14 Sep 2023, 11:15

Q&A – Germany weighs electricity subsidies to shield industry

Germany is considering a plan to boost the international competitiveness of its prized heavy industry by subsidising electricity. Energy-intensive firms are to receive billions of euros in state help if they promise to decarbonise and to stay within the country, according to a proposal by the economy and climate ministry. Companies which qualify for the subsidies would be guaranteed electricity for 6 cents per kilowatt hour, for 80 percent of their consumption until 2030. This would require 25-30 billion euros in state funds. The proposal was welcomed by industry as “a clear game changer”, but remains controversial among policymakers and economists. There are also EU concerns about unfair competition. This Q&A explains the reasoning behind the ministry’s proposal, examines its details, and looks at the arguments against the scheme, which has not yet been cleared by the government. [UPDATE 14 September: Adds SPD proposal, impact on renewables investments, further details]
Steelmaking would be one of the beneficiaries of a lower industry power price. Image by thyssenkrupp
Steelmaking would be one of the beneficiaries of a lower industry power price. Image by thyssenkrupp

Why is Germany considering subsidies for industry electricity?

Germany’s energy-intensive industry has been calling for lower electricity prices for many years. Its companies and associations regularly point to lower energy costs in countries such as the U.S. or China to warn that Germany could face de-industrialisation if it does not act to push prices down. So far, de-industrialisation has not materialised on a large scale. But the energy crisis, a dependency on imports from China, and US President Joe Biden’s giant state support programme IRA, has given this issue renewed urgency in Germany, as well as Europe as a whole. German industry lobby group BDI called on the government to make support a priority this year to ensure energy-intensive companies stay competitive.

Amid the energy crisis fuelled by Russia’s war against Ukraine, both private and commercial consumers have faced drastic price increases for energy. The government has introduced temporary support schemes, but economy and climate minister Robert Habeck (Greens) insists that electricity subsidies are necessary because power prices remain 2-3 times higher than before the war.

Habeck – mindful not only of rising energy prices but also Germany’s skill shortage, high investment needs, and depleted competitiveness - said at the end of last year that keeping industry in the country would be a central challenge for the government in 2023.

The energy ministers from Germany’s sixteen states earlier this year called on the federal government to consider lowering the electricity tax to the European minimum, and supporting energy-intensive industries through a special power price to help them implement decarbonisation efforts.

The BASF plant in Ludwigshafen is one of Germany's largest electricity consumers. Image by BASF
The BASF plant in Ludwigshafen is one of Germany's largest electricity consumers. Image by BASF

What exactly is Germany’s economy ministry proposing?

The economy ministry is proposing a “bridge electricity price” of 6 cents per kilowatt hour (ct/kWh) for a “clearly defined circle of recipients” until 2030. To encourage energy savings, the subsidy will only apply to 80 percent of a company’s power consumption. If the average annual price on the electricity exchange exceeds 6 ct/kWh, companies would get reimbursed the difference. The actual procurement of electricity is carried out by the companies independently of this mechanism. “The companies thus continue to have the incentive to procure electricity as cheaply as possible in line with the market,” writes the economy ministry. Based on current future electricity prices, 25-30 billion euros of state funds would be needed until 2030.

In the long term, Habeck proposes that industry receives cheap electricity from new renewable energy installations. The state would enter so-called contracts for difference (CfD) to help build the facilities, or back direct power purchase agreements (PPA) between producers and industry consumers with guarantees to reduce the risk premiums in the contracts, which would make them cheaper.

The parliamentary group of Germany’s Social Democrats (SPD) presented its own concept for reducing power prices for energy-intensive industry. The SPD's “transition electricity price” would limit prices to five cents per kilowatt-hour for selected industries, would initially be limited to five years, be reviewed and adjusted if necessary after two, and end as soon as enough electricity can be generated with renewables, as this is set to bring prices down.

How much does industry pay for electricity in Germany?

There is currently no single power price for industrial consumers in Germany. Instead, there is an exceptionally broad range of prices. While German households in 2023 pay roughly 45 ct/KWh for their electricity - one of the highest rates in Europe, energy-intensive companies already pay significantly less because they are exempt from many taxes and levies [For more details, read our factsheet Industry power prices in Germany: Extremely high - and low].

What do companies and unions say about the proposals?

Industry lobby group BDI supports the ministry’s initiative. "Companies whose existence is threatened need relief now," said the association’s head, Siegfried Russwurm. Chemical industry association VCI called the proposals “a clear game changer” for international competitiveness. “The industrial electricity price helps us to secure production and industrial value creation and to master the transformation to climate neutrality even better. The whole of Germany and Europe benefits,” said the lobby group. It added that the industry price cannot be a permanent solution, but must provide “a bridge into the future” because there is no alternative solution.

Trade unions are also in favour of the subsidies. Metal industry’s trade union IG Metall has called for a rapid agreement on the scheme, arguing the next few weeks and months will be a matter of life or death for many energy-intensive companies. Chemical and mining union IGBCE also said an industry power price would give companies the security they needed to shoulder the massive investments necessary to make their production more climate-friendly.

Is the proposal likely to be agreed by the government?

The economy ministry’s proposal has not yet been agreed within the entire government. Given that the plans have already been criticised by chancellor Olaf Scholz, a Social Democrat (SPD), and finance minister Christian Lindner, from the pro-business Free Democrats (FDP), they are likely to meet resistance in the government cabinet.

Scholz said Germany “will not be able to sustain subsidising everything that takes place in normal economic activity in the long run”, while Lindner argued that “relying primarily on direct state aid is economically unwise”, because it “contradicts the principles of our social market economy”. Lindner has called the proposal "unfair in terms of distribution policy, economically inefficient and difficult to implement in practice."

