Germany Introduces Capacity Market to Secure Power Supply

The German Federal Government adopted the draft Act to Safeguard Security of Electricity Supply and to Provide New Capacity on 13 May 2026. Its central element is the draft Electricity Supply Security and Capacity Act (Strom-Versorgungssicherheits- und Kapazitätengesetz - StromVKG-E). The draft must now pass through the parliamentary legislative process, meaning that changes remain possible before its final adoption.

The StromVKG-E represents a key element in safeguarding security of electricity supply in Germany. For the first time, it establishes a standalone capacity market as a supplement to the existing energy-only market, combining market-based allocation mechanisms with regulatory requirements designed to ensure security of supply and decarbonisation. The StromVKG-E is not conceived as a comprehensive permanent regime, but primarily addresses the target year 2031. For the period from 2032 onwards, a comprehensive capacity market is expected to follow, the legislative design of which is, as things currently stand, reserved for a subsequent legislative project.

The following overview first outlines the fundamental decision in favour of a capacity market and then explains the tendering and assessment mechanisms, the associated availability and safeguarding rules, and the regulatory and financial framework of the draft.

Objective and fundamental regulatory decision

The purpose of the StromVKG-E is to introduce a capacity market in order to provide sufficient secured electrical capacity to meet electricity demand in the target year 2031 (section 1 StromVKG-E).

The starting point is the legislator's assumption that the existing electricity market no longer reliably triggers investments in dispatchable capacity, even though such capacity will be required to safeguard security of supply. In particular, additional secured capacity is intended to be available in order to cover scarcity situations in which generation from renewable energy sources or contributions from neighbouring electricity markets are insufficient.

From a systematic perspective, the draft therefore creates an additional regulatory object: not only the generation of electricity, but already the provision of capacity is remunerated and regulated as a matter in its own right. The draft thus marks a structural intervention in the existing market design, without fully replacing the energy-only market.

Structure of the capacity market

Against this background, the draft organises the capacity market through competitive tenders (section 3 StromVKG-E), in which market participants submit bids for the provision of capacity and receive awards on the basis of price competition.

An award gives rise to a legally binding capacity obligation. The capacity provider is required to keep the bid nominal capacity available during the relevant obligation period in accordance with the Act (sections 52(1) no. 1, 65 StromVKG-E). At the same time, the award gives rise to a claim for capacity remuneration (sections 52(1) no. 2, 74 StromVKG-E).

The mechanism is therefore designed as a mutually calibrated system of remuneration and obligation and differs structurally from pure support instruments. The capacity procurement initially addresses the delivery period from 1 November 2031 to 31 October 2032 (section 2 no. 9 StromVKG-E). This must be distinguished from the obligation periods of individual awarded capacities, which may amount to one year, seven years or 15 years, depending on the tender and the bid.

Demand assessment and tendering logic

The tenders under the StromVKG-E are initially based on statutory initial volumes and subsequently on a monitoring-based assessment of demand. In this way, the draft combines early investment signals for new capacity with later procurement rounds that are more closely aligned with actual demand.

The capacity procurement tenders are staggered over time (sections 3-6 StromVKG-E) and address different segments. Functionally, the tenders cover different categories of capacity: first, the development of long-term available capacity, in particular newly constructed long-term capacity (section 4 StromVKG-E); second, additional generation capacity without a strict long-term criterion (section 5 StromVKG-E); and third, technology-neutral capacity, including existing installations and flexibility options (section 6 StromVKG-E).

For the first tenders, the draft already specifies concrete tender volumes and bid dates:

Two tenders for long-term capacity are to take place on 8 September 2026 and 22 December 2026. The tender volume is 4.5 GW in each case, i.e. 9 GW in total (section 4 StromVKG-E).

One tender for generation capacity is scheduled for 18 May 2027 and comprises 2 GW (section 5 StromVKG-E).

