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European Commission opens investigation into German plans for electricity capacity reserve

The European Commission has opened an investigation into whether German plans to set up an electricity capacity reserve comply with state aid rules.11 Apr 2017

The capacity reserve measure would require German network operators to procure 2 gigawatts of capacity to be held in reserve outside the market as a safeguard against developments during its transition to a low carbon, environmentally sustainable energy supply. The extra capacity would be used as a strategic reserve if the electricity market did not meet demand.

The Commission is concerned that the plans may distort competition and favour power plant operators over demand response operators, it said.

Under Commission guidelines, a country looking to install a capacity measure must demonstrate the need for the measure, ensure that it is fit for purpose and open to all capacity providers.

The Commission has doubts about how Germany has assessed the need for the reserve. It will look into the assumptions and scenarios that Germany has used to calculate the development of electricity demand and supply, and give third parties the opportunity to comment on the assessment, it said.

The Commission is also concerned that the reserve will not be phased out once Germany's electricity market has been reformed and it is no longer needed, it said.

The criteria for capacity providers may discriminate against demand response operators, such as consumers who are willing to cut or reduce their electricity use to help balance demand with supply, the Commission said, while foreign providers are completely excluded.

Finally, the Commission said, Germany may not have carried out all of the possible reforms that would let the market ensure security of supply without state intervention.

"Even if capacity measures are well designed, they cannot replace essential electricity market reforms," it said.

The Commission carried out a sector inquiry into capacity mechanisms between April 2015 and November 2016 which concluded that strategic reserves may be appropriate when countries identify temporary risks.

"Strategic reserves should only be deployed in emergency situations. They should be held outside the market to minimise distortions to the market's day-to-day functioning. Strategic reserves must be transitional measures, which accompany market reforms and are phased out as soon as the reforms take effect," it said.

The Commission approved an amendment to a capacity mechanism in France in November 2016. The country had been asked to change its original plans to maintain competition in the sector.