Andelsblatt: How Germany is trapped in the energy price trap

Dramatically rising electricity and natural gas prices are increasingly becoming a competitive disadvantage for businesses in Germany, reports Handelsblatt.

“German industry is currently paying a purchase price for natural gas that is eight times higher than the purchase price in the US,” says Christof Bauer, energy expert at TU Darmstadt.

Bauer’s calculations, which are exclusively available to Handelsblatt, refer to the current wholesale price for deliveries in 2023, which is currently €270 per megawatt hour.

If taxes and levies are added, gas prices in Germany and the US differ by a factor of nine, according to Bauer. Only the levies, such as concession fees and network fees, to which the new gas levy will be added in October, are nearly as high as the total price of natural gas in the US. Already less product is being made and production is being shifted due to higher natural gas prices, Bauer says.

Energy costs: High gas and electricity prices are weighing on industry in Germany

Matthias Zachert, CEO of the chemical company Lanxess, considers this development dangerous and warns of deindustrialization of the country. “If German energy prices stay at their current level, we will see rows and rows of factories in key German industries closing,” he says. “And what has been lost now in more competitive regions like the US will not come back.”

The industry warning is also explosive because the real cost increase is yet to come. “The big surge in electricity and gas costs will only really hit energy-intensive businesses in Germany next year,” says entrepreneur Carletta Heinz, head of French perfume bottle maker Heinz-Glas.

At present, many companies still benefit from old supply contracts that protect them for a certain period of time from the current large price increases. But these are gradually expiring. In the coming months and next year, they will have to buy gas and electricity at the terms then in place – and according to today’s expectations, these will hardly be lower than they are today in futures trading on the exchanges energy.

Energy-intensive sectors are particularly affected by high gas and electricity prices

Energy-intensive industries such as chemicals, steel, paper, building materials, cement and glass are hit particularly hard. “For the industrial site, high gas and electricity costs are a huge problem,” says Hubertus Bardt, managing director of the German Economic Institute (IW).

“In the short term, we have extreme price increases that have not happened in other regions. In the long term, we can expect a higher level of prices if we supply ourselves more through LNG,” says the IW CEO. This, he says, calls into question the competitiveness of energy-intensive businesses. “Germany was already an expensive energy country and this will now become much worse,” he says.

The high level of energy prices has been burdening many industries in Germany for many years. The consequences have been felt for a long time: firms in energy-intensive sectors invest less than they depreciate, depleting their assets as a result.

Energy prices in Germany are becoming more and more expensive than abroad

This trend is now likely to intensify significantly. The gap between Germany and other European and non-European countries in electricity and natural gas prices is widening.

A ten-year comparison with International Energy Agency (IEA) data shows how sharply energy prices diverged even before the outbreak of war. According to this, the industrial price of electricity in Germany was still around ten cents per kilowatt-hour in 2010, and by 2021 it had risen by 50% to around 15 cents per kilowatt-hour – without electricity tax. Thus, Germany replaced Japan as the long-term electricity price leader among the major industrialized countries.

It is true that in other regions, such as the US, industrial electricity prices have also increased by double digits over the past ten years. But the level remained comparatively low. In 2010, US companies paid the equivalent of just over five cents per kilowatt-hour, while in 2021 it was six and a half cents.

Similar dimensions are observed in the price of natural gas according to comparative data collected by the World Bank. According to it, the price per megawatt-hour in Europe was still 20 euros at the end of 2020, three times higher than the comparable price in the US at the time, but less than that in Japan. Since mid-2021, gas prices in Europe have shot up much more sharply than in the US and Japan.

There are several reasons for the high level of energy prices. For electricity, the generation mix is ​​one of them. Currently, high gas prices are driving up the cost of electricity. Gas-fired power plants are the last to start up during peak periods because they are the most expensive electricity generation option. But they set the price for all electricity generation.

In other words, electricity from coal-fired power plants or wind turbines is also settled on the electricity exchange at the price that expensive gas-fired power plants set for their electricity. Therefore, high gas prices automatically raise the price of electricity.

