EPICO released a new analysis, conducted in collaboration with Aurora, on Germany’s energy market. The analysis evaluates hybrid and central market designs, examining how each model can support the integration of innovative, flexible technologies while balancing costs and risks.
As Germany phases out coal and responds to rising energy demand, a flexible, market-based, and technology-neutral capacity mechanism is set to be introduced in 2028 to ensure energy security. This mechanism will be essential for fostering flexibility, particularly in demand-side management and emerging technologies.
However, there are concerns that a centrally designed system might favour large power plants, potentially stifling opportunities for innovation. While the German Ministry for Economic Affairs and Climate Action (BMWK) advocates for a hybrid model combining centralised and decentralised elements, this approach remains untested and presents greater complexities.
We propose a pragmatic and gradual approach which includes:
- A central mechanism with an enhanced approach as the foundation: Build on successful practices from other EU countries to lower barriers for innovative technologies, such as pre-qualifying demand-response technologies for auctions.
- Tightly scoped central auctions with an innovation-driven design: Avoid adding unnecessary security margins to auction sizes, giving the market space to develop flexibility solutions independently.
- Strict monitoring: Consistently assess whether innovative flexibility providers are being effectively integrated. If not, a decentralised segment could be introduced to incentivise these technologies.