How is Germany increasing flexibility in the power system?

Grid reliability and flexibility options

Central to Germany’s transition to a zero-carbon energy system with low-cost renewables is the ability to maintain power system reliability at all times. In practice, this entails ensuring that supply and demand match in real time, 24/7, throughout the year. Achieving this in an electricity system with high shares of wind and solar PV requires power system flexibility. 

The rise of electric vehicles, heat pumps and other large sources of electricity demand presents new opportunities for flexibility. Research suggests that these flexible resources can not only provide a valuable service to the energy system, they can also help keep costs low for households and businesses (see: Agora & FfE (2023)). Five major sources of flexibility will help Germany achieve its energy and climate objectives:

1. Grid expansion and cross-national grid interconnections: Interconnected and smart grids enable regions to bridge periods of low supply (or high prices) with more abundant supply (or cheaper electricity) from elsewhere.

2. Dispatchable power plants: Having dispatchable sources of power supply such as biomass, reservoir hydro, or others can help overcome short-term energy supply needs. Since periods of scarcity are generally associated with higher prices, such dispatchable suppliers can often earn sufficient revenues despite only operating part of the time.

3. Curtailment and remote control: When supply from variable renewables like wind and solar exceeds grid capacity, electricity may need to be curtailed. This requires technology  that enables the grid operator to remotely control the power output of most power plants.

4. Demand-side flexibility: This refers to the flexibility provided by customer-sited demand, including flexible operation of heat pumps, smart electric vehicle charging and hot water storage, as well as demand flexibility in the commercial and industrial sectors. 

5. Storage: Storage in all its forms – mechanical, chemical (such as hydrogen), electrochemical (batteries) and thermal – can balance supply and demand during periods of surplus or shortage.

A strong and highly interconnected electricity grid is one of the key flexibility assets in Germany – and Europe. No other region of the world has a comparable cross-national grid as robust, reliable and interconnected as that in Europe. Since this grid provides a reliable flexibility resource, other flexibility options are less important in the German and European context. This is one reason the discussion of grid-scale storage technologies has only recently entered the policy debate in Germany in a serious way, while already more pronounced in other countries. 

Grid expansion and building a smarter grid (via digitalisation) at national and European levels will continue in the coming decades. According to plans drawn up by the four German transmission system operators, EUR 301 billion need to be invested in the German transmission grid by 2045. While this figure seems substantial, annual investments are relatively modest when spread across a service lifetime of up to 80 years (ENTSO-E (2012)). Grid expansion is thus comparatively the most cost-effective flexibility option. By expanding the German transmission grid and improving the transmission capacity from the north (which has most of the wind energy capacity) to the south (where most of the electricity demand arises), Germany can also reduce re-dispatch costs. 

At the same time, the European electricity grid is becoming increasingly interconnected. The EU has set an interconnection target of at least 15% by 2030.²⁹ Thanks to its central position within the European grid, Germany already benefits from substantial cross-border interconnections.

Dispatchable power plants operate flexibly and play an important role in balancing wind and solar fluctuations. The electricity output of these plants can be controlled and scheduled, unlike the “variable” nature of wind and solar generation. They include fossil fuel-based thermal power plants (coal, gas, nuclear) and some renewable energy-based technologies (biomass, hydro).

This flexibility is incentivised by the economic dispatch from power plants according to their short-term marginal costs. As the share of wind and solar power in Germany increases, so too do the “ramps” caused by millions of solar PV power plants starting to produce at the same time. Dispatchable power plants must react to this variation through quick start-up times, reducing minimum output to very low levels, and the ability to quickly ramp up and down. Although battery storage and demand-side flexibility will also provide these services, today, dispatchable power plants can often do so at lower costs.  

Gas-fired power plants are generally more flexible than coal plants (see: Agora (2017)), and thus align with Germany’s 2024 Power Plant Strategy to prioritise hydrogen-ready gas-fired power plants over other options being discussed internationally, such as ammonia-ready coal-fired power plants. 

Until 2035, hydrogen-ready gas-fired power plants will continue to use some fossil gas, reaching Germany via the gas network or the newly constructed liquefied natural gas terminals. After 2035, these power plants should run solely on green hydrogen, with low annual operating hours. As green hydrogen can be stored, these power plants are expected to play an important role by providing longer-term storage and additional flexibility. Policymakers in Germany are also taking steps to incentivise biogas producers to operate their plants more flexibly, by paying a flexibility bonus.³⁰

Shorter-term variability in generation will be primarily balanced via battery storage and demand-side flexibility (including sector coupling). Grid-scale batteries with very short start-up times and the capability to run very steep ramps will become an important asset in operating the German power system. 

Virtual power plants (VPPs) are virtual networks of small, decentralised energy sources – like solar PV, wind energy and batteries – coordinated via software to function as a single power source. VPPs stabilise power production from variable renewables and help balance supply and demand, regardless of the physical location of assets. Operators remotely control all units within the VPP. 

Aggregators – who aggregate electricity generated by many renewable energy producers to sell it on the German wholesale and ancillary service markets – are a prerequisite for VPPs. By linking many distributed generation units (often spanning different technologies), aggregators optimise their portfolios to increase revenues from electricity sales. 

Several companies in Germany operate VPPs, some of which aggregate thousands of household battery systems into a large-scale “virtual” battery capable of providing a range of services to the electricity system. 

Being able to remotely control the output of solar PV and wind plants is an important technical prerequisite for running a power plant with very high shares of wind and solar PV. German transmission system operators can in this way control and reduce or curtail the output of variable renewable energy sources. 

