The Energy Regulation and Markets Review: Germany

Overview

German climate policy derives its objectives from the energy and climate targets at European level and from the agreements of the Paris Climate Agreement. The main aim is to achieve greenhouse gas neutrality in Europe by 2050 (the European Green Deal). In its Climate Protection Plan of 2016, the German government therefore adopted an overall concept for German energy and climate policy with national targets for 2050. In 2019, it additionally created a new level of permanence for German climate measures with the Climate Protection Programme 2030. In this context, the Federal Climate Protection Act, which came into force at the end of 2019, provides the legal framework for German climate protection policy. It sets reduction targets for individual sectors from 2020 to 2030 by specifying annually decreasing annual emission levels.

In Germany, climate protection is understood as a horizontal shaping task that affects a large number of policy areas. From an energy policy perspective, the phase-out of coal-fired power generation, grid expansion and the expansion of renewable energies are of particular importance. The focus is also on increasing energy efficiency, promoting sector coupling, energy research and the use of hydrogen. Thus, in 2020, the national legislature set an important course towards further reducing greenhouse gas emissions and decarbonising the German energy industry. Newly created drivers of the German government's active climate protection policy in this context are the Renewable Energies Act (EEG 2021), the Building Energy Act (GEG), the Coal Phase-out Act, the Federal Emissions Trading Act (BEHG) and the Combined Heat and Power Act (KWKG).

Regulation

i The regulators

Regulation of the German energy sector is in the hands of the Federal Network Agency for Electricity, Gas, Telecommunications, Post and Railway (BNetzA) and the federal state regulatory authorities. While the federal state regulatory authorities are concerned, for example, with approving or setting charges for network access or monitoring the rules on unbundling, the BNetzA becomes active outside this conclusively defined scope of competence (i.e., when the limit of 100,000 grid connection customers is exceeded or in the case of cross-border concerns). As an independent higher federal authority in the portfolio of the Federal Ministry for Economic Affairs and Energy (BMWi), the BNetzA's primary mandate is to promote competition through regulation in the relevant areas of responsibility and to ensure non-discriminatory network access on fair terms. In addition to the BNetzA, the Federal Cartel Office (BKartA) exercises antitrust and wholesale energy abuse supervision in the field of electricity generation/wholesale.

Legal sources

Germany's energy policy is guided by the triangle of objectives set out in the Energy Industry Act (EnWG), which consists of the goals of security of supply, competitiveness and environmental compatibility. Other relevant regulations include, for example, the Renewable Energy Sources Act (EEG), which promotes electricity generation from renewable energy sources, and the Combined Heat and Power Act (KWKG), which promotes combined heat and power plants. In addition to the federal laws, there are numerous legal ordinances, such as the Incentive Regulation Ordinance (ARegV) and the Electricity and Gas Grid Charging and Grid Access Ordinances (StromNZV and GasNZV), which contribute to further specification and more detailed content.

ii Regulated activities

Network operation

The commencement of operation of an energy supply network requires prior approval by the authority responsible under state law. If the applicant brings with him or her the personnel, technical and economic capacity and also possesses the necessary reliability, he or she has a legal right to be granted a permit in accordance with Section 4 (2) Sentence 1 EnWG. For the operation of a transport network (this includes all transmission networks), the newly inserted provisions of Sections 4a to 4d EnWG require certification by the BNetzA. The aim of the certification procedure is to ensure that the network operator complies with the unbundling or organisational requirements.

Generation and supply

Pursuant to the Federal Emission Control Act (BImSchG), plants that harm the environment or endanger their neighbourhood require a permit. Due to the concentration effect, the permissibility of the power generation plant under building planning and building regulations is also examined as part of the emission control permit. Since the German government has decided to phase out nuclear energy by 2022, commercial nuclear power plants will no longer be licensed.

