As a result of Germany’s green energy transition, electricity prices are exploding. Consumers and businesses are paying the price while Germany faces gradual de-industrialisation. Economists estimate that the cost of the green energy transition will total 170 billion Euros by 2020. This is more than double of what Germany would have to write off if Greece were to withdraw from the monetary union.
In June 2011, Angela Merkel said: “German companies just as citizens of Germany have to be supplied with affordable electricity, also in the future.”
Today it is obvious that Merkel has promised too much. Energy prices in Germany are increasing dramatically – by 57 percent in just the past ten years – and not least because the state is one of the biggest drivers of cost. Taxes and duties on electricity prices have now risen to 23.7 billion Euros p.a. – an increase of just over 1,000 percent within 15 years. The levies on electricity look more like a special energy tax, which is higher than the revenue from tobacco and motor vehicle taxes combined.
This figure is the result of an electricity price analysis by the Federal Association of Energy and Water Industry (BDEW). It should have been a wakeup call for the Chancellor who met with the Prime Ministers of the German states in the Chancellery this week to discuss the green energy transition. The results of the meeting were meagre: the Federal Government and state governments will work together more closely in the future. Merkel announced that summit meetings will be held every six months.
“The green energy transition is a big task to which we are committed together,” said the Chancellor. A Federal network planning law to expand the electricity grid should be agreed before the summer break and adopted by the end of the year.
According to Merkel, it was also agreed to harmonise the further expansion of renewable energy “with the need for base-load capable power plants.” The Federal Government will soon make a suggestion towards this goal. The Chancellor also expressed the hope that there would be an agreement in the mediation process for the energy renovation of buildings and the planned cuts in solar subsidies by the government until the summer.
For industry and consumers, this is only a small consolation. Experts agree that renewables subsidies must be cut quickly. The promotion of renewable energy has become the largest single item of green taxes and levies. This year, the subsidies will increase to the highest ever annual figure of 14.1 billion Euros.
German industry, in particular, is suffering from high electricity prices. Most affected are the chemical, metal and paper industries. In the aluminium industry, the electricity costs amount to about 40 percent of total costs.
All industries complain; some companies have already closed down: the aluminium smelter Voerdal in the Lower Rhine town of Voerde recently filed for bankruptcy because of high energy prices. The U.S. chemical giant Dow Chemical currently operates 17 plants with more than 5,000 employees in Germany. “Because of the green energy transition I get increasingly critical questions from our corporate headquarters in the US about whether energy supply in Germany is still possible at competitive prices,” said Germany boss Ralf Brinkmann.
Germany’s de-industrialization has already begun
“The de-industrialization has already begun,” Energy Commissioner Guenther Oettinger has warned in an interview with the Handelsblatt. Hans Jürgen Kerkhoff, President of the Steel Trade Association, complains: “The levels of industrial electricity prices are higher here than in most other countries.”
Within the Federal Government, the concerns are growing: “The price of electricity has become the Achilles’ heel of the energy revolution. We must design it in such a way that electricity prices remain affordable,” says Thomas Bareiß, energy policy coordinator of the Parliamentary Christian Democrats (CDU). Experts estimate that the cost of the green energy transition will total 170 billion Euros by 2020. This is more than double of what Germany would have to write off if Greece were to withdraw from the monetary union.
What is of particular concern is that Germany’s industry has helped the country to more economic growth compared to other countries during the recent years of crisis. Countries such as Britain envy Germany for the 22 percent share of industry in its GDP.
Therefore, policy makers face a dilemma. On the one hand, industry has to be relieved from energy costs in order not to jeopardize its international competitiveness, says CDU expert Thomas Bareiss. On the other hand, the burden should not unilaterally end up with households. “The only solution is to make the green energy transition as cost effective as possible,” says the conservative politician. In this context, he criticised the federal states that had recently rejected a cut in solar subsidies by a two-thirds majority.
At the Chancellor’s energy meeting with the prime ministers of the German states, the issue of electricity prices will be high on the agenda. Merkel initially only wanted to talk about the expansion of the national grid. Maybe she did not want to be reminded of her promise from last June that the price of electricity would be affordable for industry and consumers.
Yet, the figures tell a different story. At the beginning of the liberalisation of the electricity market in 1998, government taxes and levies for all electricity consumers amounted to 2.28 billion Euros. In 2012 the figure is about ten times as high. The 14.1 billion in subsidies for the promotion of renewable energy is also the single largest item of government taxes and levies on electricity.
Taxes and levies already make up 45 percent of the electricity bill of an average private household with three people. The average household is charged 75 Euros per month, of which only 41 Euro are derived from the procurement, transportation and distribution of electricity, i.e. the actual service. 34 Euros are taxes and duties.
The tenfold increase in taxes represents only the beginning of a trend that will further accelerate significantly in the opinion of many experts. The reason: the green energy transition. If the Federal Government wants to achieve its ambitious goals, it will have to redistribute a lot of money, which it has collected from consumers. The share of renewable energy in electricity generation is supposed to increase from currently 20 percent to 35 percent by 2020 and to 50 percent by 2030.
That will incur additional costs. There are now a number of calculations and scenarios on the subject. In a report presented in early May, the management consultancy McKinsey comes to the conclusion that the total cost of the green energy transition will amount up to 175 billion Euros between 2011 and 2020. In 2020, Germany’s electricity consumers would have to bear costs of 21.5 billion Euros, costs that are caused entirely by the switch to renewable energy.
The renewable energy industry argues that the electricity from wind farms or photovoltaic systems also have cost-reducing effects. The German economy would have to spend less and less money for fossil fuels such as oil and gas. In addition, on sunny and windy days, green electricity would flood the Leipzig Power Exchange and push down electricity prices.
Experts, however, think that only a fraction of the cost can be absorbed in that way. “The financial burden of the green energy revolution is enormous,” says McKinsey expert Thomas Vahlenkamp. “The main burden will be carried by private households.”
The most energy-intensive industries such as steel or aluminium, however, can hope for hand-outs to compensate for higher electricity prices from 2013 onwards. Appropriate conditions have been created by the European Commission through changes in the state aid law were announced this week. In 2013, the EU Emissions Trading Scheme will be entering a new phase, which will result in additional electricity cost increases. But now EU Member States can cancel out these additional costs. The corresponding handouts for industry may cover up to 85 percent of the higher costs until 2015.
After 2015, the percentage of allowable handouts will be reduced. The European Commission justifies the handouts with the prospect of affected industries otherwise relocating outside the EU if energy costs continued to increase. If they then used cheaper electricity from comparatively more polluting power plants abroad, nothing would be gained for climate protection, goes the argument. Germany’s federal government will redistribute 500 million Euros they make from the Emissions Trading Scheme and will hand it out to the energy-intensive industry.
Translation Philpp Mueller
Handelsblatt, 23 May 2012