Gradual and Flexible Procurement: A Note on Germany's Power Station Strategy

We propose a novel approach to electricity capacity procurement based on robust economic theory and extensive experience. Our approach builds upon the current best practice but allows for more flexible and gradual government purchases. Using Germany's power station strategy as an example, we suggest gradual procurement in hourly auctions over three years, which effectively mitigates market power and allows fine product granularity in time and space. Moreover, it aligns with a rational buyer's purchase and risk management strategy by enabling the purchase of a blend of forward energy and energy options that vary by time and delivery location, tailored to the buyer's specific needs. By promoting efficient pricing, competition, and innovation through coordinated forward trading, the gradual and flexible approach also addresses the shortcomings of existing capacity mechanisms and forward markets as ACER and the European Commission identified.