Under the Coal Phase-out Act passed in July 2020 with the aim of phasing out electricity generation from coal by 2038, lignite-fired power plants are to be decommissioned via contractual agreements with operators. The EU Commission's approval for lignite-fired power plants under state aid law is still pending. The hard coal-fired power plants are to be decommissioned in the period up to 2026 via tendering procedures, for which the respective operators will be financially compensated. As an incentive for early decommissioning, the respective maximum prices will decline. If the defined phase-out path is not achieved by 2024, power plants will be decommissioned by law.

Regarding the first-time commencement and full termination of the supply of energy to household customers, the energy supply companies are exclusively subject to a notification obligation in relation to the BNetzA.

iii Ownership and market access restrictions

If a TSO or its owner is controlled by one or more persons from a country that is not a member of the European Union (EU) or of the European Economic Area (EEA), the grid operator will only be certified by BNetzA if, in addition to compliance with the unbundling rules, BMWi confirms that the certification does not endanger the security of the electricity and gas supply of Germany or of the EU.

Under general foreign investment rules, BMWi may prohibit on the grounds of public policy or national security the acquisition by a non-EU or non-EEA investor of 25 per cent or more of the voting rights in a German company or asset. For certain critical infrastructure, the threshold is 10 per cent. In the energy sector, this relates among other things, to infrastructures that supply 500,000 persons or more with electricity, gas, fuel, heating oil or district heating or generation assets with more than 420MW installed capacity. The rules will be further tightened during summer 2020, to reflect recent EU legislation.

iv Transfers of control and assignments

The transfer of regulated assets (i.e., network assets) is not subject to any sector-specific restrictions. However, network operators have to inform the regulatory authority about transfers, mergers or the splitting of grid assets. In the case of a transfer of network assets, part of the revenue cap is transferred with the assets.

The acquirer of transmission assets must comply with the unbundling rules. TSOs have to inform BNetzA of any intended transactions that may require a reassessment of their certification, particularly in the case of a planned takeover or participation by an investor from outside the EU or EEA.

Any transfer of control or decisive influence must be notified for merger clearance to BKartA or to the European Commission if certain thresholds are exceeded. A merger will be cleared if it does not significantly impede effective competition, in particular by creating or strengthening a dominant position. BKartA decides within one month of notification or, if an in-depth investigation is initiated, within an additional four months. The European Commission has a maximum of 135 working days in which to carry out an in-depth investigation to review a merger (or a maximum of 160 working days if remedies are offered).

Transmission/transportation and distribution services

i Vertical integration and unbundling

In Germany, the stages of unbundling are set out in the EnWG (Sections 8 to 10 EnWG). The EnWG provides measures for unbundling in terms of accounting, information, organisation and corporate law, which are aimed in particular at vertically integrated energy utilities with a monopoly position. The aim is to enable neutral network operation.

Transmission system operators (TSOs)

As a result of the transposition of Directive 2009/72/EC of the Third Internal Energy Market Package for Electricity and Gas into the EnWG, TSOs can choose between three alternative unbundling models: ownership unbundling (OU), designation of an independent system operator (ISO) or an independent transmission operator (ITO).

In German practice, these provisions led to extensive sales of network operators by the integrated energy utilities E.ON, RWE and Vattenfall. As a result, TenneT TSO (formerly E.ON) and 50Hertz Transmission (formerly Vattenfall) are now ownership unbundled transmission system operators. Only Amprion (formerly RWE) and TransnetBW, which is still owned by EnBW today, have been certified by the BNetzA as independent transmission system operators under the ITO model.

For transmission system operators, certification by the regulatory authority was regulated as part of the EU's Third Internal Energy Market Package. The certification serves to demonstrate the compliance of the transmission system operator with the unbundling or organisational requirements.

Due to the improper implementation of some provisions from the Third Internal Energy Market Package, the EU Commission took Germany to the European Court of Justice in July 2018. In addition to the requirements on the independence of the regulatory authorities, Germany is said to have incorrectly implemented several requirements on the unbundling model for the independent transmission operator (ITO). For example, the national requirements for the independence of the ITO's staff and management do not fully comply with these directives; furthermore, the definition of 'vertically integrated undertaking' incorrectly excludes activities outside the EU.

