Germany adopts new capacity framework for 11 GW of dispatchable electricity capacity

Background:

On 10 July 2026, the German Parliament adopted the Electricity Supply Security and Capacity Act (Strom-Versorgungssicherheits- und Kapazitätsgesetz) (“StromVKG”). Publication in the Federal Law Gazette and approval by the European Commission under EU State aid rules remain outstanding.

The legislation follows several years of debate over how Germany should maintain security of supply as coal-fired and nuclear generation leave the market and the share of intermittent renewable electricity continues to increase.

Germany has traditionally relied on an energy-only market, in which power plants are primarily remunerated for the electricity they sell. The StromVKG introduces an additional payment for maintaining secured capacity that can be made available during periods of low renewable generation or electricity scarcity. 

The StromVKG is designed to establish a capacity market on an accelerated timeline, ensuring that sufficient firm capacity is available to meet electricity demand from 2031.The StromVKG is, however, intended as an interim measure. A Capacity Market Act (Gesetz zum Kapazitätsmarkt) is planned for 2027, which is intended to set out the detailed rules for the capacity market from 2032 onwards and the levy mechanism envisaged for its financing.

How the new capacity framework works:

The StromVKG introduces a competitive auction process administered by the German Federal Network Agency (Bundesnetzagentur).

Successful bidders will undertake to make a specified amount of derated capacity available during a defined commitment period. Derated capacity means the nominal capacity of a facility adjusted by a technology-specific factor reflecting its expected contribution to security of supply.

In return, successful projects will receive an annual capacity payment from the relevant transmission system operator. The payment will supplement revenues earned through participation in the electricity market rather than replacing them.

The StromVKG provides for the auction of capacity in several stages:

• two auctions for long-term capacity of 4.5 GW each, scheduled for 8 September and 29 December 2026; 
• one auction for 2 GW of generation capacity, scheduled for 18 May 2027; and
• two auctions for additional required capacity, scheduled for 1 December 2027 and 1 October 2029.

The three initial auctions comprise a total volume of 11 GW of new capacity and primarily target new facilities and provide for a 15-year commitment period. The two subsequent auctions are intended to be more technology-neutral and may also be open to existing generation, battery storage, flexible demand and aggregated flexibility. The precise auction volumes for these two subsequent auctions will be determined by the German Federal Network Agency on the basis of the overall capacity requirement. Bidders can bid for commitment periods of one, seven or fifteen years.

Projects will generally be ranked according to their bid value in EUR per MW of derated capacity per year, starting with the lowest bid. The maximum bid value for the initial long-term and generation capacity auctions is EUR 244,000 per MW per year.

Successful projects will be subject to continuing availability and performance obligations. Insufficient availability may result in reduced remuneration, compensation payments or penalties, while over-performance may result in additional payments.

The law also provides for peak-price compensation. Where spot electricity prices exceed a specified strike price, successful operators must pay part of the excess revenue to the relevant transmission system operator. The mechanism is intended to limit excessive returns during scarcity periods while incentivising facilities to generate when electricity is most needed.

Key Requirements for auction participation:

The first long-term capacity auctions are formally open to different technologies but include enhanced technical requirements.

Eligible facilities must be capable of supplying electricity for at least ten consecutive hours at 80% of their installed capacity. Energy-limited technologies must be capable of meeting the same requirement again following an interruption of no more than three hours.

These requirements are likely to favour flexible gas-fired power plants, which can generally provide continuous output for longer periods. Battery storage may participate in principle, but its competitiveness will depend on the duration and configuration of the project, the applicable derating factor and the cost of meeting the recovery requirement.

Participants must also satisfy requirements relating to technical capability, grid connection, financial standing, emissions performance and project delivery. Double funding under other support schemes, including the German Renewable Energy Sources Act and the Combined Heat and Power Act, is generally excluded.

New thermal generation receiving a 15-year capacity contract must be designed so that it can subsequently be converted to hydrogen operation. In addition, facilities with a 15-year commitment period must be capable of climate-neutral operation by 2045.

Certain projects will also be subject to product-origin requirements. Key components must generally be manufactured in the EU or in countries that have entered into a free trade agreement or customs union with the EU.

These requirements will need to be considered at an early stage in project development and reflected in procurement, EPC, financing and supply-chain arrangements.

Key changes compared with the April draft:

The final legislation contains several important amendments following industry consultation and parliamentary negotiations.

First, the long-duration requirement has been relaxed. Facilities must now supply electricity for ten consecutive hours at 80%, rather than 100%, of installed capacity. The permitted recovery period for energy-limited technologies has also been extended from one hour to three hours. These changes improve the position of battery storage and other energy-limited technologies. However, the ten-hour requirement remains demanding and may still require significant oversizing or hybrid project configurations.

Second, the maximum bid value has been increased from EUR 173,000 to EUR 244,000 per MW of derated capacity per year. The increase reflects higher investment and financing costs as well as additional technical requirements, including hydrogen-readiness and product-origin obligations. It is intended to reduce the risk that the initial auctions attract insufficient eligible bids.

Third, the regional steering mechanism has been revised. Projects located in the grid-technical south may benefit from a EUR 16,000 per MW adjustment when bids are ranked. However, this adjustment only applies once projects in the grid-technical north account for one third of the relevant long-term auction volume. The mechanism is intended to encourage investment in areas with a particularly high system need while preserving a minimum share for projects in northern Germany.

Finally, certain security and penalty provisions have been adjusted. In particular, the operational security will only need to be provided before commissioning rather than immediately following an award. The penalty for failure to realise a project has also been reduced. These changes should reduce the amount of capital tied up during project development and may make participation more accessible to a broader range of developers.

Outlook and implications for project developers and investors:

For project developers and investors, the StromVKG creates a new potential revenue stream for dispatchable generation projects. A 15-year capacity payment may improve revenue visibility and support financing. New gas-fired power plants are likely to be particularly well placed in the initial long-term capacity auctions. 

The revised duration requirements improve the prospects of battery storage projects, but storage developers will need to assess carefully whether their projects can satisfy the ten-hour requirement at a competitive cost.

The timetable is highly ambitious. The first auction is scheduled for 8 September 2026, although approval by the European Commission under EU State aid rules remains outstanding. The Bundesnetzagentur may prepare and launch the auction process before approval is granted, but final awards cannot be made until the Commission has authorised the scheme.

Prospective bidders should therefore assess eligibility and begin preparing without delay. In particular, developers should review technical requirements, grid connection and permitting status, supply-chain compliance, financing arrangements and the contractual allocation of availability and penalty risks.

The StromVKG will also provide an important test case for the design of Germany’s broader capacity mechanism from 2032. That future framework will need to determine how much capacity should be procured, how generation, storage, flexible demand and cross-border resources can compete on comparable terms, and how the costs of the mechanism should be allocated.

The initial StromVKG auctions are therefore likely to shape not only the development of individual projects, but also the future architecture of the German electricity market.