Jul 30, 2023

Third German energy relief package introduces power price brake, windfall taxes, and freezes CO2

With its third energy cost relief package since the start of Russia’s war on Ukraine, the German government hopes to alleviate concerns over skyrocketing prices for heating and electricity in the coming winter. The large package worth some 65 billion euros includes one-off payments to households, a price brake for electricity, postponing the scheduled rise of the national CO2 price, and suggestions for a nationwide reduced fare public transport ticket. While government members say supporting poorer members of society in the crisis is key, businesses complain the package does not contain enough measures to safeguard economic stability and jobs that are at risk due to high energy costs. The energy industry warned that a tax on windfall profits generated during the crisis could hamper much-needed investments in clean energy infrastructure.

After weeks of negotiations, the German government coalition has agreed on a third economic relief package for households and businesses struggling with rapid inflation driven by Europe’s energy supply crisis. Worth 65 billion euros, the third package is larger than the two previous ones combined and will be used to prepare the country for the “hard times ahead,” chancellor Olaf Scholz said in a report carried by public broadcaster ARD. “This is about steering our country safely through this crisis,” the Social Democrat (SPD) said, adding that the government would take citizens’ concerns “very, very seriously.”

Rising energy prices and their effects on households and businesses have become the greatest concern for German voters, recent surveys have shown. Their rapid increase, fuelled by Russia’s invasion of Ukraine, has been spurring inflation more broadly. While previously the focus had been on high prices for gas and oil, power prices in Europe have also become heavily affected by knock-on effects from the gas market.

Despite the financial difficulties many citizens face as a result of the rising energy prices, Scholz said he did not expect mass protests against the government in the coming winter, which are being fanned by the Left Party and the far-right AfD. “If some disagree and shout the slogans of [Russian president Vladimir] Putin, well, then some may do so,” Scholz said. Most people would understand the benefits of living in a welfare state with a strong economy. Regarding power supply security in the coming months, the chancellor said there currently would be no reason for major concern. “As far as we can tell now, we will get through the winter with our supplies.”

The relief measures agreed by the SPD, the Green Party and the pro-business Free Democrats (FDP) include:

Finance minister Christian Lindner from the FDP said Germany would not have to take on new debt to fund the major relief package. “These measures will be introduced as part of the government’s existing budget planning.” The budget will be complemented by taxing windfall profits, which will bring a double-digit billion euro sum into the state’s coffers, Lindner said.

Economy and climate minister Robert Habeck said the package’s basic concept would be to “help those more who earn less,” a principle needed to “safeguard the democratic consensus in this crisis.” The rapid rise in energy costs has “brought the question of fairness to a new level,” the Green Party minister said, which is why the agreement on taxing windfall profits has been especially important for him. Together with his EU energy minister colleagues, he would debate the tax as well as the brake on power prices on 9 September.

Habeck called the windfall tax “just,” arguing that companies that produce power with renewables, coal or nuclear power can do so without any production cost increases. But due to the European power market’s functioning, these would currently scoop of “insane” profits based merely on “coincidence.” Using this money to finance solidarity measures by lower prices would thus be the right thing to do, Habeck argued. Incentives to lower consumption would remain in place, as the brake applied only up to a certain consumption level. Small and medium-sized enterprises (SMEs) would be able to access a similar mechanism, he added.

Economist Michel Hüther of research institute IW criticised the windfall tax, arguing its proceeds and thus relief payments for power customers would remain “incalculable.” Hüther told newspaper Rheinische Post the tax would ultimately be “a vague solution with an unclear volume and effect.”

The association of local utilities (VKU) said the large relief package would be “necessary” but commented that some of the measures still had to be spelled out more clearly, “especially the mechanism for taxing windfall profits and the power price brake these will be financing.” VKU head Ingbert Liebing said such a measure would have to be “implementable for energy providers and grid operators,” including local utilities that struggle to cope with the current situation.

Kerstin Andreae, head of energy industry association BDEW, said the only way to leave the energy crisis behind in the long run would be to invest more. “We need smart approaches that move Germany and the energy transition ahead,” Andreae said, which would have to include investments in renewables, gas, hydrogen and hybrid-powered plants, LNG and grid infrastructure, storage technology and electrolysers. “These investments in the energy transition must not be lowered by a windfall tax,” she argued.

Renewable power industry lobby group BEE described the current crisis as “a fossil supply crisis” that had to be eradicated at its root. Investments in renewable power infrastructure would be the only way to achieve this and strengthen companies in their home market in Germany, BEE head Simone Peter said.

The head of chemicals producer association VCI, Wolfgang Große Entrup, said relief for businesses in the package had so far remained “vague” and had to be made more concrete quickly. “The situation for companies is dramatic,” he said, arguing that companies needed at least some planning security to stay afloat. “If there’s no massive support for companies now, we’ll lose entire industrial structures. And together with the jobs, we also lose tax earnings – not just temporarily but long-term,” Große Entrup said.

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