Distribution system operator (DSOs)

While network operation functions smoothly at the transmission network level, interconnections still prevail at the regional and local network level. This is due to the exemption regulations in place in Germany, which provide for more relaxed rules for DSOs with fewer than 100,000 grid-connected customers.

This regulation was initially introduced to protect small network operators from being overburdened by bureaucracy. However, since around 90 per cent of electricity and 95 per cent of gas distribution system operators in Germany fall under this de minimis rule, a large proportion of system operators are exempt from the statutory regulations on the legal and operational separation of network and sales.

ii Transmission/transportation and distribution access

In Germany, grid access is regulated by the EnWG and supervised by the BNetzA. Accordingly, energy supply network operators must grant non-discriminatory grid access to all network users who either want to feed energy into the network or purchase energy from it (downstream network operators, generators, end consumers and suppliers) in accordance with objectively justified criteria. From a civil law perspective, grid access under German energy law is implemented by means of a claim by the market participant against the network operator for shared use of the electricity and gas networks.

The network usage contract or supplier framework agreement governs the network operator's obligation to make the network available to the network user on a non-discriminatory basis for the purpose of drawing off or feeding in electricity in return for a fee payable by the network user. The network user is usually a supplier, but can also be any end consumer. The contracts are based on a model network access contract developed by the BNetzA. As a rule, residential customers do not conclude their own network access contract. They have an all-inclusive contractual relationship with their supplier, that handles network use for its customers via the supplier framework agreement with the network operator.

The entry-exit model will be introduced for access to gas transport networks. Network operators will be obliged to cooperate in order to enable gas transport in accordance with the 'two-contract principle between customers and network operators. Within each of two gas market areas in Germany (GASPOOL and NetConnect Germany), gas can be transported and traded across networks without physical restrictions, including at virtual trading points.

According to the Network Development Plan for Electricity (NEP) for onshore transmission grid expansion published by the TSOs in February 2021, the share of renewable energy in relation to gross electricity consumption is between 70 and 74 per cent in 2035 and 76 per cent in 2040. These predictions assume an installed capacity of renewable energy of between 233 and 261GW in 2035 and 268GW in 2040. As in the previous NEPs, this shows that the advancing energy transition will result in a higher demand for electricity transport within Germany.

In order to ensure a stable and secure power supply in Germany in the future, high-performance direct current lines such as SuedLink must be used. SuedLink is the name of a corridor planned by the transmission system operators TenneT TSO and TransnetBW for the construction of direct current lines within the framework of the NEP of the Federal Republic of Germany. The SuedLink is intended to transport offshore wind power from the North Sea to the southern German conurbations on the Main and Neckar rivers, respectively. The project will be implemented as an underground cable with a capacity of up to 4GW. Commissioning is planned for 2026.

iii Rates

Within incentive regulation, the BNetzA and the competent state regulatory authorities set the network operator's individual annual revenue cap for each year of the five-year regulatory period, taking into account individual and industry-specific efficiency targets and an allowable return on equity set by the BNetzA. For the third regulatory period (gas: 2018 to 2022, electricity: 2019 to 2023), the BNetzA has set the permissible return on equity at 6.91 per cent before taxes for new installations and at 5.12 per cent before taxes for old installations. The approved revenues will enable the company to fulfil its duties as a network operator.

In order to achieve climate targets efficiently and in a socially responsible manner in the heating and transport sectors as well, national emissions trading was introduced for these sectors on 1 January 2021. The BEHG, which was passed in December 2019, obliges fuel distributors to purchase emission allowances for fuel emissions and surrender them to the national emissions trading registry of the German Emissions Trading Authority (DEHSt). To protect industry from carbon leakage, according to the German government's Carbon Leakage Ordinance of 31 March 2021, companies are to be given the option of financial compensation if they suffer disadvantages in international competition as a result of CO2 pricing in the heat and transport sectors.

