6 Aug 2015
| Ellen Thalman

Energiewende effects on power prices, costs and industry

German industry and its competitive edge in times of the Energiewende

Industrial competitiveness in times of an energy transition: few issues have been watched as closely as this. So far, German manufacturers have kept their competitive edge, backed by strong exports, despite concerns about rising electricity costs. Some of the most energy-thirsty companies are actually benefitting from the lowest wholesale prices in Europe. Many are exempted from levies that fund the Energiewende. As consumers shoulder the bulk of these costs and some firms don't qualify for such privileges, the topic of competitiveness is likely to persist as the Energiewende progresses.

Content

No sign of losing competitive edge so far

Mixed view of the Energiewende among industry branches

Industry has policy jitters

The fly in the ointment: Investment

Prices are a bugbear, but may not reveal much about competitiveness

Big, industrial users largely exempt from renewables surcharge

Wholesale prices have fallen

Need indicators to guide policy


Is the Energiewende putting a dent in Germany’s highly prized industry and driving production overseas? This question has been at the heart of many heated debates over the cost of the transition to a low-carbon economy and about who pays how much for the shift to renewable power sources like wind and solar.

The public debate has been sparked by a spate of high electricity prices for households and smaller business consumers, which rose partly with the “surcharge” on power bills that funds the expansion of renewables. That trend recently ebbed. Meanwhile, wholesale power prices have dropped dramatically, largely due to a plentiful supply of renewable power, while much of Germany’s energy-intensive industry is exempted from the surcharge on retail power.

Energiewende-related costs are, of course, not limited to the price of electricity. They include building new power lines from Germany’s windy north to the industrial south, dismantling nuclear power plants and investing in energy-efficiency measures like building insulation. After tough battles in 2014 among government, industry, unions and green interest groups to cut costs by reforming Germany’s renewable energy law, and wrangling over new measures to cut emissions, the country now faces a power market reform. The latest government proposal to cut emissions opts to keep some old, coal-fired plants on stand-by in an emergency reserve, before eventually decommissioning them. This has also stoked concerns over future cost burdens.

At the same time, the German government has made “competitiveness” an explicit policy goal of its Energiewende, an objective some fear could hamper the big push for green power. Critics of the project claim that cutting emissions and casting off fossil fuels and nuclear power – its long-term ambitions – are too much for the economy to bear all at once. They also cite worries over the changing regulatory environment and fears about the security of supply through wind and solar power that fluctuates with the weather. This, they warn, could induce companies to set up shop elsewhere – like in the US, where they can benefit from cheap shale gas and what they see as a more business-friendly regulatory environment.

“The Energiewende has to become an economic success story,” said Rainer Baake, state secretary for energy in the economics ministry at a recent event in Berlin. “If energy intensive industry leaves, nobody will follow suit.” Germany hopes to be an ecological and economic role model for other countries – it emits just 3 percent of the world’s CO2 – leveraging its impact as a standard bearer is an important aspect of the project.

No sign of losing competitive edge so far

The German government is confident it can uphold its green energy goals without compromising competitiveness.  By 2020, it aims to garner 35 percent of the power the country consumes from renewables, up from around 27.8 percent in 2014 and around 33 percent in the first half of 2015. So far, economic data show a country that is neither losing its manufacturing base nor its competitive edge. Germany currently enjoys record employment, a growing economy and rising exports despite the crisis of some of its key markets in the euro zone. Protests from an unlikely alliance of industry and workers’ representatives who say the Energiewende is a threat are countered by those who say the economy remains unscathed or is even thriving, thanks to the transition. That is because renewables have created jobs and spurred innovation, and brought down wholesale prices.

Lower wholesale prices and exemptions from levies that fund investment in renewables have buffered large users of electricity, says Jürgen Weiss, energy economist at The Brattle Group in Boston. Weiss told the Clean Energy Wire: “My sense is that the impact of the Energiewende on competitiveness has been exaggerated.”

And since Germany’s renewed commitment to phase out nuclear power after the disaster in Fukushima, Japan, its exports have increased by 17 percent in real terms. Output from manufacturing rose by around 10 percent between the end of 2010 and 2014, employment in the manufacturing industry was up 7 percent and overall more people are in work in Germany than ever before and unemployment is falling despite strong immigration.

The energy-thirsty manufacturing sector makes up about 22 percent of gross domestic product, compared to 15 percent in the EU on average. Around 15 percent of Germany’s workforce is employed in sectors that export products as diverse as automobiles, chemicals, machine tools, electronics or steel. These exports are a big driver of economic growth in a country that is the world’s fourth-largest exporter, not to mention the fourth-largest economy. Thus, much is staked on industrial competitiveness.

