EU approves German capacity mechanism of up to €35 billion to secure electricity supply

The European Commission has approved, under EU State aid rules, a capacity mechanism for Germany available from 2031. This measure, with an estimated cost between €15.6 billion and €35.2 billion, aims to ensure sufficient capacity to produce, store or flexibly consume electricity, so that electricity production can consistently meet expected demand. Capacity mechanisms can play an important role ensuring security of supply as part of the transition to a decarbonised electricity system, and the measure includes requirements that will support climate neutrality by 2045 at the latest.
The German measure
Germany notified to the Commission a measure to ensure security of electricity supply in 2031.
Under this market-wide mechanism, the transmission system operator remunerates all the capacity needed to meet the reliability standard, which is a standard to ensure adequate security of supply. The reliability standard has been established based on the recent European Resource Adequacy Assessment 2025 carried out by the Agency for the Cooperation of Energy Regulators.
This capacity mechanism will be open to all technologies (generation technologies, storage and demand response) and to both existing and new capacity, as well as to cross-border capacity. Contracts will be signed for up to 15 years. The capacities will be selected in competitive auctions, for delivery starting in 2031. All supported capacity benefitting from 15-year contracts will be required to operate in a climate-neutral way by 2045 at the latest. All new gas-fired power plants bidding for a 15-year capacity contract must be hydrogen-ready, so they can switch in due course.
The first auctions will be organised in 2026 and in 2027, if undersubscription occurs. They will be reserved for additional long-term capacity, based in Germany. The subsequent auctions, to be organised in 2027 and 2029, will be open to all technologies and to both existing and additional capacities. Germany will also implement decarbonisation tenders to accelerate the decarbonisation of part of its gas-fired capacity via a switch to hydrogen, helping to offset a possible lock-in of natural gas. Germany will provide support for the switch from gas to hydrogen.
The measure is estimated to cost between €1 billion and €3 billion for 2031, subject to the auction results. From 2032 through 2045, annual costs are estimated to range between €0.9 billion and €2.3 billion.
The measure, other than the initial tenders reserved for additional capacity, will be open to foreign capacity located in a Member State that has a direct network connection with Germany.
The Commission’s assessment
The Commission assessed the German measure under EU State aid rules, in particular Article 107(3)(c) of the Treaty on the Functioning of the EU (‘TFEU’), which enables Member States to support the development of certain economic activities subject to certain conditions, and the Guidelines on State aid for climate, environmental protection and energy 2022 (‘CEEAG’). The Commission found that:
The measure is necessary and appropriate to achieve the objective pursued, in line with the EU Electricity Regulation.
The measure is proportionate as the level of the aid corresponds to the effective financing needs. In addition, the aid will be granted to projects selected through a transparent, non-discriminatory bidding process, with safeguards to ensure effective competition. Beneficiaries will compete based on the amount of aid requested to cover their price per unit of de-rated capacity per year for the projects. As a result, the measure has a limited impact on competition and trade between member States.
On this basis, the Commission approved the German measure under EU State aid rules.
Germany’s future capacity mechanism and decarbonisation tenders
In addition to the measure approved today by the Commission under EU State aid rules, Germany intends to introduce a structural capacity mechanism in 2027. This new measure is planned to more extensively address Germany’s security of supply concerns from 2032 onwards and will be covered by a separate budget. This future capacity mechanism is outside the scope of today’s Commission decision but is an important part of the package for delivering the investor certainty needed for security of supply.
Decarbonisation tenders for the switch of 2 GW of capacity from gas to hydrogen by 2040, will be carried out by 31 December 2027. Tenders for the switch of a further 2 GW of capacity by 2043 will be carried out between 2032 and 2035. This decarbonisation support is not covered by today’s decision and will be notified and assessed separately.
Background
The Commission’s 2022 CEEAG provide guidance on how the Commission assesses the compatibility of environmental protection, including climate protection, and energy aid measures which are subject to the notification requirement under Article 107(3)(c) TFEU.
The Guidelines create a flexible, fit-for-purpose enabling framework to help Member States provide the necessary support to reach the Clean Industrial Deal objectives in a targeted and cost-effective manner. The rules involve an alignment with the important EU’s goals and targets set out in the Clean Industrial Deal and with other recent regulatory changes in the energy and environmental areas and cater for the increased importance of climate protection. They include sections on energy efficiency measures, aid for clean mobility, infrastructure, circular economy, pollution reduction, protection and restoration of biodiversity, as well as measures to ensure security of energy supply, subject to certain conditions.
Capacity mechanisms have the important objective of ensuring security of electricity supply. Capacity mechanisms need to be well designed to ensure that they do not (i) lead to higher electricity prices for consumers, (ii) give undue advantages to certain energy operators, or (iii) hinder electricity flows across EU borders.
The EU Electricity Regulation establishes rules to ensure the functioning of the internal market for electricity and defines a framework for regularly assessing the forecast level of security of supply in the EU. Whenever a risk is identified, Member States need to review the functioning of electricity market, and consider removing the distortions, which may cause the risk. In case such approach is insufficient to address the identified risk, Member States may introduce a capacity mechanism, subject to design requirements to ensure cost-efficient, cleaner and proportionate measures to deliver security of electricity supply.