Companies that produce and use green hydrogen could be fully or largely exempt from paying the EEG levy under the EEG 2021. Section 93 of the EEG 2021 authorises the German government to issue an ordinance without the approval of the Bundesrat to regulate requirements for the production of green hydrogen. Among other things, Section 69b EEG 2021 already stipulates that the entitlement to payment of the EEG surcharge is reduced to zero if electricity is used to produce green hydrogen. The complete EEG apportionment exemption for green hydrogen is therefore initially limited to 1 January 2030. By then, the Federal Ministry of Economics assumes that the market ramp-up will be complete.

The Xgen productivity factor for German gas network operators, confirmed by the Federal Court of Justice (BGH) on 26 January 2021, shows the development of the network sector's productivity in relation to the rest of the economy. However, it is also intended to serve as an incentive to demand efficiency from individual network operators in relation to other network operators. In addition, Xgen reflects a cost reduction objective that must be met regardless of the conditions of the individual network operator. After the Xgen had been 1.5 per cent and 1.25 per cent, respectively, during the first two regulatory periods, it was set at 0.49 per cent by the BNetzA during the third regulatory period (2018 to 2022).

iv Security and technology restrictions

There are no specific restrictions on technology transfer for the energy sector.

The IT security catalogue published by the BNetzA in consultation with the German Federal Office for Information Security (BSI) in August 2015 obliges electricity and gas network operators to establish an information security management system (ISMS) in accordance with DIN EN ISO/IEC 27001 and certify it. The IT Security Catalogue for Energy Systems of December 2018 regulates the same obligations for energy system operators.

Operators of energy supply networks must submit a report to the BNetzA by 30 April of each year on the supply interruptions that have occurred in their network. In the report, the network operator must outline the measures taken as a result of the disruption to prevent future supply disruptions.

Energy markets

i Development of energy markets

The BNetzA's power plant list maps the power generation market in Germany. According to this list, generation plants with a total net nominal capacity of 229.2GW are currently installed (January 2021). Of the net nominal capacity, a share of around 127.7GW is attributable to renewable energies.

In Germany, electricity is traded both on exchanges, such as the European Energy Exchange (EEX), and bilaterally (OTC trading). While most electricity volumes in Germany are not sold on exchanges but in OTC trading (i.e., in over-the-counter, mostly long-term direct contracts between producers and buyers), power exchanges are where the remaining volumes are traded. Since, in contrast to direct OTC trading between two contracting parties, exchange trading takes place between various market-experienced and highly liquid trading partners, the power exchange also forms a kind of clearing house that prevents payment defaults.

EEX is an energy exchange based in Leipzig, Germany, whose trading objects consist of energy and energy-related products. As an institution under public law, EEX (or the exchange itself) is subject to the German Stock Exchange Act (BörsG). The operating company of the exchange, on the other hand, operates as a stock corporation under private law. Energy is traded on EEX either on the longer-term futures market or on the short-term spot market.

The 2017 amendment to the GasNZV required transmission system operators to form a single Germany-wide market area, Trading Hub Europe (THE), from the two existing market areas NetConnect Germany (NCG) and GASPOOL by 1 April 2022 at the latest. The implementation is planned for 1 October 2021. EEX will enable trading of gas products for the new German market area THE within the existing NCG order books. In order to make the technical connection as simple as possible for all trading participants and, at the same time, to avoid a division of liquidity in German gas trading, EEX trading participants can already trade THE futures within the current EEX NCG futures contracts.

ii Energy market rules and regulation

With the exception of the natural monopoly of the transmission system operators, Germany has a fully liberalised energy market. To ensure that network operators do not exploit their monopoly position to their advantage, the charges for the use of the networks (network usage charges) are regulated by the state through the BNetzA. Since 1 January 2009, with the entry into force of the ARegV, network usage charges have been subject to incentive regulation, which is intended to encourage operators to reduce costs and increase efficiency. Under incentive regulation, network operators are given individual, efficiency-based revenue caps.