Indeed, Germany has long ranked among the top five in key global competitiveness indices. According to the World Economic Forum’s 2014 European Competitiveness Report, “German companies are among the most innovative in the world, with heavy spending on R&D (ranked 4th)—notably with an increase from 2.5 to 2.8 percent of GDP in both public and private sectors between 2010 and 2012—and displaying a high capacity for innovation (2nd).”

The Energiewende is frequently cited as a driver of that innovation. Germany’s machinery industry, for example, is home to many energy intensive companies that also produce the moving parts for the renewables industry. Many of these outfits belong to the “Mittelstand,” typically family-owned businesses that are often described as the backbone of the economy. The German Engineering Association VDMA, comprised of around 3,000 manufacturers, walks a tightrope between supporting the energy transition and ensuring that the regulatory environment – like exemptions from levies - remains favourable to its businesses.

“The machinery industry is developing the technology that is making the Energiewende economically possible,“ said VDMA Executive Director Thilo Brodtmann. “The Energiewende ‘made in Germany’ will only be attractive globally if it is economically successful. Today already, the machinery industry exports around two-thirds of its goods to other European countries and around the world. We have the key technologies that will be in demand in the future.”

Mixed view of the Energiewende among industry branches

The intensity of criticism differs widely among industry branches. But while these may diverge, nearly all are adamant about one thing: exemptions from the renewables surcharge must remain in place to protect certain sectors and thus the economy in general.  This surcharge is added to electricity bills and pays the difference between the wholesale market price and a state-guaranteed price to investors in renewable facilities like wind or solar parks.

A 2014 study by the research group IHS, which was sponsored by the Chemicals Industry Association (VCI), said that if exemptions were phased out, GDP in Germany would be nearly 5 percent lower by 2020. Large users with significant power costs (those who use about a sixth of all power consumed in Germany) are partially or wholly relieved from the surcharge. These include companies like chemicals maker BASF or steel and technology company ThyssenKrupp. Business is eager to hang on to these exemptions, and executives are vocal about the need to maintain these policies in the future.

Weiss of the Brattle Group says: “The general concept of exempting companies in energy intensive and trade-exposed sectors, while unpopular among individual ratepayers, has likely helped shield those companies from the effects of higher domestic prices.”  At the same time, “This does not mean that certain companies in certain industries are not negatively impacted.”

Among the loudest voices arguing against the Energiewende has been the VCI chemicals industry association, home to some of Germany’s most energy-intensive companies, and also to a number of medium-sized “Mittelstand” companies.

Marijn Dekkers, VCI President and CEO of big German chemicals and pharmaceuticals company Bayer, told the mass-market Bild newspaper in June: “The goals of the government are much too ambitious. Everything is meant to happen far too quickly: The nuclear exit, the roll-back of CO2 emissions.” According to Dekkers, this policy has caused a rapid rise in prices, which has been most damaging to medium-sized chemicals companies. “This (segment) is very energy intensive and can’t just move production abroad.”

In 2015, the number of companies eligible for exemption from the renewables surcharge rose by 5.3 percent to 2,461 in total, including 280 off-takers in the chemicals and pharma industry, according to the Economics and Energy Ministry. Chemicals was the third-largest industrial group exempted, with by far the largest amount of power at 27,600 gigawatt-hours, compared to the next highest, the steel and iron ore industry at 10,700 gigawatt-hours. There are around 2,000 chemicals companies in Germany, according to the Chemicals Industry Association VCI.

For all its worry mongering, the chemicals industry said in December that it had invested 7 billion euros in Germany in 2014, up 2 percent from 2013, half of which was spent on expansion of production capacities. For 2015, it said it was “cautiously optimistic.”

Indeed, a 2015 Ecofys and Fraunhofer ISI study comparing electricity prices, network charges and privileging criteria for companies in 10 countries showed that, across the board, “Energy-intensive, large-scale consumers from the metalworking industry and the chemical industry pay the lowest electricity prices.” Furthermore,"Aluminium and copper producers, and also electric arc furnace operators, pay no or significantly reduced taxes and levies and low network charges." Stressing the importance of exemptions, the think tanks said, "the German price without privileges would be much higher than electricity prices in other countries."

Industry has policy jitters

Industry leaders from many branches have repeatedly said they want more certainty on future energy policy. This is not limited to exemptions on the surcharge. A number of political decisions are slated for the next few years – from reforming the German and EU power markets to the question of ensuring reliable power supply as the share of fluctuating renewable electricity grows in the power mix

“Especially mid-sized companies must find their way in the Energiewende,” VDMA President Reinhold Festge said recently. “Reliable regulatory conditions and security of supply are for them the most important thing.”

Holger Lösch, a member of the executive board at the BDI Federation of German Industries, also warned at an Energiewende event in Berlin that there is currently a “high level of political insecurity in the business sector.”