In addition, two tenders for capacity are planned for 1 December 2027 and 1 October 2029. In 2027, 75% and in 2029, 100% of the tender volume determined pursuant to section 6 StromVKG-E in conjunction with Annex 1 will be tendered. Capacity already awarded must be taken into account as reducing the remaining demand.

Assessment of capacity

The capacity market does not remunerate the installed capacity of an installation as such, but rather its contribution to security of supply. Since different technologies are not available in scarcity situations in the same way, their capacity contributions must be made comparable. For this purpose, the draft uses the concept of "reduced capacity" (reduzierte Leistung) (section 22 StromVKG-E).

Reduced capacity is calculated by multiplying the bid nominal capacity by a technology-specific reduction factor. This reduction factor reflects the extent to which the relevant technology contributes to secured capacity under the system established by the draft. An installation is therefore not necessarily taken into account in the capacity market at its full installed or nominal capacity, but only to the extent of the capacity share attributed to it on the basis of the applicable reduction factor.

The reduction factors are determined pursuant to section 23 StromVKG-E in conjunction with Annexes 3 and 4. For energy-limited technologies, such as storage facilities or controllable loads, the assessment depends in particular on the period for which the relevant capacity can be reliably provided. This takes account of the fact that an installation with a limited delivery duration makes a different contribution to security of supply in longer scarcity situations than a generation installation that is permanently available.

The draft thereby introduces a de-rating approach intended to enable technology-neutral tendering without ignoring the different system value of individual technologies. The capacity tendered and remunerated is therefore not necessarily identical to the installed or nominal capacity, but is assessed by reference to its contribution to security of supply.

Availability regime and revenue mechanics

During the obligation period, capacity providers must keep the awarded capacity available (section 65 StromVKG-E). Compliance with the availability obligation is reviewed during high-price quarter-hours, i.e. periods of high spot market prices (section 66(2) StromVKG-E), which indicate a potential scarcity situation.

Compliance with the availability obligation is safeguarded by a comprehensive settlement and sanctions regime. This includes, in particular, compensation payments for availability shortfalls (section 76 StromVKG-E), compensation premiums for availability surpluses (section 77 StromVKG-E), a settlement system for shortfall and surplus quantities (section 75 StromVKG-E), and penalties in the event of an incomplete functionality demonstration (section 80 StromVKG-E). In addition, an annual functionality demonstration must be provided (sections 69, 70 StromVKG-E).

Remuneration is based on the individual bid and the bid reduced capacity. It is paid by the competent transmission system operator (section 74 StromVKG-E). At the same time, capacity providers are required to make payments under the peak price settlement mechanism in periods of high electricity prices (section 81 StromVKG-E). This introduces a mechanism that is functionally equivalent to a reliability option: the provider receives capacity remuneration, but must make payments where a specified strike price is exceeded.

Overall, this creates a risk allocation in which capacity remuneration, market integration, availability obligations and sanction mechanisms are closely interlinked.

Prequalification, collateral and realisation risks

The draft accompanies the tenders with a detailed prequalification and collateral regime. Participation in the tenders for capacity generally requires full or provisional prequalification (sections 25 et seq. StromVKG-E). This involves, in particular, reviewing information on the bidder, the installation, the grid connection, installed capacity, technology class and compliance with emission limits.

For the tenders for long-term capacity and generation capacity, the draft provides for a special procedure due to the short lead time. In these cases, no full or provisional prequalification takes place before the bid is submitted. Instead, the bids must contain certain information and self-declarations. Following the award, provisional prequalification must be completed.

Extensive collateral requirements are added. Bidders must provide bid collateral (section 42 StromVKG-E). In the case of multi-year obligation periods, realisation collateral is also required following the award (section 43 StromVKG-E). In addition, collateral must be provided for compensation payments and penalties in the event of an incomplete functionality demonstration (section 44 StromVKG-E).

If an awarded installation is not realised, or is not realised in time, the draft provides for a non-realisation penalty (section 64 StromVKG-E). The capacity market is therefore not only designed as a remuneration mechanism, but also as a strictly safeguarded realisation and availability regime.