Since, in contrast to direct OTC trading between two contracting parties, exchange trading takes place between various trading partners who are experienced in the market and highly liquid, the EEX energy exchange also forms a kind of clearing house that prevents payment defaults. As the exchange supervisory authority, the Saxon State Ministry of Economics, Labour and Transport performs its duties in accordance with the provisions of the BörsG. On the one hand, it is responsible for supervising compliance with the regulations and orders under stock exchange law (legal supervision); on the other hand, it ensures that trading on the stock exchange is conducted fairly and that stock exchange transactions are carried out properly (market supervision).

To ensure that wholesale prices are formed in line with competition, the BNetzA and the BKartA jointly monitor wholesale electricity and gas trading in the Market Transparency Unit. The basis for joint market monitoring is the trading and fundamental data reported by market participants.

iii Contracts for sale of energy

Bilateral contracting dominates German wholesale energy trading. Unlike open exchange trading, however, the prices and volumes traded are known only to market participants. Since there are hardly any regulatory requirements other than the provisions of the German Civil Code and 'good customs', OTC trading is susceptible to manipulation. The BNetzA's task is therefore to ensure transparent and fair wholesale energy trading. It monitors the German energy market in accordance with the REMIT Regulation of 2011. 'REMIT' is short for 'Registration and Reporting Requirements for Wholesale Energy Market Integrity and Transparency' and serves to detect and prevent market manipulation and insider trading in wholesale energy trading.

Under the Basic Electricity and Gas Supply Ordinance from 2006, the basic supplier has the right to make corresponding price increases to the end customer in the event of its own increased procurement costs due to higher sovereign charges. At the same time, however, there is also an obligation to include lower procurement costs in its calculations, taking into account its future charges in the following year.

iv Market developments

Primary energy consumption in Germany fell by 8.7 per cent year on year to 11,691 petajoules (PJ) in 2020. The noticeable decline was primarily due to the macroeconomic and sectoral effects of the covid-19 pandemic. In addition, the continued steady increase in energy efficiency, substitutions in the energy mix by renewables, economic effects and the comparatively mild weather caused additional energy savings.

According to the 2020 monitoring report on developments in the German electricity and gas markets published by the Federal Cartel Office and the BNetzA in January 2021, market concentration in electricity generation and first-time electricity sales has declined continuously in recent years. However, RWE remains the market leader with 26 per cent, far ahead of LEAG (16.2 per cent), (EnBW 12.7 per cent), Vattenfall (6.4 per cent) and E.ON (8.8 per cent).

In its 2019 decision, the EU Commission approved the takeover of RWE subsidiary Innogy by energy group E.ON. E.ON and RWE had announced plans for their realignment on the German energy market in March 2018. Through them, E.ON, in future without its own power plants, is to become primarily an electricity and gas supplier and RWE primarily an electricity producer and wholesaler. In addition, RWE will receive a 16.7 per cent stake in E.ON as part of the deal. Innogy will be broken up in the process: while E.ON will receive the grids and the end-customer business, RWE will retain Innogy's renewables business and also take over this division from E.ON.

Renewable energy and conservation

i Development of renewable energy

German renewable electricity sources include wind power, solar power, hydropower and biomass, in that order. The electricity mix in Germany in the first half of 2020 includes 55.8 per cent renewable energy. As recently as 2019, this share was around 46 per cent.

Primary energy consumption of renewables increased by 3.0 per cent year-on-year to 1,962PJ in 2020. Wind energy (on- and offshore in total) recorded an increase of 7 per cent, and solar energy an increase of 9 per cent. Geothermal energy saw an 8 per cent increase in consumption. Only hydropower and biogenic waste showed declines: -5 per cent and -1 per cent, respectively. Renewable energies as a whole covered 16.8 per cent of Germany's primary energy consumption in 2020.

