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German energy policy is never far from the headlines, but since
the invasion of Ukraine in February 2022 the government has made
two important announcements with massive repercussions for the
market.
In April, the Cabinet published a draft legislative package
focusing on renewables called the Easter Package,
which it called the "biggest energy policy reform in decades." Some
measures on renewables had already been promised under the
coalition agreement of November 2021, but the Easter Package is far
more ambitious with the new aim of
"almost"100% renewables in power by 2035.
Secondly, the government announced it had released
almost€3 billion in funds for
new floating LNG terminals (FSRU) and was drafting an LNG
Acceleration Act to accommodate these terminals quickly. It also
made €1.5 billion available to market area manager THE in March
2022 for companies to purchase LNG for meeting German storage fill
obligations. Germany is pushing for direct LNG import capacity now,
while long term it seeks to reduce natural gas demand to become a
carbon-neutral economy by 2045.
The twin drivers of an urgent need to decarbonize the power
system as well as reduce imports of Russian gas make for a delicate
balancing act for the government.
The Easter Package is ambitious. All onshore renewables capacity
targets for 2030 have been increased. Solar PV's capacity target is
now 215 GW and onshore wind's is 115 GW. Yearly additions of solar
PV will increase to 22 GW from 2026. Onshore wind additions are
expected to reach 10 GW per year from 2025. This implies a step
change in additions. In recent years, renewable auctions have
failed to attract as much capacity as the available volumes casting
doubt on whether the industry can deliver. Even In our most
ambitious outlook, we don't expect these targets to be met.
Integrating this renewable capacity will have consequences for
the market. Our latest Planning Case (April 2022), which assumes
lower additions than the targets, shows that for the full year of
2030, the majority of hours in Germany will be priced below
€15/MWh. This would create significant cannibalization risks for
new and existing assets. Accelerating the electrification of demand
(directly or via hydrogen) and the development of storage could
offset this risk, however, in both cases, additional government
support may be needed.
These proposals are currently working their way through the
parliamentary process in Germany. Meanwhile, the government has a
Summer Package planned, which should provide long-awaited
incentives for onshore wind. German energy policy is at a critical
point.
