Reintegrating reserve power plants into the electricity market could mitigate short-term price spikes. However, it may also increase redispatch costs and weaken investment incentives. As a result, grid charges and the costs of a potential capacity mechanism could increase.
In its new Policy Brief “Back (-up) for good? Implications of Reintegrating Reserve Power Plants into the Electricity Market”, a team from the Institute of Energy Economics (EWI) at the University of Cologne analyzes both the short- and long-term effects – that is, the static and dynamic implications – of a potential reintegration of reserve capacities. The Policy Brief was supported by the Gesellschaft zur Förderung des Energiewirtschaftlichen Instituts an der Universität zu Köln e.V. The analysis makes use of EWI’s publicly available Merit Order Tool.
The analysis finds that reintroducing reserve capacity to the electricity market would, in principle, dampen prices. However, the magnitude of this effect strongly depends on the specific market design – such as the amount of reserve capacity integrated, whether the integration is market-based or administrative, and the selected activation price.
At the same time, a reallocation of costs may occur: If reserve power plants displace system-critical units from the market outcome, redispatch costs may rise, leading to higher grid charges for consumers. Moreover, the coalition agreement leaves key implementation questions unanswered – for example, how to handle market revenues from reserve plants or how to offset them against existing remuneration mechanisms. Strategic behavior by market participants presents an additional risk that must be carefully managed.
Utilizing reserve plants in the market would systematically suppress scarcity prices – a key driver for investment in new generation or storage capacity. The profitability of existing plants would also decline, potentially resulting in increased retirements or their transfer into the reserve. This, in turn, could shift costs from the electricity market to the grid charges.
The coalition agreement also includes the introduction of a capacity mechanism to provide investment incentives outside the electricity market. However, capacity payments must rise as scarcity pricing and investment signals within the market are suppressed. As such, reintegrating reserves could increase the overall cost of the capacity mechanism.
Both the static and dynamic effects of reintroducing reserve capacity are complex and partly contradictory. Temporary market participation could offer efficiency gains, as the capacities are already maintained. However, this requires avoiding new market distortions – such as those caused by information asymmetries, strategic behavior, or increased redispatch needs. It is also crucial to prevent short-term savings from causing long-term inefficiencies, such as reduced investment signals or structural cost shifts toward grid tariffs.
Whether reintegration of reserve power plants is beneficial in the long run depends heavily on the detailed design and consistency with the broader market design. A general deployment of reserve capacity entails risks but could contribute to short-term cost reductions if implemented under clear operational conditions. Policymakers must carefully balance short-term relief with long-term market logic.
