Energy Policy Exacerbates Structural Imbalances

BMI View: The transition towards renewable resources will continue to exert a sizeable economic cost on Germany despite recent energy reforms. Attempts to shield industry from these costs will delay the process of economic rebalancing towards a more consumption-based growth model, although German industrial competitiveness will ultimately suffer from higher energy costs.

Recent reform of Germany's renewable energy law amounts to no real change in policy trajectory by the grand-coalition government. Our Power & Renewables team believes that despite government attempts to limit the cost of energy policy, the adoption of renewable energy sources will continue, albeit at a slightly slower pace than originally planned, and a return to nuclear energy will remain off the table under the current administration. The result will be high energy costs for at least the next decade, as renewable energy plant operators continue to receive guaranteed payments for electricity generation.

How the government decides to share these high costs has major implications for the shape and pace of German growth. At the same time, since these costs will remain high for well over the next decade, the net impact will be negative for German industrial competitiveness regardless of who ultimately picks up the bill.

Overwhelming Support
Germany - Are You In Favour Of Energiewende?

BMI View: The transition towards renewable resources will continue to exert a sizeable economic cost on Germany despite recent energy reforms. Attempts to shield industry from these costs will delay the process of economic rebalancing towards a more consumption-based growth model, although German industrial competitiveness will ultimately suffer from higher energy costs.

Recent reform of Germany's renewable energy law amounts to no real change in policy trajectory by the grand-coalition government. Our Power & Renewables team believes that despite government attempts to limit the cost of energy policy, the adoption of renewable energy sources will continue, albeit at a slightly slower pace than originally planned, and a return to nuclear energy will remain off the table under the current administration. The result will be high energy costs for at least the next decade, as renewable energy plant operators continue to receive guaranteed payments for electricity generation.

How the government decides to share these high costs has major implications for the shape and pace of German growth. At the same time, since these costs will remain high for well over the next decade, the net impact will be negative for German industrial competitiveness regardless of who ultimately picks up the bill.

Economic Distortions

The economic distortions caused by German energy policy stem from the high cost of transitioning towards renewable sources (the so-called Energiewende), and the government's preference for shielding the domestic manufacturing sector from these costs. This means that not only are German electricity costs much higher than most developed state peers (double the EU average and almost three times as high as the US), but that the bulk of these costs are currently borne by households rather than corporations, since the former do not receive the surcharge exemptions afforded to many industrial firms.

Although impossible to quantify the extent of such policies on the various segments of the German economy, we do believe this policy has contributed to capping consumption. Indeed, the government's decision to shift the burden onto households rather than industry is an example of the authorities' long-held preference for maintaining cost competitiveness in the industrial sector over stronger consumption levels. In short, we believe that to date energy policy has contributed to Germany's relatively low share of consumption as a percentage of GDP when compared to other developed states (just 50%), and very high current account surpluses.

Industry Must Ultimately Pay

Despite what are very obvious costs to the consumer, a recent survey by the Ministry for Conservation, Construction and Nuclear Safety implies that the majority of the German electorate still supports the Energiewende. This means limited incentive for the government to shift the cost burden away from consumers, particularly given the strength of Germany's industrial lobby. Such priorities are reflected by comments from Economy Minister Sigmar Gabriel, who back in January talked of the need for urgent action on renewable reform to avoid 'deindustrialisation' of the German economy.

Overwhelming Support
Germany - Are You In Favour Of Energiewende?

However, the government cannot protect industry indefinitely from energy costs, since workers will eventually demand compensation for a higher cost of living. The alternative to forcing consumers to pay is to shift the burden on to the public sector, which we believe is also highly unpalatable for the current administration given its aggressive fiscal consolidation plans. There is also the threat of regulatory creep by the EU Commission, which ruled in April this year that Germany had to reduce the number of domestic firms which are currently exempt from paying the renewables surcharge.

The result will be a gradual erosion of German industrial competitiveness until either the government reverses its commitment to renewable energy transition (unlikely anytime soon based on current levels of popular support) or adopts more accommodative fiscal policy. Since neither scenario is likely under the current administration, Germany will continue paying the macro costs for at least the next few years.

Fiscal Policy (Germany 2010-2018)
Indicator 2010 2011 2012 2013 2014f 2015f 2016f 2017f 2018f
Revenue, % of GDP 43.7 44.3 44.8 44.7 44.5 44.0 43.5 43.1 42.8
Fiscal expenditure, EURbn 1194.1 1178.7 1191.5 1224.8 1248.0 1271.7 1294.6 1323.1 1354.9
Expenditure, % of GDP 47.9 45.2 44.7 44.7 44.5 43.9 43.4 43.0 42.7
Budget balance, EURbn -104.2 -22.0 2.4 -1.9 -0.5 0.8 3.3 4.7 3.5
Budget balance, % of GDP -4.2 -0.8 0.1 -0.1 -0.0 0.0 0.1 0.2 0.1
Primary balance EURbn -40.7 43.7 66.2 58.1 61.9 70.7 81.0 84.1 84.8
Primary balance % of GDP -1.6 1.7 2.5 2.1 2.2 2.4 2.7 2.7 2.7
f = BMI forecast, Source: National Sources/BMI

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Related sectors of this article: Economy, Economic Activity
Geography: Germany, Germany
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