Industrial Electricity Price: Bridge to Nowhere
OpinionOpinion by ZEW President Achim Wambach and Axel Ockenfels, Professor at the University of Cologne
The German Federal Ministry for Economic Affairs and Climate Action is planning the introduction of an industrial electricity price – a medium-term electricity price cap for energy-intensive industries – to bridge the time until the energy transition is sufficiently advanced. It is feared that without this measure, deindustrialisation may occur. The underlying assumption is that a future renewable electricity system will be more cost-effective. Based on this belief, the Ministry for Economic Affairs and Climate Action expects that this industrial electricity price will no longer be necessary by 2030 at the latest.
While the ministry’s concern is understandable, the premise itself is questionable. Although each kilowatt-hour of solar and wind power can replace electricity generated from gas and coal power plants at low variable costs, the challenge of affordable energy storage during periods of low wind and sunshine remains unsolved. Unless there are significant breakthroughs in storage and other technologies, climate protection cannot be achieved without costs.
This is evident in the inadequate voluntary commitments of the international community and the continuous increase in global CO2 emissions, even after the Paris Agreement, with new record levels annually, only briefly interrupted by the COVID-19 pandemic. Germany’s experience with the energy transition to date also provides little reason for optimism. For over 20 years, it has been hoped that the transition would lead to lower electricity prices and competitive advantages. Instead, Germany now faces some of the highest electricity prices worldwide.
Even in the long term, when renewable energy can be produced reliably and cost-effectively, Germany is unlikely to gain cost advantages. The country is not among the sunniest or windiest nations. Simulations for Germany’s energy supply project that green hydrogen will have to be imported from other countries in the long run. The federal government has already embarked on its hydrogen diplomacy to lay the groundwork for this. Electricity costs in those countries will be cheaper, potentially resulting in a shift of parts of the value creation there.
Today, we can already observe how low-value industrial production is relocating abroad due to Germany’s higher energy prices. This may not be a cause for immediate concern. Germany’s industrial strength in sectors, such as in the chemical, mechanical engineering, or automotive sectors, does not rely on having the lowest input costs. However, those advocating for a bridging electricity price should be mindful of where it leads.
The discussion surrounding an industrial electricity price highlights a fundamental challenge of climate policy. The Ministry for Economic Affairs and Climate Action rightfully points out the risk of the energy-intensive industry, engaged in “fierce international competition,” losing its competitiveness. However, beneath this concern lies the fact that many countries are free riders in the context of climate policy. Without internationally coordinated climate policies, national efforts to reduce CO2 emissions may even diminish incentives for other nations to join in.
In turn, high burdens on industries in Germany present opportunities for industrialisation in other countries with less ambitious goals. Moreover, reduced oil and gas consumption in Germany is likely to lower global market prices, making consumption cheaper for climate egoists. The latter could also not be impeded by the planned European Carbon Border Adjustment Mechanism, aimed at preventing industrial relocation for climate-policy reasons.
The good news is that there is no fundamental conflict between competitiveness and effective climate protection. The alarming surge in global CO2 emissions and concerns about Germany’s competitiveness share the same root cause: a lack of international cooperation. There are two ways to encourage other countries to participate: firstly, through an international cooperation agreement enforced with reciprocal sanctions and rewards. Blueprints for achieving this exist, and the climate club agreed upon by the G7 could serve as a foundation. Secondly, through innovations that promote the breakthrough of green technologies, so that ambitious climate policies are henceforth in the nations’ and businesses’ self-interest.
Germany could achieve so much more with just a small fraction of its climate policy costs. The estimated 30 billion euros earmarked to finance the industrial electricity price, as proposed by Federal Minister Habeck, could fund a research initiative until 2030 that exceeds twice the combined budgets of all 85 Max Planck Institutes. Climate protection requires tremendous efforts and adjustments. However, the bridging electricity price lacks the necessary direction and foundation for success.
