EC Investigation Calls into Question Sustainability of German Subsidies

While the shale boom in the US has lowered electricity bills for consumers, Europeans are struggling to keep up with rising energy costs, in large part due to ambitious emissions targets set by the EU. In Germany, known for both its aggressive push towards renewables and the storied competitiveness of its exporters, companies may soon lose an exemption that dispenses them from paying expensive renewable energy surcharges. Business leaders worry this will “destroy Germany’s industrial core”.

In no other country has the shift towards renewable energy been so aggressively pursued as in Germany, where policy wants to increase the percentage of renewables in the electricity mix to 35% by 2020 and 80% by 2050. The main instrument behind this push is Germany’s Renewable Energy Act (EEG). Enacted in 2000 by the red-green coalition government, the law provides for feed-in tariffs to ensure long-term guaranteed prices for a wide array of renewables as well as levies for infrastructure improvements.

Germans have taken to the renewable transition, commonly called Energiewende, faster than anyone expected, quickly driving up the cost of subsidies and putting pressure on the existing electricity grid and storage infrastructure. Instead of coming out of government coffers, surcharges are collected directly from consumers. The cumulative total that consumers have paid subsidizing green energy will surpass €100 billion next year and, at €0.265 per kilowatt, prices now rival with those in Denmark, the most expensive in the EU.

Heavy, energy-intensive industries, however, are exempt from these surcharges. In 2012, the government estimated that these exemptions amounted to some €440 million ($573 million), an amount ultimately borne by Germanys ‘ordinary’ consumers. Introduced in 2003, they were intended to provide relief for industries and companies that consume large amounts of energy and compete internationally with peers that can purchase energy at much lower prices in their home markets.

According to Der Spiegel, the exemptions have since become “farcical”. As the cost of the subsidies rose, the German government lowered the limit beyond which a company is eligible for exemptions from 10 gigawatt-hours a year to only 1 gigawatt-hour a year. According to reports, some golf courses are even benefiting from the exemptions.

Europe’s competition authorities have been following the situation closely and now seem poised to take action against what they see as a breach of EU competition law. At a dinner in Brussels earlier this year, European Energy Commissioner Günther Oettinger told a group of industry leaders that the price concessions for energy-intensive companies in Germany clearly amount to inadmissible subsidy levels.

German businesses are becoming increasingly concerned that they may lose their privileged position and, even worse, be forced to repay hundreds of millions of Euros to the German government. Speaking to Euractiv this week, a representative of the VIK industry, a lobby for heavy energy users, warned that a loss of the exemptions could saddle companies with billions of euros in additional costs and “destroy Germany’s industrial core”.

Berlin hopes to negotiate an agreement with Brussels to keep exemptions in place for the most energy intensive companies who face intense international competition, while weeding out the more abusive cases. A document procured by Reuters this week hinted that the government may be prepared to cut exemptions by more than €1 billion. The government dismissed the leak and denied all plans to do away with the discounts, but Environment Minister Peter Altmaier admitted that some of the 2,300 companies in the exemption scheme may not deserve special treatment.

Even if Berlin can cut a deal with Brussels, no doubt highly wary of inflicting damage on the continent’s strongest economy, German voters may prove to be a more formidable obstacle. Anger is mounting in the country as energy bills rise. With German households footing the bill for corporate exemptions, voters may offer much less clemency to industry. Both the Greens and SPD have pushed for a significant cut back or even an end to the exemptions.

All across Western Europe, taxes or renewable subsidies and transmission charges account for roughly half the average household bill. Following the latest round of price rises last month, the cost of gas and electricity for an average household in the UK is now an estimated £1,500 per year, or 5% of average household income, with the UK actually coming in below average. Danish consumers pay €0.295 per kilowatt of electricity, compared with €0.17 in the UK.

Even in Member States less keen than Germans on the renewable transition, compliance with the EU’s ambitious carbon emissions targets have tied the hands of policymakers in deciding how to meet their countries’ energy needs. The EU’s Large Combustion Plant Directive (2001), for example, will cut emissions significantly, by phasing out dirty energy sources such as coal-fired power plants and mandating more renewable generation.

This piece is cross-posted from OilPrice.com with permission.