German industry embraces Energiewende transformation challenge

In growing parts of German industry, resistance to the Energiewende has given way to concerns that the energy transition’s home country could miss the boat in the global movement towards a low-carbon future.

“Germany needs a robust strategy for implementing its comparatively stringent emission reduction targets if it does not want to fall behind in the global race to develop carbon-neutral economies,” reads a call for government action signed by 50 prominent businesses including sports equipment makers Adidas and Puma, budget retailer Aldi, industry conglomerate Siemens, the electronics industry, and others, in early 2018.

Replacing fossil fuels and nuclear power with renewables has already begun to reshape many sectors. It will have far-reaching impacts on many others, as the main transformations still lie ahead. “The Energiewende will turn the German economy inside out,” says Achim Wambach, president of the Centre for European Economic Research (ZEW). “Economic activity will be transformed. We will find ourselves in a different world once renewable electricity powers all sectors. Germany’s economy will be changed beyond recognition.”

But how to make this a success? After wreaking havoc among traditional utilities, heavily reliant on coal and nuclear power and sluggish to embrace renewables, Germany’s carmakers are now in focus. Years of developing “clean” diesel technology ended in scandal, leaving VW, Daimler and BMW scrambling to catch up in the e-car segment. The Energiewende will change the face of countless other businesses, among them construction, steelmaking, engineering, and chemicals.  

On the road to cutting emissions by 80 to 95 percent by 2050, Germany’s official target, the jury is still out as to whether the energy transition will be a boon or a bane for the economy as a whole. Sceptics – among them many energy-intensive companies – continue to warn that it might undermine Germany’s strong international competitiveness by overburdening companies with high power costs and stringent emission rules.

Energiewende proponents counter that a determined decarbonisation is essential to preserving the country’s status as a technology leader, because it will spur innovation and boost growth, employment, and international demand for climate-friendly technologies “Made in Germany.” Young companies with innovative business models are, in fact, springing up across many sectors, snatching clients and personnel from struggling incumbents.

In their 2018 call for government action, businesses agreed: “Taking on a vanguard role in climate protection represents a tremendous opportunity for promoting innovation and bolstering Germany’s economic competitiveness."

Germany’s current economic boom suggests that the Energiewende has not been a major drag on businesses so far.

Recent data signals that Germany is far from losing its manufacturing base or its competitive edge. Quite to the contrary, sustained economic growth, fuelled by its formidable export prowess and domestic consumption, has pushed employment to a record high. Lack of skilled labour has become a key business concern.

Since the turn of the millennium, when the Energiewende started in earnest, industry – from machinery to chemicals and carmaking – has grown by around one third.

“It’s been a long time since the German economy has been in such good shape,” ZEW’s Wambach told the Clean Energy Wire. “This is why we can afford certain Energiewende policies other countries can’t.”

The country continues to rank among the world’s most competitive economies, according to global indices such as the World Economic Forum’s.

But this does not answer the question: Can Germany remain an industrial powerhouse on its journey to a low-carbon future?

The shift to low-emission technologies has also reached Germany’s car industry with full force. The impact is felt not only at carmakers BMW, Daimler, and Volkswagen, who have at last seriously committed to the shift to electric mobility, but also at a huge array of suppliers. In total, the industry employs around 800,000 people, and cars remain the country’s top export good. [Find plenty of background in the dossier BMW, Daimler and VW vow to fight in green transport revolution.]

Transport is Germany’s only sector that has made no progress in cutting emissions, but the upcoming shift promises to be rapid and profound: The sector will have to reduce CO2 emissions by 40 percent within little over a decade.

The sector underlines that the Energiewende’s effects on employment are complex.

“At present, the shift to electric mobility boosts employment in the automotive industry, because it will continue to produce conventional engines, while researching and rolling out electric vehicles at the same time,” says the ZEW’s Wambach, who is also a member of the National Platform for Electric Mobility, which advises the government.

“But as soon as conventional engines start to be discontinued, it will lead to job losses, because an electric engine is much simpler and therefore contains far less value added. This is why employment currently benefits from the shift to electric mobility, but that will no longer be the case in five to ten years.”

