The parties forming Germany’s prospective next government, the conservative Christian Democrat Union and Christian Social Union (CDU/CSU alliance) and the Social Democrats (SPD), have presented their coalition agreement.
While the document lacks detail, several points related to renewable energy expansion and support for the industry could have direct implications for the GO and PPA markets.
The coalition partners have agreed to extend the state aid scheme for indirect ETS costs indefinitely and expand it to other sectors such as data centres. The scheme has been approved by the European Commission under its current form to run until 2030. It is intended to partially compensate energy-intensive industries that have incurred carbon costs under the EU ETS (see table below).
State aid beneficiaries can qualify for financial compensation by either implementing the recommendations of the energy audit report, investing at least 50 % of the aid amount in GHG emission reduction projects, or reducing the carbon footprint of their electricity consumption. For the latter, unbundled GOs and PPAs fulfil the criterion.
German state aid criteria require that at least 30 % of renewable electricity be sourced within defined market boundaries – 80 % can come from Central Western Europe (Germany, Austria, Luxembourg), and 20 % from the rest of EU/EEA.
An additional rule came into effect on 1 January 2023 which requires state aid beneficiaries who use Germany-issued GOs to fulfil the 80 % criterion, to secure a coupled delivery – the parallel delivery of the electricity and the associated GOs.
The coupled delivery is stated in the GO after a confirmation by an environmental expert. Thus, expanding the state aid scheme would also boost demand for such GOs.
The features of the state aid scheme for indirect emission costs in Germany assist in boosting the demand for GOs in Europe, with a preference for GOs from Germany and the CWE.
This has likely supported the large increase in GO demand in Germany over the last few years. Combined with the fact that GOs are not issued for supported generation in the country, this has resulted in a growing domestic supply deficiency (see graph).
German GOs are generally traded with a premium because of this imbalance and the preference for local GOs. The intention to extend and expand the state aid scheme would have a bullish impact on both the GO and PPA markets, provided the EU signs off on it.
The European Commission’s guidelines on the matter extend until 2030, but the emergency measures of 2022 have opened for other kinds of support beyond sectors eligible under the state aid schemes for indirect emission costs. The coalition agreement does not go into details on these issues, but it shows the intention of the new government.
The shift towards demand-side drivers for the power transition in Germany comes amidst the push it has received from the European Commission to adopt more market-friendly mechanisms.
The commission has stated that Germany’s current support to RES-E generation needs to be phased out, with an alternative system or systems in place for new generation capacity from 2027 and onwards.
The previous government’s preliminary study for replacing the current support system investigated four options designed to limit excess profits by investors, which in turn should incentivise projects in prime locations to opt for PPAs as an alternative route to market. Therefore, the new support scheme should primarily boost renewables build-out at sites that would otherwise not be developed, thus increasing total capacity expansion.
The coalition agreement does not directly mention the expected change of the renewable support scheme, but it reiterates Germany’s ambitious renewable energy targets. The coalition states that renewable producers should be provided with incentives to feed electricity in a grid-friendly manner and renewable projects should be made ready to fully finance themselves on the market. In addition, the permissible level of land leases for subsidised plants is likely to be limited.
The coalition partners also plan to swiftly implement the Renewable Energy Directive III (RED III) and the Pact for Accelerated Planning. Against these principles, it is difficult to decipher the exact way forward in Germany, but it will likely entail a mixed package. It is clear, though, that the new coalition intends to strengthen the industry and use it for the decarbonisation of the economy.
As stated above, the potential extension and expansion of the state aid scheme would be bullish for the GO and PPA markets, provided the EU gives the green light. The EU state aid schemes are usually only temporary.
However, given the complex geopolitical situation and deindustrialisation risk, Germany may be able to secure an approval under certain conditions.
In Germany, Veyt estimates that the state aid scheme for ETS costs could have been responsible for 13.2 TWh of renewable GO demand in Central-Western Europe, and 3.3 TWh in the rest of EU/EEA in 2023. This compares against 17.6 TWh and 3.3 TWh in 2022 respectively.
The year-on-year demand drop is likely linked to uncertainty regarding sourcing coupled delivery of electricity and GOs inside Germany which came into effect on 1 January 2023. German environmental agency UBA published guidelines on the process in mid-2024 and recently launched a survey to evaluate the regulations.
However, for certain energy-intensive companies who may require additional support beyond state aid, a so-called industrial electricity price would be offered, according to the coalition agreement. This in turn could dampen demand for green electricity by these companies, depending on the requirements of the scheme.
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