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UPDATE: Germany agrees €65 billion inflation relief package

The German government on Sunday unveiled a new multi-billion euro plan to help housesholds cope with soaring prices, and said it was eyeing windfall profits from energy companies to help fund the relief.

UPDATE: Germany agrees €65 billion inflation relief package
German Chancellor Olaf Scholz and Finance Minister and Free Democrats Party (FDP) leader Christian Lindner address a press conference on the government coalition's relief plan to cope with soaring energy costs, on September 4, 2022 at the Chancellery in Berlin. (Photo by Tobias SCHWARZ / AFP)

German businesses and consumers are feeling the pain from sky-high energy prices, as Europe’s biggest economy seeks to extricate itself from reliance from Russian supplies in the wake of Moscow’s invasion of Ukraine.

Rapid measures to prepare for the coming cold season will ensure that Germany would “get through this winter,” Chancellor Olaf Scholz said at the unveiling of the €65 billion package.

The latest agreement, which brings total relief to almost €100 billion since the start of the Ukraine war, was hammered out overnight into Sunday by Germany’s three-way ruling coalition of Scholz’s Social Democrats, the Greens, and the liberal FDP.

READ ALSO: Russia halts gas supplies to Germany

Among the headline measures are one-off payments to millions of vulnerable pensioners and a plan to skim off energy firms’ windfall profits.

The government’s latest relief package came two days after Russian energy giant Gazprom said it would not restart gas deliveries via the Nord Stream 1 pipeline on Saturday as planned after a three-day maintenance.

The government had made “timely decisions” to avoid a winter crisis, Scholz said, including filling gas stores and restarting coal power plants. 

But preventative measures, including a drive to reduce consumption, have done little to break a sharp increase in household bills.

Third package

The latest announcement follows two previous relief packages totalling 30 billion euros, which included a reduction in the tax on petrol and a popular heavily subsidised public transport ticket.

But with the expiration of many of those measures at the end of August and consumer prices soaring, the government has been under pressure to provide new support.

READ ALSO: EXPLAINED: The German states pushing for €9 ticket follow-ups

Inflation rose again to 7.9 percent in August, after falling for two straight months thanks to previous government relief measures.

The take-off in energy prices is expected to push inflation in Germany to around 10 percent by the end of the year, its highest rate in decades.

Scholz said however that not everyone is suffering from the high consumer prices.

Some energy companies which may not be using gas to generate electricity were “simply using the fact that the high price of gas determines the price of electricity and are therefore making a lot of money,” he said.

“We have therefore resolved to change the market organisation in such a way that these random profits no longer occur or that they are skimmed off.”

The trimming of windfall profits would create “financial headroom that should be used specifically to relieve the burden for consumers in Europe,” the government said in its policy paper.

READ MORE: What you need to know about Germany’s €300 energy relief payout

The move could potentially bring “double-digit billions” of euros in relief, finance minister Christian Lindner estimated in the press conference.

The government said it would push for the move to be implemented across the European Union, before going ahead with the measure on its own.

Brussels on Monday said it would prepare “emergency” action to reform the electricity market and bring prices under control.

Scholz said he expected the EU to “deal quickly” with the issue, adding that it was “very clear that we need rapid changes in this area”.

‘Never walk alone’

Repeating his mantra that Germans will “never walk alone” through the energy crisis, the chancellor unveiled a raft of measures, including a one-off payment of €300 to millions of pensioners to help them cover rising power bills.

The government will also target students with a smaller one-time transfer of 200 euros, and an heating cost payment for people receiving housing benefits.

Berlin also set aside €1.5 billion for work on a successor to the wildly popular €9 monthly ticket on local and regional transport networks.

The relief package as a whole should be financed without planning to take on further debt, Lindner said.

“These measures are included within the government’s existing budget plans,” covering 2022 and 2023, he said, with the remainder covered by the windfall energy profit measures.

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ENERGY

How electricity prices are rising across Germany

As the year draws to an end, price comparison portals have observed huge spikes in electricity costs across Germany - though the scale of the price hikes vary across different regions.

How electricity prices are rising across Germany

According to analysis carried out by comparison portal Check24, there were at least 580 cases of price increases in the basic electricity supply at the beginning of the year, with around 7.3 million households affected.

Electricity costs increased by an average of 60 percent, the analysis found, though in some cases were much higher. In the case of the Cologne-based supplier Rheinenergie, a kilowatt hour of electricity has gone up to 55 cents – 130 percent higher than the previous price. 

Comparison portal Verifox, which conducted its own analysis, found that prices were rising by an average of 54 percent across the board. 

“The new year is beginning with a massive wave of price increases for electricity,” said Verifox energy expert Thorsten Storck.

