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26 Oct 2021, 17:29
Julian Wettengel

Energy price hike to leave mark on coalition talks as parties aim to help households

Photo shows construction of natural gas pipeline in Germany with wind power turbines in background. Photo: Open Grid Europe OGE.
High natural gas prices have been the main driver of the electricity price surge for months; in the end, they could help push renewables expansion. Source: Open Grid Europe OGE.

High gas, petrol and power prices are set to play a part in the ongoing negotiations to form the next German government coalition, which will shape the country’s energy transition policy for years. The election winner Social Democrats, the Green Party and the pro-business FDP have said they aim to offer relief to consumers – especially to lower income households – by ensuring competitive energy prices. However, the current crisis is unlikely to alter the potential coalition’s “central task to bring Germany on a 1.5°C path,” as the parties consider rapid renewables expansion key to reducing dependence on fossil fuel imports and avoiding similar crises in the future. In the near term, analysts say, the unusual situation with record-high prices already at the start of winter could mean a market shakeout among energy suppliers. In the long term, high prices will give a push to the shift to renewables.

The unusually high energy prices at the start of Europe’s winter season are set to leave a mark on the ongoing negotiations to form Germany’s next government, as the parties pledge to offer relief to lower income households. However, the situation is unlikely to deter the potential coalition from pursuing ambitious climate action. Negotiators as well as independent analysts see the high prices as a driver for massive renewables expansion that would reduce dependence on imported fossil fuels.

The coalition negotiations will be about charting a way for Germany to “implement its future energy system in real terms,” Green Party MP Ingrid Nestle told Clean Energy Wire. She and fellow negotiators from her party as well as from the election winner SPD and the pro-business FDP are currently hammering out a coalition deal, the “central task” of which is to steer Germany on a 1.5°C path.

“All partners in the talks also have current developments in mind, such as energy prices.” Nestle, who has been spokesperson for energy industry of the Greens’ parliamentary group, is part of the negotiating team on climate and energy.

“We are aware of the issue,” said SPD general secretary Lars Klingbeil at the start of the coalition talks on 21 October, when asked about the influence of high energy prices on the negotiations. While all three parties have told Clean Energy Wire that they do not intend to publicly comment on the content of the talks, Klingbeil hinted that affordable energy for households would be a key focus. “Three parties are standing here whose goal is to relieve the burden on low- and medium-income earners, and now we have to see what a way forward might look like.”

Prices for gas, coal, oil and electricity are unusually high as demand, especially in Asia, has increased much faster than expected after the coronavirus crisis, investments in fossil fuel production capacity have been limited, and gas storage levels in the northern hemisphere are lower than usual during this time of the year.

The price increase coincides with the introduction of Germany’s national CO2-price for transport and heating fuels of 25 euros per tonne of CO2 at the beginning of this year. It has already increased the price per litre of diesel or petrol by 7-8 cents, and the outgoing government agreed to raise it step-by-step to 55 euros by 2025. During the election campaign, the Green Party called for a faster increase and it remains to be seen whether the new alliance plans another reform. The SPD wants to stick with the agreed price path, with chancellor candidate Olaf Scholz citing “the hardships of the citizens” as the reason.

All three potential partners agree that the revenues of the carbon price should continue to be used to lower and eventually abolish the renewables levy (EEG surcharge), which power consumers pay to support the build-out of wind and solar. The outgoing government had agreed to use parts of the revenues in this way to relieve citizens and companies. The coalition negotiations could also feature a uniform per capita payment to citizens, which would benefit especially lower income households.

“Energy transition is not part of the problem, it is part of the solution” – BDEW head

This is the energy policy backdrop against which the SPD, the Greens and the FDP have started their coalition negotiations. They said their goal was to kick off “the biggest industrial modernisation project in probably more than 100 years in Germany” and that they consider renewables expansion the crucial element. Just as the potential new alliance seeks to move Germany into high gear on climate, the high price of energy leads the governments of some European countries to try and delay the EU’s climate policy plans, warning of an “excessive burden” on consumers. Others, such as Spain and France, at least call for reforms in the electricity market. Germany is among those member states that push back against hasty changes and say that the price increase is temporary.

