EU approves German support for new backup power plants

The European Commission has approved a German support mechanism for new backup power plants and electricity storage facilities designed to ensure sufficient electricity during periods when wind and solar generation does not cover demand. The first two auctions for long-term available backup capacity will take place later this year, with new gas-fired power plants expected to dominate.

The European Commission has given the green light to Germany's plan to support capacity for ensuring security of supply as a replacement for retiring coal-fired power plants. Approval under EU state aid rules paves the way for auctions for state support for new dispatchable power plants, battery storage and demand-side flexibility. Germany aims to use the mechanism to ensure sufficient capacity in situations where generation from wind and solar power plants is insufficient.

According to the European Commission, the approved measures could cost the German state between €15.6 billion and €35.2 billion. The actual costs will depend on the results of individual auctions and the prices at which investors commit to provide the required capacity.

The first auctions will take place this year

The German mechanism was established under the Electricity Supply Security Act (StromVKG), which created a framework for the gradual introduction of support mechanisms for backup resources and, later, a full-fledged capacity mechanism. The aim of the law is to ensure that resources capable of supplying electricity are available in the system even during prolonged periods of low renewable energy generation or limited import possibilities.

Germany's network regulator, the Bundesnetzagentur (BNetzA), already launched the first auction in July, with interested parties able to submit bids until 8 September. It offers support for 4.5 GW of so-called de-rated capacity, meaning offered capacity adjusted according to how individual technologies actually contribute to security of supply. The maximum support in the first auction was set at €244,000 per MW of de-rated capacity per year. Successful bidders will receive support for 15 years.

A second auction of the same type and for the same volume of capacity is due to follow later this year. A further 2 GW of generation capacity will be tendered in May 2027 under the rules.

Gas-fired power plants are expected to dominate

Although the mechanism is formally technology-neutral and various technologies meeting the specified conditions can participate, new gas-fired power plants are expected to play a major role in the first auctions. Gas-fired power plants will be required to be ready to switch to operation using green hydrogen. Germany thus aims to link the need for new dispatchable capacity with its long-term goal of achieving climate neutrality by 2045.

The support is also intended to enable Germany's gradual shift away from coal use in the power sector. As the share of wind and solar power plants grows while coal-fired power plants are simultaneously retired, the need is increasing for resources that can rapidly and sustainably supply electricity when renewable generation is insufficient.

The German government has previously argued that, without state support, investment in new power plants would not be sufficiently attractive under the current market setup. Operators must invest in power plants that will be used relatively rarely, but whose capacity will be crucial during periods of electricity shortages.

In addition to new power plants, future auctions are also expected to involve large-scale battery storage, other storage technologies, flexible demand and, under certain conditions, existing facilities.

Capacity market to come later

From 2027, Germany plans to introduce a full-fledged capacity market, which is intended to cover security-of-supply needs from 2032. The European Commission explicitly stated that the future capacity market is not part of the mechanism now approved. At the same time, it described it as an important part of a package of measures intended to create sufficient investment certainty to ensure security of supply.