The impact of the coalition agreement on the German power market

The coalition negotiations between the CDU/CSU and SPD mark a pivotal moment for the future direction of German energy policy. The decisions made now will significantly shape the course of the energy transition – with direct implications for the expansion of renewable energy, the handling of conventional power plant capacities, and not least, the development of electricity prices. 

To better assess the potential impact of political decisions on the power market, Montel Analytics has conducted two sensitivity analyses based on our European long-term power price scenarios. The aim is to identify potential price dynamics in response to different energy policy approaches at an early stage. 

Relief for electricity consumers in the focus of the coalition agreement 

The past weeks of coalition negotiations indicate a possible shift in German energy policy. Following the election success of the CDU/CSU under Friedrich Merz on 23 February 2025, the CDU/CSU and SPD have agreed on a joint coalition agreement1, which has now been published. The document includes several noteworthy provisions in the field of energy policy. 

At the centre of this is the goal of noticeably reducing the burden on electricity consumers - both private households and electricity-intensive industry. Planned measures include tax reductions as well as the lowering of levies. At the same time, the expansion of dynamic electricity tariffs should be driven forward. The necessary rollout of intelligent metering systems (smart meters) is named as a central prerequisite and prioritised accordingly. 

Battery storage is classified in the coalition agreement as being “of overriding public interest” – a clear political signal of its importance in the future energy system. The concept of ‘presuming’ – the use of solar energy in combination with home storage – is also explicitly viewed in a positive light. 

A change in the German energy mix in the near future? 

The new coalition agreement outlines key cornerstones for the future composition of Germany’s energy mix. Alongside to renewable energy, the focus is particularly on the expansion of flexibility and storage solutions, as well as ensuring supply security through a power plant strategy. 

Concrete expansion targets for wind and solar energy remain largely vague within the coalition agreement. Nevertheless, it is emphasised that the promotion of solar energy should be designed to serve the energy system in future - particularly in combination with batterie storage. The expansion of wind energy should to continue, with the interim targets of the Wind Energy Area Requirements Act (Windflächenbedarfsgesetzes) for 2027 left unchanged. The area targets for 2032, on the other hand, are to be evaluated. The contribution of flexible biomass power plants to grid stability and security of supply is to be increased in a more targeted manner. The existing potential of hydropower and pumped storage power plants should also be increased. 

A central element of the planned power plant strategy are technology-neutral tenders for new controllable capacities. The aim of the tenders is to incentivise the construction of up to 20 GW of additional gas-fired power plants by 2030. These should not only ensure security of supply, but also have a dampening effect on electricity prices by increasing supply. In addition, CO₂ Capture and Storage technologies (CCS) and Utilisation technologies (CCU) in particular are to be used to achieve the goal of climate neutrality. To this end, a legislative package is to be adopted in future that will enable the capture, transport, utilisation and storage of carbon dioxide for gas-fired power plants. There are also signs of a potential adjustment to the coal phase-out timeline. Although the goal of exiting coal-fired power generation completely by 2038 remains in place, the specific phase-out path is to depend on the pace of gas power plant expansion. This would mean a slower phase-out of coal capacity could be expected, with a decommissioning stretched until 2038. The coalition agreement does not include any provisions on nuclear energy. 

At Montel Analytics, we have analysed in two sensitivity what effects the addition of 20 GW of gas-fired capacity by 2030 and a potentially delayed coal exit could have on the power market and price developments. 

Sensitivity analyses on the coalition agreement: ‘Fast-Gas-Expansion’ and ‘Slower-Coal-Exit’  

Based on the recently published coalition agreement between the CDU/CSU and SPD, Montel Analytics has prepared two sensitivity analyses to quantify the potential impact on the German electricity market. The starting point for both calculations is our ‘Central’ scenario, which reflects the current political decision-making situation. 

In the ‘Central’ scenario, it is assumed that the expansion targets for renewable energies set out in the EEG are achieved. Coal is phased out by 2038 at the latest, as provided in the Coal Phase-out Act (Kohleausstieggesetz), with a gradual reduction in lignite and hard coal capacities in the years before that. In addition, an expansion of 20 GW of gas-fired power plant capacity is assumed by 2038, which in this scenario begins gradually from around 2030. The long-term goal of zero emissions is achieved here by 2060. You can also find a detailed explanation of this and other scenarios in our current EU Energy Outlook.

The two variants ‘Fast-Gas-Expansion’ and ‘Slower-Coal-Exit’ are based specifically on these assumptions: While the first assumes an faster expansion of gas-fired power plants well before 2030 - as indicated in the coalition agreement - the second considers a delayed reduction in coal-fired power generation depending on the progress of the expansion of gas-fired power plants. As already mentioned, both sensitivities2 are based on the ‘Central’ scenario, which has been slightly modified for both sensitivities: 

• In the ‘Fast-Gas-Expansion (FGE)’ sensitivity, it was assumed that an additional 20 GW of gas capacity will be added from 2030 compared to today. This assumption represents an extreme case, which some experts have categorised as unrealistic. In comparison: In the ‘Central’ scenario, the additional 20 GW will just be reached in 2038. In the long term, the same capacities are assumed for gas capacities. Figure 1 illustrates the difference in the expansion of gas capacities for the period 2025 to 2039 between the ‘Central’ scenario and the ‘Fast gas expansion’ sensitivity. In the long term, the same capacities are assumed for gas capacities. Figure 1 illustrates the difference in the expansion of gas capacities for the period 2025 to 2039 between the ‘Central’ scenario and the ‘Fast-Gas-Expansion’ sensitivity. 

