London, 13 August (Argus) — Germany is still “a few years” away from making a decision on a capacity market mechanism to incentivise construction of new fossil fuel-based power plants, the country's largest utility, Eon, said.

There are no “solid discussions” yet on how a capacity design would function or when it might be introduced, chief executive Johannes Teyssen said today, presenting the utility's interim results. “I think the majority of commentators believe that it [deciding on a capacity market regime] will be done quite a few years later and we also have argued that a premature starting of a capacity market would not be helpful for anybody and would cost customers a lot without helping,” Teyssen said.

Eon is in talks with the grid regulator and transmission system operators (TSOs) to put a “low number of stations” into a strategic reserve to help smooth out grid and supply bottlenecks. The utility will retire these units if there is no deal to operate them under a compensation scheme, because they are unprofitable.

But the strategic reserve would not influence prices on the wholesale market because the units would only operate under the compensation scheme and would otherwise not be offered, Teyssen said.

The company is reviewing its power generation portfolio amid depressed clean dark and spark spreads, with older and less efficient hard coal and gas-fired plants hit hardest by rapidly rising renewable power output. Renewable power is cutting into conventional plants' load hours and is weighing on day-ahead prices in the German wholesale market.

“There might a low number of stations that go into strategic reserve and there might other stations that we just close for good,” Teyssen said. “There also might be a number of stations that due to their locations are still profitable for at least a very limited amount of time.”

The negotiations with the regulator and TSOs to keep some units in a strategic reserve are progressing. “I could well foresee that we agree with the TSO and regulator on such a compensation mechanism.”

The utility would receive compensation for keeping plants ready to provide power if needed to keep grids stable, such as in demand-intensive times during winter.

Municipal utilities are in talks with the economy ministry to keep unprofitable plants available in return for compensation, municipal utility association VKU said last week. But negotiations have so far failed to reach a conclusion because the ministry refuses to agree a binding deal to reimburse utilities for the cost of keeping unprofitable plants operational. The next talks are scheduled for the end of August, VKU said.

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