The major subsidy contradiction after harsh criticism of the EEG: CDU minister now plans huge cost levies for gas-fired power plants

The return of the electricity surcharge: Why we will all soon have to pay for idle power plants

Up to 435 billion euros: The hidden cost trap in the government's new electricity plan

German energy policy is facing a remarkable paradigm shift – and a blatant political contradiction. Federal Economics Minister Katherina Reiche (CDU) is planning to introduce a so-called capacity market, which will subsidize the construction of new gas-fired power plants with billions of euros in state funding. Citizens and businesses are to foot the bill through a new levy on electricity prices. Ironically, the very party that for years denounced the historic EEG surcharge as an expensive misallocation of resources and a symbol of excessive state subsidies is now resorting to precisely the same instrument to finance controllable fossil fuel reserve power plants. Consumers and the already strained industrial sector face the threat of gigantic additional costs of up to 435 billion euros over the coming decades. Is this project a bitter energy policy necessity to secure supply during the energy transition – or simply hypocritical special-interest politics? A detailed analysis reveals what lies behind the planned "Electricity Supply Security and Capacity Act," why the question of costs is unavoidable, and what financial burdens we will actually face in the future.

When the critic becomes the perpetrator – the political contradiction at the heart of energy policy

Gas-fired power plants at state expense: The new electricity levy and the subsidy discourse of the Republic

Federal Economics Minister Katherina Reiche (CDU) plans to finance the construction of new gas-fired power plants in Germany through a levy on electricity prices – a mechanism whose structure is strikingly similar to the EEG surcharge, which she and her party criticized for years as a symbol of excessive state subsidies for renewable energies. The question being asked by economists, energy policymakers, and an increasingly discerning public is: Is this hypocrisy, an energy policy necessity, or simply the inevitable result of an electricity system that offers no cost-free solutions?

The project in detail: A new law, a new burden

The Federal Ministry for Economic Affairs and Energy has initiated internal government consultations on a so-called "Electricity Supply Security and Capacity Act." The core of this law is the introduction of a capacity market through which new dispatchable electricity generation capacities will be tendered and subsidized by the government. At the beginning of 2026, the German government reached an agreement with the European Commission on the key points of a power plant strategy. According to this agreement, tenders for a total of twelve gigawatts of new dispatchable capacity are to be launched in 2026 – ten gigawatts of which are designated as so-called long-term capacities, which must provide electricity continuously over an extended period, meaning, in practice, that gas-fired power plants will be used.

A further two gigawatts are to be tendered in a technology-neutral manner, so that battery storage or other flexibility solutions can also be considered. The new power plants are to be connected to the grid by 2031 at the latest and guarantee security of supply for a period of fifteen years. All subsidized power plants are to be operated in a climate-neutral manner after 2045 – through conversion to hydrogen, for which contracts for difference are planned.

The financing of this system is to be achieved through a levy on the electricity price, which would be borne by consumers. The Federal Ministry for Economic Affairs and Energy stated upon inquiry that "the amount of the levy cannot yet be estimated." The levy is to be introduced by law in 2027 and collected from 2031 onwards. In earlier considerations, the Ministry itself had suggested a figure of around two cents per kilowatt-hour.

What is behind the capacity market?

The German electricity market has so far been based on the so-called energy-only market (EOM): power plant operators are only paid for the electricity they generate and feed into the grid. A power plant that is ready but not operating generates no revenue. This model works under conventional conditions, but reaches its limits as the electricity market becomes increasingly dominated by renewable energies, whose marginal costs are close to zero.

Gas-fired power plants, which serve as backup capacity for periods of low solar and wind power generation, ideally operate for only a few days a year. Under normal market conditions, their operation is simply not profitable. An investor who builds a gas-fired power plant that only kicks in on rare, extreme days cannot recoup their capital costs through the energy market alone. This is precisely where the capacity market comes in: it compensates not only for the amount of electricity generated, but also for simply maintaining capacity. Operators receive a government-organized payment for being ready to operate – regardless of whether they actually generate electricity.

The tendering process is designed as an auction: power plant operators compete against each other. Whoever submits the lowest bid receives the subsidy. This model exists in a similar form in Great Britain, Belgium, Italy, Ireland, and Poland, all of which have introduced centralized capacity markets. France, on the other hand, attempted a decentralized approach, which studies have shown to be less effective.

The cost dimension: Hundreds of billions as a system price

The financial implications of the planned capacity market are considerable. The German Association of New Energy Industries (bne) has calculated, based on estimates from the Federal Ministry for Economic Affairs and Energy and the electricity consumption scenarios of the official monitoring report, that a central capacity market would cause levy costs of between 340 and 435 billion euros over two decades – a sum on the order of the entire German federal budget.

