Auction Design for Germany´s Power Station Strategy

Germany´s power station strategy of investing in hydrogen-ready gas-fired power plants requires subsidies; market and regulatory failures currently undermine the units´ anticipated future cash flows. Our proposed competitive procurement auction, designed to restore the revenue shortfall - the missing money - guarantees that the units will be built, ensuring a more sustainable and secure energy future for Germany. The procured product bundles physical, hydrogen-ready capacity with a financial option to deliver energy when prices are high. After conversion to hydrogen, a government hedge will be provided to cover the fuel cost difference to natural gas minus the carbon price. The design of the auctions should avoid locational preferences, letting expectations about future market incentives guide efficient location choices. Auctions can be conducted as open or sealed-bid auctions, and should use a pay-as-clear price rather than pay-as-bid to encourage more competitive bidding. A unit is affected by the future capacity mechanism and other market reforms. Our approach accommodates many capacity market mechanisms and interacts most smoothly with state-of-the-art energy and capacity markets.