Germany introduced a  requirement to include remote control technology in solar PV and wind farms in 2009. However, this requirement only applied to power plants larger than 100 kW, as the cost of the technology was deemed to be disproportionately high for smaller-scale systems. However, this decision has led to the roll-out of 60 GW of small-scale rooftop solar PV in Germany’s system as of 2024, which cannot be remotely controlled and thus pose risks to system stability. Policymakers are now exploring ways to improve the flexible operation of these smaller assets. 

Germany is currently trying to reduce PV and wind curtailment by expanding the grid, thus also avoiding costs related to re-dispatch and counter-trading. While re-dispatch involves adjusting power plant output to manage congestion within a market zone, counter-trading adjusts cross-border electricity trades, both incurring costs for compensating generators and handling price differences between zones. However, with very high shares of solar PV and wind power in the system, curtailment will probably not be an exceptional but rather a standard feature of the future German power system. It will probably be cheaper to occasionally curtail excess electricity (from solar in particular) than to build out large-scale storage or grids to absorb it fully. For instance, in a net-zero scenario for Germany in 2045, larger amounts of solar PV are curtailed during summer weeks, as the power system and thus the share of solar PV is optimised for the winter when electricity demand is highest (see graphic below). In this scenario, curtailment in 2045 could increase to 48 TWh annually, around 5% of the total electricity demand (899 TWh).³¹ While curtailment levels may spike on specific days or weeks, the annual impact remains manageable and does not undermine renewables project bankability. 

Demand-side flexibility has long been overlooked by German policymakers. In the past, significant measures have only been taken in the industrial sector, which accounts for 50% of total electricity demand. Targeting large-scale consumers was thought to be more cost-efficient than introducing regulation and technical solutions for millions of individual households. Industrial consumers typically buy some of their electricity directly on the wholesale market. They are thus indirectly incentivised to adjust demand to electricity supply patterns reflected in price variations. 

Between 2013 and 2022, transmission system operators conducted demand response auctions (Abschaltbare Lasten), where large electricity consumers were compensated for reducing their demand. At the same time, these consumers benefited from lower grid fees for consistent electricity consumption throughout the day – an advantage that disincentivised flexibility provision and often outweighed market price fluctuations. However, since steady consumption is no longer as beneficial to the grid as it once was, and with the demand response programme ending in 2022, the Federal Network Agency (BNetzA) is now working on revising these privileges to better align with current energy system needs.

From an international perspective, Germany lags behind with regard to demand-side flexibility from residential consumers and smart meter adoption;³² regulatory and technical prerequisites are only just emerging. From 2025, electricity supply companies must offer time-of-use rates to residential customers. Previously, most supply companies and utilities only offered fixed-price options. At the same time, smart meter roll-out has been slow, with less than 5% of households equipped with them compared to over 90% in Sweden and Norway and an EU average of 60% as of the end of 2023.³³

Electricity storage systems will become increasingly important as the share of variable renewables increases further and other flexibility options (such as grid expansion) reach their limits. In Germany, most important storage options include pumped hydro (9 GW)) and battery storage (11 GW – 18 GWh storage capacity). Battery storage, as well as green hydrogen-based storage are likely to be most critical in the future, with other technologies – such as compressed air energy storage, flywheels and gravity storage – having a more limited market share. 

At the end of 2023, Germany’s Federal Ministry for Economic Affairs and Climate Action (BMWK) published the country’s first storage strategy, highlighting the importance of electricity storage to ensuring system flexibility and secure operation.^{34, 35} The strategy is intended to address regulatory bottlenecks, streamline approval processes and incentivise private investment in battery storage projects by enabling greater revenue stacking. It also prioritises the co-location of storage at wind and solar farms as well as the development of a circular economy for key battery materials such as lithium, cobalt and nickel.³⁶

Battery storage is essential for managing fluctuations in renewable energy production, particularly from wind and solar power. Storage systems help balance supply and demand, storing surplus energy and releasing it during peak demand. This reduces the need for conventional fossil fuel-based generation for back-up – a significant gain, given that the power sector accounted for over 50% of Germany’s total gas consumption in 2023 (approximately 45 bcm out of a total national consumption of 86 bcm).³⁷ 

With Germany working to reduce reliance on imported fossil gas following Russia’s invasion of Ukraine and disruptions to its fossil gas supply, adding storage can enhance energy security. Estimates suggest that Germany could have avoided 36 GWh of costly fossil gas-based power generation in June 2024 alone had it simply had an additional 2 GW of grid-scale battery storage.³⁸ 

Key to activating greater investment in battery storage is a revamped policy and regulatory framework. Germany’s strategy emphasises creating a stronger market framework for storage operators with a greater variety of products and trading strategies. Specifically, it is intended to enable batteries to earn revenue through multiple streams, such as energy trading, grid stabilisation services and participation in capacity markets.³⁹

Storage will be key to enabling Germany to better leverage its abundant wind and solar generation, which accounted for over 60% of total electricity generation in the first half of 2024. Currently, on very windy and sunny days, grid operators often resort to curtailment. Strategically adding storage across the power system, including onsite at wind and solar plants, can help reduce the volumes of electricity that are curtailed.⁴⁰

Currently, home battery storage dominates the battery market with around 6 GW installed capacity, corresponding to 85% of the battery market (see FIGURE BELOW). However, most household storage is underutilised for system services due to insufficient smart meter deployment and a lack of financial incentives like time-of-use electricity prices or time-differentiated feed-in tariffs. Instead, these systems are mainly used to increase self-consumption.⁴¹

Up until 2019, the storage sector was almost exclusively based on pumped hydro. However, recent growth in the deployment of battery storage has significantly increased available storage capacity.

Looking ahead, long-term forecasts on how Germany can achieve a climate-neutral energy system estimate that total battery storage capacity will reach around 500 GW by 2045 (including vehicle to grid).⁴²

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