These figures sound abstract until you break them down to specific households: A capacity levy of two cents per kilowatt-hour translates to an additional burden of around 80 euros per year for an average four-person household with an annual consumption of 4,000 kilowatt-hours. For energy-intensive industrial companies, the scale is drastically larger: A company with an annual electricity demand of 100 gigawatt-hours would have to raise approximately two million euros more. This hits an industry already suffering from high energy prices yet again.

Furthermore, current electricity levies are already substantial. For end customers, the total electricity levy in 2026 will be 2.946 cents per kilowatt-hour, an increase of 11.13 percent compared to the previous year. The CHP levy alone rose from 0.277 to 0.446 cents per kilowatt-hour, an increase of over 61 percent. Therefore, introducing another capacity levy would not be a pointless endeavor, but rather would add to an already existing burden.

The EEG surcharge: The historical precedent that nobody wants to cite

To understand the political sensitivity of the current debate, it's worth looking at the history of the EEG surcharge. With the Renewable Energy Sources Act (EEG) in 2000, a mechanism was introduced that financed the expansion of renewable energies not through public subsidies, but through a surcharge on the electricity price. This so-called EEG surcharge was an annually recalculated amount that was shown separately on the electricity bill.

The surcharge grew considerably over the years: from 1.33 cents per kilowatt-hour in 2009, it rose to 6.24 cents by 2014 – a fivefold increase. Between 2017 and 2021, it fluctuated between 6.40 and 6.88 cents per kilowatt-hour. For a typical household, the EEG surcharge alone resulted in an annual burden of €180 or more. Adding up all the subsidies and system costs spent on the energy transition between 2000 and 2021, the total direct costs amount to at least €476 billion, depending on the calculation method; pessimistic estimates are well over €1 trillion.

In light of soaring energy prices, the EEG surcharge was reduced to zero ahead of schedule in 2022. The German Bundestag decided to abolish it completely on July 1, 2022, with the aim of providing "noticeable relief for consumers." With the Energy Financing Act, which came into force on January 1, 2023, the surcharge was formally abolished. However, the promotion of renewable energies was not ended; it was merely shifted out of the consumers' view: Instead of appearing on electricity bills, it has since been financed from the Climate and Transformation Fund (KTF), a special federal fund. The abolition of the EEG surcharge at the time meant an immediate reduction of €6.6 billion in electricity prices.

The crucial realization: The costs didn't disappear. They were merely shifted from the visible part of the electricity bill to the invisible part of public finances.

The political contradiction: The wealthy caught between criticism and practice of subsidies

Herein lies the core of the political contradiction that makes this debate so explosive. As Minister of Economic Affairs, Katherina Reiche has taken a clear stance on state support for renewable energies: subsidies should be systematically reduced. The feed-in tariff under the Renewable Energy Sources Act (EEG) for small solar installations under 25 kilowatts is to be abolished. Her reasoning: "Installations that are economically viable on their own do not need permanent subsidies from the general public." Existing subsidies must be reviewed, and the focus must be on the market, technological diversity, and innovation.

At the same time, the same minister plans to subsidize the construction of gas-fired power plants with billions of euros in state aid, which would be borne by the general public through a levy on electricity prices. The EU Commission must explicitly approve this subsidy because it constitutes state aid. The Federal Ministry for Economic Affairs and Energy itself has suggested a levy of two cents per kilowatt-hour as a possible figure – amounts structurally reminiscent of the historical EEG surcharge.

The criticism was swift: Left-wing and Green parties accuse Reiche of pursuing policies solely in the interest of the gas lobby. The German Renewable Energy Federation describes Reiche's course as "another attack on renewable energies." The environmental organization BUND speaks of "the next blow against the energy transition." And the energy company 1KOMMA5° has filed a complaint with the EU Commission, as it considers the subsidies for gas-fired power plants to be anti-competitive.

What is a subsidy and what isn't? An economic clarification

The question of whether the planned capacity levy constitutes a subsidy is not merely academic, but has far-reaching political and legal consequences. From an economic perspective, a subsidy is any form of government financial assistance that alters a market price, incentivizes investments that the market would not make on its own, or provides advantages to actors that would not arise without government intervention.

According to this definition, the planned capacity levy is clearly a subsidy: it compensates power plant operators for maintaining capacities that would not be profitable under normal market conditions. The EU Commission therefore treats it as state aid and must approve the project. According to European regulations, capacity support mechanisms are only permissible if it can be demonstrated that they are necessary and appropriate for security of supply.

