In response to the so called “reality check” report, the coalition government has come out with 10 measures that will guide future energy policies, where cost-efficiency is set to play an equally important role as security of supply and clean power targets.
The planned measures could have both bearish and bullish implications for the Guarantees of Origin (GO) and Power Purchase Agreements (PPAs) markets, depending on the exact implementation of planned policy shifts.
Weaker demand expectations, RES growth below targets
The government expects electricity demand in 2030 to be at the lower end of 600-700 TWh, well below the previously assumed 750 TWh. The goal of having 80 % share of renewable energy sources in gross electricity consumption is still deemed attainable, while the renewable capacity targets are likely to be missed.
Solar could still reach the 215 GW target by 2030 assuming no fundamental changes in implementation requirements such as land availability or economic conditions. However, risks such as a slowdown in rooftop solar installations need to be addressed to avoid a significant shortfall.
The 115 GW onshore wind goal may be missed by at least 9 GW, despite recent progress on accelerated permitting, according to the “reality check” report.
Offshore wind expansion is hindered by grid connection delays, supply chain issues, and permitting challenges, making the 30 GW target likely achievable by 2032 instead of 2030.
Below Veyt focuses on the measures that could have an impact on the GO and PPAs markets.
Systematically reduce consumer subsidies
The German government appears to have made a U-turn on its initial intention to make the state aid for indirect emission costs a permanent scheme. The 10-measures document stipulates that all support schemes and subsidies for consumers will be reduced to the absolute minimum. Targeted, time-limited support will be offered to energy-intensive companies, research, and innovation.
To this effect, complex subsidy instruments will be replaced by market-oriented ones, avoiding artificially low electricity prices driven by permanent subsidies. The European Emissions Trading System (ETS) will take the lead in rewarding the most efficient forms of energy.
System- and market-oriented renewable support scheme
Germany’s current support scheme is based on a floating premium model where large-scale solar and onshore wind plant operators are paid a remuneration when achieved electricity prices on the wholesale market are below a reference price set via auctions. However, producers are not required to return any extra profits above the reference price.
In future, this support scheme will be replaced with more market-oriented financing models such as bilateral Contracts for Difference (CfDs) and clawback mechanisms.
The government is also determined to discontinue the existing feed-in-tariff (FiT) for solar projects up to 100 kW. Compensation for negative-price hours will be terminated and a direct marketing (Direktvermarktung) requirement for new plants will be introduced.
Veyt has analysed the previous government’s market re-design proposal which outlined four options for the future renewable support scheme for large-scale projects. The new government is yet to reveal details of their scheme proposal.
It remains to be seen if the planned 79.9 GW solar and onshore wind capacity currently scheduled for auctioning by 2029 will be kept unchanged or it will be revised down in line with the lower-expected capacity achievements in 2030, specifically for onshore wind.
If the schedule remains as is, and future auctions are fully subscribed, then the minimum expected total capacity of 241 GW for solar and onshore wind would be exceeded by 70 GW.
On the other hand, to achieve the maximum expected total capacity of 321 MW solar and onshore wind, around 10 GW of merchant-based projects such as those financed via PPAs would be needed.
It is also unclear if the new scheme will be introduced for offshore wind projects which so far have been awarded based on willingness-to-pay for a designated site but a recently failed auction may prompt a change in the approach. In any case, any future change to the offshore wind scheme would only affect capacity coming online post 2030.
Currently, Germany operates 9.2 GW offshore wind capacity. A further 10.3 GW worth of awarded projects in various stages of development are due to come online by 2030, according to the latest data by Deutsche WindGuard.
This would place the expected offshore wind installed capacity at 19.5 GW at the end of the decade – slightly lower than the average 21 GW presented in the “reality check” report. Most of the upcoming projects would still need to find PPA offtakers ahead of commissioning (see table).
Synchronously expand grids and renewables
Grid-friendly renewable expansion will be another lever of the new government strategy. Instruments such as grid traffic lights, cable pooling, capacity-based grid charges, and regionally differentiated construction cost subsidies and bonuses are expected to lead to an efficient use of existing grid capacity.
Where the grid situation is critical, the investor would bear a higher share of the expansion costs; at favourable locations, an accelerated grid connection can be achieved at reduced costs.
Market impact
The new government measures derived from the “reality check” report lack detail and time frames, making it difficult to have a firm view on how these would impact the GO and PPA markets.
On the demand side, the reduction in 2030 electricity demand expectations from 750 TWh to the lower end of 600-700 TWh could indicate lower GO and PPA demand.
In addition, the plan to reduce consumer subsidies to a minimum and focus on time-limited support for the industry, suggests that the government no longer intends to expand and extend indefinitely its state aid scheme for indirect ETS costs, as stated in the coalition agreement.
This in turn could prove bearish for the GO and PPA markets in the long term, in contrast to Veyt’s previous assessment of a bullish market impact if the plan had been approved by the European Commission.
However, the new government has also been promoting an industry electricity price, although concrete proposals have never materialised. Considering the new minimum-subsidy approach, the scheme may not be introduced at all or it could promote future GO and PPA demand if it follows the design of the Italian energy release scheme.
On the supply side, the report reiterates the government’s plans to introduce a new renewable support scheme based on two-way CfDs. However, the government is running out of time to put forward a concrete proposal that would give developers clarity on what to expect in future, which could hamper the speed of building new capacity.
The amount of solar and onshore wind capacity likely to be supported via auctions scheduled up to 2029 would be crucial to assess how much additional new-built capacity could come online via PPAs to reach the maximum 2030 capacities presented in the “reality check” report.
This would bring more clarity on the amount of bundled GOs that could be issued as a result.
The 10-measures document stipulates that long-term PPAs will mitigate risks for investors and that a market-oriented approach for consumer subsidies is preferred. Given that both PPAs and GOs are market-based instruments, we could expect that future policies would be in favour of developing these markets.
German businesses have urged the government to boost PPA uptake and strengthen the role of GOs in the country’s decarbonisation efforts. However, much is still uncertain, including if the double-marketing ban on GOs would remain in place, thus keeping the status quo of not issuing GOs to supported generation and maintaining the inherently undersupplied market with cancellations outweighing issuances.
