DIW study argues in favor of a security of supply reserve

06.12.2024

A study by the German Institute for Economic Research (DIW) has examined two different options for ensuring sufficient electricity generation capacity.

A central capacity market limits incentives for investments in demand-side flexibility, according to a study by the German Institute for Economic Research (DIW Berlin). In contrast, it favors a security of supply reserve. This could be implemented more quickly and would promote flexible demand much more strongly. The Federal Ministry for Economic Affairs and Energy (BMWK) is planning a combination of central elements and flexibilities in the new capacity guarantee in an evaluation of the Platform for a Climate-Neutral Electricity System (PKNS). However, it will not be implemented in this legislative period.

A capacity mechanism is to be introduced in Germany to safeguard the electricity supply in extreme situations. The DIW study compared two possible mechanisms in a model calculation. According to the study, a central capacity market would cap electricity prices significantly. According to the authors, this would make investments in demand-side flexibility technologies in industry and the district heating sector unattractive.

Promote faster expansion of storage

"With comparable overall costs for electricity customers, a security of supply reserve, on the other hand, promotes demand-side flexibility much more strongly," concludes the study. Consumers could react flexibly to volatile electricity generation from renewable sources. For example, storage systems such as batteries or Power-to-X could shift electricity consumption over time, explains study author Wolf-Peter Schill. "Our study shows that this happens much more with a security of supply reserve than with a central capacity market."

A capacity mechanism remunerates players in the electricity market for providing controllable capacity, for example peak-load power plants that may only run for a few hours a year. To this end, new hydrogen-capable gas-fired power plants are to be put out to tender in the Power Plant Guarantee Act (KWSG). In a central capacity market, the regulator determines the required amount of capacity and puts it out to tender in auctions. Players with the lowest bid price receive capacity payments and market their electricity in parallel on the wholesale market.

Details of the security of supply reserve

In contrast, the authors of the study propose an enhanced security of supply reserve. Here, power plants are kept in reserve that only produce electricity if the electricity price rises to a fixed, moderately high value of, for example, EUR 500/MWh. A regulator determines the required size of the reserve and procures the capacities in auctions. "The security of supply reserve strengthens the investment environment for storage technologies and stabilizes energy costs," described co-author Karsten Neuhoff.

The calculations showed that both mechanisms secure the demand for electricity in all modeled weather years and also lead to comparable total costs. However, they have different effects on the wholesale prices for electricity and therefore the economic viability of demand-side flexibility: Wholesale prices would fluctuate more with the reserve than with the central capacity market, creating incentives to invest in flexible demand-side technologies.

Accordingly, almost four times as much is invested in product storage to make energy-intensive industry more flexible than with a capacity market. Investments in storage facilities for process heat would also double and, according to the DIW modeling, more than quintuple for district heating storage. This makes it possible to shift the electricity demand of these consumers much more strongly in terms of time.

According to DIW, the enhanced security of supply reserve offers further advantages. "It can be implemented quickly, as it can build on extensive experience with reserves," said Neuhoff. It protects the electricity market against uncertainties, strengthens the investment environment for various storage technologies and stabilizes energy costs for electricity customers. This is another reason why the reserve could be a better alternative to a central capacity market.

The DIW study on security of supply is available online.

Author: Susanne Harmsen, E&M powernews