Funding of Germany’s energy transition needs updated framework amid geopolitical upheaval – industry

Financing Germany’s transition towards climate neutral energy sources requires a rethinking of the policy’s aims and priorities, as geopolitical challenges increasingly expose the security risks of fossil fuel dependencies, said Kerstin Andreae, the head of the Federation of German Energy and Water Industries (BDEW) at a conference in Berlin. The impact of the US-Israeli-led war on Iran on global energy markets made clear that a greater independence in terms of energy supply needs to come “on top” of existing energy transition goals, Andreae said. “Resilience and related concepts need to be discussed in the context of geopolitics, not only as part of climate policy,” she argued.

BDEW and the Association of Local Utilities (VKU) had invited government and industry representatives to discuss how to place the financing of Germany’s energy transition on a more sustainable footing. Amid a prolonged period of economic stagnation, Germany faces key decisions to put the country on track towards a climate neutral energy system by expanding renewable energy sources and decarbonising heating, transport and industry. Annual investments of around 90 billion euros per year are required until 2030 to meet energy transition targets, the groups said, adding that these will also strengthen the country’s long-term competitiveness. 

Expanding renewables, grid infrastructure, storage and backup capacity as well as heating and transport electrification all will require significantly higher funding. While Germany’s special fund for infrastructure and climate neutrality could help kick-start key projects, a more structural approach is needed to incentivise private sector investments, Andreae said. The Germany Fund, designed to leverage investments with state guarantees, is a step in the right direction and should be further developed at a state energy minister meeting in May, Andreae added. 

VKU head Ingbert Liebing said that local utilities face a particularly steep challenges. Investments in expanding and modernising distribution grids for electricity and heating and other measures at the local level could be up to four times higher per year than current spending. “This is not about classic municipal funding, but about a fundamental transformation of our energy system,” Liebing argued. At the same time, high debt levels in many municipalities limit their ability to reinvest utility revenues, as funds are often needed to cover budget shortfalls.

Representing the economy ministry, state secretary Frank Wetzel said recent spikes in oil and gas prices showed that Germany and Europe are directly affected by the escalating conflict in the Persian Gulf. “The current crises show that we need greater resilience and sovereignty,” Wetzel said, adding that raising the required investments will be a “mammoth task” in the coming years that cannot be borne by the state alone. Wetzel said the Germany Fund could open new pathways for investors and the rapid scale-up of technologies such as geothermal energy. State guarantees provided by development bank KfW, along with more flexible marketing instruments such as power purchase agreements (PPAs), could help unlock investments, he added. 

Martin Blessing, former banker and now personal investment advisor of chancellor Friedrich Merz, said that investor interest in Germany had increased significantly over the past year, as instability in other markets has made the country comparatively more attractive. “The money is there,” both domestically and internationally, Blessing said. However, attracting investments for the country’s more than 800 individual utilities, which vary widely in creditworthiness, remains challenging, he added. Blessing questioned whether the country needed such a high number of local suppliers, adding that the government is working on standardised investment models to attract capital. 

Since the 2022 energy crisis, energy supply security gained in importance as a key goal of Germany's energy transition. The country is still heavily reliant on imported fossil fuels.