The energy industry is critical of the subsidization of electricity prices for the manufacturing sector proposed by Economics Minister Robert Habeck (Greens) and the trade unions. "An industrial electricity price starts in the wrong place, at least if it impairs price signals," said Kerstin Andreae, chairwoman of the German Association of Energy and Water Industries (BDEW), to the F.A.Z. "We need price signals from the market for investments in energy efficiency, in renewables, but also for the transformation processes in industry," she demanded, referring to an as yet unpublished BDEW brief analysis of Habeck's ideas.

Christian Geinitz

Business correspondent in Berlin

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The proposals of the Ministry of Economics provide for a "bridge electricity price" of 2030 cents per kilowatt hour by 6. The difference to the average stock exchange price is to be reimbursed by the state for 80 percent of annual consumption. To this end, 25 to 30 billion euros could be taken from the Economic Stabilisation Fund. Later, from 2030 onwards, a price close to production costs is to be achieved, facilitated by – in some cases mandatory – contracts for difference for wind and solar parks as well as by state guarantees for risk premiums for industrial direct contracts between producers of renewable energies and companies (Power Purchase Agreements, PPAs). The trade unions IGBCE and DGB had also spoken out in favour of an industrial electricity price. Most recently, there was talk of 4 cents per kilowatt hour.

However, according to Andreae and the BDEW study, the envisaged market interventions could have a negative impact on innovative instruments such as PPAs, abbreviated electricity supply contracts. In order to reduce energy costs, Andreae prefers "post-market" steps, including investment incentives and tax and duty relief. In the long term, tariffs can only be reduced if renewable energies and grids are expanded and there are incentives for investments in controllable generation, such as hydrogen-capable gas-fired power plants. "The willingness of the private sector to invest in the expansion of renewables, in flexibilities as well as in the climate-neutral transformation and development of new business models should be promoted more strongly and not dampened by a state-guaranteed price," Andreae demanded.

Production declines by 25 percent

The BDEW analysis does not deny that tariffs have gone out of hand after the Russian invasion of Ukraine and have hit the economy hard. On August 26, 2022, a record price of 985 euros per megawatt hour was called on the futures market for the annual base load. On an annual average, a large consumer with an annual consumption of 70,000 to 150,000 megawatt hours had to pay 184.40 euros per megawatt hour without reimbursable taxes.

That was 18.44 cents per kilowatt hour, more than three times the intended industrial electricity price. The high levels have harmed international competitiveness, according to the BDEW. This is one of the reasons why the energy-intensive industry in Germany suffered a 25 percent decline in production in January of this year. Therefore, a reduced industrial electricity price seems like "an obvious and plausible answer to the high energy costs" and could increase the competitiveness of German suppliers again. However, if this remedy is chosen, the negative effects should be "contained", Andreae complained. For example, the subsidy must be based on a fixed percentage and not on a lump sum, and state aid must be steadily reduced.

Overall, however, the following applies: "A regulated industrial electricity price will impair free pricing on the market and have negative effects on the wholesale electricity market." Andreae justifies her doubts by saying that the government-guaranteed prices reduce the incentive for companies to hedge the first 80 percent of their consumption in the long term or to conclude PPAs. From the futures market, volumes would be shifted to the short-term spot market. On the one hand, this runs counter to the EU Commission's efforts to increase liquidity on the futures markets. On the other hand, it increases the procurement costs for all those buyers who do not benefit from the bridge electricity price.