Germany puts a price on hydrogen-ready power — and a deadline on gas
The European Commission has approved a German capacity mechanism worth up to €35bn, under which every new gas-fired plant winning a 15-year contract must be hydrogen-ready and every supported plant must run climate-neutral by 2045. We look at what the pricing of firm capacity and the separate gas-to-hydrogen switching tenders mean for Latvia's own power system, and for Riga's TEC-1 and TEC-2.
NEWS
HydrogenLatvia
9/3/20264 min read
On 2 September the European Commission cleared a German capacity mechanism worth up to €35bn. The headline is security of supply — Berlin buying insurance against the days when wind and solar do not deliver. The more consequential part sits in the conditions. Every new gas-fired plant that wins a 15-year contract has to be hydrogen-ready, and every plant taking the money has to operate climate-neutral by 2045 at the latest. Public support for firm capacity now comes with a fuel-switching obligation attached.
What the Commission approved
The mechanism becomes available from 2031 and is estimated to cost between €15.6bn and €35.2bn. It is market-wide: the transmission system operator remunerates all the capacity needed to meet Germany's reliability standard, and it is open to generation, storage and demand-side response alike. Beyond the initial tenders reserved for additional capacity, it is also open to foreign capacity located in a Member State with a direct network connection to Germany.
The auctions have already started. Germany is procuring 9 GW of new long-duration capacity through two rounds this year — a first 4.5 GW tender with bids due on 8 September, a second 4.5 GW round in December — followed by a further 2 GW in 2027. Later rounds in 2027 and 2029 will be sized against projected 2031 demand. The tenders are technology-open, but any new gas plant that wins has to be capable of switching to hydrogen.
The price of firmness
What makes this interesting is not the size of the envelope. It is that Germany has published a price for keeping dispatchable capacity available. Successful bidders receive annual payments for 15 years in return for being there when the system needs them; gasworld reports a maximum bid price of €244,000/MW per year in the first tender. Fifteen years of contracted revenue is the length of a project finance tenor, not a subsidy cycle — and that is the point. Energy-only markets do not reward capacity that runs rarely, so the capacity gets built only when somebody prices availability directly.
That number is a useful yardstick for anyone building flexibility in the Baltics. Storage, demand response and hydrogen-fuelled generation all face the same problem the German mechanism solves: they earn their value in the hours nobody can forecast, which makes them hard to finance on merchant revenue alone. Knowing what a large, liquid market considers a fair annual payment for firm capacity gives Latvian project developers a reference point they did not have last month.
A funded exit, not only a promise
The second instrument is the one hydrogen developers should read twice. Alongside the capacity mechanism, Germany plans separate tenders to support 4 GW of gas-fired capacity switching to hydrogen ahead of the 2045 deadline — 2 GW in 2040 and another 2 GW in 2043. Those subsidies fall outside this approval and will be assessed separately, but their purpose is explicit in the Commission's reasoning: to accelerate decarbonisation of part of the gas fleet and offset a possible lock-in of natural gas.
Put the two together and something changes for the supply side. A hydrogen-readiness requirement on its own is a design specification that may never be exercised. A readiness requirement, plus a binding climate-neutrality date, plus a funded route to convert, is a demand signal. It tells electrolyser projects, import terminals and pipeline operators that a defined volume of power-sector consumption is being manufactured on a known timetable. That is the anchor offtake the European hydrogen build-out has been short of, and it is the first time it has appeared inside a state aid approval of this scale.
Reading it against Riga
Latvia has a version of the same problem, at a tenth of the scale. Riga's TEC-1 and TEC-2 are the country's largest fossil-fuel combustion assets in the power sector. TEC-2 alone runs 832 MW of electrical capacity in cogeneration mode, 881 MW in condensation, and 1,124 MW of thermal capacity serving Riga's district heating. The plant was commissioned in 1973 and rebuilt around combined-cycle units in 2008 and 2013, which means the equipment is modern enough to have decades of technical life left in it — and to burn natural gas for all of them.
Neither plant carries a conversion deadline. Neither has a funded pathway to one. Neither sits inside a revenue mechanism that would pay for availability if it stopped running on gas. Germany has now put all three in place at once, and that combination is the thing worth copying — not the €35bn, which is an artefact of German system size, but the sequencing. Deadline, revenue, conversion money, approved as a package rather than argued about separately over a decade.
What this means for work in Latvia
Five things follow for Latvian hydrogen ecosystem stakeholders:
Hydrogen-readiness is becoming a condition of public money, not a voluntary credential. Any future Latvian support for dispatchable capacity will be assessed by the Commission against this precedent.
A conversion deadline only works if a funded pathway sits behind it. Germany paired 2045 with tenders in 2040 and 2043; a deadline without that becomes a stranded-asset argument instead of an investment plan.
Capacity payments are a hydrogen demand instrument. Whoever designs Latvia's flexibility procurement is, whether or not they intend it, deciding how much hydrogen the power sector will eventually buy.
Cross-border eligibility matters for a small system. A mechanism open to directly connected neighbours changes where capacity value can be earned.
Riga's case is a heat question as much as a power question. TEC-1 and TEC-2 supply district heating, so any conversion pathway has to keep the city warm through the switch — a constraint most German sites do not carry.
The German mechanism will take until 2031 to bite and until 2045 to finish its job. Latvia has roughly the same window and has not yet started the conversation. Starting it while the precedent is fresh — and while the Commission has just shown what it will approve — is cheaper than starting it in 2035.
Source: EU clears €35bn German capacity mechanism to underpin hydrogen-ready power