Analysts also noted strong regional differences in the scale of the price increases, with Munich and Cologne topping the list for the most expensive electricity. 

In Munich, a kilowatt hour of energy will cost 61.9 cents from January, compared to 55 cents in Cologne.

Meanwhile, MVV Energie in Mannheim, Baden-Württemberg, will charge almost 45 cents per kWh for its basic supply from January onwards – instead of the previous 27 cents. The East German energy supplier EnviaM, based in Chemnitz, will charge 48.1 cents in the future – 20.1 cents more than before.

In Potsdam in Brandenburg, the region supplier is raising its electricity prices by around 21 percent to 46.5 cents per kilowatt hour.

READ ALSO: ‘It’s going to be a bleak winter’: How people in Germany are coping with the energy crisis

Why are the prices so high? 

In a statement explaining the imminent jump in prices, Rheinenergie pointed to the huge increase in their procurement costs and other overheads.

“Compared to the previous year, prices on the electricity exchanges have risen by more than 300 percent,” they explained. “At their peak they had increased more than tenfold. In addition, the grid fees are also rising.” 

The extreme spike on the markets is yet another consequence of Russia’s invasion of Ukraine, which has sent the price of natural gas soaring.

An electricity pylon near a motorway in Lower Saxony.

An electricity pylon near a motorway in Lower Saxony. Photo: picture alliance/dpa | Moritz Frankenberg

Though gas isn’t the only component involved in producing electricity – much cheaper renewables also account for a decent portion of Germany’s supply – it does have a significant impact on prices. That’s because of something known the “merit order,” in which the most expensive gas-fired plant used to produce electricity is decisive in setting the cost.  

READ ALSO: Germany’s Scholz dims lights on Christmas tree amid energy squeeze

What can customers do?

How to handle the latest wave of price increases may in part depend on who your current supplier is.

According to Udo Sieverding, an energy expert at the North Rhine-Westphalia consumer advice centre, people using a private supplier should consider whether it would make more sense to fall back on the so-called “basic supply.” 

“Customers outside the basic supply should even consider making use of the special right of termination in case of price increases and let themselves fall into the basic supply,” he said. 

The basic supply – or Grundversorgung – is generally provided to people who don’t set up their own electricity or energy contract with another supplier. Prices are set on a regional level and used to be considered expensive, but in recent months they have generally slipped below the rates offered by private companies. 

For people already using the basic supply, the situation is a bit trickier.

“The electricity price increases at the turn of the year are in part drastic,” said Sieverding. “Unfortunately, the new customer tariffs via the intermediary portals are even higher, which means that a change of supplier won’t lead to savings in most tariff areas.”

That means it could make sense to sit tight for now and accept the higher prices, but keep an eye on any deals that could be offered in the coming months. 

READ ALSO: EXPLAINED: How to save money on your German electricity bill

Will electricity stay this expensive in the future? 

Energy prices were rising dramatically even before Russia’s war on Ukraine – in part due to pandemic supply issues – and experts don’t think they’re set to drop anytime soon. 

According to analysis by Check24, a sample household with an annual consumption of 5000 kWh paid an average of 29.4 cents per kWh in November 2020. One year later, it was 31.6 cents. Currently, the average is 42.7 cents.

Apartments in Lower Saxony

A few apartments are lit up in a tower block in Lower Saxony. Photo: picture alliance/dpa | Julian Stratenschulte

Electricity market expert Mirko Schlossarczyk, who works for consultancy firm Enervis, said 40 cents per kilowatt-hour was likely to be the new normal in 2023 and 2024, and that prices could even rise to 50 cents per kilowatt-hour after that. 

Although wholesale electricity prices could fall again significantly in the future, as a result of a prospective drop in gas prices and the increased expansion of renewable energies – the noticeably larger share of the end customer price would be accounted for by levies, surcharges, fees, and taxes, Schlossarczyk said.

“We will not see a return to 32 cents (the pre-war price) in the coming years simply because of the comparatively high wholesale electricity price level and the already announced increases in grid fees,” he added. 

But isn’t there supposed to be a price cap coming?

That’s right: from March 2023, the government plans to introduce a cap on electricity prices that will apply retrospectively from January.

However, this still won’t take electricity bills back to pre-war levels. Instead, 80 percent of a household’s normal electricity consumption will be capped at a price of 40 cents per kilowatt hour, while any excess over this will be billed at ordinary market prices.

That is likely to mean that households that don’t reduce their consumption by at least 20 percent still face much higher bills, and even those that do will pay an average of eight cents more for a kilowatt hour of electricity than they were in 2021. 

READ ALSO: Germany plans to cap energy prices from start of 2023

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