That mood is unsurprising against a backdrop of reports like the chemicals industry-sponsored IHS study, which ominously predicted that “the current high-cost energy path will make Germany less competitive in the world economy, penalize Germany in terms of jobs and industrial investment and impose a cost on the overall economy and household income.”

But industry has recently toned down its criticism of moving the economy to a low-carbon future, focusing more on improvements in policy than on rolling back the project altogether. In its 2014 Energiewendebarometer, the VDMA said that while 85 percent of its companies surveyed were unhappy with the political implementation of the project, saying improvements were necessary, 63 percent saw the Energiewende as an opportunity, expecting “positive effects,” although this figure was down from 65 percent in 2013.

And there is broad agreement in German society that the Energiewende is worth the cost, compared to the high price of climate change and the often hidden costs of the old energy system – subsidies for coal, renovation of old, coal-fired plants, nuclear waste disposal, or the risk of relying on Russia for gas, to name a few.

According to a 2012 study by Joachim Nitsch at the German Aerospace Centre, the extra costs for the Energiewende “are clearly below the as yet unaccrued costs of damage to the climate, and below the costs for subsidising the fossil fuel energy sector.” To enhance the security of supply and lower expenses over the long term, the government aims to cut fossil fuel consumption to 40 percent of overall energy (not just electricity) consumption by 2050.

The fly in the ointment: Investment

One sticky issue for the German economy is sluggish private investment. Critics, such as the DIHK German Chamber of Commerce, argue that this is a sign of a slow, grinding process in which companies scale back investment due to uncertainties in the business environment. Over the long run, this hurts growth prospects and jobs.

The country's overall sluggish private investment has long been a concern and possible explanations are heatedly debated. According to Marcel Fratzscher, president of the DIW German Institute for Economic Research, who headed a group of experts looking into possible solutions: “Since 1999, Germany has amassed an investment deficit of around a trillion euros and thus has missed out on considerable growth potential.” The DIW estimates that Germany should be investing around 3 percent more of GDP, or about 75 billion euros a year.

In its 2014 annual Energiewende-Barometer, the DIHK said companies were hesitant about new investment projects, citing uncertainty over the surcharge exemption for self-produced power, and worries about the reliability of supply due to the nuclear phase-out and the slow expansion of the network, especially in southern Germany.

Jochen Leonhardt, member of the board of the BVMW German Association of Small and Medium-sized Businesses said recently that, "we are seeing a creeping exodus of energy intensive industries." It was not that plants or production that were being shut down in Germany, instead “new investment is often carried out abroad, where energy costs are lower."

Deutsche Bank Research says that the real capital stock of the chemicals industry has even decreased in recent years – the only export sector in which this has occurred. “A hesitancy to invest is likely mainly related to high energy prices and insecurities about the future direction of energy policy,” the researchers said in a report in March.

Prices are a bugbear, but may not reveal much about competitiveness

Just how much are these costs affecting business? Of the some 24 billion euros consumers paid in levies to finance renewables in 2014, private households paid 8.3 billion euros, while industry paid 7.4 billion (with commercial enterprises, including services, paying 12.5 billion euros in total), according to the BDEW Association of Energy and Water Industries.

While commercial customers are the largest power user in Germany, consuming almost 70 percent of overall production, (followed by households with 28 percent), big, energy intensive industry benefits from over 20 different exemptions from taxes, levies and surcharges. Those apply to certain, but not all, industrial power customers, but not to households. This has meant retail consumers and less energy-intensive – often smaller - businesses have been footing the bill.

The exemptions, along with a broad range of wholesale and retail electricity prices, which depend on how companies source their power, have created huge differences in what buyers pay for power.

The steep rise in power prices in the years after renewables subsidies began has been the source of much criticism. But Andreas Löschel, energy economist at the Centre for European Economic Research (ZEW) and part of the independent group that evaluates the government’s annual Energiewende progress report, says prices are not a good indicator of competitiveness. Instead, “unit energy cost” - how much energy it takes to create one unit of gross domestic product (GDP) - could provide clues as to how Energiewende costs are affecting the economy. This is also known as energy intensity - the higher the unit cost, the higher the price of energy for generating economic growth.

Löschel says a big problem is that cost comparisons by industry sector and country are hampered by a lack of data.  This is especially true of the manufacturing sector – the very sector that has been the subject of the most heated debates.

Nevertheless, Löschel does not see indications that Germany is losing competitiveness. “All in all, the problems do not appear to be very big,” Löschel told Clean Energy Wire. While electricity expenditures for end users rose from 2010 to 2013 – by around 10 billion euros, or 16 percent — these ticked only up to  2.6 percent in relation to GDP in 2013 from 2.5 percent in 2012 and were bearly higher than at the beginning of the 1990s, Löschel said in a recent report. “But this is not to say that problems don’t exist when the data is broken down by sector,” he added.

