Germany has set itself a clear goal - to achieve climate neutrality by 2045. This will require a significant expansion of renewable energies. This is a challenge for the current electricity market design, which is geared towards fossil fuels.
In order to efficiently integrate the increasing share of weather-dependent and volatile energy sources such as solar and wind energy, the electricity market design must be adapted. It is crucial to create an economically viable basis for renewable energies and remove barriers to further market ramp-up. In addition, the flexibility of the electricity supply in the areas of consumption, storage and generation must be increased in order to effectively reduce problems such as negative electricity prices.
Various market models for the electricity market are repeatedly discussed in an ongoing debate. The central question is which electricity market design can guarantee a secure, cost-effective and environmentally friendly supply of electricity even with a high proportion of renewable energies. In addition to the prevailing energy-only market, the capacity market has increasingly come to the fore in recent years and has been on everyone's lips since the announcement of the German government's power plant strategy in February 2024.
What is behind the market models? How do they differ and what role do large-scale battery storage systems play in them? This article provides an overview.
Anyone looking for an example of the energy-only market (EOM) only needs to look outside their front door. Since the liberalization of the electricity markets in Germany in the 1990s, the EOM electricity market design has become established in this country.
The energy-only market (EOM) is an electricity market design in which energy producers generate revenue solely on the basis of the amount of energy actually supplied. More specifically, energy producers generate their revenue exclusively by selling electricity on the spot market or through long-term contracts, without receiving additional payments for the provision of capacity for electricity production. This market model is based on the principle that the price of electricity is determined by supply and demand
In Germany, the energy-only market is largely shaped by the energy exchange, in particular the European Power Exchange (EPEX SPOT). In addition to long-term forward transactions and bilateral over-the-counter contracts, electricity trading on the EOM comprises the day-ahead and intraday markets:
The price of electricity on these markets fluctuates depending on supply and demand. In times of high demand or when cost-effective generation from renewable energies is low, prices rise. Conversely, excess supply and low demand lead to lower prices.
One of the biggest and most discussed challenges in the EOM, particularly in light of the energy transition, is ensuring security of supply. In other words, is there enough electricity available at all times to cover the entire demand?
For this reason, various instruments and flexibility options such as the grid reserve, capacity reserve and security standby supplement the energy-only market in Germany. The three reserve models mentioned above remunerate capacities for the additional generation of electrical energy that are only on standby or temporarily shut down. They secure additional capacity for the system, which in principle should never be called upon.
Stationary large-scale battery storage systems play an important role in the energy-only market (EOM), as they contribute to grid stability and the efficiency of the electricity market. They are integrated in various ways:
Overall, stationary large-scale battery storage systems in the EOM are of central importance for making the electricity supply more flexible, integrating renewable energies and ensuring grid stability. Their ability to store and release energy quickly makes them a valuable tool for overcoming the challenges associated with the increasing penetration of renewable energies.
Advantages of the energy-only market
Disadvantages of the energy-only market
The "missing money problem" is a central economic problem that arises in the context of energy-only markets (EOM). In an EOM, electricity producers are only paid for the electricity they actually supply, based on market prices determined by supply and demand. The missing money problem describes the situation in which the revenues that generators can generate on the market are not sufficient to cover the fixed costs of their plants and at the same time finance the necessary investments to maintain or build new generation capacity. At the heart of this problem are the price volatilities of energy prices. When the availability of renewable energies is high, for example on sunny or windy days, supply can exceed demand, leading to a drop in prices. This makes it difficult for operators of conventional power plants, which have fixed operating costs, to remain profitable, especially if they cannot fully utilize their plants. Added to this is the challenge of investment security. Taken together, these factors can lead to a structural revenue shortfall for generators on energy-only markets, which jeopardizes the economic viability of power plants and curbs the willingness to invest in new capacities or technologies.
The argument of the missing money problem is particularly understandable from the perspective of the traditional energy market. This market relies on large-scale and cost-intensive power plants to cover peak load capacities, which require long construction periods of several years and therefore require extensive and long-term investments. By contrast, investments in a decentralized infrastructure to provide secure capacities from many small plants can be implemented more easily and quickly.
