German government approves price cap for gas and electricity

In a bid to shield households and businesses from the drastic increase in energy prices, Germany’s government has approved a draft law to cap the price of electricity and gas by granting customers a fixed volume of supplies at reduced rates. The “price brakes” devised by the economy and climate as well as the finance ministry will become effective in March 2023, but will also retroactively cover higher costs in January and February. The caps will remain in place until at least April 2024. According to the economy and climate ministry, the price caps form “the centrepiece” of the government’s 200-billion-euro “defence shield” against the energy crisis, and will be co-funded by scooping up windfall profits made by electricity producers after 1 December this year. “The levy will be designed in a way that leaves an adequate share of the proceeds to guarantee profitable operations, but also ensures that a substantial contribution is made towards relieving customers and the economy,” the ministry said. The windfall levy remains in place until at least the end of June next year and can be prolonged until April of the following year if necessary, according to the draft law, which still requires approval by parliament.

The cap on gas (at 12 cents per kilowatt hour) for households, smaller companies, and public institutions like hospitals or universities will apply to a consumption level equalling 80 percent of their estimated annual consumption. Any consumption beyond this amount will cost customers the usually much higher market rates. Prices for larger industrial customers will be capped at 7 ct/kWh for gas, and will apply to 70 percent of their consumption in 2021. Electricity prices for households and small companies will be capped at 40 ct/kWh for 80 percent of the estimated consumption and at 13 ct/kWh for larger industrial companies covering a volume equal to 70 percent of last year’s consumption. The measure is accompanied by several “hardship provisions” for customers affected “in a particular way.” The government devised the subsidies in reaction to the energy crisis fuelled by Russia’s war on Ukraine, which had led many companies to increase their own prices and contribute to general inflation, the government said.

In a first reaction to the agreement announced on 25 November, the German Association of Local Utilities (VKU) said the draft was “better than expected but generally leaves work to be done.” VKU head Ingbert Liebing commented the price brakes are a “very complex undertaking with an extremely ambitious schedule” but at the same time “necessary to bring relief to customers in a quick and effective way.” However, the association criticised that no differentiation had been made for the windfall profit levy, which would now also apply to operators of bioenergy plants, waste incinerators and other forms of electricity generation, that already grapple with high costs. According to the VKU, these producers should remain exempt from the levy. The Association of Energy and Water Industries (BDEW) said the electricity price cap's “overly complex, unclear and bureaucratic” design made it questionable whether support would reach customers quickly, arguing that parliament still had to make several key amendments to the draft before it could be adopted. Regarding the windfall levy, the BDEW said it would hamper investments into the sector and thus contribute to power scarcity and high prices the longer it remained in place. The head of Germany‘s economic experts’ council (Wirtschaftsweise), Monika Schnitzer, said companies that benefit from the tax-funded price brakes should not be allowed to pay out premiums or bonuses to employees for as long as they participate in the scheme. Allowing companies to pay out bonuses “would not be plausible” and lead to public resentment, she argued.