Why Germany needs a power plant strategy
Germany is facing one of the biggest challenges in its energy policy: the legally enshrined phase-out of coal-fired power by 2038 at the latest will result in the loss of more than 30 gigawatts (GW) of secured capacity in the next few years. At the same time, a growing proportion of electricity generation comes from wind and solar energy, meaning from sources that naturally fluctuate. During so-called dark doldrums, which refers to periods without sufficient wind and solar power, part of the electricity demand must be covered by conventional power plants. Without the addition of new controllable power plant capacities, there is a real risk of supply shortages. The German government’s power plant strategy wants to address this problem: it aims to create the framework for building modern, flexible and, in the long term, climate-neutral power plants that can step in when renewable energies do not provide sufficient supply.
The issue is more relevant than ever: on 15 January 2026, the Federal Ministry for Economic Affairs and Energy (BMWE) announced a basic agreement with the European Commission on the key points of a new power plant strategy. According to this, the first tenders for new controllable capacities are to take place in 2026. For potential power plant operators, project developers and investors, now is the right time to best position themselves.
An energy-only market to a capacity market represents a paradigm shift
To understand the scope of the power plant strategy, it is worth taking a look at the architecture of the German electricity market. Until now, it has been based on the so-called energy-only market (EOM): power plant operators are remunerated exclusively for the electricity they generate and feed into the grid. A power plant that is on standby but not running does not generate any revenue.
However, in a system with a high proportion of renewable energies, this model is becoming increasingly problematic. Controllable power plants such as modern gas-fired power plants will have significantly fewer operating hours in the future. Their task will be to be available as a backup during periods of low wind and low sunlight. In a pure EOM, there is no economic incentive to build and maintain such power plants, as the revenues from the few hours of operation do not cover the high investment costs. This is where the capacity market comes in: it remunerates power plant operators not only for the electricity they supply, but also for keeping secure capacity available. This creates an investment framework that makes it economically feasible to build new power plants, even if they are rarely used.
The history of the power plant strategy from the traffic light coalition to its break-down
The traffic light coalition of the SPD, Greens and FDP had already identified the expansion of gas-fired power plants as the solution for stable electricity production. In February 2024, the coalition leaders agreed on the basic principles of a power plant strategy, which was finalised in July 2024 and incorporated into the draft Power Plant Safety Act (KWSG).
The KWSG provided for the tendering of a total of 12.5 GW of power plant capacity and 500 megawatts (MW) of long-term storage in two pillars. The first pillar included 5 GW of new hydrogen-compatible gas-fired power plants (so-called H₂-ready power plants), 2 GW of upgrades to existing plants to make them H₂-ready, 500 MW of pure hydrogen power plants (so-called “sprinters”) and 500 MW of long-term storage. The H₂-ready power plants were to switch to green or blue hydrogen by the eighth year of operation at the latest. The second pillar envisaged a further 5 GW of gas-fired power plants to ensure security of supply during periods of low wind and low sunlight. Both the investment costs and the difference in costs between hydrogen and natural gas for later hydrogen operation were to be subsidised. In order to reduce redispatch costs, locations in the so-called grid-technical south were to be supported in particular. Finally, a comprehensive, technology-neutral capacity mechanism was planned from 2028 onwards, into which the tendered power plants were to be integrated.
The consultation phase for the KWSG ran from 11 September to 23 October 2024. At the same time, the key points were discussed in advance with the European Commission, as the law required approval under state aid law.
The break-up of the traffic light coalition in November 2024 put a temporary end to the plans. Although a draft bill was submitted to the associations for consultation on 22 November 2024 and the then Federal Ministry for Economic Affairs and Climate Protection (BMWK) emphasised its urgency, it was not passed by the Bundestag. The first tenders planned for early 2025 were also cancelled.
Even under the traffic light coalition, there was criticism that the tender volume of 12.5 GW would not be sufficient in the long term. The Association of Municipal Companies (VKU) estimated the demand for at least 25 GW of new H₂-ready gas-fired power plants. In addition, the ambitious timetable and the still missing design of the capacity mechanism were questioned.
A new start under the grand coalition brings changes
Following the federal elections in February 2025 and the formation of a “grand coalition” between the CDU/CSU and SPD, the principle of discontinuity applies. This means that all unfinished legislative procedures from the previous legislative period are no longer valid. As a result, the draft KWSG has become obsolete.
However, the new government announced in its coalition agreement that it would swiftly revise its power plant strategy. Instead of the originally planned 12.5 GW, up to 20 GW of gas-fired power plant capacity is now to be built by 2030 – a more ambitious target. The tenders are to be technology-neutral, market-based and give priority to existing power plant locations and regional demand.
