How to integrate decentralised flexibility into an integrated capacity market

Flexibility in Germany’s future capacity market

The new German government must address the introduction of a capacity market promptly. The integration of flexible consumption devices and batteries has played a key role in the discussion so far.

In our new study for the German Association of the Energy and Water Industries (BDEW), we show that the creation and use of decentralised flexibility can be incentivised in a variety of ways within an integrated capacity market.

The previous German government had announced the introduction of a technology-neutral capacity mechanism to guarantee a secure electricity supply and establish a stable investment framework for controllable loads and flexibility. It is expected that the new German government elected in February 2025 will also pursue the basic idea of a capacity market.

The German Federal Ministry for Economic Affairs and Climate Protection (BMWK) supports the introduction of a combined capacity market (German: Kombinierter Kapazitätsmark - KKM), combining the advantages of centralised and decentralised capacity markets. In particular, the KKM aims to integrate flexible consumer and storage facilities more effectively than the internationally established centralised capacity markets.

In its statement of 6 September 2024, the German Association of Energy and Water Industries (BDEW) called for the introduction of an integrated capacity market (IKM). In the IKM, the state should be responsible for determining the level of security of supply. In addition, all technologies such as capacities, storages and (load) flexibilities should be effectively integrated and all support mechanisms should be taken into account.

A key element of the IKM is centralised competitive tendering, which should provide a secure investment framework for controllable capacity and flexibility options.

The BMWK argues that decentralised flexibility cannot be sufficiently integrated into capacity markets with centralised tenders. Against this backdrop, we analysed various options for integrating decentralised flexibility into the IKM in a study commissioned by BDEW.

An adaptable system with inbuilt flexibility

On the one hand, decentralised flexibility can be explicitly incentivised in the IKM by pre-qualifying the potential capacity providers and providing them with capacity payments if they successfully participate in ancillary services markets or capacity market auctions. On the other hand, implicit incentives for the creation and use of decentralised flexibility can be created through fluctuations in the electricity price, as well as through the introduction of dynamic levies for capacity market costs.

Global markets prove the success of decentralised flexibility in central capacity markets

In centralised capacity auctions, various instruments exist to facilitate access for smaller decentralised flexibility options. As illustrated in the following graphic, many of these measures are already standard practice on an international level.

Experience from European capacity markets shows that centralised tenders can effectively and efficiently integrate flexibility. This is particularly true if the instruments for integrating flexibility into centralised tenders are implemented. Moreover, the French capacity mechanism demonstrates that a decentralised system does not necessarily lead to satisfactory results for the development of flexibility options.

The IKM offers the opportunity to effectively integrate flexibility

In the IKM, existing and new incentives for the creation of generation capacity and flexibility can be integrated into one system. When designing a future capacity mechanism in Germany, it would be beneficial to draw on international experience. There are various instruments that have been successfully implemented internationally for integrating decentralised flexibility into centralised tenders, which could inform the design process.

The new German government should capitalise on this experience. This may also accelerate EU state aid approval.

Experience from European capacity markets shows that centralised tenders can effectively and efficiently integrate flexibility. This is particularly true if the aforementioned instruments for integrating flexibility into centralised tenders are implemented. Moreover, the example of the French capacity mechanism demonstrates that a decentralised system does not necessarily lead to satisfactory results for the development of flexibility options.