Electricity generation from renewable energies is mainly subsidised under the EEG. A fundamentally amended EEG 2021 came into force on 1 January 2021. Based on a forecast gross electricity consumption of 580 terawatt hours, the target of 65 per cent renewable energies in the electricity sector in 2030 is now anchored in expansion and electricity quantity paths for the first time. To this end, the tender volumes for the individual renewable energies will be clearly and transparently defined. In addition, the EEG enables financial participation by municipalities in the expansion of onshore wind, a follow-up regulation for plants that have been subsidised, a levy exemption for green hydrogen and a practicable tenant electricity model.

The expansion of offshore wind energy is governed by the law of the same name (WindSeeG), which was amended in 2020. The amendment to the WindSeeG came into force on 10 December 2020.

The accelerated development of a nationwide charging and line infrastructure for electromobility in buildings is governed by the Building Electromobility Infrastructure Act (GEIG), which was passed on 11 February 2021. To this end, the GEIG obliges every building owner to equip each parking space with line infrastructure when constructing a new residential building with more than 10 parking spaces. When constructing a new non-residential building with more than 10 parking spaces, initially only every fifth parking space must be equipped and at least one charging point must be installed, regardless of the number of parking spaces.

ii Energy efficiency and conservation

The German government is pursuing the goal of making the German economy the most energy-efficient economy in the world. In its Energy Efficiency Strategy 2050 at the end of 2019, the German government therefore set a target, among other things, of reducing primary energy consumption by 30 per cent by 2030 compared with 2008. It also bundles the German government's measures needed to achieve this in a National Action Plan on Energy Efficiency (NAPE 2.0).

One essential tool for increasing energy efficiency is cogeneration. With the latest amendment to the Combined Heat and Power Act (KWKG 2020), the German government is supporting the coal phase-out. CHP plants must adapt to an electricity market that is increasingly characterised by volatile feed-in of renewable energies. The KWKG amendment sets incentives for CHP plants to respond more strongly to market signals in the future, make their operation more flexible and decarbonise their heat supply.

With the GEG, which came into force on 1 November 2020, the German government has standardised and simplified energy-saving legislation in the building sector. The Act brings together the Energy Saving Ordinance, the Energy Saving Act and the Renewable Energies Heat Act. It creates a uniform, coordinated set of regulations for the energy requirements for new buildings, for existing buildings and for the use of renewable energies to supply heating and cooling to buildings. Key innovations include a fundamental ban on the installation of oil-fired heating systems from 2026 and the introduction of an innovation clause.

iii Technological developments

With the National Hydrogen Strategy adopted on 10 June 2020, the German government is creating a framework for action for the future production, transport, use and further use of hydrogen and thus for corresponding innovations and investments. It also defines necessary steps to achieve climate targets, create new value chains for the German economy and further develop international energy policy cooperation. The technology-open, highly innovative approaches to production, transport and use in the field of hydrogen technology are funded by the German Federal Ministry of Education and Research (BMBF). The focus is on electrolysis, methane pyrolysis, artificial photosynthesis and fuel cells. More than €300 million will be available for this purpose until 2023 from the Climate Fund alone. In order to promote the market ramp-up, a draft law regulating hydrogen infrastructure was introduced in February 2021.

The further development of electromobility is a forward-looking topic for German industry. There are currently 60 electric vehicle models from German manufacturers on the market that are charged with electricity at around 24,000 publicly accessible charging points (as of June 2020). One million electric vehicles will be on Germany's roads by 2022. To continue making the use of electric vehicles more attractive, the German government has decided to provide additional impetus for electromobility. The overall package consists of temporary purchase incentives (until the end of 2025), further funding for the expansion of the charging infrastructure, additional efforts in the public procurement of electric vehicles, and tax measures.

The Act on the Digitisation of the Energy Transition, passed by the German Bundestag in June 2016, set the starting signal for smart grids, smart meters and smart homes in Germany. This will enable the digital infrastructure to connect more than 1.5 million electricity generators and large consumers. At the centre is the introduction of smart metering systems. They serve as a communication platform to make the power supply system fit for energy use.