The country’s energy industry is also cautious about the EU’s energy market reforms. “Careless interventions in the liberalised internal energy market increase the costs of energy supply and reduce investor confidence, which is needed for many energy transition projects,” says Kerstin Andreae, head of Germany’s energy industry association BDEW. “As a general rule, the energy transition is not part of the problem, it is part of the solution,” she told Clean Energy Wire.

The pressure to get away from oil and gas will increase now.

Andreas Schroeder, ICIS

The current crisis could give an additional push to an ambitious energy transition policy, says Andreas Schroeder, head of energy analytics (quantitative) at energy intelligence services provider ICIS.

“The pressure to get away from oil and gas will increase now,” he told Clean Energy Wire. The key long-term effect of the current energy crunch will thus be on renewable energy production, says Schroeder. “The wish to be more independent from price fluctuations grows in the current situation, and that means not to import oil and gas.”

Germany’s outgoing government seems to agree. It has so far showed little interest in intervening in the market, and chancellor Angela Merkel has called for “prudent” reactions. After a leaders’ summit with her European Union counterparts, Merkel said the current situation had to be considered separately from the bloc’s debates on climate action and the Fit for 55 legislative reforms “because the medium and long-term transformation of our energy supply must go in the direction of climate neutrality and must not be hindered by such temporary increases in prices.”

Gas main driver of rising power prices

Energy prices in Europe have been on the rise, because global demand increased substantially as the countries’ economies, especially in Asia, have been recovering from the effects of the coronavirus pandemic. Supply has not kept up. Prices are high for oil, coal and electricity, but especially for natural gas. Storages in Europe are at atypically low levels for this time of the year, following a cold winter with high heating demand.  

“What we are experiencing is indeed quite unusual, because we are at the start of a winter and we are already seeing record-high prices,” says analyst Schroeder. “This has never happened in the history of liberalised energy markets since the turn of the millennium.”

Wholesale power prices are also high. In spring of this year, the CO2 allowance price in the EU Emissions Trading System (ETS) was a major reason for rising prices, says Schroeder. “However, since then, gas prices have taken over as the main driver.”

This has led to a short-term revival of coal power in Germany, especially domestic lignite, he says. Lignite power plants are now more competitive and have run at high capacity for more than half a year, also because wind power conditions were not very good in the first half of 2021. This is set to lead to rising carbon emissions in Germany’s power sector for the full year.

“If we get a cold winter then we will really have a problem”

High gas and power prices have already affected the industry of Europe’s largest economy. The businesses that buy their energy on the wholesale market are the ones most directly affected, such as energy suppliers and industry companies.

Following several UK businesses, power and gas retailer Otima Energie was the first German company to file for insolvency in October, citing the “massively rising wholesale prices.” It might only be the first of several such cases, says Schroeder.

“Over the winter, we could see a market shakeout, as small companies without long-term supply contracts drop out and the bigger ones, such as Uniper, remain.” Other energy suppliers, such as E.ON, have halted their business with new customers as they re-evaluate their pricing.

But the impact on German industry goes beyond the energy supply sector. Natural gas is used especially in the chemical industry, for example in fertiliser production, and operations there have been stopped or at least reduced in some places, says Schroeder. “You don’t see something like that very often, because they must normally produce very steadily.” The effect on other energy-intensive sectors like steel manufacturing might be less immediate, he adds.

“German industry players are reasonably protected, because many have long-term supply contracts with somewhat fixed prices,” explains Schroeder. Here, the crisis may thus hit with a delay when they also pay higher prices. “The industry must already start thinking about whether they can avoid gas and replace it with other energy sources in different processes.”

Whether the situation gets a lot worse depends to a large extent on temperatures in the northern hemisphere, as gas consumption increases with heating needs.

“If we get a cold winter then we will really have a problem,” says Schroeder.