Regulatory embedding and orientation

Participation is subject to extensive requirements. These include, in particular, a minimum capacity requirement (section 7 StromVKG-E), a grid connection or binding grid connection commitment (section 8 StromVKG-E), compliance with emission limits (section 9 StromVKG-E), requirements applicable to the bidder (section 10 StromVKG-E), and the exclusion of double funding (section 11 StromVKG-E).

At the same time, the draft provides for various flexibility mechanisms. Installations may, subject to certain requirements, be aggregated and offered via installation pools (sections 20, 21 StromVKG-E). This is intended, in particular, to facilitate the inclusion of decentralised and smaller-scale flexibility options. The draft also provides for cross-border participation by installations in Luxembourg and in other EU Member States with a direct cross-border electricity interconnector to Germany, provided that the necessary requirements under EU law and contractual arrangements are met (sections 18, 19 StromVKG-E). Finally, the draft contains provisions on the transfer of capacity obligations and the fulfilment of a capacity obligation with another installation (sections 56 et seq. StromVKG-E), thereby preserving a limited degree of flexibility after an award has been granted.

For new and longer-term committed capacity, additional investment and structural requirements apply (sections 12, 14 StromVKG-E). These are intended to ensure that additional capacity is actually created and that awarded capacity meets the requirements of the security of supply mechanism. For certain 15-year obligations, the draft also provides for resilience requirements and manufacturing in the European Economic Area (section 15 StromVKG-E).

The decarbonisation requirements are particularly noteworthy. Power plants with a 15-year obligation period that use natural gas as their primary energy source must be prepared for operation with hydrogen (section 17 StromVKG-E). In addition, capacity providers with a 15-year obligation period must operate the installation that is the subject of the bid on a climate-neutral basis by 2045 at the latest (section 73 StromVKG-E). The draft thus links security of supply with long-term decarbonisation elements.

The draft was preceded by an agreement in principle between the Federal Ministry for Economic Affairs and Energy and the European Commission on key elements of the power plant strategy. However, this does not replace the formal State aid approval of the specific statutory mechanism. Rather, under section 87 StromVKG-E, the system remains subject to a State aid approval requirement. Essential provisions may only be applied after State aid approval has been granted by the European Commission and only in accordance with that approval. The actual implementation of the mechanism therefore remains conditional under EU law.

Financing and cost implications

The financing of the capacity market is not intended to come directly from the federal budget. According to the explanatory memorandum to the draft, the costs of the capacity market for 2031 and the use of the revenues generated from it are to be financed, in accordance with European requirements, through a levy. The specific design of this levy is to be regulated only in a follow-on capacity market act planned for 2027, which is also intended to address the delivery period from 2032 onwards.

According to the explanatory memorandum, the support costs are subject to considerable uncertainty. For 2031, they are estimated at EUR 1 billion to EUR 3 billion. For the years from 2032 to 2045, annual costs of EUR 0.9 billion to EUR 2.3 billion are specified. The costs to be financed through the levy include, in particular, the capacity remuneration payable from 2031 onwards, less collateral collected and revenues from penalties, as well as administrative costs incurred by the transmission system operators.

The capacity market therefore shifts part of the refinancing of secured capacity from electricity market revenues into a regulated financing mechanism. At the same time, the specific cost impact for market participants and consumers remains dependent on the design of the future levy regime.

Summary

The StromVKG-E establishes a capacity market intended to ensure security of supply through a competitive mechanism, while at the same time being governed by dense regulatory requirements. The draft can therefore be characterised as a hybrid model between market mechanism and State steering.

For market participants, the draft creates new revenue opportunities through the remuneration of secured capacity. However, these are accompanied by significant regulatory requirements, evidentiary obligations, collateral requirements, availability risks and State aid uncertainties. The StromVKG-E is therefore of considerable significance not only from an energy policy perspective, but also from a regulatory and transactional perspective.