The year in review

On 1 January 2021, the fundamentally amended EEG 2021 came into force, with which the legislator submitted a plan for the further implementation of the energy transition through the accelerated expansion of renewable energies. As a result, individual brakes on the German energy turnaround are being eased through practicable solutions such as the connection rule for plants that have been subsidised, the tenant electricity model or the EEG surcharge privileges.

Germany's phase-out of coal-fired power generation by 2038 at the latest was decided when the Coal Phase-out Act came into force on 14 August 2020. While the shutdown of the large lignite-fired power plants is regulated by individually legally defined shutdown dates and a public law contract between the operators and the Federal Republic, tenders and the statutory reduction apply to hard-coal plants and smaller lignite-fired power plants.

With the latest amendment to the Combined Heat and Power Act (KWKG 2020), the German government is supporting the coal phase-out. It sets incentives for these plants to respond more strongly to market signals in the future, to make their operation more flexible and to decarbonise their heat supply.

Germany is currently focusing on the conversion of its energy system, with hydrogen playing a key role.

With the GEG, which came into force on 1 November 2020, the German government has standardised and simplified energy-saving legislation in the building sector. The GEG thus provides new impetus for the use of innovative approaches in energy-efficient construction.

As a further key component of the German government's package of measures to achieve the climate targets for 2030, the national emissions trading system for the heating and transport sectors started on 1 January 2021.

Conclusions and outlook

The implementation of the higher EU 2030 climate target of 55 per cent greenhouse gas reductions means that the German 2030 climate target must also be raised – to reduce greenhouse gas emissions by at least 65 per cent compared to 1990. Within the context of the consequences of the covid-19 pandemic, the German government must pay strict attention to the ecological impacts when rebuilding the German economy in order to enable a sustainable economic and energy system for Germany. Accelerating the developments to date in coal phase-out, renewable energy expansion, CO2 pricing, energy retrofits, market ramp-up of electromobility, hydrogen and CO2-neutral industrial technologies is essential in this regard.

The challenge for the German energy transition is to create security of supply and grid stability with an energy system based on renewable energy. Above all, the considerable hurdles with regard to the expansion of the power transmission grid and energy storage must be removed and potential improvements exploited.

The gradual shutdown of coal-fired power plants and Germany's planned phase-out of lignite and hard coal by 2038 mean that electricity increasingly has to be transported over long distances. In order to eliminate bottlenecks in the German electricity transmission network, which has not yet been fully developed, the Federal Requirements Plan Act passed by the Bundestag on 28 January 2021 defines the planned extra-high voltage lines for which there is an urgent need. Due to the delays in recent years, a clear united stance at all levels and a visible commitment to realising the grid expansion as quickly as possible are of great importance. Above all, it is important to further optimise planning and approval procedures and to ensure that the authorities are equipped with sufficient expert personnel.

Electrolysis offers a promising storage technology for Germany. Although hydrogen technology is being promoted in Germany with the funding guideline 'International Future Laboratories Green Hydrogen' published in February 2021 and the National Hydrogen Strategy from June 2020, the current German legal framework does not yet include a sustainable perspective for investing in energy storage. In addition, regulatory framework conditions must be created to ensure non-discriminatory access to the market and grids for this storage option. The objective of the draft legislation on the development of a hydrogen infrastructure, which was approved by the German cabinet on 10 February 2021, is therefore to incorporate various forms of hydrogen-related infrastructure use into the existing EnWG quickly and with legal certainty.

The compensation payments to operators of large lignite-fired power plants to promote the early closure of their power plants as part of the German coal phase-out up to 2038 remain controversial. The European Commission is examining whether these are in line with EU state aid rules in its investigation launched on 2 March 2021. The European Commission expresses concerns about the adequacy of the compensation payments, and whether the compensation of operators for lost profits extending so far into the future could be considered a necessary minimum. The decision of the European Commission remains to be seen.

Footnotes

1 Boris Scholtka is a partner, Eric Holger Glattfeld is a director and Friederike Frizen is a senior manager at Ernst & Young Law GmbH.

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