by Jonathan Packroff and Nikolaus J. Kurmayer
Germany’s economy minister has defended plans to subsidise electricity consumption for energy-intensive industries, despite warnings from Brussels and smaller EU member states that it would distort competition on the EU single market.
Germany is currently in the midst of a tense debate over its future as a global industrial hub.
The imperative of replacing cheap Russian gas with costlier alternatives has signalled a long-term increase in energy prices for German industry, while corporate giants like chemical giant BASF are lured by foreign subsidy schemes like the US Inflation Reduction Act (IRA).
To prevent manufacturers from leaving the country, German Economy Minister Robert Habeck has proposed to subsidise energy consumption for key indutrial sectors that are heavy consumers of electricity. In return, companies would be obliged to keep production at home and invest in the green transition.
At the heart of the minister’s proposal is a special power tariff of 6 cents per kilowatt-hour for 80% of consumption until 2030 for large industrial consumers. According to the government’s calculations, this would bring Germany’s industrial energy prices close those of China and the US.
In total, the German subsidy scheme would cost up to €30 billion, a price tag that has sparked criticism in Brussels and other EU countries.
Concerns in Brussels and beyond
EU competition chief Margrethe Vestager has cautioned against the idea, saying the scheme risks unduly penalising smaller companies that are not eligible for such subsidies.
It would also make it more difficult to maintain fair competition within the EU single market where other countries cannot afford such largesse for their own industry, she cautioned while on a visit to Berlin in May.
Germany is aware of those reservations from smaller EU member states, which were already expressed during the COVID-19 crisis when Germany injected billions of euros to prop up its economy.
Smaller EU member states “are influencing the Competition Commissioner to ensure that she is not allowed to approve this under any circumstances,” said Wolfgang Schmidt, special minister in charge of Chancellor Olaf Scholz’s cabinet, on 3 July.
However, Germany’s Habeck believes it is now time to reform the EU’s state aid rules, which he argues are out of touch with today’s realities.
“Competition law has been designed purely with a European perspective in mind,” explained the economy minister. “But the competitive situation is no longer France against Italy, but Germany against the USA and Germany against China,” he added in front of chemical workers’ union IG BCE on Tuesday (4 July).
What’s more, EU state aid investigations take too long to conclude at a time when global competition requires moving fast, Habeck warned.
“These state aid negotiations are extremely complicated because Europe is very meticulous about making sure that one country does not take advantage of another,” Habeck continued. “Those who have gone through this once have aged years over an application procedure. It’s like dog years, one year counts as seven, because it’s so, so tedious.”
“If we tie our own hands behind our backs, we should not be surprised if we get dented in the [global] boxing match we are in,” he said.
Government infighting
However, Germany’s proposed industrial electricity tariff does not only face resistance in Brussels.
German Finance Minister Christian Lindner, who holds the purse string and is considered a key hurdle for the proposal, is similarly not a fan of such a subsidy scheme, instead favouring a tax cut.
“The goal must be to relieve all electricity customers without directly intervening in the market,” he said in late May.
Habeck defended his proposal in front of the trade union, saying the subsidised electricity price would only act as a “bridge” until a sufficient amount of cheap renewable electricity is available.
The German chemical workers’ union applauded his view. “Industry helps Germany, it helps Europe, it helps the [green] transformation, and we need it,” IG BCE boss Michael Vassiliadis said.
Germany’s heavy-weight industry association BDI supports the subsidy scheme as well – while stressing that the underlying problem of high taxes on electricity would need to be addressed too.
However, others warn that the German industrial power tariff may be a waste of money.
A study by the Institute for Macrofinance (Dezernat Zukunft), a political think tank, estimates that electricity generation will come in at about 7 cents per kWh in 2030. Thus, industrial consumers will likely have to pay higher prices once the “bridge tariff” comes to an end.
“The German electricity production costs are up to 80% higher than the production costs of other favourable industrial locations,” according to a briefing by the think tank. Energy-intensive products like steel, ammonia and olefine will make more sense to be imported instead of produced domestically, the paper argues.
*first publishd in: Euractiv.com
By: N. Peter Kramer
