The German Government has found a new agreement on how to bring down electricity prices for businesses. Here, we look at the content and politics in the support package.
- The German Government announced today new measures to bring down electricity prices for industry. The package consists of a broad cut to the electricity tax, extended compensation for internationally exposed companies and a reinforced exemption on the renewable energy levy for the most energy-intensive companies.
- The measures will be in place for five years and cost around €12 billion annually. It will be partly funded from the Budget and partly from the Climate and Transition Fund.
- This package is a win for Finance Minister Christian Lindner, who always wanted the measures to focus on tax cuts and to give more to SMEs. Economy Minister Robert Habeck will try to spin that the end result for big energy-intensive industries will be the same as under his original proposal, though that remains unclear.
- This will provide an important precedent for France in its quest to subsidise electricity prices. Smaller states will worry that this is another blow to the Single Market.
The German Government has just announced how it wants to lower electricity prices for businesses, particularly for the most energy-intensive companies.
After months of debate, the coalition has settled on a limited package of subsidies combined with tax cuts, mostly in line with what we predicted (see: Options for the German industrial electricity price).
There are three measures in the package. The first applies to all manufacturers and consists of a simple cut to the standard tax paid on electricity consumption down to the minimum level permitted by EU law. This by itself can take off about €0.015/kWh. This extends the current ‘peak compensation’, whereby small- and medium-sized companies could get up to 90% discount on their electricity price if they could prove they have invested in energy efficiency and climate measures. Under the new agreement, the need to prove this would be removed.
Second, there is an extension of electricity price compensation for the most internationally exposed companies. This also includes relief for indirect carbon costs.
Third, the ‘super cap’, which applies to the 90 most energy-intensive companies, will also be extended and expanded. At the moment, this limits the amount these companies must pay for the renewables levy. The new agreement would simply bring it down to 0%.
That final set of companies will therefore be able to stack all the measures together to make for a significant cut in electricity costs.
All these measures are pencilled in to last for five years, with a guarantee until 2026, and would come at a cost of around €12 billion per year, with a large part drawn from the Climate and Transformation Fund.
This package ultimately represents a win for Finance Minister Christian Lindner. He strongly argued against the initial proposal from Economy Minister Robert Habeck, which consisted of state-funded subsidies for the most energy-intensive industrial companies (see: First details on the German industrial electricity tariff).
Lindner objected on two key grounds. One was that the support would be too focused on big companies and would not do enough for the SMEs that form the core of his party’s base. The other was it was wrong to generate new spending and rely on a state-driven process when taxes could be cut instead.
With this new agreement, Lindner appears to have won on both points, as the biggest single measure (the electricity tax cut) has a wider scope, and the support mostly takes the form of tax cuts.
Nonetheless, Habeck will still spin this as a win for him. He argued that energy-intensive industries needed access to an electricity price of around €0.05-0.06/kWh to remain competitive. By piling the different measures on top of each other, he’ll argue that companies in this position will be able to do just that and that he has delivered on their needs.
Politically, the intervention could be significant for the Government as a whole. If they can convince both the public and investors that they have secured the short-term future of industry while new energy sources are developed, and companies decarbonise, then it could give them a much-needed economic and electoral boost. If nothing else, some respite from the constant coalition infighting should help.
A German agreement on an industrial electricity price will also have broader repercussions for Europe.
While it’s too late to impact discussions around reform of the electricity market, other countries such as France are also looking at how to support their industry and lower electricity prices through national policies.
The likely French approach is quite different as it would involve taxing their nuclear power output and then redistributing these revenues (see: France’s plans for redistributing EDF revenues). But for Germany to advance in this area would still set a precedent, both in terms of the principle and also in terms of how it is applied (such as requiring a wider scope and not limiting support to key industrial ‘champions’).
But as well as encouraging large countries to do the same, it will create concern among smaller countries that they are being put at a competitive disadvantage. It is not obvious they will have any route to oppose what Germany is doing but it will complicate future discussions on state aid rules.
The final compromise is a long way from the industrial electricity price that Habeck wanted at first, but it will still provide some relief for a number of businesses in Germany and some positive headlines for the Government.
The real significance for Germany’s economy will depend on whether Habeck’s claims for the energy-intensive sector can be stacked up.
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