Energy-only market · Glossary

An energy-only market is an electricity market design in which mainly the electrical energy actually delivered or taken off is traded and paid for. What is remunerated is the megawatt-hour of electricity. Merely being ready to provide capacity at a later point in time is not paid for. A power plant earns money when it sells electricity. A storage unit earns money when it takes in electricity cheaply and releases it later at a higher price. A flexible consumer benefits when it shifts its consumption into cheap hours or reduces it in expensive hours.

The difference between energy and capacity is fundamental. The megawatt-hour (MWh) is a quantity of energy. The megawatt (MW), by contrast, describes the ability to generate, store, feed in or consume electricity at a given moment. A comparison helps: a market can trade very many megawatt-hours efficiently over the year, just as a water pipe delivers a lot of water over the year. Nevertheless, flow can be lacking in a few critical hours, that is, reliably available capacity. This is exactly where the debate about the energy-only market begins.

Price formation

In the energy-only market, plants earn money mainly through wholesale prices, for example on the day-ahead market and in intraday trading. Prices are formed within a bidding zone from supply and demand. Plants with low short-term costs are dispatched first, more expensive ones follow as demand rises. This sequence is called the merit order. When there is a lot of wind and solar power, prices can become very low or even negative. When demand is high, renewable feed-in is low and flexible capacities are scarce, prices can rise sharply.

In Germany, this principle is anchored in law. Under Section 1a(1) of the Energy Industry Act (Energiewirtschaftsgesetz, EnWG), the electricity price is formed freely on the market according to competitive principles. The level of wholesale prices is not restricted by regulation. This does not rule out technical price limits of European market coupling. Under the ACER methodology, the reference maximum limit in single day-ahead coupling (SDAC) is +4,000 euros per MWh and the minimum limit is −500 euros per MWh. If prices reach the maximum limit, it is automatically raised by 500 euros per MWh in each case. In European intraday trading (SIDC), the limits are ±9,999 euros per MWh. These values are not a political cap on scarcity prices. They are technical guardrails set so high that in practice they are meant to apply only rarely.

Energy remuneration and capacity provision

Energy-only does not mean that nothing is regulated apart from the sale of electricity. Transmission system operators procure balancing energy to offset short-term deviations between generation and consumption. Through redispatch they adjust the feed-in of plants for grid reasons. Balance responsible parties must adhere to their schedules, otherwise they pay imbalance energy. In Germany there are additionally reserves outside the market, such as the grid reserve. These building blocks do not, however, turn the energy-only market into a general capacity market.

In a capacity market, the availability of firm capacity is paid for additionally. Plants receive money for being available in critical situations, even if they deliver no electricity in a particular hour. In return, they must demonstrably provide the committed capacity at relevant points in time. The strategic reserve works differently: there, plants are held outside the normal market and deployed only in defined emergencies. Capacity markets and reserves are grouped together as capacity mechanisms. The pure energy-only approach, by contrast, relies on high prices in scarcity situations providing enough incentive to keep power plants, storage and flexible demand available.

This distinction determines what revenues investors can expect, what risks they bear and by what route the costs reach consumers: via market prices or via levies. In the energy-only market, operators bear the risk that scarcity prices occur too rarely. With a capacity mechanism, part of this risk is spread through administratively organised payments.

Scarcity prices and the missing-money problem

An energy-only market needs scarcity prices. When firm capacity becomes scarce, prices must be allowed to rise far enough for rarely used plants to cover their fixed costs. These include gas turbines, load management and storage that are needed only in a few hours per year. Their profitability depends on a few, but high, revenues.

If these revenues are insufficient, this is called the missing-money problem. There are several possible causes:

Technical or administrative price limits that are too low cut off the highest scarcity prices.
Political interventions skim off high prices retroactively or dampen them.
Many tariffs do not pass on wholesale prices. As a result, demand hardly reacts to hourly price signals.
Investors doubt whether very high prices will be politically tolerated in stress situations. This regulatory uncertainty slows investment.

What matters is less the individual high-price hour than the reliability of the expectation. Anyone building a plant that runs only a few hours a year must first estimate whether those hours will actually be well paid. If market participants expect scarcity prices to be capped or politically called into question, the incentive to invest declines. Formally, an energy-only market then still exists, but its price signals are weakened.

Significance for security of supply

For security of supply, the annual quantity of electricity alone is not what counts. What matters is whether enough capacity is available in every hour: generated, from storage, imported or through consumption reduction. Hours with high load, little wind and solar power, limited imports or grid bottlenecks are particularly tight, for example during a Dunkelflaute (dark doldrums).

The energy-only market responds to such situations through prices. High prices are meant to reduce demand, discharge storage, attract imports and bring all available power plants into the market. This works only if the price signals reach the actors. If households, businesses or industry see only rigid tariffs, much flexibility remains unused. Other, often more expensive resources must then fill the gap.