The difference to the EEG surcharge is structurally minimal: Both instruments are levies on the electricity price, financed through consumption, and incentivize investments in specific technologies that would not be economically viable without this incentive. The EEG surcharge was designed for renewable energies; the new capacity surcharge is primarily designed for gas-fired power plants. The basic principle – state-organized cross-subsidization via the electricity price – is identical.

A key difference, however, lies in transparency: For years, the EEG surcharge was listed as a separate item on the electricity bill and was visible to every consumer. The new capacity surcharge is embedded in an already opaque surcharge structure, which by 2026 will consist of three different components. Furthermore, the EEG surcharge was effectively abolished and replaced by budget funds, while the new surcharge is added directly to the electricity bill – precisely the approach that was considered politically unacceptable for the EEG surcharge.

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The security of supply argument: necessity or pretext?

Proponents of the capacity market argue that security of supply is a public responsibility, legitimizing government funding. The share of renewable energies in German electricity consumption was around 53 percent in the first quarter of 2026. It is projected to rise to 80 percent by 2030. With the increasing share of volatile sources such as wind and solar, the need for dispatchable capacities that can step in during periods of low wind and solar power generation inevitably increases.

Currently, Germany has approximately 35.6 gigawatts of installed natural gas capacity. A modern gas-fired power plant delivers between 500 and 800 megawatts of power, depending on its design. The planning of up to twelve gigawatts of new dispatchable capacity – ten of which would be gas-fired power plants – appears technically justifiable in light of the coal phase-out and climate targets.

The crucial question, however, is not whether, but how these capacities will be procured and financed. Critics of the capacity market point out that technology-neutral tenders, which also include battery storage, demand-side response solutions, and other flexibility options, could be significantly cheaper. A study by Frontier Economics calculated that battery storage could reduce the need for gas-fired power plants by up to nine gigawatts—with substantial savings in construction and operating costs, as well as a reduction in CO₂ emissions of up to 6.2 million tons. The design of the capacity market, which effectively reserves ten out of twelve gigawatts for gas-fired power plants, can therefore rightly be criticized as technologically biased.

International Experiences: What Europe Teaches Us

Germany is not the first country to introduce a capacity market. Great Britain launched a centralized capacity market in 2014, and Belgium, Ireland, Italy, and Poland followed with similar models. France was the only European country to initially opt for a decentralized approach, but operational experience from 2017 onward showed this to be less effective, necessitating the addition of centralized mechanisms.

Experience from these countries shows that capacity markets can, in principle, function to ensure security of supply, but a well-thought-out design is crucial to avoid misallocations and unnecessary costs. Particularly critical is the question of the derating factor (note: technical term for realistic availability assessment) – that is, the realistic assessment of what capacity is actually available when needed – as well as the avoidance of overcapacities, which unnecessarily drive up costs for consumers.

A key criticism of the German proposal is that the long-term criterion of ten hours of uninterrupted electricity supply is effectively tailored to gas-fired power plants and structurally disadvantages storage and other flexibility solutions. Thus, the German approach is more of a tool for technology control than a genuine capacity competition.

The system change: From the energy-only market to the capacity market

The introduction of a capacity market is not merely a matter of financing individual power plants, but marks a fundamental paradigm shift in the design of the German electricity market. Until now, the German electricity market was explicitly conceived as an energy-only market, in which market forces determined investment decisions. Capacity markets, on the other hand, are state-organized and replace the market mechanism with government planning.

For a country whose economic identity is strongly based on its commitment to the social market economy, this step is remarkable. The irony lies in the fact that it is a CDU economics minister, who rhetorically advocates for market liberalism and fewer subsidies, who is taking this step towards greater state planning. In its purest form, the capacity market is the antithesis of a market-based instrument: it replaces price as a steering signal with state tenders and guaranteed remuneration.

The transition from an energy-only market to a capacity market has its own logic that transcends political preferences. With a target share of 80 percent for renewable energies and falling wholesale prices due to the low marginal costs of wind and solar, the energy-only market loses its incentive function for investment in dispatchable capacity. The fundamental problem is systemic and not a political invention of Reiche – but the answer to it is a political choice.

Comparison: EEG surcharge and capacity surcharge in contrast

The structural parallels and differences between the EEG surcharge and the planned capacity surcharge can be precisely identified:

The table illustrates that both instruments are state-organized levies that subsidize specific technologies. After its abolition, the EEG levy was criticized for being too expensive and not sufficiently market-oriented. The planned capacity levy shares the same structural characteristics.

