ZEW Podcast with Kathrine von Graevenitz
Proposed by the Federal Ministry for Economic Affairs and Climate Action, the industrial electricity price aims to cap industrial electricity costs for energy-intensive companies at 80 per cent of their consumption until 2030. Advocates argue that these subsidies are vital to prevent industrial exodus, while critics stress that such subsidies discourage electricity conservation. In this episode, Professor Kathrine von Graevenitz, deputy head of ZEW’s “Environmental and Climate Economics” Research Unit, delves into whether the implementation of the industrial electricity price is a viable strategy and why she considers broader economic measures more suitable than sector-specific subsidies.
The primary goal of the industrial electricity price cap is to “bridge a challenging phase: Certain industry representatives and policymakers see Germany’s competitive edge at risk due to relatively high energy prices.” The electricity price is crucial in this context. It’s not the absolute price that’s concerning, but the fact that “German electricity prices surpass those of other nations we compete with on the global stage, potentially leading to industrial migration.”
The success of achieving relatively low electricity prices by 2030 remains uncertain: “Other countries boast more abundant sunshine and more wind, and they are ramping up their renewable energy production. It’s not clear that, in the end, we’ll manage to have cheaper electricity compared to countries with more favourable conditions.”
A never-ending bridge?
Moreover, there is the problem of companies becoming reliant on subsidies, making them hard to phase out: “While it’s consistently said that this price cap is only temporary, there are already industry voices assuming it is here to stay. I’m not sure that in 2030 we will simply say, ‘You’ve had seven years.’ Clearly, we won’t be competitive with such high electricity prices in the future. So what’s the plan? Many thanks and goodbye? I doubt it will play out like that.” Incentives to save electricity would also diminish, as the time span until “an investment in electricity-saving measures pays off” would lengthen, ultimately slowing down the energy transition.
Prioritising no-regret measures
Rather than funnelling resources into specific sectors, the focus should be on crafting “a comprehensive economic policy, one that doesn’t involve subsidising every corner. Instead, we should prioritise no-regret measures – investments that consistently pay off, regardless of shifting circumstances. These encompass investments in digitalisation, bolstering infrastructure like roads, railways, and expanding the power grid.” Equally important are investments in education and “highly skilled professionals, for which Germany is renowned and which have long been a competitive advantage.”
Reducing bureaucracy is also part of von Graevenitz’s approach. In summary, these are “measures that have a broad impact, those that aren’t a gamble on which technologies will be better or worse in the future because, quite frankly, we don’t know. Therefore, in my view, the best course of action we can pursue is to create fertile ground. Then, we observe what grows.”
Furthermore, we must remain aware of the global perspective. “Our success doesn’t hinge solely on Germany’s actions but also on the collective efforts of nations worldwide. Thus, we should actively foster global cooperation, particularly in the realm of climate policy. Achieving a global carbon pricing system is paramount – whether it involves the participation of all nations or the formation of a climate club that includes the major emitters.”