German econ minister doubles down on power price subsidies with new industry strategy

Germany's economy minister Robert Habeck has presented an industry strategy in a bid to strengthen the country’s industrial prowess, prevent the migration of energy-intensive key industries, and renew prosperity, and push the transition towards climate neutrality forward.

A key element of the strategy is a bridge electricity price for energy-intensive companies, as their production curve in industries such as the chemical, paper and glass has fallen sharply, Habeck said during a press conference presenting the strategy. "There is good reason to build a bridge until access to cheap, renewable energy is available. We should give the industry this time," he added. The strategy comes from the economy ministry (BMWK) and now has to be debated within the government.

When the idea of an industry power price was first introduced, it was welcomed by industry as "a clear game changer," but it remains controversial among economists and policymakers. Both chancellor Olaf Scholz and finance minister Christian Lindner (FDP) have repeatedly rejected it.

At a conference by the Industrial Union of Metalworkers (IG Metall) on 24 October, Scholz promised support for energy-intensive industries, but did not mention the industry power price subsidies. “We are thinking about how we can use the expansion of renewable energies and the instruments we have under EU law to create a concept that means that no company that consumes a lot of energy and currently dependends on affordable, competitive electricity prices has to close down,” said the chancellor. Scholz said this concept would be a combination of many individual measures and the government was working on this “intensively”.

Germany's heavy industry will need to fundamentally shift its production processes as substantial emission reductions cannot be achieved simply by replacing fossil fuels with renewable power. With this proposed industry strategy, the economy ministry is outlining the path Germany should follow to diversify value chains, maintain and rebuild value creation both domestically and in Europe, and support industry in the transition to climate-friendly production.

"We want to maintain Germany as a strong industrial location in all its diversity," the Green politician said. "From global corporations to medium-sized hidden champions to small businesses. From the energy-intensive basic materials industry to mechanical and vehicle engineering to aerospace. If we want to continue to be an economically successful country in the future, we must build on our greatest strength: On our industry and thus on our ability to develop and manufacture first-class products."

Key points from the strategy include:

• A temporary, state-subsidised industry electricity price as a "bridge" to protect energy-intensive firms from highly subsidised competition in the U.S. and China – a highly disputed topic within the ruling government coalition and economists
• Tax incentives for the storage of CO2 – another controversial topic
• The rapid expansion of renewable energy, the electricity grid, and the hydrogen industry and infrastructure
• An infrastructure "renewal offensive" for railways, bridges and roads
• Faster planning and approval procedures
• Securing skilled workers domestically (for example by offering financial benefits to seniors who still want to work) and from abroad
• Closing new trade agreements and raw material partnerships with states all over the world
• German and European production facilities for so-called critical products (such as semiconductors, clean energy, hydrogen and batteries)

Habeck's plans to subsidise industry power prices would require lifting Germany's debt brake, which limits government spending. During the press conference, he said the country's strict debt rules ought to be redesigned to keep pace with the times.

"This industrial policy will cost a lot of money," economics professor at Düsseldorf's Heinrich Heine University, Jens Südekum, told newswire Reuters. "But this is in contradiction to the debt brake, which considerably restricts the room for manoeuvre." The financing of the strategy is likely to be met with resistance from FDP's Lindner, who has repeatedly said that the country must reduce spending and return to a constitutional limit on borrowing (the debt brake) following its suspension during the coronavirus pandemic and the energy crisis.

Germany as an industrial location

Germany's industry has struggled with high production costs, a shortage of skilled workers, and long approval procedures. The strategy acknowledges that conditions for companies in Germany have deteriorated because the necessary reforms and investments – such as the expansion of renewable energy, renewed infrastructure, or bureaucracy cuts – failed to materialise over a long time.

However, the country is committed to preserve its status as a strong industrial power in the future, as Habeck said already at the end of 2022. With the proposal, he rejected the idea that the country should give up on energy-intensive companies like the chemical, glass or cement industries. Should they migrate out of Germany, "the starting points of our value chains will be destroyed," the strategy reads.

Last year, the government introduced electricity and gas price caps to shield households and businesses from rising energy prices. Germany's industry insists that substantial financial support will have to trigger the necessary investments to slash CO2 output, worth many billions of euros. The government is drawing up plans on how Germany can lead in the necessary low-emission technologies, and turn them into a successes, Habeck said.

Within the EU, the two largest economic and industrial leaders Germany and France, have spearheaded efforts to put the bloc ahead in the global scramble for green industry leadership and decarbonisation technologies. Despite differences in how they produce energy, both Berlin and Paris have closed ranks in response to competition from the U.S. and China.

German industry welcomes strategy, economists and environmentalists call for improvements

The German industry federation BDI widely welcomed the strategy, and called for clarity from the government and a swift implementation of the proposed measures. "We share the assessment that the harsh geo-economic reality in particular puts us under strategic pressure: Those who want to meet the challenges of an emerging new world order must first work on their own performance and competitiveness and can then forge alliances as strong players," BDI head Siegfried Russwurm said.

The German Chemicals Industry Association (VCI) called the strategy "a strong commitment to Germany as an industrial location and steps in the right direction," praising especially the focus on competitive industry power prices. They said that the concept must now become a national government strategy and be implemented immediately in order to retain energy-intensive industry. "No more time must be lost in accelerating the licensing procedures either," the lobby group wrote.

The call for a speedy implementation was echoed by the Association of Energy Intensive Businesses (VIK). "The strategy must now be quickly followed by concrete action in order to defend international competitiveness and not lose out in the industrial transformation," VIK head Christian Seyfert said. "After many years without a clear target image of Germany as an industrial location, this federal government has thus found a clear language again. That is extremely positive."

Moritz Schularick, head of the Kiel Institute for the World Economy (IfW Kiel), agreed that the strategy tackles important steps towards improving the framework conditions for the competitiveness of the German industry. However, he called the strategy "too backward-looking" and was especially critical of the proposed industry power price. It "could even have the opposite effect of what is intended and become a brake on the necessary structural change and future growth," he said, as competitiveness depends largely on innovation and technology.

Energy industry association BDEW was also critical of the bridge industry power price and warned it would be "a direct market intervention with unforeseeable side effects." Overall however, the lobby group welcomed the strategy, saying investments in the energy sector – from renewables and grids to the hydrogen economy – were a key aspect of it. "Renewable energy is always at the beginning of climate-neutral industrial processes and products, regardless of the form in which it is ultimately used," BDEW head Kerstin Andreae said. "At the same time, as a producer and supplier of important technologies and equipment, industry is an important and indispensable partner in the modernisation and transformation of the energy system."

Environmental group NABU said that investments should be made in an environmentally compatible way. "If we do not take care of people and nature, the best industrial strategy will be useless," NABU head Jörg-Andreas Krüger said. "Therefore, the expansion of roads, railways and electricity grids must not be at the expense of our environment." The union demanded that accelerated planning and approval procedures do not forgo environmental standards and testing, and called for the strategy to be interlinked with a circular economy strategy, carbon management strategy, and biomass strategy.