Fiscal policy, special funds and the question of fiscal honesty

Another aspect that complicates the debate is the fiscal context. The EEG surcharge was not abolished in 2022/2023 because subsidies for renewable energies ended, but because its financing was transferred to the special fund of the Climate and Transformation Fund (KTF). The KTF was endowed with approximately €180 billion and was intended, among other things, to finance the abolition of the EEG surcharge. Consumers therefore no longer saw the surcharge on their electricity bills – but the costs continued to be covered by taxpayers' money.

Following the Federal Constitutional Court's ruling on the debt brake and the resulting budgetary crisis for the governing coalition, the funds allocated to the KTF (Kiel Transparency Fund) were significantly reduced. The federal government under Friedrich Merz faces the problem that large investment projects – gas-fired power plants, infrastructure, and energy transformation – can no longer be financed arbitrarily through special funds. The new levy on electricity prices is therefore also a budgetary response to the debt brake: what the state can no longer spend directly, it finances through mandatory levies that are not formally considered government expenditures.

From an economic perspective, this is not a trivial distinction. A levy on the electricity price is a mandatory charge that affects all electricity consumers, regardless of their financial means. Its distributional effect is regressive: poorer households, which spend a higher proportion of their income on energy, are burdened proportionally more than wealthier ones. Direct household financing could, at least theoretically, be made more socially balanced through progressive taxation. From the standpoint of social justice, a return to the levy is therefore a step backward.

Between market and state: The energy policy truth that no party wants to hear

The honest energy policy answer to the question of whether the capacity levy is a subsidy is: Yes, unequivocally. And it is a subsidy that becomes necessary for the same structural reasons that made the EEG levy necessary – because the electricity market alone does not provide sufficient investment incentives for socially desirable but economically unviable capacities.

The difference is that the EEG surcharge promoted technologies that initially required start-up funding and are now largely competitive without subsidies. Photovoltaic and wind power plants have completed their learning curves; costs have fallen dramatically. Gas-fired power plants, on the other hand, which only operate for a few days a year and serve as backup during periods of low wind and solar output, will structurally remain dependent on government subsidies – because their business model is not based on full-load operation, but on availability. The subsidy is therefore not a phase of market maturity, but a permanent system component.

This realization puts an end to any ideological innocence in German energy policy. There is no such thing as free energy security. Anyone who wants both – phasing out coal and nuclear power and a reliable electricity supply even during periods of low wind and solar output – must pay for it. The only questions are who pays and how transparently this is done. Those who condemn government subsidies for renewable energies as subsidies and defend government subsidies for gas-fired power plants as an instrument for security of supply are arguing politically, not economically.

Forecast and outlook: What's in store for consumers and industry?

The immediate financial impact on households and industry will depend on the design of the capacity market. With a levy of two cents per kilowatt-hour, a four-person household with an annual consumption of 4,000 kilowatt-hours would pay approximately 80 euros more per year. Energy-intensive industries, which are already suffering considerably from German energy prices, would have to raise approximately two million euros more per 100 gigawatt-hours of annual consumption.

In the long term, the German Association of New Energy Industries (BNE) has calculated total costs of between €340 and €435 billion over two decades. These figures make transparent for the first time the structural costs associated with a centralized capacity market. By comparison, the total EEG subsidies up to 2021 cost approximately €476 billion directly. The new capacity market would operate on a similar scale – but for a different technology.

The tenders are scheduled to begin in 2026, with the power plants connected to the grid by 2031. A further tender framework for a comprehensive capacity mechanism is planned from 2027 onwards, taking effect from 2032. Germany is thus definitively entering the era of state-organized electricity market planning – and doing so with a government that is programmatically committed to the market. This is not a contradiction in practice, but one in rhetoric.

Concluding remarks: The grammar of subsidies

Subsidies have had a peculiar history in German energy policy. When the previous coalition government abolished the EEG surcharge, it was celebrated as a relief measure – even though the costs were merely shifted. Now, when the new federal government plans a capacity surcharge, it is framed as an investment in security of supply – even though it is structurally the same instrument.

The crucial point is not whether one prefers gas-fired power plants or renewable energies – that is a legitimate energy policy debate. The crucial point is the consistency of the argumentation. Those who criticize government subsidies for renewable energies as market distortions cannot then present government subsidies for gas-fired power plants as a natural part of a market economy. Both are subsidies. Both are justified by the same logic: without government incentives, socially desirable investments will not be made to a sufficient extent.

The grammar of subsidies remains the same, even if the vocabulary changes. And consumers will pay – whether through their electricity bills, the federal budget, or both. The most honest statement German energy policy could currently make is: security of supply costs money, and someone has to pay it. Everything else is political rhetoric.

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