Unit energy costs for the chemicals industry, for example – outspoken critics of the transition – have remained steady over the years, according to Löschel’s data. The trick is to pinpoint specific segments of the chemicals industry that may be under pressure. “Finer data is needed,” Löschel said.

Big, industrial users largely exempt from renewables surcharge

The renewables surcharge has risen more than fivefold since 2009. For smaller industrial users, power prices rose some 12 percent between 2008 and 2014, according to the German Statistics Office. Before 2008, higher prices for generating power were the main driver, but that has since been replaced by levies. Companies that aren’t exempted from levies have had to pay an ever-increasing surcharge for renewable energy, which is the “main reason” for rising power prices, according to energy statistics provider AG Energiebilanzen.

Exempting energy-intense users from the renewables surcharge means others have to pay more for the move to renewables. This raises the surcharge by 1.36 cents, or some 28 percent, according to the BDEW Association of German Water and Energy Industries. And this is unlikely to change as the new renewable energy law of 2014 – designed to cut costs through market reforms for new renewables installations – kept subsidies for large users stable at 5 billion euros a year, according to Economy Minister Sigmar Gabriel.

For the first time in years, the levy fell in 2015, by 1.1 percent to 6.17 cents per kilowatt hour. Germany’s four grid operators set the levy each year by estimating how much money they will have to pay renewables producers to cover the cost of the “feed-in tariff.” The jury is out as to whether this is a shift in the 15-year trend of rising surcharges, or whether it is a one-off effect because operators paid too much to green power producers last year. As new renewable energy facilities come onto the grid, more money must be paid out in fees.

Energy think-tank Agora Energiewende said in 2015 that it expected the surcharge to fall steadily starting in 2023, while the share of renewables in the power mix will rise to 60 percent by 2035.  

Wholesale prices have fallen

Perhaps surprisingly, the energy transition has actually pushed some power prices lower: The wholesale price for electricity on the power exchange has fallen by more than half since reaching its ten-year peak in 2008. While this was in part due to the global financial crisis that began the same year, a larger supply of cheap green power is also driving more expensive conventional power out of the market.

Wholesale prices in Germany were among the lowest in Europe in the fourth quarter of 2014, due in part to renewables generation, a report from the EU Commission shows. For example, Dutch aluminium smelter Aldel last year filed for insolvency, blaming uncompetitive production costs on the big difference in power prices between the Netherlands and surrounding countries. The power price can make up as much as 40 percent of the production cost for aluminium.

But wholesale prices are only one way to compare industrial end-user prices, and they do not always reflect what customers pay. Large users may make their own power, have long-term power purchase agreements independent of the market, or they may lease entire power plants from utilities. That can make the average price for these users intransparent and means it is only partially governed by regulatory and market developments.

Wholesale prices can help compare energy costs for industry, because they do not include levy exemptions. But even this is difficult. The BDEW gives a wholesale price range of 4.5 cents per kilowatt-hour (kwh), the lowest level in 17 years, to 15 cents, the highest in the period.

Internationally, a study by think tanks Ecofys and Fraunhofer-ISI, commissioned by the German government, estimated industrial power prices in Germany to be somewhat higher than those in the large US state of Texas. In an example, a company in the metals industry using 1,000 gigawatt-hours of power and a 20 percent share of electricity paid around 4.95 cents per kilowatt-hour in Germany in 2013 and 3.91 cents per kilowatt-hour in Texas in 2012. Those included subsidies, taxes, fees and exemptions. Cheaper power in the US, largely due to the rise in shale gas production, has been cited as one reason companies were considering moving production there.

Need indicators to guide policy

Even staunch proponents of the Energiewende agree that some companies do fall through the cracks: businesses that need a lot of energy for production, but whose overall consumption is not high enough to qualify for relief. It is very hard to evaluate how these companies are faring because “there is no data,” Ralf Wiegert from IHS told the Clean Energy Wire.

The Brattle Group’s Weiss notes the importance of some of these companies to the German economy. “Germany’s success is built on small and medium sized companies. It is certainly possible that many of those are exposed to international trade and are also relatively energy intensive,” he says.

The exemption system should be evaluated to ensure it benefits energy-intensive companies that are important contributors to the economy. “There is no very good argument why only companies above a certain size should benefit from these exemptions,” he says.

Looking ahead, the government will have to find a way to assess how the Energiewende affects the different sectors of industry, including improving data breakdowns within sectors to evaluate which areas are suffering.

Making competitiveness a goal of the Energiewende should be accompanied by indicators – like energy unit costs - that help guide policy decisions, said the independent group of experts asked to examine the government’s progress report in December. Without quantitative goals for competitiveness – like the government has for emissions or the share of renewables in the power mix – political conflicts could arise that whittle away at the very foundation of the Energiewende. According to the experts, this could “lead to an implicit revision of climate targets and the nuclear exit, through an intransparent process of weighing up advantages and disadvantages of political goals.”

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