With more wind and solar power, the role of the market changes. Renewable plants have low short-term marginal costs, so prices fall in hours with a lot of feed-in. Hours with high residual load, that is, high demand after deducting fluctuating renewable generation, become more valuable. The market must then above all value temporal flexibility. This includes battery storage, shiftable heat pump loads, electrolysis, industrial load adjustment and controlled charging of electric vehicles.

Situation in Germany in 2026

For many years, the German electricity market was regarded as an energy-only market, supplemented by reserves outside the market. This is changing in 2026. On 9 July 2026, the Bundestag adopted the Act on Securing Security of Electricity Supply and on the Provision of New Capacities (StromVKG) in the version amended by the Economic Affairs Committee. The act introduces a capacity market that is initially limited to the target year 2031. According to the draft act, a comprehensive capacity market is to follow from 2032, to be governed by a separate act.

According to the Bundestag's report, two tenders of 4.5 gigawatts each are planned for 2026, on 8 September and on 29 December. They are aimed at plants that can deliver electricity continuously over a longer period. In May 2027, a further auction of 2 gigawatts is to follow, in which battery storage can also participate. New gas power plants must be hydrogen-ready and operated climate-neutrally from 2045. Wholesale trading in energy thus remains in place. However, it will no longer rely solely on scarcity prices financing enough firm capacity.

Typical misunderstandings

A common misunderstanding is that an energy-only market with a lot of renewable generation guarantees low electricity prices. Low prices in many hours are possible. However, they do not automatically solve the financing of plants that are needed only in a few expensive hours. Their costs must be covered through these rare revenue hours or through supplementary mechanisms.

Equally inaccurate is the assumption that high prices are always a market failure. In genuine scarcity situations, high prices are an intended signal: additional generation, storage discharge, consumption reduction or imports are then particularly valuable. High prices are problematic when they result from market power, weak competition, flawed rules or a lack of transparency.

Energy-only also does not mean that the state stays out of it. Electricity markets always follow rules. Bidding zones, balancing group rules, technical price limits, support schemes, reserves, market monitoring and European market coupling shape price formation. The real question is what scarcity and investment signals the chosen rules generate.

Finally, the boundary with grid operation is often blurred. Wholesale trading treats a bidding zone as if electricity could be transported within it without bottlenecks. Grid operators subsequently resolve physical bottlenecks, for example through redispatch. A high or low wholesale price therefore says nothing about whether the grid is sufficient at a particular location. Market scarcity and grid scarcity are different phenomena, even though they can reinforce each other.

Assessment

The core question of the debate is: can price signals alone finance enough firm capacity and flexibility? Proponents point to efficient dispatch decisions, technology-neutral signals and a transparent reflection of scarcity. Critics doubt that rare, very high prices are politically sustainable and reliable enough for investors. Both sides rely on assumptions about price limits, flexible demand, market power, investment risks and the desired level of security of supply.

Electrification sharpens this question. Heat pumps, electric mobility, electrolysis and electric industrial processes increase electricity demand, but also bring new flexibility. This flexibility can be used only if metering, tariffs, controllability and market rules allow time-dependent responses. The term energy-only market therefore does not describe a complete electricity system, but the core of a remuneration regime: energy is paid for on the market, firm capacity is not automatically. Whether this suffices depends on the rules for scarcity prices, the response of demand, the credibility of policy and the interplay with grid operation, reserves and capacity mechanisms.

Sources

Energiewirtschaftsgesetz (EnWG) § 1a Grundsätze des Strommarktes — Bundesministerium der Justiz / gesetze-im-internet.de; unbekannt (aktuelle Fassung). § 1a Abs. 1
Bundestag beschließt Sicherung der Stromversorgung (StromVKG) — Deutscher Bundestag; 2026-07-09. Abschnitte 'Bundestag beschließt Sicherung der Stromversorgung', 'Gesetzentwurf der Bundesregierung' und 'Finanzielle Anreize für Investitionen'
ACER Decision 02/2026 – Annex I: Harmonised maximum and minimum clearing prices for single day-ahead coupling — Agentur der Europäischen Union für die Zusammenarbeit der Energieregulierungsbehörden (ACER); 2026 (genaues Datum unbekannt). Art. 3 und Art. 4
CACM regulation – Harmonized max and min clearing prices — Nord Pool; unbekannt. Abschnitt 'Harmonized max and min clearing prices'
Drucksache 21/6279: Entwurf eines Gesetzes zur Sicherung der Versorgungssicherheit Strom und zur Bereitstellung neuer Kapazitäten — Deutscher Bundestag / Bundesregierung; 2026-06-08. A. Problem und Ziel; § 1

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Edited by eCMS on 11.11.2026 19:46