Electricity market of the future: Power plants, electric cars and heat pumps for energy security

A secure and affordable energy supply sets the pace for prosperity and industrial value creation. After coal, oil, and gas, electricity is becoming the new most important fuel in modern industrial society: for mobility, for heat, for digitalization and industrial production, for economic success and new growth. Compared to other countries, electricity prices in Germany are too high; they burden industry and consumers and hamper the transformation. A reversal of this trend is essential: Electricity must be climate-friendly, affordable, and secure.

Germany has made much faster progress in the expansion of renewable energies than planned ten or fifteen years ago. Today, well over 50 percent of our electricity consumption comes from renewable energies. However, the expansion of renewable energies alone is not enough. The phase-out of nuclear power and, in the long term, coal-fired power generation will create a gap that cannot be filled by wind and solar power alone. To ensure a secure supply to Germany as an industrial location, new gas-fired power plants are needed as a backup for renewable energies.

While renewable energies have now become competitive and are increasingly asserting themselves in the market, significant investments in new power plants and thus in security of supply are now imminent. These investments must be profitable, but they must not place further burdens on consumers and industry. We need an improved energy supply and a reduction in the burden on electricity prices caused by taxes and levies.

It’s about the future of the industrial location. The next legislative period therefore calls for smart concepts for an electricity market that simultaneously secures supply and reduces costs. Without decisive action, Germany's future as a business location would be at stake. Three ideas should serve as guiding principles for the next government in restructuring the energy supply.

Without the massive and short-term construction of new gas-fired power plants, Germany faces serious problems with its security of supply. Since the construction of new gas-fired power plants is not economically viable in the current electricity market, the new federal government must implement a power plant strategy that is as lean and effective as possible as quickly as possible and also begin a short-term tender process for at least 25 large gas-fired power plants. It must be clear: Any additional requirements will increase the cost of the power plant strategy and should be carefully considered or avoided altogether.

Second, a technology-open capacity market is needed in the medium term. It must fulfill several functions to make supply secure and affordable: This capacity market must reward existing power plants for standing by like firefighters, stepping in when the wind isn't blowing and the sun isn't shining. It must incentivize additional new construction and leverage a previously almost untapped potential that can flexibly step in when there is too much or too little electricity: in addition to industrial consumers, this includes electric vehicles, heat pumps, and electricity storage systems, a kind of power bank for the electricity system.

Third: “Everything has its price”. The construction of new power plants is absolutely necessary, but costly. For a secure and efficient power supply, the specific design of the capacity market and effective incentives for consumers are crucial: Security of supply can be achieved either on the power generation side through flexible, dispatchable power plants, through load shifting in electricity consumption, or through storage. To ensure affordable power supply, the most cost-effective mix of generation- and demand-side technologies, as well as storage, should always be used. Only if this is achieved, additional burdens for consumers can be avoided.

Considering the generation side from the current geopolitical perspective, Germany faces significant cost disadvantages. Due to structurally higher gas and CO₂ prices, the use of gas-fired power plants in Germany will be many times more expensive than in the USA or China, for example. The situation will most likely be similar for electricity generation from climate-neutral hydrogen in the future.

Decentralized approaches are necessary. A cost-efficient capacity market that limits additional burdens for consumers therefore relies on decentralized and digital approaches. Electric vehicles and heat pumps offer the greatest potential, which must be leveraged through effective incentive systems for consumers and new technologies such as bidirectional charging: Through intelligent charging behavior, electric vehicles can be charged more frequently when renewable energy is abundant and electricity prices are low. In the future, they will feed power back into the grid bidirectionally as needed. Heat pumps of all sizes are similarly flexible: They can shift their operation to hours with plenty of wind and sunshine using thermal storage.

Both electric vehicles and heat pumps are "inherent capacities" that can contribute particularly cost-effectively to security of supply: Purchasing decisions are not primarily made to make them available to the electricity or capacity market. However, it would be economically foolish not to use them to ensure security of supply. With the right framework and the financial incentives of a capacity market, a win-win situation can arise: Electric vehicles and heat pumps become even more attractive through new revenue sources, and consumers benefit from an overall cheaper and more secure electricity supply.

Central tendering and decentralized markets. When shaping the electricity market of the future, the next government should therefore opt for affordability and security: as much decentralized "inherent flexibility" as possible, and as many new gas-fired power plants as necessary. The key lies in a capacity market that brings both together: centralized tenders for new gas-fired power plants and decentralized markets for electric vehicles and heat pumps, which, through digital networking, contribute to the affordability and security of the electricity supply.

 

Andreas Rade is Managing Director of the German Association of the Automotive Industry (VDA) and Kai Lobo is Vice General Manager of the Association of Municipal Enterprises (VKU).