Ahead of February’s general election in Germany, the country’s industry leaders raised the alarm. They urged the new German government to do something against high electricity prices and warned of business closures and companies relocating abroad if nothing happened.Their concerns appear to have resonated with the new coalition government of the conservative CDU/CSU party alliance and the Social Democrats (SPD) headed by Chancellor Friedrich Merz.After only a few weeks in office, it is planning significant relief measures, but some experts are warning of potential downsides.How high are electricity prices for German industry?It’s hard to pinpoint a single figure, as existing relief from electricity costs varies depending on company size and sector.According to a study by the Bavarian Business Association (vbw) based in Munich, Germany’s industrial electricity prices were around the European average in 2022. However, the impact of Russia’s full-scale invasion of Ukraine in February 2022 affected energy markets, making year-to-year comparisons difficult.Recent EU data shows that Germany ranks third in the bloc regarding electricity prices for non-household consumers — a category that includes not only industries but also public institutions like schools and government offices, thus making it hard to draw conclusions about the impact on industry specifically.When it comes to the wholesale electricity price — before taxes and fees — Germany is in the middle of international comparisons, said Bruno Burger, energy expert at the Fraunhofer Institute for Solar Energy Systems, while speaking to the German daily Frankfurter Rundschau recently.Germany’s plan to keep up with US and ChinaOne thing is clear, though, companies in the US and China pay significantly less.In 2023, industrial electricity prices were around 7 euro cents (around 8 cents) per kilowatt-hour in the US, according to the German ifo Institute think tank, and about 8 cents in China, vbw data show. In Germany, however, industrial firms pay around 20 cents, ifo says.Plans by the coalition government in Berlin reportedly include broad-based relief measures to reduce industrial electricity prices.In Germany, the electricity price is made up of the wholesale price, plus an electricity tax, surcharges, and grid fees. Grid fees are charges for using the power network, while surcharges fund specific government initiatives.Berlin is now planning to reduce the electricity price by 5 cents per kilowatt-hour for businesses by lowering the electricity tax to the EU minimum and cutting surcharges and grid fees.The government also wants to extend and expand the electricity price compensation program, which reimburses energy-intensive industries for costs arising from CO2 pricing. The CO2 price is applied to the use of fossil fuels in Germany and the EU to discourage emissions.Is this plan a good idea?Andreas Fischer, energy and climate policy expert at the Cologne-based German Economic Institute (IW), told DW that “from the consumer’s perspective, the broad-based relief is positive.”Max Jankowsky, CEO of Lössnitz Foundry and president of the Chemnitz Chamber of Industry and Commerce, agrees, telling DW in a statement that the urgency of reducing electricity prices for industry has been “recognized.”But the plan is also drawing criticism.“A blanket reduction in electricity prices contradicts the needs of a system based on renewable energy,” says Swantje Fiedler, scientific director at the Forum for Ecological-Social Market Economy. Rather, the German energy system would need incentives for energy storage and flexibility, she told DW, because renewable electricity supply is bound to fluctuate, with abundant supply in summer and scarce in winter.“At the same time, it is important to consider how flexible a company can be,” says IW expert Fischer, as not all firms could quickly adapt to changes in electricity supply or pricing.The pros and cons of cheaper electricityLeonhard Probst, from the Germany-based Fraunhofer Institute for Solar Energy Systems in Freiburg, believes lower electricity prices may reduce incentives for companies to use electricity more efficiently.Probst, who manages the Energy-Charts.de platform — the most comprehensive database for power generation in Germany — also said that, on the other hand, cheaper electricity can make it easier to electrify industrial processes, which is better for the environment in the long run.The Lössnitz Foundry would be such a case in point, as the company’s CEO Max Jankowsky has been planning to switch from coke to an electric smelting furnace. So far, however, high power prices are holding him back: “It feels like running into a buzzsaw,” he said, referring to the risk of permanently high electricity prices.Will Brussels thwart Berlin’s plan?The coalition agreement of Germany’s ruling parties also mentions further relief for energy-intensive companies. It remains unclear whether this includes capping the wholesale electricity price, though some experts believe that’s the intent.As shown in price breakdowns, taxes and surcharges already account for only a small portion of the final electricity cost.Fraunhofer scientist Probst warns that artificially lowering prices could backfire: “If electricity is in short supply but sold cheaply, scarcity intensifies and prices rise further,” he argued.Sebastian Bolay, head of energy, environment and industry at the German Chamber of Industry and Commerce (DIHK), sees another problem looming for the government on the horizon.“A price cap would interfere with market pricing and would likely not be permissible under EU state aid rules,” Bolay told DW.Moreover, a price cap could also be expensive for taxpayers, Probst added, as many companies that don’t need relief, because energy costs make up only a small part of their value creation, would “benefit unnecessarily.”‘Tailored measures’ make more senseSwantje Fiedler is convinced that a faster rollout of renewable energy in Germany will “lower prices in the long term.”In the meantime, said Probst, “targeted subsidies” are more effective than blanket price reductions, and could include special electricity rates for the use of heat pumps.Jankowsky is also calling for what he called “tailored measures,” especially to help small and medium-sized businesses (SME’s), noting that many existing subsidies don’t apply to them, which must be changed, “and it needs to happen fast.”