Reducing dependence on imported fossil fuels key to avoiding similar situations in the future

Germany and Europe are highly dependent on imported fossil fuels. In 2019, more than 60 percent of the EU’s energy needs were covered by net imports. The main imported energy product was petroleum (including crude oil, which is the main component), accounting for almost two-thirds of energy imports into the EU, followed by gas (27%) and solid fossil fuels (6%).

Russia is Europe’s main supplier with 27 percent of crude oil imports, 41 percent of natural gas imports and 47 percent of solid fuel imports. The country has been accused of holding back on additional gas deliveries with the aim of exerting pressure on Europe to greenlight the contentious Russian-German gas pipeline Nord Stream 2.

Analyst Schroeder could not confirm this. “We simply don’t know whether Russia is holding back supply because of Nord Stream 2. I am an analyst and I look at data. The data situation in Russia is bad, because there is no market with reporting obligations about production outages or the like.” Schroeder says Russian requirements to fill domestic storages ahead of the winter are quite strict and Gazprom has promised more deliveries to Europe from November, once storages in Russia are filled.

We need to become less dependent on energy imports. This can only be achieved through a rapid expansion of renewable energies.

Timon Gremmels, SPD

Sources from the European Commission said that while there may be reasons for gas producer Gazprom not to increase supplies – higher prices in Asia or the need to fill domestic storages – “we believe that under market conditions a supplier like Gazprom can be expected to increase its supply.” The situation proves the importance of speeding up the transition to clean energy sources and thus reducing dependence on imported fossil fuels.

Germany’s coalition negotiators agree. “Switching to cheaper renewables is our best chance against future price rallies – and at the same time a prerequisite for climate action and the future of industry,” says the Greens’ Nestle. She is backed up by fellow MP Timon Gremmels, energy policy rapporteur for the SPD parliamentary group.

“We need to become less dependent on energy imports,” he told Clean Energy Wire. “This can only be achieved through a rapid expansion of renewable energies.”

Both politicians say they want to work towards reforms that help push renewables. Gremmels says his party wants to “modernise the entire system of levies and charges in the energy sector,” while Nestle says the current sharp rise in electricity prices shows how urgently the next government should push ahead with necessary reforms of the power market.

Coalition partners “committed to ensuring that mobility and energy remain affordable”

Households across Germany also face rising prices, but when this will happen and by how much prices will go up very much depends on the situation. Homeowners who have not yet filled their oil heating tanks have to pay almost 90 percent more for the fuel than in the same period last year, says price comparison website Verivox.

Verivox also expects many gas suppliers to pass on the price increase on the wholesale market to their customers, albeit with a bit of a delay. Average household power prices, meanwhile, are at a record high of more than 31 cents per kilowatt hour, says the website. High procurement costs for the suppliers and rising grid fees would mean that household prices are bound to remain high next year, despite the country’s renewables levy decreasing to its lowest level in ten years.

The prospective government coalition partners have put their focus on relieving lower income households. In their paper for the coalition talks, the three parties have already announced their aim to end the financing of the renewables levy via the electricity price as soon as possible in this legislative period to lower power costs.

“In the upcoming coalition talks, the SPD is committed to ensuring that mobility and energy remain affordable,” says Gremmels.

Many energy industry stakeholders and politicians have proposed to gradually lower or outright abolish the renewables levy over the coming years. “This would relieve the burden on electricity customers and not least on small and medium-sized enterprises,” BDEW head Andreae told Clean Energy Wire. At the same time, environmentally friendly electricity-based applications, such as electromobility or heat pumps, would become more attractive, the ramp-up of the hydrogen economy would be supported and bureaucracy would be noticeably reduced, she added.

Aside from household consumers, the parties' agreed 12-page paper which serves as the basis for negotiations shows that the potential coalition partners also have industry in mind. As Germany should “ideally” exit coal by 2030, massive renewables expansion and some modern gas power plants will be necessary to secure supply and meet increasing electricity demand “at competitive prices”, it says.

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