More than 600,000 German industry jobs hinge on combustion engine technology, according to the Institute for Economic Research (ifo).

Many car industry experts are concerned that Germany is lagging behind in the shift to e-mobility, as Tesla’s electric cars outsell the luxury flagships of Mercedes-Benz, BMW, and Audi, which are still equipped with combustion engines, even in Europe.

In one of his first speeches as Germany's new economy and energy minister, Peter Altmaier urged carmakers and mobility experts to push the mobility transition so Germany can remain a technology leader.

The country has already missed the boat on the production of battery cells, which represent the lion’s share of electric cars’ value added. In a setback for the German government, the automobile industry and the European Union, the continent’s largest car supplier Bosch decided in early 2018 not to enter the fray, leaving the dominance of Asian suppliers unchallenged. Altmaier said the government is ready to support the production of EV batteries.

In other transport sectors, such as aviation and shipping, the change has barely begun, but promises to be just as profound. Numerous start-ups like Munich-based electric airplane maker Lilium have already made international headlines with innovative concepts. [We hope to cover these sectors later this year.]

Germany’s industry must reduce its CO2 emissions by an additional 20 percent by 2030, and also has set its eyes on the 2050 targets.

Siemens is a prominent example of profound shifts within a company. The healthcare-to-turbines industry conglomerate with 377,000 employees epitomises the upheaval caused by the Energiewende. Decarbonisation has boosted its renewable energy and industry efficiency divisions, while business areas serving fossil energy production have “burned to the ground,” according to management. [For details, read the factsheet Germany’s Siemens: a case study in Energiewende industry upheaval]

The business of energy efficiency is not only flourishing at Siemens. More than half a million people in Germany already work in this growth area, and the number of start-ups is rising strongly, according to industry efficiency initiative DENEFF.

Beyond corporate Germany, entire geographic regions are also feeling the seismic shift. The Association of German Chambers of Commerce and Industry (DIHK) has identified winners and losers from north to south, east to west.

“In the north of the country, industrial activity has been traditionally weaker. But recently, some regions have turned into wind energy clusters. Thanks to the Energiewende, they now have strong industrial sectors,” says DIHK energy expert Jakob Flechtner. “In contrast, energy-intensive industry has had a strong presence the country’s west and south – for example steel and aluminium makers – where concern about the Energiewende’s potential negative impacts is highest.”

Energy prices are the most prominent industry concern in connection with the Energiewende. Solving this issue will require a walk on a tightrope: if energy becomes too expensive, Germany could irretrievably lose key industry sectors. But if it remains too cheap, companies have little incentive to lower carbon intensity.

The issue is more complex than first meets the eye. While Germany’s household power prices are among the highest in Europe, partly due to the surcharge to finance renewables expansion, wholesale power prices are among the continent’s lowest following a dramatic drop caused by wind and solar generation. Renewables provided more than a third of the power the country used in 2017. The new government has said it wants to increase their share to almost two thirds by 2030.

Germany’s energy-intensive industry benefits from the fall in wholesale prices, because it is largely exempt from taxes and levies to preserve its competitiveness. But wholesale prices do not always reflect what large users pay, because many make their own power, or have long-term power purchase agreements independent of the market. [For more details, see the factsheets What German households pay for power and Industrial power prices and the Energiewende]

“You also have to differentiate clearly between energy prices and costs,” says the DIW’s Kemfert. “Prices are key, but consumption is also crucial. German industry is very efficient.”

“Additionally, power prices are only one component of energy costs. Oil, gas, and coal are still more important on a national scale, and for many companies. Our energy cost indicator for the industry has shown that total energy costs have decreased substantially over recent years.”

But DIHK’s Flechtner says especially many smaller companies do suffer from high power prices, because they do not enjoy the full range of industry exemptions, and therefore might move production abroad as a result.

“Of course, those companies don’t just pack their bags and go. Rather, it’s a creeping process concerning decisions where to modernise or extend production – here in Germany or abroad,” according to Flechtner.

