In brief

On 5 February 2024, Federal Chancellor Olaf Scholz, Economy Minister Robert Habeck and Finance Minister Christian Lindner agreed on the key elements of a new power plant strategy (Kraftwerksstrategie). While the political agreement must still be followed by a specific legislative proposal, details of the power plant strategy became available through a press release from Germany’s Federal Ministry for Economic Affairs and Climate Action (BMWK).

Overview

By 2035, Germany aims for its electricity system to be largely climate neutral. To achieve this goal, the share of renewable energy in electricity generation must amount to at least 80% by 2030. The power plant strategy shapes the federal government’s scheme for building modern, highly flexible, and climate-friendly power plants to decarbonize the electricity sector. The strategy focuses on the construction of up to 10 gigawatts of natural gas power plants that will later be converted to hydrogen (“hydrogen-ready plants“). This makes the development of hydrogen-fired power plants a key element of the country’s transition to clean energy and to phase out coal plants.

What are the elements of the power plant strategy?

1. Future electricity market design

It was agreed that BMWK will continue working on the future electricity market design without delay and continue shaping new concepts to create a so-called capacity market. Development of the capacity mechanism could be used in a few years to reward operators for maintaining power plant capacity. The plans for the capacity market are expected by the summer of 2024 at the latest and the start of the capacity market itself is awaited in 2028.

Future market design is targeted at solving the issue of insufficient energy supply by renewable plants on cloudy and still days by primarily locating the new power plants in so-called system-critical locations. In this respect, BMWK, together with the parliamentary groups of the governing parties, interest groups and research institutions, has already set up the Climate-Neutral Electricity System Platform (Plattform Klimaneutrales Stromsystem) to develop approaches for a new electricity market design. As a result, BMWK plans to present an options paper on the future electricity market design in the summer of 2024.

2. Framework for investments in modern power plants

While it is known that the power plant strategy sets up a framework for investments in climate-friendly power stations, there is still an urgent need for greater clarity for investors. It was solely specified that the federal government would use the Climate and Transformation Fund to boost investments in power plants and provide security for investors.

According to the present agreement, a capacity mechanism market should be ready for operation by 2028. Yet, the specific tender periods, questions of location and financing for the power plants are still unclear. However, the agreement on the crucial elements for investors will most likely be disclosed by the summer in the adopted power plant strategy.

3. Expansion of power plants

To accelerate the expansion of power plants, in 2023, BMWK and the European Commission drew up plans to subsidize 4.4 gigawatts of sprinters (plants that generate electricity from renewable hydrogen), 4.4 gigawatts of hybrid plants and up to 15 gigawatts of hydrogen-ready plants. The Climate and Transformation Fund (Klima- und Transformationsfonds) was supposed to be the source of these subsidies. However, the federal constitutional court by its decision of 15 November 2023 disallowed usage of the COVID-19 debt allowances rolled over into Germany’s Climate and Transformation Fund. Consequently, the federal government now plans to subsidize a lower volume of 10-gigawatt hydrogen-ready turbines and 8.8-gigawatt combined sprinters and hybrids. A tender process will offer state support for the construction and operation of four 2.5-gigawatt hydrogen-ready plants.

It was also stated that the planning and approval procedures for the power plants included in the power plant strategy will be substantially accelerated.

4. Switch to hydrogen

The new gas-fired power plants (i.e., hydrogen-ready plants) will only be operated with natural gas on a transitional basis. From 2035 to 2040, they are to switch from natural gas to green hydrogen. The exact changeover dates will be determined in 2032.

5. Support and funding of the development of new technologies

While power plants that run exclusively on hydrogen may receive funding as part of energy research, the federal government is open to other technologies beyond hydrogen.

The federal government already supports research and development of carbon capture storage and nuclear fusion technologies. Additionally, carbon capture and storage for power generation plants using gaseous energy sources is taken up as part of the carbon management strategy.

It was also said that existing barriers to the construction and operation of electrolyzers should be removed without restriction and that all possibilities should be used to accelerate the expansion of electrolyzers that are to be operated in a way that serves the system. It was also decided that there must be no double burdens of levies and fees on electricity for storage and electrolysis, so that there are market and systemic incentives to produce hydrogen. Existing regulatory hurdles will be removed as much as possible.

Energy market stakeholders’ assessment of the new power plant strategy

The strategy has drawn both criticism and praise among energy market stakeholders:

Criticism

In particular, North Rhine-Westphalia (NRW) called for the readjustment of the power plant strategy. NRW Economic Affairs and Energy Minister Mona Neubaur is dissatisfied that only 10 gigawatts, instead of 24 gigawatts, as agreed in 2023, will be put out to tender for the hydrogen-capable conversion of gas-fired power plants. Chemical industry association VCI called the agreement a temporary solution and emphasized that the planned 10 gigawatts of capacity are far from sufficient to guarantee supply. It also emphasized that “there is still a lack of planning security necessary for the investments” in the agreement on the power plant strategy.

In turn, the so-called environmental campaigners are concerned with natural gas as a necessary transitional fuel on the path to clean energy and transitioning to hydrogen between 2035 and 2040. “New fossil gas-fired power plants must be converted to hydrogen by 2035 at the latest,” said Simone Peter, head of the German Renewable Energy Association (Bundesverband Erneuerbare Energie). The German Association of the New Energy Economy (Bundesverband Neue Energiewirtschaft), which represents the interests of grid-independent energy suppliers and energy service companies, also criticized that the planned switchover date to hydrogen in 2035-2040 is much too late. NRW likewise states that instead of focusing on supporting the further build-out of renewable energies with energy storage, the power plants strategy puts forward investments in more gas-fired power plants, with the promise of converting them to run on hydrogen by 2040.

Endorsement

The German Association of Energy and Water Industries (Bundesverband der Energie- und Wasserwirtschaft (BDEW)) welcomed the agreement as “a crucial building block for a successful path towards climate neutrality” while at the same time maintaining supply security. “The expansion of new gas-fired power plants is the basis for the coal phase-out,” BDEW said.

The German Association of Municipal Enterprises (Verband kommunaler Unternehmen (VKU)) welcomed the fact that there is now a political agreement in the federal government on the cornerstones of a future power plant strategy. VKU stated that “the basic agreement on a capacity mechanism for secured electricity outputs is the right one” and VKU had been calling for it for a long time.

Uniper’s CEO Michael Lewis, is satisfied with the power plant strategy and commented that he expects his group to build some of the new capacities for Germany. Uniper will decide whether and with what investments to participate in as soon as it can check the details. “RWE plans to participate in the tenders,” the energy group RWE confirmed its interest in the construction of hydrogen-capable gas-fired power plants with at least three gigawatts of capacity by 2030, primarily at its own coal-fired power plant sites in Germany.

Next steps

The power plant strategy agreement outlined the main landmarks for decarbonization of the energy market through the construction of natural gas power plants that will later be converted to hydrogen as the end goal. However, much more needs to be done to achieve the latter. In the short term, the details should be worked out to a full strategy, which must be followed by a specific legislative proposal.

The agreement reached on the power plant strategy should also be discussed with the EU Commission and then consulted with the public, especially while the decision to support only hydrogen technology is not sufficiently supported by the market stakeholders and focus on natural gas power plants leads some to the conclusion it will slow down the transition to clean energy and contradict Germany’s goal for a largely climate-neutral electricity system by 2035.