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Regulation and Renewable Financing for a Climate-Neutral Power System in Germany

By February 2, 2024February 5th, 2024Public, Flexible Energy & Storage, Germany, Insight, Reports

This report is in German.

What does a climate-neutral power system look like for Germany and what regulation is required for the transition?

We were commissioned by the World Wide Fund for Nature (WWF) to analyse the challenges associated with achieving a climate-neutral power system, identifying regulatory needs to overcome them. Our task also involved exploring the optimal financing approaches, considering both subsidies and market-based routes, for the effective buildout of renewables.

Key findings of the study include:

  • For reaching a decarbonised power system, four key challenges need to be addressed:
    • The buildout of renewables needs to be accelerated from its current path, and the capacity must be more than tripled before 2035.
    • Low-carbon dispatchable capacity needs to be built and incentivised, since 35 GW of coal assets will leave the market – ideally by 2030 to meet government plans.
    • Additional flexibility from batteries needs to be leveraged, reflecting an increase in intermittent generation.
    • Local price signals are necessary for supply to meet demand efficiently.
  • The buildout of renewables, a key lever to reach carbon neutrality, cannot fully be achieved by a market-based approach:
    • Support is required for achieving buildout targets at the necessary speed, since in our Net Zero scenario we see capture prices falling below the Levelized Cost of Electricity (LCOE) of solar and wind in the medium term – due to high deployment rates.
    • However, Sites with attractive load factors and developers closing attractive PPAs will be able to realise projects without government funding.
  • The exact design of a subsidy mechanism is key – especially if CfDs are implemented in Germany as a consequence of the EU electricity market reform:
    • While Germany might keep a market premium with a cap, the option of introducing CfDs is still on the table.
    • Many of the drawbacks of conventional CfDs can be circumvented by so-called financial CfDs – as they keep an incentive for market integration by decoupling support from asset-specific production levels.
    • CfDs should also be designed such that they allow a combination with PPAs, e.g. by allowing developers to only sell part of their generation or capacity under the CfD.

 

Access the report to get more insights on regulation and renewable financing for a climate-neutral power system in Germany.

Reach out to Nicolas Leicht for questions or to learn more!

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