Subsidising electricity for German industry economically ineffective - researchers

A proposed subsidised electricity price for heavy industry would not be effective for the economy as a whole, according to a report by the German Institute for Economic Research (DIW). The economy ministry (BMWK) is pushing for subsidised power price rebates to help German industry remain competitive amid rising energy costs and the loss of cheap Russian gas in the wake of Russia's war on Ukraine. Government approval of the proposal remains uncertain, however. Economy minister Robert Habeck put the chances of the subsidised price coming into force at “fifty-fifty”, news magazine Der Spiegel reported.

The DIW report illustrates in different scenarios the effects of higher electricity prices on cost increases in relation to companies' value creation. It also shows how the proposed temporary subsidy, which would lower the electricity price for industry to 6 cents per kilowatt-hour, would relieve the burden on companies. The report examines the effects of rising electricity prices on energy-intensive companies and finds that even an extreme increase in costs would mean a significant burden to only a few companies in narrowly defined industrial sectors. Subsidised prices would thus only dampen costs for companies with extremely high electricity demand, but not completely compensate for them, it notes. The report also rejects the interpretation that the proposed subsidy, which would expire in 2030, is a bridging solution. It stressed that some energy-intensive industries would likely continue to face competitive disadvantages, particularly compared to non-European countries. “All of these findings suggest that a broad-based industrial electricity price is not a panacea for strengthening German companies in international competition,” DIW economist Tomaso Duso said. “But selective relief for individual sectors of the economy could also be problematic in terms of competition law and would have to be approved by the European Commission.”

The industry electricity price is aimed at boosting the international competitiveness of Germany's prized heavy industry. Energy-intensive firms are to receive billions of euros in state help if they promise to decarbonise and to stay within the country, according to a proposal by the economy and climate ministry. The proposal was welcomed by industry as “a clear game changer”, but remains controversial among policymakers and economists. It has also come under fire from renewable energy operators, who fear it could undermine renewables expansion.