It is policymakers’ intention that Germany’s energy requirements be met to the largest possible extent (or even completely) by power from renewable sources. Renewable energy is to replace natural gas or oil for heating purposes and petrol or diesel as fuel in the mobility sector. A shift towards electricity is also envisaged for those industrial processes, which currently still rely on coal, natural gas or oil. If it is impossible to replace fossil fuels by electricity, green hydrogen (i.e. hydrogen produced with renewable power) is supposed to be an option. Some visionaries are even proposing an “all electric world”. In 2019, however, electricity had a share of only about 20% in total final energy consumption in Germany. The way towards a world in which electricity plays a much larger role is stony and difficult. It will be necessary to establish sufficient renewable power capacities. Moreover, the problem of weather-dependency of wind and photovoltaic plants has to be addressed. That is why these types of renewable energy still make only a small contribution to assured capacity, even though their generation capacities have been increased considerably. High-performance and cost-efficient industrial-sized power storage technologies are still not in sight. In addition, companies and households will be in for considerable expenses if they are to shift from fossil fuels to electrical power in the coming years. The existing infrastructure will need to be retrofitted or replaced. For example, electric heating pumps are to be used for heating instead of natural gas, oil or district heating produced by thermal power plants. This will require huge refurbishment expenses in the building stock. Car owners are expected to replace their current cars with petrol or diesel engines by e-vehicles. Companies may have to implement completely new industrial procedures if they are to rely on power and/or green hydrogen in the future. This is an enormous challenge for energy-intense sectors in particular. In short, households and companies will have to invest huge sums up front. At the same time, they will need some kind of reassurance that these investments will pay off, in particular if existing infrastructure (industrial plants, heating systems, vehicles, etc.) is to be replaced ahead of the end of its natural lifetime. The government will not be able to subsidise the transformation in full. Both policymakers and companies should give up this illusion as quickly as possible. Electricity prices have risen more strongly than petrol or natural gas prices
Sources: Eurostat, Association of the German Mineral Oil Industry (Mineralölwirtschaftsverband)
Electricity prices have risen more strongly than petrol or natural gas prices
Electricity prices have risen more strongly than petrol or natural gas prices
Sources: Eurostat, Association of the German Mineral Oil Industry (Mineralölwirtschaftsverband)
Sources: Eurostat, Association of the German Mineral Oil Industry (Mineralölwirtschaftsverband) This means that private-sector investment is urgently required for a large-scale electrification of the economy. At the same time, companies and households have seen electricity prices rise more strongly than petrol, diesel, natural gas or heating oil prices during the last few years. Much of this electricity price increase is due to state components. German electricity prices are therefore among the highest in the world and considerably above the EU average. For example, gross prices (i.e. prices including taxes and fees) for commercial customers (not large-scale industrial customers) were 43% above the EU average in H2 2020. Excluding taxes and fees, the difference amounted to only about 8%. This weighs on Germany’s position as an economic hub. If electricity prices continue to rise at an above-average clip, owners of electric cars, for example, will see their regular expenses rise disproportionately in comparison to owners of combustion-engine cars. Rising electricity prices during the last few years are an obstacle to the desired investments in an electricity-based economy. A turnaround is obviously necessary. Companies and households need some reassurance that electricity prices will remain low in order to provide an incentive to make the infrastructure investments, which policymakers are looking for. In particular, it is desirable that industry investments be made in Germany (and not anywhere else). This suggests that policymakers should reduce the state components of electricity prices as quickly as possible.