european energy

More Market, Not More Costs

pylon dark DPA
We need a European energy policy, says Marijn Dekkers of Bayer.
  • Why it matters

    Why it matters

    If European countries determine a shared approach to the energy market, this would ensure efficiency and reduce costs in the future.

  • Facts

    Facts

    • Germany is in the midst of a hasty transition to renewable energy sources which receive government subsidies.
    • There is uncertainty about how the traditional power infrastructure will support renewable energy sources.
    • The price of energy is high in Germany; across Europe, there are large differences in prices.
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  • Audio

    Audio

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It’s time to dispel a few of the myths surrounding Germany’s energy policy turnaround.

One particularly stubborn one is that energy-intensive industries like the chemical industry are the financial beneficiaries of the change in energy policy because they profit from relief provisions and lower market prices.

However, a recent survey by the German Chemical Industry Association (VCI) among its member companies shows that this is not the case. On the contrary, energy-intensive sites in Germany are facing increasingly tough competitive pressure resulting from high electricity costs. Both large and medium-sized companies took part in the survey.

High energy costs are hampering the international competitiveness of Germany's chemical industry.

Their responses reveal that companies are paying prices very much higher than those on the electricity exchange. This is because they have mostly tied themselves to longer-term forward contracts in order to be able to plan their prices. With production plants operating 24/7, this additional planning reliability doesn’t come for free. Taken together, the production sites are paying an average of two-and-a half to three times the electricity price on the spot market.

More importantly in terms of competitiveness, comparison with other countries shows that companies there are paying much less for their electricity – in some cases just a third to two thirds of German prices. Very few countries like Singapore or Italy have prices that match those in Germany and only Spain’s prices are slightly higher. This calculation already takes account of exemptions under the hardship clause contained in the German Renewable Energy Act (EEG).

Confirmation that high energy costs are hampering the international competitiveness of Germany’s chemical industry comes from a recent study by research institute Oxford Economics and from a survey of 150 mid-sized companies in the industry. The German chemical industry – which employs more than 444,000 people – has no options left for compensating further disadvantages against its global competitors.

And yet this is precisely what it is being asked to do in the current discussion about electricity market redesign. The electricity suppliers are already calling for the introduction of a capacity market to ensure that they get paid for the production capacities they have put in place to increase supply security – even those capacities which are unused. This is intended to safeguard the profitability of existing and new power plants insofar as they are essential to securing electricity supply.

The overhasty introduction of a poorly designed capacity market would result in additional costs. Yet – at least at the present time – such a move is not necessary because conventional power plants still have overcapacities. What we need more than anything else is more market, with the change in energy policy integrated into a European energy concept so as to ensure secure supply and adequate prices for the long term. The chemical industry is dependent on both these aspects in particularly large measure.

The German government has demonstrated a sense of perspective on this issue by rejecting the immediate introduction of a capacity market. This is the right course. If, against all expectations, a pure market solution were to result in electricity shortfalls, it would initially be the task of Germany’s Federal Network Agency to ensure further power plant reserves. If these options prove to be inadequate, a decentralized market-based capacity mechanism should then be considered. However, it is also right to keep a close eye on the situation and have the capability to act quickly if the need arises.

The German government should keep to this course. Its Green Paper makes useful proposals for modernizing the electricity market. The aim must be to stimulate competition and design the electricity market in a flexible way within the context of a European solution. Energy-intensive companies can make a limited contribution to this by operating their plants flexibly. In return, they must be able to rely on the political community’s acceptance that, in terms of industry and climate policy, it makes no sense to impose the EEG surcharge on the companies’ own efficient production of electricity in co-generation plants beyond 2016.

Many energy-intensive companies in Germany are now very reticent about investing in light of energy price development. Seeking to increase supply security at high additional cost would therefore be the wrong approach. Instead, all stakeholders should come together to develop ideas for making the energy policy turnaround affordable and Germany more competitive as an industrial location.

 

To contact the author: gastautor@handelsblatt.com

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