Germany has long benefited from cheap natural gas from Russia

In addition, Germany has particularly high taxes, levies and surcharges on electricity. Although energy-intensive industries particularly benefit from exemptions and reductions, these concessions are hard-fought on a case-by-case basis and must be claimed year after year. And even when they come into effect, the level of electricity prices often remains higher than in many other countries.

In the case of natural gas, on the other hand, Germany benefited for years from cheap gas from Russian pipelines, but over the years this advantage has lost its importance, because in particular the US has gone from being a net importer to a net exporter of natural gas. gas. Therefore, natural gas prices in the US are particularly low. For energy-intensive industries, the US has therefore become a very attractive location.

Gas surcharge: industry in Germany demands compensation

Especially in the case of natural gas, the situation is made even more difficult by the new gas supply levy. It is “difficult to understand why private consumers are fully compensated for this contribution through funds from the federal budget due to the VAT reduction, while industrial enterprises receive support at best in isolated cases of extreme hardship”, criticizes Christoph Bauer. “From this point of view, it would be consistent to neutralize the levy, also from state funds, for the industry,” says Bauer.

The gas levy could also cause electricity prices to rise

Moreover, the levy affects not only the price of natural gas, but also the price of electricity. This is because higher fuel costs for rate-setting gas-fired power plants will drive up the price of electricity.

The dramatic increase in energy costs in Germany is accelerating processes that have been taking place rather insidiously in recent years: Investments are delayed, production is reduced.

Germany’s aluminum industry, for example, saw production fall by 23% in the second quarter compared to the same period last year. The industry, which is one of the largest consumers of electricity in the country, is pessimistic about the future.

“If we don’t find a solution to the energy crisis in time, there will soon be no more aluminum smelters in Germany. They are under serious threat,” says Hinrich Mählmann, president of the Aluminum Deutschland trade association. Just on Wednesday, the manufacturer Speira announced that it would cut the production of its foundry in Neuss, North Rhine-Westphalia, to half of its total capacity.

The situation in the chemical industry is dramatic due to high energy costs

For the German chemical industry, one of the most energy-intensive industries, high energy prices have been a challenge for years. But thanks to imaginative management and government help, companies have managed to cope so far.

Now the situation is much more dramatic. “The weights have multiplied to such an extent that even the strongest shoulders will fail in the short and medium term,” says Wolfgang Große Entrup, managing director of the German Association of Chemical Industries (VCI). “No idea in the world yet manages to offset today’s competitive disadvantages in energy costs.” The step from a “world’s leading industrial and exporting nation to an industrial museum is short and should be avoided at all costs,” he warns.

Large chemical companies can still bear the brunt because they are more stable internationally with large facilities in the US and Asia than, say, a medium-sized company exporting from Germany. But expensive energy is also leaving deep scars on companies like plastics maker Covestro.

Covestro: The boss fears the weakening of the industry in Germany
For the current year 2022, Covestro expects global energy costs of up to €2.2 billion. This is more than three times what it was in 2020. Added to this will be the gas levy, which will increase costs by a low to mid-three-digit millions of euros. Now the Leverkusen-based company is saving gas where it can.

Expensive energy has not yet affected Covestro’s investment plan – at least for this year. CEO Markus Steilemann fears a structural weakening not only of the domestic chemical industry if prices remain high. “Overall, high energy costs are jeopardizing Germany’s competitiveness as a location for businesses,” he says.

With the prevailing energy costs, many medium-sized companies can only survive if they have long since moved their production abroad. A development that could be accelerated due to the precise energy base.

Medium-sized companies are setting up production abroad due to rising energy costs

Franconian glass manufacturer Heinz-Glas, for example, has been making bottles for perfume producers in South America and India for several years. However, at its headquarters in Kleintettau in Upper Franconia, production cannot operate economically due to expensive energy. In 2019, the cost for electricity and natural gas at the glass manufacturing company was still eleven million euros.

This year, the medium-sized company will spend 30 million euros on energy. Next year, it will likely be significantly more, fears entrepreneur Carletta Heinz. The boss wants to keep the company at its traditional headquarters in Franconia, where it was founded 400 years ago. But he is clear: “We will not succeed without political support.