EU Approves German Power Capacity Mechanism, to Launch in 2031

en.Wedoany.com Reported - The European Commission has approved a German capacity mechanism. The mechanism is intended to safeguard power supply during the German power system's transition to near-complete decarbonization.

The draft of the Electricity Supply Security and Capacity Act (Strom-Versorgungssicherheits-und Kapazitätengesetz, or StromVKG-E) was adopted by the German federal government in May 2026, and in July it was passed by the Bundestag and Bundesrat and entered into force; the European Commission subsequently granted its approval.

This whole-market mechanism is scheduled to launch in 2031, with an estimated lifecycle cost of EUR 15.6 billion to EUR 35.2 billion. Its goal is to ensure that generation capacity, storage, and demand-side flexibility are sufficient to meet electricity demand as Germany increasingly relies on variable renewable generation.

German transmission system operators will procure capacity meeting the country's reliability standard through competitive auctions. The mechanism is open to technologies including generation, storage, and demand response; both existing and new capacity can participate, and some cross-border resources are also within scope; contracts last up to 15 years, capacity is determined by auction, and delivery begins in 2031.

Climate constraints include: capacity awarded 15-year contracts must operate in a climate-neutral manner by 2045; new gas-fired power plants seeking long-term capacity contracts must be hydrogen-ready so they can switch fuels in the future. Germany will also introduce decarbonization tenders, funding support for some existing gas-fired units to switch to hydrogen, in order to reduce the risk of long-term fossil fuel dependence resulting from investment in new and existing gas capacity.

The first auction is scheduled for 2026; if subscription is insufficient, another auction will be held in 2027. Early tenders focus on securing additional long-term capacity within Germany. In 2026, two rounds will release a total of 9 GW of new long-term capacity, 4.5 GW per round. Such capacity must be able to run continuously without interruption at rated full output for at least 10 hours.

Further auctions will follow in 2027 and 2029, following the principle of technology neutrality, with both existing and new capacity eligible to participate. In addition to the first tenders reserved for new domestic German capacity, eligible resources from EU member states directly connected to the German grid may also enter the mechanism.

The European Commission estimates that the mechanism will cost EUR 1 billion to EUR 3 billion in 2031, depending on auction results; annual costs from 2032 to 2045 are expected to be EUR 900 million to EUR 2.3 billion.

As conventional generation gradually exits and the share of renewables rises, this approval adds a tool for Germany to manage supply security. Policymakers hope that by opening the mechanism to generation, storage, and demand-side response, they can establish a technology-neutral reliability market rather than relying solely on building new dispatchable power plants; the challenge is balancing the need for reliable capacity with Germany's 2045 climate neutrality target. For developers and equipment suppliers, technologies capable of providing reliable or flexible capacity—such as battery storage, hydrogen-ready generation, and demand response systems—may gain new market space.