Germany has set itself a clear goal — climate neutrality should be achieved by 2045. This requires a significant expansion of renewable energy sources. A challenge for the current electricity market design based on 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 energy and to reduce barriers to further ramp-up market barriers. In addition, the flexibility of electricity supply in the areas of consumption, storage and generation must be increased in order to effectively reduce problems such as negative electricity prices.
In an ongoing debate, different market models for the electricity market are being discussed again and again. The focus is on the question of which electricity market design can guarantee a secure, cost-effective and environmentally friendly supply of electricity even with high shares of renewable energy. In addition to the prevailing energy-only market, the capacity market has also increasingly come to the fore in recent years and has been on everyone's lips since the Federal Government announced the power plant strategy in February 2024.
What is behind the market models? How do they differ and what role do large battery storage systems play in them? This article provides an overview.
If you're looking for an example of the Energy-Only Market (EOM), all you need to do is look outside your 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 revenues exclusively on the basis of the amount of energy actually delivered. More specifically, energy producers generate their income exclusively by selling electricity on the spot market or through long-term contracts, without receiving additional payments to provide 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 significantly influenced by the energy exchange, in particular the European Power Exchange (EPEX SPOT). In addition to long-term futures and bilateral “over-the-counter” contracts, electricity trading at EOM includes the day-ahead and intraday markets:
The price of electricity in these markets fluctuates depending on supply and demand. Prices rise in times of high demand or when low-cost production using renewable energy sources is low. Conversely, oversupply and low demand lead to lower prices.
One of the biggest and most discussed challenges in EOM, particularly in light of the energy revolution, is ensuring security of supply. So is there enough electricity available at all times to meet all demand?
For this reason, various instruments and flexibility options, such as network reserve, capacity reserve and security readiness, complement the energy-only market in Germany. The three backup models mentioned above reimburse capacities for the additional generation of electrical energy that are only on standby or are temporarily shut down. They secure additional capacities for the system, but in principle they should never be called up.
Stationary large 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 battery storage systems in EOM are of central importance for making 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 energy sources.
Benefits of the energy-only market
Disadvantages of the energy-only market
The “missing money problem” is a key economic problem that occurs in the context of energy-only markets (EOM). In an EOM, power generators are paid exclusively for the electricity actually delivered, based on market prices, which are determined by supply and demand. The missing money problem describes the situation in which the income that producers can generate on the market is not sufficient to cover the fixed costs of their plants and at the same time finance the necessary investments to maintain or build generation capacities. The price volatilities of energy prices lie at the heart of this problem. If renewable energy is highly available, for example on sunny or windy days, supply can exceed demand, leading to a fall in prices. This makes it difficult for operators of conventional power plants, who have fixed operating costs, to remain economical, particularly if they are unable to fully utilize their plants. There is also the challenge of investment security. Taken together, these factors can result in a structural revenue deficit among producers on energy-only markets, which jeopardizes the economic viability of power plants and dampens the willingness to invest in new capacities or technologies.
Especially from the perspective of the traditional energy market, the argument of the missing money problem is understandable. To cover peak load capacities, this relies on large-scale and cost-intensive power plants, which require long construction periods of several years and therefore require extensive and long-term investments. Investments in decentralized infrastructure to provide secure capacities from many small plants, on the other hand, are easier and faster to implement.
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 unsustainable. Investments are absent due to fears that political interventions, such as the introduction of a capacity market, could change the price structure in a few years and make investments unprofitable. It therefore remains to be questioned whether the introduction of the energy-only market (EOM) was actually an ill-considered decision. Had the missing money problem been considered a fundamental and insoluble obstacle, an alternative to 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 energy supply that aims to ensure security of supply by ensuring that sufficient power generation capacity is available at all times. The main difference from the energy-only market (EOM), where producers are only paid for the electricity actually delivered, is that in the capacity market, the provision of capacity — i.e. the availability, ability and willingness to generate electricity — is financially rewarded. Power producers commit to provide a fixed amount of energy at specific times — particularly during peak load periods. For this, they receive compensation known as a capacity payment. These payments are made regardless of whether the provided capacity is actually used to generate electricity or not. They serve as financial incentives to ensure that there is enough power plant capacity to cover peak loads in all circumstances, particularly during periods of high demand or when the availability of other energy sources is limited.
Capacity market benefits
Disadvantages of the capacity market
The debate about the introduction of a capacity market gained momentum again at the beginning of the 2020s after the discussion stagnated for a long time. This discussion was fuelled 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 to ensure security of supply on days with low levels of solar and wind energy and to ensure the financing of secure generation capacities.
In the announcement of a power plant strategy in February 2024, the Federal 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 is announced, which will complement or possibly replace the energy-only market from 2028. The exact formulation and its consequences remain to be seen.
The integration of large battery storage systems depends primarily on the requirements of “derating”. In the context of the electricity market (particularly in capacity markets for energy storage devices such as batteries), derating means adjusting the nominal power capacity of storage systems based on their actual availability and performance provision during stressful events. This adjustment reflects the realistic ability of the system to perform reliably under various operating conditions. “Derating” answers the question of how long an asset must be able to perform at full capacity in order to receive full compensation for it. In the case of a gas-fired power plant, this capacity is in principle unlimited; for most large battery storage systems currently on the German market, it takes an average of two hours. In Great Britain or France, on the other hand, the average is four hours. Depending on the design for which a market is dimensioned, the offers of the large battery storage systems provided would therefore also change in case of doubt.
In principle, large battery storage systems, as in the energy-only market, can contribute to grid stability and the efficiency of the electricity market. They achieve this, for example, by providing control energy and general flexibility, by participating in capacity tenders and by reducing network load in grid congestion management. As a result, large battery storage systems make a significant contribution to the stability and reliability of the power grid in a capacity market and also support the integration of renewable energies here.
The comparison between the energy-only market and the capacity market reveals significant advantages and disadvantages, which must be carefully considered. The energy-only market offers incentives for cost-effective electricity production by only remunerating the electricity actually delivered. This promotes competition and innovative strength in the renewable energy sector. However, this model can reach its limits when it comes to ensuring security of supply in times of fluctuating production from renewable sources.
The capacity market, on the other hand, secures supply by providing producers with remuneration for providing capacity, regardless of whether it is actually being used. This can be particularly advantageous in times of low production from renewable energy sources. However, this can result in higher costs for consumers, as in addition to electricity costs, there are also costs for providing capacities. In addition, prices on the continuing energy market are distorted, which can affect investments.
In Germany, the energy-only market (EOM) has established itself over decades and has been finely balanced time and again. Therefore, extreme caution should always be exercised when introducing new mechanisms on the electricity market. Fundamental changes, such as the implementation of a capacity market, could have unforeseeable and, in particular, 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 contribute to stabilizing the grid through their ability to react quickly and flexibly and can store surpluses from renewable energy sources and return them when needed. In the capacity market, they offer additional security by being able to be provided as secured capacities to ensure security of supply.
.png){kind=logo}
