German Power Market Outlook – How will the Energiewende unfold?

2016 has been a landmark year in German energy policy: the Power Market Act (Strommarktgesetz) introduced a schedule to transfer 2.7 GW of lignite plants into a standby reserve as well as a new capacity reserve mechanism to ensure security of supply, the new Renewable Energy Act (EEG) introduced the competitive auctioning of support for wind, solar and biomass capacities, and the revised CHP Act (KWK-Gesetz) did the same for many CHP plants. On the market side, we saw a slump and subsequent partial recovery in fuel, and therefore power prices early in the year, as well as an unexpected, if small, recovery of gas plant utilisation.

Despite the political progress of the past year, several of the Energiewende’s main challenges remain unaddressed:

  • hard coal and lignite continue to provide the bulk of the country’s power, leading to at best slowly declining emissions,
  • consumer prices continue to rise, driven by renewables subsides and the use of ground cables for most transmission grid expansions,
  • grid stability is challenged by the closure of thermal plants in the south and the delays in the HVDC projects, leading to rapidly rising re-dispatch costs and restrictions on the construction of new wind parks in certain regions.

This report analyses these issues, and their implications for the German power market. Besides an outlook on the key metrics, including prices, spreads, volatility, capacities, generation, asset utilisation and profitability and emissions, we provide a deep-dive analysis of the market conditions for renewables: How will capture prices develop? What are the implications of the six hours’ curtailment rule on profitability? How will auctioning affect RES capacity timelines, and is there a risk of auction quotas not being filled?

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