On 15 January 2026, the BMWE then reached an agreement in principle with the European Commission on the key points of the new power plant strategy. According to this, new controllable capacities of 12 GW are to be put out to tender by 2026. Of these, 10 GW are subject to a long-term criterion. These capacities must be able to generate electricity over a longer period of time. It is highly likely that these will be hydrogen-compatible gas-fired power plants. In addition, 2 GW of secured capacity will be put out to tender for various technologies, such as battery storage, small-scale plants and aggregated plants (pooling). The commissioned capacities are scheduled to go into operation by 2031 at the latest. All power plants must also be completely decarbonised by 2045 at the latest. To achieve this decarbonisation target, 2 GW are to be converted to hydrogen ahead of schedule by 2040 and a further 2 GW by 2043. Among other things, contracts for difference are planned for the additional fuel costs associated with early conversion. Further tenders are to follow in 2027 and 2029/2030. From 2027 onwards, tenders for a comprehensive capacity mechanism are also to be held. From 2032 onwards, this mechanism is intended to ensure that sufficient controllable capacity is available in the system. The overall use of power plants is to be decided efficiently via the electricity market on the basis of the merit order.
However, the new plans are also controversial. The amended state aid justification, which now focuses on security of supply rather than climate protection, is complicating negotiations with the European Commission. An expert opinion commissioned by Deutsche Umwelthilfe (German Environmental Aid) concludes that the strategy focused on gas-fired power plants could violate EU state aid law, as large battery storage facilities should also have been considered. In addition, the energy company 1KOMMA5° has lodged a complaint with the European Commission, as it considers the subsidies to be distortive of competition. Due to the existing agreement in principle, it is unlikely that the Commission will reject the strategy entirely. It is possible that the Commission will adjust the technology-neutral quota (currently 2 GW) once again at the expense of fixed gas capacities as part of the formal review process that will now follow. Of course, the European Court of Justice will have the final say if the Commission’s decisions are appealed. The plan to use reserve power plants to stabilise electricity prices is also the subject of heated debate. This would constitute a significant market intervention and jeopardise battery storage business models. In addition, the capacity mechanism is to be financed by a levy, about which little is known at this stage. Critics fear high costs for the system and for consumers.
What does this mean for companies?
The power plant strategy opens up considerable market potential for electricity suppliers, project developers and investors, but it also requires them to take decisive action. Specifically, companies should already be considering the following steps:
Securing locations: Since tenders are likely to address the grid suitability of locations, it can be assumed that there will be a clear focus on southern Germany in order to reduce redispatch costs. Those who can secure suitable locations – especially in the south, which is relevant in terms of grid technology, or in a regionally suitable corridor with reliable integration into the transmission grid – will gain a competitive advantage.
Permit planning: Although planning and approval procedures are to be accelerated, the lead time nevertheless requires tight project ramp management and early coordination with the authorities (emission control, water law, grid connection).
Securing core components and construction capacities: It is crucial for potential power plant operators to secure early access to the essential core components – in particular gas turbines, steam turbines, generators and transformers, including the associated ancillary equipment. The same applies to the availability of capacity at the relevant EPC companies (engineering, procurement and construction). As both OEMs (original equipment manufacturers) and EPC companies are currently operating in a pronounced seller’s or supplier’s market, delivery slots and construction capacity are limited. Companies should therefore reserve the necessary components and implementation capacities at an early stage of the project. In practice, capacities are usually reserved by concluding exclusivity agreements with OEMs and EPC contractors.
H₂ readiness: All power plants built as part of the strategy must be hydrogen-compatible. The technical design for later hydrogen operation should be integrated into the planning from the outset.
Financing structures: The tender design and funding conditions are not expected to be finalised until later this year. Nevertheless, it is advisable to start designing financing models and identifying potential funding sources now.
State aid and public procurement law compliance: The agreement in principle does not yet constitute final approval under state aid law. Companies should keep an eye on the state aid framework and structure their projects in such a way that they can participate in the tendering process in compliance with the rules. This also includes preparing for prequalification and tendering requirements. Companies should monitor publications on the Power Plant Safety Act, which will form the legal framework for the tenders.
Outlook
The political will is clear: the first power plant tenders are to take place in 2026. For this to succeed, the agreement must be implemented in law at short notice, meaning before the Bundestag’s summer recess, and finally approved by the European Commission. According to Federal Minister for Economic Affairs Katherina Reiche, the first contracts could then be awarded before this summer.
The specific design of the capacity mechanism remains open. It is no longer expected to start in 2027 as originally planned, but rather the relevant decisions are to be made in 2027 so that the mechanism will be operational from 2032. A central capacity mechanism based on the Belgian model is being discussed as a possible option.
One thing is certain: the power plant strategy is no longer a project in the distant future, but a concrete regulatory project requiring immediate action. Those who position themselves early on – in terms of locations, permits, OEM and EPC capacities, and financing – will be able to benefit from the upcoming tenders. The coming months will show whether legislators can keep to the ambitious schedule. Companies that want to become active in this market should closely monitor developments and start their preparations now in order to be able to participate successfully in the tenders.