• The ‘Slower-Coal-Exit (SCE)’ sensitivity takes into account the fact that it will not be possible to build controllable gas-fired power plants quickly enough - as was assumed in the first sensitivity. The shutdown of coal-fired power capacities will therefore take place more slowly here than assumed in the ‘Central’ scenario. However, the coal phase-out will also be completed here in 2038. In this sensitivity, we have therefore assumed the expansion of gas capacities as in the ‘Central’ scenario, but a slower shutdown of coal-fired power plants compared to our assumptions from the ‘Central’ scenario. Figure 2 illustrates the difference in the reduction of lignite and hard coal capacities for the period 2025 to 2040 between the ‘Central’ scenario and the ‘Slower-Coal-Exit’ sensitivity. It is important to emphasise here that the coalition agreement does not provide any specific details on what this delayed exit scenario could look like. For the sake of simplicity, an extreme case is also modelled here: for both hard coal and lignite, all power plants that have not yet been decommissioned by 2030 according to the current plan will continue to operate until the end of 2038.

Faster expansion of gas-fired power plants lowers electricity prices - but increases CO₂ emissions in the electricity sector 

An accelerated expansion of gas-fired power plant capacities by 2030 has a significant dampening effect on the electricity price level - but at the same time leads to an increase in CO₂ emissions in the electricity sector. Figure 3 shows the percentage differences in base and peak prices between the ‘Fast-Gas-Expansion’ sensitivity and the ‘Central’ reference scenario. 

The modelling shows that the base prices (annual average price of all hours in the year) could be around 16% lower in 2031 and 2032, provided that an additional 20 GW of gas capacity is fully connected to the grid by 2030. The price difference is lower in the years before this, as the expansion is only in the implementation phase. The difference also decreases from 2034 onwards, as the ‘Central’ scenario also assumes an additional expansion of gas-fired power plant capacities from this point onwards. From 2038, the prices in both scenarios converge, as the complete expansion of 20 GW is taken into account in both modelling approaches. 

As gas-fired power plants are primarily used at peak load times, the price effect is particularly significant for peak prices: In 2032, the peak price (annual average price of the hours between 8 a.m. and 8 p.m. on weekdays) falls by around 32% in the ‘Fast-Gas-Expansion’ variant. The number of hours with extreme prices above €100/MWh also falls noticeably - specifically by 14% in the same year. 

The faster expansion of gas-fired power plants leads to an increase in CO₂ emissions in the electricity sector - despite positive effects on electricity prices. In the ‘Fast-Gas-Expansion’ sensitivity, emissions in 2031 are around 9% higher than in the ‘Central’ scenario. For 2032, the increase is slightly less than 8 %. In absolute terms, this corresponds to additional emissions of around 8.44 million tonnes of CO₂ in 2031 and around 7.25 million tonnes in 2032. This temporary increase in emissions is due to the increased use of gas-based generation capacities. 

A complementary side analysis as part of the ‘Fast-Gas-Expansion’ sensitivity shows: If the use of CO₂ Capture and Utilisation technologies (CCS/CCU) were to be extended to the new gas-fired power plants, as envisaged in the coalition agreement, this would only have a minor impact on the electricity price level. In the model, the efficiency of gas-fired power plants is reduced, which increases marginal costs and reduces gas consumption. Both base and peak prices increase only minimally compared to the original sensitivity. Due to the lower gas consumption, the CO₂ emissions to be absorbed rise less sharply, with the increase falling to 6.35% and 5.24% respectively. 

Coal-fired power plants as a backup solution for a slower expansion of gas-fired power plants dampen prices but increase emissions 

Figure 5 shows the percentage price changes in base and peak prices between the ‘Central’ scenario and the ‘Slower-Coal-Exit’ sensitivity. A slower coal exit leads to a reduction in base prices of 16 % in 2031, which rises to 18 % in 2032. For the peak price, the reduction is 32 % in 2031 and 26 % in 2032.  

However, the number of extreme prices above €100/MWh is slightly lower than in the previous sensitivity, with a reduction of 12% compared to the ‘Central’ scenario. 

One noticeable aspect of the ‘Slower Coal Exit’ sensitivity is the significant increase in CO₂ emissions compared to the ‘Central’ reference scenario. Particularly in the years shortly before the complete coal phase-out, CO₂ emissions increase by around 72 %. This is of course due to the assumption of a maximum delayed phase-out. In 2031, an increase of around 33% is forecast, which corresponds to around 30.52 million tonnes of CO₂ in absolute terms. 

Conclusion for future price development 

The analysis of the two sensitivities shows that - under the assumptions made and in comparison, to our ‘Central’ scenario of the European power price scenarios - a rapid expansion of the 20 GW of additional gas-fired power plants can significantly reduce the electricity price on average, particularly in 2031 and 2032. However, this price decline is accompanied by an increase in total CO₂ emissions in the electricity sector. Slowing down the coal phase-out, as mentioned in the coalition agreement, if the expansion of gas capacities does not take place as planned, would lead to a similar price effect. However, this variant would lead to significantly higher CO₂ emissions due to the higher CO₂ intensity of coal-fired power plants. 

It is important to emphasise that both sensitivities are based on assumptions made by Montel Analytics taking into account the current coalition agreement. No changes in the expansion of renewable energies or flexibility options were taken into account in these scenarios, as the coalition agreement does not provide any specific details in this regard. 

Another interesting aspect is the role of reserve power plants mentioned in the coalition agreement. In future, these should not only contribute to avoiding supply bottlenecks, but also to stabilising the electricity price. Apart from the legal issues, it still needs to be clarified in future under what conditions and framework this use could take place.