He adds that Germany’s small and medium-sized businesses – the so-called Mittelstand – boasts a number of highly innovative hidden champions that rely on an uninterrupted local value chain.

“This involves everything from basic material development and research to implementation. If we want to preserve industry as a whole, we have to ensure all the chain links stay in Germany. This is why it would be so regrettable if we lose energy-intensive raw material companies.”

But even in the case of Germany’s numerous chemical companies – among them the world’s largest, BASF – complaints about high power prices must be seen against a backdrop of many other concerns.

Utz Tillmann, head of chemical industry association VCI, earlier this year concluded a sector outlook with a list of issues that urgently needed addressing – energy prices came last but one.

“If we [Germany] want to keep up in the international comparison, we need to set the course for more investments and innovation, speed up the optimisation of digital infrastructure and the administration’s digitalisation, improve education, an affordable energy supply, and adjustments in corporate taxation,” according to Tillmann.

After complaining about the high costs of the Energiewende, he added: “Don’t get me wrong: The chemical industry in particular is a proponent of the energy transition, not an enemy. Chemical products and solutions play an important role for the energy transition: Raw materials for renewable power production, or for power storage as a precondition to link up heat, mobility and electricity in the future, are part of many company portfolios.”

But Frank Peter, deputy executive director at Agora Energiewende* and head of the energy think tank’s Germany team, argues that sparing industry from high power prices must not go too far because it will reduce incentives for low-carbon and flexibility innovations.

“Industry protection must go hand in hand with the right incentives to lower carbon intensity. If Germany conserves current production in the name of protecting industry from the Energiewende’s consequences, we will miss the boat on an international level. Other countries such as China have also made great strides in their effort to cut industry emissions by increasing environmental standards. These efforts have meant cost increases for affected industries abroad, thus lowering the pressure to keep all industry exemptions in Germany in the name of competitiveness,” says Peter.   

“Protecting existing industry production, while also establishing a new low-carbon one, is one of the Energiewende’s central challenges.”

As an example, Peter names recent suggestions by steelmakers Salzgitter and Thyssenkrupp to replace fossil fuels with renewable hydrogen in production, and to recycle CO2 emissions in the chemical industry.

Salzgitter says its low-carbon steel production technologies with the objective of replacing “substantial portions of the fossil natural gas used with hydrogen, which is to be acquired through electrolysis using volatile electricity from renewable energies,“ can cut the company’s CO2 emissions by up to 85 percent, with the further option of supplying residual emissions for synthesis processes.

Thyssenkrupp calls its “Carbon2Chem” project an “essential contribution to climate protection as well as energy transition,” but admits it will take about 15 years before the concept will be applicable on an industrial scale.

 “Innovations like these have great export potential. But if we leave all industry exemptions unchanged, what are the incentives to get these technologies to market?” asks Peter. “At the same time, we have to tread carefully. Once steel-making has left the country, it will no longer be possible to establish low-carbon steel-making technologies here.”

Germany’s Energiewende will remain a work in progress for decades to come. Many hard decisions still lie ahead, and few economic activities will be left untouched. But business now appears increasingly ready to embrace the challenges, in the hope of reaping long-term rewards. 

“The energy transition can be described as a rejuvenation cure. It will involve some pain and profound changes. But in the longer run, it makes the economy fit for the future,” says Kemfert.

At the same time, other countries can draw valuable lessons from Germany’s experience as a „living lab“ for the energy transition, according to Ortwin Renn, scientific director at the Institute for Advanced Sustainability Studies (IASS) in Potsdam, who researches the economic impacts of Energiewende policies.

Given the pitfalls of quantifying the Energiewende’s economic impact in detail, exact numbers will remain a mystery. But according to ZEW’s Wambach, the issue might no longer carry a lot of weight.

“In the end, it doesn’t really matter whether it’s good for the economy or not – it’s simply necessary. The Paris Agreement has made this a task we will have to address anyway, and therefore we should do it to the best of our abilities.”