Capacity market or strategic reserve: What's the next step?

There is an intense debate among economists about whether the existing energy-only markets are able to ensure security of supply. In other words, will energy-only markets always have enough power plants available to meet a peak-load electricity demand? In many countries and regions with liberalized markets (such as on the east coast of the United States, Brazil, Spain, France, Great Britain, Russia or South Korea), electricity market regulators have introduced additional tools to ensure the balance of power plant capacity – for example, a capacity market. The reason: supply security is a public good that benefits all electricity users. However, there is a high risk that the energy-only market cannot ensure adequate security of supply.

After the national parliamentary elections in September 2013 such choices will also be on the agenda in Germany. It is already foreseeable that, as a result of the phasing out of nuclear power and the inefficiency of many existing power plants, there could result a gap in generation capacity.

As for solutions to the problem, there are currently four main models under discussion:

• the – transitional or permanent – introduction of a strategic reserve;
• the introduction of comprehensive capacity markets;
• the introduction of focused capacity markets;
• the introduction of decentralized capacity markets.

These four models are different from one another and can vary significantly in their impact on the existing energy-only market. This publication:

• gives a summary overview of the current debate;
• explains these four models according to their authors;
• presents the capacity market discussion in the context of the Energiewende;
• summarizes the applicable statutory provisions in an understandable way;
• documents an expert discussion that the Agora Energiewende held on this issue in August 2012 together with the magazine Energy & Management.

The publication is intended to furnish more transparency in the context of upcoming decisions that Germany will have to make. It will also give all interested parties the opportunity to get a grasp of this – admittedly not so simple – debate.

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The printed publication can be ordered here.