Weekly Commentary

Regulating the industrial electricity price? Do so.

August 2023 Industry lobbies for a regulated industrial electricity price, and in rare unity the unions are also in favor of such a measure. In fact there are many arguments in favor of this demand.
A comment from Dr. Cyrus de la Rubia

Dr. Cyrus de la Rubia

Waves are running high in the debate about a subsidized industrial electricity price. Chancellor Olaf Scholz recently rejected this outright and is in agreement with the FDP. Unions and employers, but also the Greens and the SPD parliamentary group are in favor, as is Hendrik Wüst, CDU Minister President of North Rhine-Westphalia. You can see that the political colors are getting a bit mixed up here. In fact, you don't get anywhere here with simple black-and-white thinking.

The planned package of measures

Specifically, the Federal Ministry of Economics led by Robert Habeck of the Green Party is proposing that a so-called bridge electricity price of 6 cents/Kwh should benefit only energy-intensive industrial companies that are in international competition. The chemical industry and the steel, metal, glass and paper industries are typical examples. In addition, the industries that drive the climate-friendly conversion, i.e. the producers of wind turbines, solar plants, storage capacities, etc., are also supposed to benefit from these subsidies. This bridge electricity price is to be phased out automatically by 2030 at the latest, when - according to the Economics Minister's idea - the supply of electricity has been increased by other measures to such an extent that market prices have returned to normal. It is also envisaged that the subsidized electricity price will only apply to 80% of demand, in order to maintain the incentive to save energy. This structure takes some of the wind out of the sails of the counter-argument that unrestrained demand from German companies would drive up prices throughout the EU. The SPD parliamentary group recently presented a slightly modified concept that envisages an electricity price of 5 cents/Kwh, which is to be phased out automatically after just five years.

Companies will therefore receive the difference between the exchange electricity price and the 6 cents/Kwh for up to 80% of their consumption - this has yet to be defined. Currently, an electricity price of 13 cents/Kwh generally applies to industry for 70% of the previous year's consumption. However, this regulation is to expire at the end of the year.

Bridge to nowhere?

Opponents of a bridge electricity price claim that this bridge will never end. Ultimately, they assume that energy prices in Germany will remain permanently high. This, they say, is because Germany is not a sun- and wind-rich country - northern German states see the latter differently - and the need for renewable energy will continue to rise over the next few decades if climate targets are to be met. In our opinion, this is a bit of a short jump. It is possible that energy prices will remain at a higher level in the coming years than they were in the 2010s as the economy shifts to carbon-neutral production. But this is fundamentally a global phenomenon; the U.S. is also a signatory to the Paris Climate Agreement. What matters is whether the price differential with other countries increases or decreases, because this affects competitiveness. And that's where the second point comes in.

Integrated electricity market

The fact that the sun does not shine as often in Germany as it does in Spain does not mean that electricity prices in this country will decouple from those in southern Europe to our disadvantage. Rather, we are dealing with an increasingly integrated electricity market in the EU. Germany imports electricity from France and Denmark, for example, and our southern neighbor often buys a few billion kilowatt hours from Germany when there is a surplus here and half the nuclear power plants in France are shut down. In this way, there is a certain synchronization in electricity prices, even if there are different price levels, in particular due to different taxes and duties. In short, if Spain, for example, expands its solar energy capacities, this also benefits Germany. In addition, there is a lot of room for improvement in the expansion of renewable energies and north-south routes. This is exactly where the Ministry of Economics wants to start.

Prevent exodus

Ideally, the situation would look like this: Energy-intensive industry abandons its plans to migrate, some of which have already been voiced, because it can live well with a bridge electricity tariff of 6 cents/Kwh. In the course of an aggressive expansion of renewable energies, storage capacities and power lines - in this country and presumably also in the rest of the EU - there will be a reduction in the exchange electricity price, so that in a few years the subsidy will be superfluous. The relevant companies would then remain in Germany even after the subsidies expire. The worst-case scenario would be that the subsidies are paid, but the energy turnaround does not progress to the extent and at the speed envisaged. Exchange electricity prices would remain high or even rise, while outside Europe the supply of electricity would increase and prices there would fall. Even before the subsidized electricity price expires, many energy-intensive companies would probably pull the ripcord and look for alternative locations. The whole effort would have been in vain and the mountain of debt would have grown further.

How will it come? No one knows. What is certain, however, is who will be in the dock if there is a major industrial exodus: "politics," and the judgment will be particularly harsh if electricity prices fall again in the next few years. Because then the exodus would have been avoidable and the public opinion will ask: How could they?

Dr. Cyrus de la Rubia

Chief economist


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