Introduction
Following the February elections, Germany’s energy transition stands at a pivotal crossroads. The preliminary coalition agreement between the Christian Democratic Union (CDU/CSU) and the Social Democratic Party (SPD) reaffirms Germany’s climate targets and acknowledges overdue re-evaluations of key power sector metrics. While a decisive push for renewables expansion shall continue and the commitment to market-driven investments in renewables is promising, certain policy intervention plans—particularly regarding thermal assets—risk distorting market dynamics and deterring efficient investment. Striking the right balance between regulatory guidance and market forces will be crucial for achieving a resilient energy transition.
Reevaluating Energy Targets: A Pragmatic Reality Check
One of the coalition’s initiatives is to reassess Germany’s energy transition milestones—a necessary step in ensuring that policy remains grounded in economic and technical realities. Current renewables expansion plans are based on the assumption that electricity demand will reach 750 TWh by 2030. However, factors such as the economic recession following COVID-19, slower-than-expected industrial electrification, and delays in sector coupling have led to lower-than-anticipated demand growth.
Revising renewables buildout milestones in response to subdued demand projections is a pragmatic step, but it should not come at the expense of lowering decarbonisation ambitions. This reality check should rather ensure that Germany’s energy policies remain adaptive and responsive to real-world developments and ultimately contribute to a more resilient and cost-effective energy transition.
While adjusting milestones sets the framework, the regulatory environment ultimately determines the trajectory of the energy transition. Noteworthy in this regard is the large emphasis on market-based financing mechanisms in the soon-to-be coalition government’s strategy. While the previous government increasingly integrated market elements into the EEG, a quarter-century after the launch of this influential renewables subsidy scheme, a significant portion of the renewables fleet remains largely shielded from market exposure.
Increasing reliance on market-based financing could reduce subsidy dependence and allow for greater market exposure which could encourage more system-friendly dispatch behaviour. However, the specifics will be crucial, and it remains to be seen how concrete measures will take shape. There are two promising avenues for strengthening market-based financing: the first being the long-overdue revamp of the EEG subsidy scheme that needs to be in place by 2027, and the second being the potential introduction of government guarantees for power purchase agreements (PPAs).
Lower Power Prices Through Reserve Plants: A Market Distortion
Despite a commendable market-oriented approach to renewables, the coalition’s stance on thermal energy raises concerns. The proposal to allow reserve capacities to participate in the wholesale market, alongside the plan to add 20 GW of new gas-fired power plants by 2030, introduces significant risks to long-term market stability.
Reactivating reserve capacities in the day-ahead market—even temporarily during high-price periods—could lead to unintended distortions. The 8.5 GW grid reserve, primarily consisting of coal, natural gas, and oil plants, is currently restricted to grid stability purposes, such as addressing a Dunkelflaute (periods of low renewable generation). Bringing these plants back into the market will signal to investors that the government will intervene during price spikes, thereby discouraging investment in fast-ramping alternatives like battery storage and gas-fired peaking plants. These assets rely on high price volatility for their business case, and their deployment could be hampered as a result of this initiative.
The economic rationale behind this intervention is also questionable. In 2024, only 4% of wholesale market prices exceeded 150 €/MWh. While some extreme price spikes occurred in November and December, they were likely driven by strategic bidding rather than fundamental supply shortages—an issue that would not necessarily be addressed by bringing reserve plants back to the market. It’s also uncertain whether old coal assets can be activated sufficiently and quickly under the proposed mechanism to help stabilise prices.
Given the limited number of hours and the high likelihood that the European Commission would reject the measure under state aid rules prohibiting market participation of reserve power plants, it is worth questioning whether this intervention is sensible—especially as it likely discourages much-needed investment in new dispatchable capacity and flexible alternatives.
Prescriptive Thermal Buildout Instead of a Technology-Neutral Capacity Mechanism: Is this efficient?
The proposed addition of 20 GW of new gas-fired power plants further complicates the picture. While ensuring sufficient dispatchable capacity is crucial for security of supply, exceeding the originally committed 13 GW appears excessive and misaligned with market realities. Given the long lead times for planning, permitting, and construction—along with the challenge of securing EU approval—it is highly doubtful that this target can be met by 2030. Expanding beyond 13 GW before a comprehensive reassessment of security of supply is completed risks locking Germany into an unnecessarily costly and potentially suboptimal pathway.
If a reassessment of security of supply is already planned in the coming months, why not wait for its findings before making long-term commitments? Moreover, prioritising an expansion beyond 13 GW in gas-fired capacity seems counterproductive when a capacity mechanism is already in development. A more flexible, technology-neutral approach would allow market forces to determine the most efficient solutions. The European Commission was already hesitant to approve the Power Plant Security Act, which aimed to support just 13 GW of new dispatchable capacity. Pushing for 20 GW will make approval even more challenging and could undermine the very objective of pre-empting thermal asset buildout to bridge the transition toward a fully developed capacity market.
Conclusion
The coalition’s commitment to reassessing market developments and promoting market-based renewables investments marks a positive step toward a more resilient energy transition. However, direct governmental interventions in the thermal sector—particularly the reintroduction of reserve power plants into the market—warrant careful scrutiny. Allowing market forces to drive investment decisions will likely lead to more efficient capital allocation and greater innovation.
A balanced approach that leverages market dynamics while providing a stable and predictable policy framework will be crucial. By fostering an investment-friendly regulatory environment and minimising distortive interventions, Germany can successfully navigate its energy transition while ensuring security of supply and long-term cost efficiency.
Authored by:
Sarah Schoch—Research Associate
Reviewed by:
Claudia Günther—Research Lead
Nicolas Leicht—Advisory Project Leader
