German energy prices 50% higher than EU average: McKinsey


One of the biggest challenges to the new German government will be to put the energy transition back on track, according to a recent study. Negative trends persist as Germany's domestic energy prices rose to 48% above the European average, EURACTIV Germany reports.

According to the latest assessment of Germany’s energy transition, the country is far from being on track to meet its 2020 targets. Many policy adjustments must still be made if Germany is to continue along the path of the “Energiewende“, the clean energy campaign originating in the 1980s.

“The Energiewende remains the biggest challenge for our country”, explained German Minister of Energy and Economic Affairs Sigmar Gabriel in Berlin last month.

>> Read: Germany to cut energy rebates for industry, renewable subsidies

The new energy minister’s assessment was no exaggeration. A recent study titled “Energiewende-Index” issued by the management consultancy McKinsey, shows that the prospect of the German Energiewende is even further away than when the first index was published in September 2012.

Every three months, the Energiewende-Index gives an overview of the status of the energy transition campaign in Germany. The latter is assessed according to the “three dimensions of the energy policy triangle”: climate and environmental protection, security of supply and efficiency.

Within each of these dimensions, five indicators allow them to be rated insofar as target values are met along the Energiewende time-frame.

The latest index shows only six of the 15 indicators can “realistically” reach their targets by 2020. Meanwhile, nine of the indicators show a “clear need for adaptation” because current target achievement has been rated “unrealistic”.

Results worse for the industrial sector

The index value for industry energy prices has “drastically worsened”, according to the McKinsey study. This can likely be traced to the 7% rise in prices during the first half of 2013 compared to the price of 11.23 ct/kWh over the previous half year.

An important driver for this was an increase in the renewables surcharge stemming from the Renewable Energy Sources Act (EEG), one of the ways German lawmakers picked up the momentum from the Energiewende’s rising public support.

Germany’s controversial EEG measure, which came into force in 2000, offered a new way to share the load of promoting green power generation: EEG created a surcharge, applied to almost all consumer price rates, to make up the difference between the price of renewables and the regular market price of energy.

But after rising energy prices in Germany there have been widespread calls for EEG reform to increase effectiveness and have it comply with EU competition law.

The authors of the Energiewende-Index indicate that current EEG legislation only partially exempts industry from the costly surcharge.

German industry prices are around 19% higher than the EU average, which has decreased as a referential value over the same time – falling by 1% to reach an average of 9.43 ct/kWh among the EU-28.

This translates to an increasing competitive disadvantage for German industry compared to European competitors, the authors of the study Thomas Vahlenkamp, Matthias Gohl and Michael Peters wrote.

The German government’s hopes of preventing a further deterioration of competitiveness with regard to 2008 industry energy prices has become “unrealistic”, the study says.

The gap between German domestic energy prices and the EU average continues to widen. At the moment, average prices in Germany lie just above those of the previous quarter at 29.71 ct/kWh.

Meanwhile the EU average price has fallen from 20.33 ct/kWh to 20.01 ct/kWh. As a result, German prices hover at 48% above the European average. After a likely increase in the EEG subsidy for 2014, a further rise in domestic energy prices is expected.

The planned expansion of solar power generation is among the goals that the McKinsey firm still considers “realistic”. In the solar power sector, the German government’s goal has been exceeded by up to 43%.

The politics of EEG surcharge

The EEG’s methods of supporting renewable energy have been a topic of political debate for some time – with different suggestions from many sides on how the surcharge should be limited in the future, as the McKinsey authors write.

Nevertheless, short-term reductions in EEG subsidies are hardly possible, the authors conclude, taking into consideration existing framework conditions for protecting the international competitiveness of energy-intensive industry.

On expanding power generation, the authors suggest focusing on the most cost-effective options and minimising follow-up costs like network expansion.

EU competition authorities seek common-ground

In December, the European Commission announced the start of a full assessment of EEG compliance within EU law.

But the German government does not see EEG subsidies and exemption regulations for energy-intensive companies as state-aid. Instead, the Federal Republic’s authorities argue that they are compatible with EU legal requirements.

Earlier this week, EU Competition Commissioner Joaquín Almunia announced conditions for a possible compromise.

Reductions should only be provided to energy-intensive companies “that are really exposed to international competition and are particularly affected by the financing of renewable subsidies”, Almunia told the trade publication “Energie & Management”.

Almunia’s guidelines are “too restrictive in many areas”, the German government said in a draft position obtained by Der Spiegel magazine. There is an urgent need for adjustment, the government said, regarding the rules for allocating relief to energy-intensive companies on green energy output.

All in all, the federal government sees the draft as “bureaucratic”, “too detailed” and “unsustainable”, the Spiegel report said. 

It is “not understandable why, of all countries, those with an ambitious renewable energy policy should be treated less favourably”, said the report, quoting the draft document. Germany insists that the Commission “fundamentally rework” its proposal. 

In May 2013, the powerful employers’ group BusinessEurope called on European Commission President José Manuel Barroso to radically shift the EU's energy policy away from climate change mitigation towards cost-competitiveness and security of supply.

But a EU summit dedicated on energy with the objective of lowering prices and boosting the Union’s industrial competitiveness, held on 22 May, ended up without major decisions. [more]

EU Energy Commissioner Günther Oettinger unveiled last November a document on state intervention in power production that warns EU energy prices will continue to rise unless governments take steps to reduce green subsidies.

As most renewable energies are still more expensive than fossil fuels, a variety of support schemes have been put in place to accelerate their uptake and meet the EU's goal of sourcing 20% of its energy from renewable sources by 2020.

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