solutions to integrate renewable energy more cheaply. This requires undistorted competition of flexibility options, flexible generation capacities, flexible consumers and storage facilities. Therefore, impediments to flexibility on the electricity market are successively being removed.

Twenty specific measures implement the electricity market 2.0. Important measures include:

  • Guaranteeing free price formation: The principle of free price formation is to be anchored in the Energy Industry Act.
    Prices send important information to the market players. They show how scarce electricity is at any given time.
  • Opening up the possibility for special grid charges for greater demand-side flexibility: Large-scale consumers receive reduced grid charges in return for acting in the interest of the system.
    In the future, these grid charges are to create additional incentives for flexible consumption.
  • Developing the balancing capacity markets further: In order to keep the system stable at all times, the transmission system operators use balancing capacity.
    More providers are now to receive access to the balancing capacity markets.
    This increases competition on these markets and thus reduces costs.
  • Monitoring security of supply: An ongoing monitoring process will use the latest methods to see whether the supply actually is secure.
  • Introducing a 'capacity reserve': The reserve serves as a back-up in emergency situations.

A balancing group is a virtual account that displays the balance between all electricity supplies, feed-in and transactions. Electricity providers and traders in their function as 'balance responsible parties' manage the balancing groups and are obliged to balance them. Strong incentives to uphold balancing group commitments ensure security of supply. The balancing group and balancing energy system is the key instrument for a secure power supply. Together with the balancing capacity, the balancing group and balancing energy system ensures that at all times just as much power is fed into the electricity grid as is taken off it.

Furthermore, stronger incentives to uphold balancing group commitments improve the possibilities to refinance capacities via long-term contracts. This is because, if the balance responsible parties rely on purchasing electricity in short-term trading, they will either pay high spot market prices in such situations, or even higher balancing energy prices. They can enter (long-term) supply contracts and option contracts to hedge against these price peaks. For this reason, clear incentives to uphold balancing group commitments will improve the possibilities to refinance capacities via appropriate contracts.

The White Paper announces that there will be stronger incentives to uphold balancing group commitments. For this purpose, the Federal Network Agency will revise the balancing energy system and thus strengthen the incentives to uphold balancing group commitments. Also, it will be enshrined in law that even in rare situations of extreme capacity scarcity, entailing intervention by the transmission system operators, the high costs of balancing energy actually reach the balance responsible parties. When the 'capacity reserve' is deployed in rare emergency cases, part of the costs must be borne by the balance responsible parties to further strengthen the incentives to uphold balancing group commitments.

Unlike the 'capacity market', the capacity reserve consists solely of power stations which do not participate on the electricity market and do not distort competition and pricing. The capacity reserve thus is much smaller than a capacity market, which also comprises power stations on the market. The reserve power stations will be used only if, despite free price formation on the wholesale market and contrary to expectations, supply does not cover demand at a particular time. The capacity reserve ensures that all consumers can still obtain electricity in such a situation.

The 'capacity reserve' serves as a back-up in very rare, unexpected emergency situations. After all, security of supply is of key significance for an industrialised country like Germany. The central feature of the capacity reserve is the fact that it consists entirely of power stations which are not participating in the electricity market. The reserve will not be deployed until, following the conclusion of intra-day trading, there is no market clearance and almost all of the available balancing capacity has been utilised. In this way, we can prevent distortions of competition on the electricity market.

2 GW of capacity are required for the reserve to fulfil the security function.

The White Paper “An electricity market for the energy transition” published at the beginning of July 2015 is the outcome of a broad and transparent discussion process in Germany and with our European neighbours on how to organise the electricity market. In October 2014, the Federal Ministry for Economic Affairs and Energy published a Green Paper and invited comments from the public over a four-month period.

The results of the consultation on the Green Paper provided an important input for the White Paper. They impacted on the fundamental decision and on the measures to implement the electricity market 2.0. The expert reports commissioned by the Federal Ministry for Economic Affairs and Energy and numerous discussions with Germany's neighbouring countries, the European Commission and various stakeholders also provided input for the White Paper.

The White Paper specifies the key elements in the field of the electricity market. The key elements provide an overview of all energy-policy decisions on the electricity market, power grids and nuclear energy taken by the federal government The White Paper explains and specifies the fundamental decision in favour of the electricity market 2.0 and against a capacity market. Furthermore, it presents the outcome of the consultation on the Green Paper.