On the other hand, there is the hypothesis that the missing money problem is only a real problem if it is assumed that extreme price peaks, which would be the alternative to covering investment costs, are politically unacceptable. Investments are not made due to fears that political intervention, such as the introduction of a capacity market, could change the price structure in a few years and make investments unprofitable. It must therefore be questioned whether the introduction of the energy-only market (EOM) was actually an ill-considered decision. If the missing money problem had been considered a fundamental and unsolvable obstacle, an alternative to the EOM would certainly have been considered.
In order to address the "missing money problems", additional mechanisms such as capacity markets or strategic reserves are often proposed and implemented.
Conceptually, the capacity market is opposed to the energy-only market. The capacity market is a regulatory measure in the energy supply sector that aims to guarantee security of supply by ensuring that sufficient electricity generation capacity is available at all times. The main difference to the energy-only market (EOM), where generators are only paid for the electricity they actually supply, is that in the capacity market the provision of capacity - i.e. the availability, ability and willingness to generate electricity - is remunerated financially. Electricity producers undertake to provide a fixed amount of energy at certain times - particularly during peak load times. In return, they receive a payment known as a capacity payment. These payments are made regardless of whether the capacity provided is actually used to generate electricity or not. They serve as financial incentives to ensure that sufficient power plant capacity is available to cover peak loads under all circumstances, particularly during periods of high demand or when the availability of other energy sources is limited.
Advantages of the capacity market
Disadvantages of the capacity market
The debate on the introduction of a capacity market gained renewed momentum in the early 2020s after a long period of stagnation. This discussion was fueled by the rapid increase in the share of fluctuating renewable energies in total electricity generation and important energy policy decisions such as the nuclear phase-out, the planned coal phase-out and the imminent conversion of natural gas power generation to hydrogen. These factors increase the urgency of guaranteeing security of supply on days with low solar and wind energy and ensuring the financing of secure generation capacities.
In the announcement of a power plant strategy in February 2024, the German government emphasized the need to strengthen security of supply by building new gas-fired power plants, which will later be converted to hydrogen operation. At the same time, the introduction of a capacity market was announced, which is to supplement or possibly replace the energy-only market from 2028. The exact formulation and its consequences remain to be seen.
The integration of large-scale battery storage systems is primarily dependent on the requirements of derating. In the context of the electricity market (especially capacity markets for energy storage systems such as batteries), derating means adjusting the nominal power capacity of storage systems based on their actual availability and power provision during stress events. This adjustment reflects the realistic ability of the system to perform reliably under different operating conditions. Derating answers the question of how long an asset must be able to provide full power in order to receive full compensation for it. With a gas-fired power plant, this ability is in principle unlimited; with most large-scale battery storage systems currently being implemented on the German market, the average is two hours. In the UK or France, on the other hand, the average is four hours. Depending on which design case a market is dimensioned for, the range of large-scale battery storage systems provided would also change in case of doubt.
As in the energy-only market, large-scale battery storage systems can contribute to grid stability and the efficiency of the electricity market. They achieve this, for example, by providing balancing energy and general flexibility, by participating in capacity tenders and by reducing the grid load in grid congestion management. In this way, large-scale battery storage systems make a significant contribution to the stability and reliability of the electricity grid in a capacity market and also support the integration of renewable energies.
A comparison between the energy-only market and the capacity market reveals clear advantages and disadvantages that need to be carefully weighed up. The energy-only market offers incentives for cost-efficient electricity production by only paying for the electricity actually supplied. This promotes competition and innovation in the renewable energy sector. However, this model can reach its limits when it comes to ensuring security of supply in times of fluctuating generation from renewable sources.
The capacity market, on the other hand, secures supply by paying producers for the provision of capacity, regardless of whether it is actually used. This can be particularly advantageous in times of low production from renewable energies. However, this can result in higher costs for consumers, as the costs of providing capacity are incurred in addition to the electricity costs. In addition, prices on the existing energy market are distorted, which can have a negative impact on investments.
In Germany, the energy-only market (EOM) has been established over decades and has always been finely balanced. Therefore, extreme caution is generally required when introducing new mechanisms to the electricity market. Fundamental changes, such as the implementation of a capacity market, could have unforeseeable and particularly long-term consequences if they are not carefully planned and implemented.
Large-scale battery storage systems play an important role in both markets. In the energy-only market, they help to stabilize the grid thanks to their ability to react quickly and flexibly and can store surpluses from renewable energies and release them again when required. In the capacity market, they offer additional security in that they can be provided as secured capacity to ensure security of supply.
.png){kind=logo}
