Does Germany Need Capacity Payments Now to Secure Its Electricity Supply?

Abstract

Basically, measures aimed at guaranteeing security of supply must address the possible causes of capacity shortages as broadly as possible. When designing such measures, besides security of supply, additional objectives such as cost-effectiveness and the environmental and social acceptability of electricity supply should also be taken into account. Capacity payments only partially meet these requirements. Moreover, once introduced they are difficult to adapt, or revise even, to suit changing framework conditions. This is particularly problematic in view of the current lack of clear evidence for future security of supply problems. Therefore introducing capacity payments at this point in time would not appear to be constructive. It would make more sense to introduce instead a mix of measures which would strengthen the electricity market, create conditions for feeding in electricity from renewable energy sources as and when required, and set incentives for the expansion of grid capacity, storage systems and demand side management. Should security of supply still appear uncertain under these changed framework conditions, the introduction of a strategic reserve, which would be held by the regulatory authority or the transmission system operator, is recommended – not, however, the creation of an entirely new, additional market segment in the form of a capacity market.