State aid: Commission opens in-depth investigation into German plans for electricity capacity reserve
The European Commission has opened an in-depth investigation to assess whether German plans to set up an electricity capacity reserve comply with EU state aid rules. The Commission has concerns that the measure may distort competition and favour power plant operators over demand response operators.
Commissioner Margrethe Vestager, in charge of competition policy, said: "Reliable electricity supplies are crucial to a functioning economy and Germany has a legitimate interest to ensure security of supply for its citizens and businesses. It is our role to ensure that companies are granted state support only when it is truly necessary and in a manner that limits distortions of competition. We currently have a number of concerns regarding the need and design of the German strategic reserve. This is why we will investigate further and invite third parties to submit their views on the measure."
Germany has plans to introduce a capacity reserve measure (or 'Kapazitätsreserve'), which would require German network operators to procure 2 Gigawatt (GW) of capacity that would be held in reserve outside the market. Germany does not expect to experience structural capacity shortages in the future but aims to create a safeguard against unforeseen developments during its ongoing transition to a low carbon, environmentally sustainable energy supply. The extra capacity would be used as a strategic reserve for such extreme and unforeseen circumstances, when the electricity market does not manage to deliver enough power to meet all demand.
In order for the Commission to approve a capacity measure under EU state aid rules, in particular the Commission's 2014 Guidelines for energy and environmental state aid, the Member State must demonstrate the need for the measure, ensure that it is fit for purpose and open to all capacity providers.
At this stage the Commission has doubts as to Germany's assessment of the need for the reserve. It will now seek to better understand the assumptions and scenarios that Germany has used to calculate the development of electricity demand and supply in the years ahead, also giving interested third parties the opportunity to comment on the assessment and submit their views.
Furthermore, it appears that the measure will not be phased out once Germany's reformed electricity market is fully functional. The scheme is set to start operating in winter 2018/2019, for an initial period of two years. The initial 2GW reserve could then be renewed and enlarged in subsequent years. The Commission is concerned that, even if Germany's assessment were to be confirmed that the reserve is needed today, the measure could continue to exist even when it will no longer be necessary.
The Commission also found that the criteria for capacity providers to participate in the reserve may not be sufficiently open for demand response operators (i.e. customers ready to cut or reduce their electricity use to help to balance demand with supply). Moreover, foreign capacity providers are excluded from participation.
Finally, the Commission at this stage believes that Germany may not have carried out all possible market reforms that would enable the market to fully ensure security of supply at lowest possible cost and without the need for state intervention. Even if capacity measures are well designed, they cannot replace essential electricity market reforms.
The Commission will now investigate further whether its initial concerns are justified. The opening of an in-depth investigation gives Germany and interested third parties an opportunity to submit comments. It does not prejudge the outcome of the investigation.
The Commission has recently assessed and temporarily approved other German measures aimed at ensuring security of electricity supply. Notably, it approved on 24 October 2016 the demand response scheme ABLAV (SA.43735) and on 20 December 2016 the network reserve (SA.42955).
Strategic reserves such as the German Capacity Reserve are capacity mechanisms. The Commission carried out a sector inquiry into capacity mechanisms between April 2015 and November 2016, which concluded that strategic reserves may be appropriate interventions where Member States identify temporary risks. Strategic reserves should only be deployed in emergency situations. They should be held outside the market to minimise distortions to the market's day-to-day functioning. Strategic reserves must be transitional measures, which accompany market reforms and are phased out as soon as the reforms take effect.
The non-confidential version of the decision will be published in the state aid register on the competition website under the case numbers SA.45852 once eventual confidentiality issues have been resolved. The State Aid Weekly e-News lists new publications of state aid decisions on the internet and in the EU Official Journal.