A scientifc advisory council to the finance ministry said the subsidy scheme should not go ahead because it could prevent necessary industry transformation by keeping unviable companies alive. A different option would be to completely abandon Germany’s electricity tax, the advisors said. Lindner said he agreed with that assessment: "It would not make sense to permanently compensate for high energy prices with subsidies. Instead, we must improve the framework conditions for a better energy supply and for domestic industry as a whole."

Regardless of the disputes within the government coalition, Habeck said he was convinced "that we will find a common solution within a reasonable time, i.e. within months”, and he signalled readiness for a compromise. If the plans are adopted by the government, they also face parliamentary discussions.

Why is the proposal controversial among economists?

Some economists welcome the ministry’s plans as essential for the transition to a climate-neutral economy, but others are highly critical of the idea. Veronika Grimm, a member of Germany’s Council of Economic Experts, a government advisory body, warns  that "keeping uncompetitive firms in business by means of an industrial electricity price” would undermine the country’s long-term competitiveness, and slow the transformation to climate neutrality. She argues that the subsidy will keep companies which have no chance in global competition alive, and whose employees should instead switch to future-proof jobs, especially given the country’s lack of skilled labour. Grimm says the government should use the money to promote climate-friendly technologies instead. "The demands of the transformation are huge, we should invest in a targeted way," Grimm says. "For many energy-intensive companies, it's not mainly about electricity, they have to switch to hydrogen. A subsidised electricity price doesn't help here at all." Economist Kathrine von Graevenitz, from research institute ZEW, warned that subsidies cannot be abolished easily. "There is no evidence that electricity will be cheaper in five years. Will the politicians really tell the companies [in 2030]: We can't save you after all?"

Four leading German economic institutes have also spoken out against industry subsidies such as cushioning high power prices. Oliver Holtemöller, vice president of the Halle Institute for Economic Research, called such subsidies “highly counterproductive” because a lack of correct price signals could make efforts towards greater innovation less attractive. However, from a security policy perspective it could “make sense to keep critical economic sectors in Germany or the EU to a certain extent through subsidies”, said the institutes.

There are first signs that the subsidies could have unintended consequences. It could stall the expansion of renewable power, by making investments in wind and solar unprofitable, according to a report by business daily Handelsblatt. Several renewable energy investors and plant operators said the proposal was creating uncertainty among investors, while industry players said it also slowed the uptake of power purchase agreements (PPAs). PPAs are long-term contracts between an electricity generator and a customer that guarantee power price, are regarded as a key tool for financing the expansion of wind and solar plants. But PPA prices are now around 10 cents per kWh hour. "If you can have an industrial electricity price of 5 or 6 cents for five years, then you'd be stupid to sign up for something more expensive," said a high-ranking manager.

In contrast to critics, economist Jens Südekum, from the University of Düsseldorf, believes that the planned subsidies will accelerate the country’s decarbonisation drive. He argues that the rollout of renewables will make electricity cheap in the long run, and that the subsidies will help companies prepare because they can convert production to stay profitable in a green power world. "The six cents are important for planning security," Südekum says. "Investment decisions must be influenced now, not in two years' time […] The industrial electricity price can be implemented quickly. Therefore, it is the tool of choice."

What is the EU concerned about?

Germany has repeatedly come under fire during the energy crisis for comparatively generous support for its domestic industry at the expense of fair competition within the European Union. Any new support scheme for industry would need approval from the EU based on state aid rules.

The EU is once again concerned that electricity subsidies give German companies an unfair advantage. EU energy commissioner Kadri Simson has warned the country that a cap on industry electricity costs would harm Europe’s single market and urged the government to back fairer reforms to ease power prices. “A lot of member states have different budgetary possibilities to subsidise their industry,” Simson said. “We have to take into account that there has to be fair competition in the EU.” Simson instead advocated the commission’s plans to support industry, which would instead allow German industry to opt for “long-term five- to ten-year predictable pricing schemes” rather than taxpayer support.

The premiers of Germany’s 16 federal states urged the EU to allow the subsidies because high energy costs are an “acute obstacle” to the economic recovery.

The European Union in spring presented its own plans to boost net-zero industries in the bloc in an effort to keep up with other regions of the world, such as the U.S. and China. The commission proposed the obligation that future subsidies for low-carbon electricity generation would have to be made through so-called two-way Contracts for Difference (CfDs), which are agreements between an electricity generator and a public body (in this case the state), where a price of electricity is pre-arranged - usually by a competitive tender.

Germany says it is mindful of the EU concerns. “We are aware of the concern of other member states that Germany could unilaterally distort competition due to its financial strength,” the proposal for an industry power price says. It adds that the government wants to enter into a constructive exchange with the European Commission. Habeck said he wants the EU to step in to ensure that all EU countries, no matter how limited their fiscal headroom, can afford a special power tariff for industry. Those who have insufficient budgets “could, for example, be given the necessary financial leeway through a temporary special European Bridge Electricity Prize programme”.

Germany’s metal industry federation WVMetalle called for an EU-wide industry power price in 2020, arguing that it would create planning security and long-term stability for investments, including in climate-friendly processes.

How else is Germany planning to support industry decarbonisation?

A low power price for industry is not the only subsidy Germany’s government is planning in order to support energy-intensive industry. In early June, the country launched preparations for a novel subsidy programme in the form of so-called Carbon Contracts for Difference (CCfDs), which compensate energy-intensive companies for the extra costs of climate-friendly production to give them “the investment security they now need”. The contracts serve not only to protect the climate, but also to ensure the country’s industrial future in response to the U.S. green industry subsidy programme IRA, according to Habeck.

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