Germany plans to subsidise power-hungry industries

The German economy ministry plans to subsidise 80 per cent of the electricity cost for energy-intensive companies, in a proposal likely to fuel divisions inside the governing coalition and further alienate European nations who cannot afford such measures.

Under a long-awaited and highly contentious proposal published by Green economy minister Robert Habeck, a large part of German industry would be offered electricity at a subsidised price of €0.06 per kilowatt hour (kWh) until 2030. The plan, which would cost an estimated €25-30bn, is aimed at bolstering German manufacturers in sectors such as chemicals, steel, metal and glass, as well as encouraging European investment in industries seen as crucial to reducing EU dependence on China, such as the production of solar panels and semiconductors.

The economy ministry said that Germany needed to respond to “tough international competition” in these sectors that was “not taking place on a level playing field” due to huge subsidies in China and, more recently, in the US due to Joe Biden’s Inflation Reduction Act (IRA).

Habeck’s proposal argues that energy intensive industries are facing an “existential threat” as they struggle with the surge in electricity prices triggered by Vladimir Putin’s invasion of Ukraine while also seeking to rapidly decarbonise — a process that often leads to higher electricity consumption.

But the plan has already faced strong opposition from within chancellor Olaf Scholz’s deeply divided three-way coalition. Germany’s liberal finance minister, Christian Lindner, who this week warned that “extremely expensive subsidies” were the “wrong approach”, describing them as unfair and inefficient.

Lindner, who has also locked horns with Habeck on a plan to ban new gas and oil heating from next year, explicitly rejected the vice-chancellor’s proposal to use funds from the €200bn “protective shield” earmarked to shield German households and industry from the impact of Putin’s invasion of Ukraine on energy prices.

A spokesman for Scholz said that the chancellor believed in “electricity prices that industry and consumers can afford without being permanently subsidised.” He added: “We now have to discuss exactly how to get there.”

The proposed subsidy also risks exacerbating tensions within the EU, where many member states are concerned Germany’s economy, which is the largest in the EU, is in danger of exploiting a shift in thinking on European industrial policy and its huge financial heft to offer help to industry that other nations cannot afford to replicate.

National decisions on subsidies are subject to approval by the European Commission, but the bloc’s state aid rule book has been weakened in recent years due to the Covid-19 pandemic and the energy crisis, further aggravating the grievances of lower-income countries.

German manufacturers have long complained about high industrial electricity prices, especially after they jumped following the war in Ukraine. Among the companies that have since been reconsidering plans to build factories in Germany is Swedish battery maker Northvolt, which has been weighing whether to set up shop in the US instead.

Volkswagen has similarly put a planned battery factory in eastern Europe on hold, instead prioritising a similar facility in Canada, which will allow it to tap into IRA subsidies and incentives.

Oliver Blume, VW’s chief executive, has since called for politicians to intervene in the European electricity market, arguing that prices must stay below 7 cent per kilowatt hour for the region to remain competitive.

The average price of electricity for business consumers in Germany was just over €0.25 per kWh including taxes in the second half of 2022, according to data from the European statistics agency Eurostat — almost exactly the average level for the EU overall.

The economy ministry’s plan says that, in the long term, industry should be guaranteed cheap electricity produced from renewable sources through fixed-term contracts. The proposed subsidised price of €0.06 per kWh would only be available to certain industries, and would be capped at 80 per cent of a business’s consumption in a bid to incentivise energy saving.

The plan was met with mixed reaction from German industry, winning the backing of the German Steel Federation and Germany’s largest union, IG Metall, but drawing scepticism from the German Chamber of Industry.

Marcel Fratzscher, head of the German Institute for Economic Research, also voiced doubts. “The aim should not be to keep energy-intensive production in Germany, but to keep innovative processes and good jobs here,” he said. “It’s also not good from a social perspective. Industry gets the subsidies while consumers are left with high energy costs.”

Fratzscher said that if companies such as the German chemicals giant BASF moved energy-intensive production to the US or China, as the company has suggested, it could actually be beneficial for Germany because it would boost the business’s global competitiveness.