Transforming Germany's Energy Landscape: A Pivotal Shift in Renewables Subsidies and Backup Power

Germany's energy transition, known as the Energiewende, is undergoing a significant transformation as the government unveils a compromise that promises radical changes to the country's renewables subsidy approach and outlines a fleet of backup power plants to support the nation's coal exit.

Powering the Future: Germany's Ambitious Energy Transition

Rethinking the Renewables Subsidy Scheme

Germany's renewable energy law, designed in the late 1990s, has long guaranteed wind turbine and solar panel owners a 20-year high price for electricity fed into the grid, propelling the country's pioneering Energiewende. However, this paradigm is now on the brink of change, as the government seeks to address fiscal strain and the identified need for backup power generation.The coalition government's internal agreement outlines two fundamental principles that will be altered in the renewables subsidy scheme starting in 2025. Firstly, there will be no remuneration for power produced during times of negative prices, a move that pulls forward an EU requirement by two years. Secondly, the government support will shift from a production-based model to an investment cost subsidy, allowing price signals to have a distortion-free effect.This transition represents a significant leap, as the government moves away from the guaranteed earnings model to a lump-sum investment subsidy. The renewables lobby group BEE has expressed concerns about the "risk of market uncertainty" inherent in this "radical change."

Securing the Coal Exit: The Role of Backup Power Plants

Alongside the changes to the renewables subsidy scheme, the German government has also outlined plans for the construction of new gas power plants, some of which can run on hydrogen. This initiative is seen as a crucial step in securing the country's coal phase-out, which is currently targeted for 2030 but is widely considered to be an ambitious goal.Within the next year, Berlin aims to tender five gigawatts (GW) of new gas power plants for immediate construction, abandoning plans for a fully hydrogen-ready fleet. This will be followed by another five GW of plants that must run on hydrogen, but only from the eighth year of their operation. Additionally, two GW of old gas plants are slated for retrofitting.The government has also committed to building half a GW of dedicated first-day hydrogen power plants and another half GW of long-term energy storage facilities. These plants will be incorporated into a "comprehensive, technology-neutral capacity mechanism" that is expected to be operational from 2028.

Navigating the Challenges: Subsidies and EU Approval

The transition to this new energy landscape will require market subsidies, which have been "in principle" greenlit by the European Commission. According to a Commission spokesperson, intensive discussions between the Commission services and the German authorities have resulted in "a way forward" for the implementation of these subsidies.Germany plans to launch the first competitive bidding process for the new power plants at the end of 2024 or in early 2025, marking a significant milestone in the country's energy transition.

Balancing Perspectives: Reactions and Concerns

The government's compromise has elicited mixed reactions, even within the coalition. While the liberal FDP party, the smallest government party, has expressed delight at the phasing out of the renewables subsidy scheme, the left-of-centre SPD party's energy spokeswoman, Nina Scheer, has voiced concerns about the "obvious investment risks" inherent in the proposed investment cost subsidy model.The transition to this new energy landscape will need to be carefully managed to address these concerns and ensure a smooth and successful implementation of the government's ambitious plans.