Going it alone: Berlin's own attempt to reform power market flounders

As the EU’s power market reform heads for the finishing line, Germany’s simultaneous process is floundering amid government reluctance to move on politically sensitive topics.

The European Commission tabled proposals in March this year to reform the bloc’s electricity market in a bid to counter soaring prices that hit consumers after Russia invaded Ukraine.

But while Brussels is almost done, the “heart” of Europe’s power system – Germany – is still busy working on its own reform.

“With regard to the interaction of national and European debate on the reform of the electricity market design, we are pursuing a two-stage approach,” a government spokesperson told Euractiv.

While the EU reform is focussed on “learn lessons from the crisis and better protecting consumers from price shocks,” the German initiative was deliberating “long-term questions,” the spokesperson explained.

Launched in February 2023, the German “Platform for a climate-neutral electricity system” or PKNS in short, was tasked to come up with a power market design that can accommodate 100% renewables.

The platform features four different work streams – ensuring the financing of additional renewables, boosting demand-side flexibility, how to finance backup power plants to meet demand when renewables are offline, and how to manage “local signals” to ensure that electricity is transported where needed.

After months of work, the multiple forums working on the design are halfway through. The results will be “an important basis for setting the political course in Germany and Europe”, the ministry of economy and climate action wrote on its website.

But as work progresses, criticisms are becoming louder. “We have been discussing for half a year and I think there is definitely some displeasure in the energy sector about progress,” said Christoph Neumann of transmission grid operator TenneT in comments made on 12 September.

Some feel the exercise ignores the broader EU context, while others are concerned that the government refuses to address sensitive issues like the splitting of Germany’s single electricity bidding zone, which many denounce as inefficient.

Germany could only achieve a climate-neutral energy system in close cooperation with EU partners, and “it seems to me that this should be taken into account even more in the work of the PKNS,” explained Konrad Stockmeier, a liberal lawmaker belonging to the freedom party (FDP), the junior partner in Germany’s tripartite government.

“National solo efforts are inefficient and too expensive,” he told Euractiv.

The electricity industry similarly complained that the European dimension of the ongoing discussions “is difficult to discern,” according to Handelsblatt, which quoted an internal memo of power association VKI. Several other stakeholders, meanwhile, urged changes to the format and to speed up discussions.

Process moving at snail’s pace

At the beginning, Germany seemed far ahead of Brussels. Developing a new power market design was already a stated aim of the new government in late 2021, long before the energy crisis prompted an EU reform proposal in March 2023.

But because the German initiative was delayed by more than a year, it kicked off discussions mere weeks before the European Commission proposed its plan – too late to weigh in meaningfully on the EU reform process.

For many of those involved, the discussions taking place in Berlin risk being meaningless if they are not reflected in Brussels.

“Any change in Germany’s electricity market design must either already begin at the European level or at least be designed in an EU-compatible manner,” warned the energy industry association BDEW in March.

Yet few believe that the changes being worked on in Brussels will match Germany’s future needs – which means the European Commission will soon be forced to go back to the drawing board.

“Major electricity market reform will, I hope, be one of the flagship projects of the new EU Commission,” said Michael Bloss, a green EU lawmaker from Germany who negotiates the ongoing EU reform for his party. He is also one of Berlin’s points of contact on the EU negotiations.

In Brussels, the Commission’s energy department was never too excited about the prospect of having to calculate the interests of 27 different countries with vastly different energy mixes all over again. When energy prices started to soar in summer 2021, Brussels initially resisted calls by France and Spain to decouple electricity and gas markets, outlining instead a “toolbox” of measures available for EU member states to address the crisis.

They may have to get cracking either way. “The EU context is the outflow and amalgamation of political processes from the member states,” stressed Nina Scheer, energy policy spokesperson of the social democrats (SPD), the largest party in the German government.

Others reject the criticism altogether. “The EU context has always been prominently invoked and considered in the work of the PKNS,” said Ingrid Nestle on behalf of the Greens, the second biggest party in government after the social democrats.

“In the relevant Council bodies in Brussels, the German government continuously advocates for an EU legal framework that ensures an environmentally compatible, affordable and secure electricity system,” the ministry of economy and climate action said.

Sensitive issues left out

All regions in Germany are subject to the same electricity price, which is formed in a single wholesale bidding zone.

In practice, renewable electricity from the North is transmitted to the South where key industries are located. But this is costly, as the price fails to adequately reflect grid congestion in wealthy southern regions like Bavaria, which fiercely resists the construction of new power lines on its territory.

A review of the situation is currently underway. But decisions have been highly politicised, with battle lines drawn as Northern German states insist on differentiated electricity prices across Germany, while the South rejects the idea.

“Bavaria is specifically calling for the continuation of the uniform electricity bidding zone and is also advocating for this in the course of the PKNS process,” a spokesperson for the Bavarian state told Euractiv.

Participants report that the German debate platform has thus far barely touched upon the matter, matching the government’s reluctance to address this politically sensitive issue.

Another thorny issue relates to gas power plants, which are needed as backup for renewables when the sun doesn’t shine or the wind doesn’t blow.

Whether 20 or 40 GW of capacity will be needed could be one of the topics for the platform to weigh in – with industry complaining that the government had yet to deliver the promised initial tender for backup power plants.

Additional complaints relate to the speed of discussions, with BDEW warning that “time is running out” to pass the reform.

Fears that a far-reaching overhaul of Germany’s electricity market could be delayed past 2030 are rejected by Green MP Nestle, who said: “I firmly assume that implementation will not be postponed until after 2030?.

Researchers like Lena Kitzing, associate professor at the Danish Technical University who takes part in the discussions, do not share these concerns either.

“Processes like designing a climate-neutral electricity market take time,” she told Euractiv. “While a speedy green transition is important, it is also important that we get this right,” she added.

[Edited by Fr?d?ric Simon and Nathalie Weatherald]