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EXPLAINED: How Germany wants to reduce electricity prices for consumers

Electricity prices in Germany have roughly doubled since the start of the year and are continuing to rise. A proposed electricity price brake aims to relieve consumers from the extra financial pressure. Here's what we know so far.

A power cable lies on a pile of euro notes.
A power cable lies on a pile of euro notes. Photo: picture alliance/dpa/dpa-tmn | Kai Remmers

What’s happening?

Consumers in Germany are currently seeing huge increases in electricity prices. Anyone signing a new electricity contract now will pay around 53 cents per kilowatt hour while a year ago, electricity cost less than half of that. Those with an existing contract usually still pay a lower price – but suppliers are soon likely to adjust prices to the current market level.

Manuel Frondel, Professor of Energy Economics at the Ruhr University in Bonn, told the Rheinische Post that the price of electricity will continue to rise in the autumn.

“Looking ahead to autumn and winter, I can’t give consumers any hope that electricity prices will get lower for the time being,” he said.

READ ALSO: German electricity prices to soar by 25 percent on average

“In the autumn and winter, many consumers heat with electricity…and if half of the nuclear power plants in France still fail in the autumn and winter, then electricity prices on the stock exchange may well reach unimagined heights.”

Why is electricity getting more expensive?

Both the war in Ukraine and the extreme weather conditions this summer are impacting the electricity price in Germany.

Although gas-fired power plants only contribute around 10 percent to electricity generation in Germany, the sky-high price of gas as a result of the scarcity of cheap Russian gas is dragging up the price of electricity.

READ ALSO: EXPLAINED: How customers in Germany can tackle rising electricity bills

Another important reason for the high electricity prices is that Germany is currently exporting an unusually large amount of electricity to other EU countries.

Austria, for example, is dependent on German imports because hydroelectric power plants are producing less electricity than usual due to the dry rivers. In France, numerous nuclear power plants are down – in part also because of the drought, which is jeopardising the supply of cooling water needed for the operation of the plants.

What are the proposed measures – and would they help residents?

The latest package of relief measured agreed by the ruling traffic light coalition on Sunday includes an electricity price cap for ‘basic consumption’ at around 30 cents per kilowatt hour.

This would mean that, for a certain amount of electricity use, a discounted price would apply. For additional consumption beyond that, the price would not be capped.

According to a sample calculation published by Federal Minister of Justice Marcus Buschmann, an electricity price cap would mean that a family with a consumption of 5,000 kWh would save €346 compared to the average electricity price in August (39.9 cents/kWh), and a single household with a consumption of 1,500 kWh would save €141.

Chancellor Olaf Scholz (SPD), Omid Nouripour, Federal Chairman of Bündnis 90/Greens, Saskia Esken Federal Chairman of the SPD, and Christian Lindner, FDP Federal Chairman and Federal Minister of Finance, at the press conference following the deliberations on the third relief package on September 4th. Photo: picture alliance/dpa | Michael Kappeler

However, it is still unclear whether the electricity price brake will apply to all households – as the coalition committee’s resolution paper actually suggests – or only to those with low incomes.

READ ALSO: What’s in Germany’s support package for rising energy bills?

The plan is to finance the price brake by skimming off the top of energy company profits, though exactly how this will work also remains unclear.

In his summer interview with ZDF, Chancellor Olaf Scholz said that this depends on developments in the electricity markets, which are hard to predict.

“If such coincidental, excess profits occur there on a large scale, we have many, many billions to give back to the citizens,” he said.

So far, however, no details are known about the energy companies from which the “price brake” is to be financed. The only thing that is certain is that the price of electricity on the stock market is always based on the cost of the most expensive power plant required to generate the electricity – the so-called “merit order”.

As a general rule, the most expensive suppliers are gas-fired power plants.

The German government is hoping that such a price brake instrument will be agreed upon quickly for the entire EU and on Friday, the EU energy ministers will discuss the issue.

But If the measures “cannot be agreed upon and implemented in a timely manner,” the German government wants to implement them itself.

It is also unclear when the new mechanism will take effect.

What are Germany’s electricity sources?

The importance of renewable energy sources for Germany’s electricity supply has risen steadily in recent years.

In the first half of 2022, renewable energies covered a total of around 49 percent of gross domestic electricity consumption. By way of comparison, in 2011, electricity from solar panels, wind turbines, biogas and hydroelectric power plants only accounted for around 20 percent of total energy production.   

Lignite and hard coal also remain an important factor in German electricity generation and account for around 30 percent of the electricity supply. But since the beginning of August, no more Russian coal has been imported into Europe. Although coal can be replaced much more easily than gas, these supply streams also have to be established first, especially since Germany’s demand for coal is likely to increase.

The sun rises between clouds behind Mehrum power plant in the Peine district. The coal-fired power plant has been back on 

Since the beginning of the war in Ukraine, Germany has brought two hard-coal-fired power plants back online: the Mehrum power plant in Hohenhameln, Lower Saxony and the Heyden power plant in Petershagen, North Rhine-Westphalia.

What about nuclear power?

Electricity is still generated by nuclear power plants in Germany, albeit to a lesser extent: the three nuclear power plants Isar 2, Emsland and Neckarwestheim 2 currently still account for around six percent of the electricity supply.

As reported by The Local, the German Finance Minister Robert Habeck (Green) announced on Monday that, despite plans to end nuclear power in Germany for good by the end of 2022, the two nuclear power plants Isar 2 in Bavaria and Neckarwestheim in Baden-Württemberg are to remain on operational standby until April 2023.

Habeck wants to leave the decision of whether the reactors should really continue to generate electricity open until the new year, so that Germany could be better protected against possible further difficulties with electricity supply.

With reporting by AFP.

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ENERGY

Will Germany set a gas price cap?

As energy costs rise further, more German politicians are coming out in favour of a cap on gas prices - and the government is reportedly looking into the matter.

Will Germany set a gas price cap?

What’s happening?

With electricity bills having doubled in some cases and German inflation seeing post-war record highs of 7-8 percent each month, the German government has been making a lot of money available to help give some relief to people struggling with their bills.

Some of this money is designed to specifically target the financial pressure brought on by the rising price of natural gas – which around half of German households use for heat. Gas also supplies around a quarter of German electricity, but has nearly quintupled in price.

The government’s relief measures include one-off payments and a cut on the VAT put on natural gas from 19 percent to 7 percent.

READ ALSO: KEY POINTS: Everything Germany is doing to help relieve rising energy costs

But more politicians and experts are saying that’s not enough, and are calling for the federal government to pass a Gaspreisdeckel – a cap on the price of gas.

The Left Party has been advocating such a cap for months. But this week, leader of the conservative opposition Christian Social Union (CSU) Markus Söder, whose Bavarian party is sister to the Christian Democrats in the rest of the country, also called for a gas price cap.

“We are experiencing an unprecedented increase in the price of gas and it is essential to prevent normal earners from becoming low earners,” he said.

CSU Leader and Bavarian Premier Markus Söder is in favour of a gas price cap. Photo: picture alliance/dpa | Nicolas Armer

He says the federal traffic light coalition should also abandon plans for its gas levy, which passes on some of the higher costs of importing gas to consumers, and to suspend the national debt brake. That would allow more government money to be spent on relief.

READ ALSO: Germany to push ahead with gas levy plans

Alexander Dobrindt, who leads the CSU in the Bundestag, says a gas price cap should cover 75 percent of consumption in private households, with the remaining 25 percent determined by market rates. Dobrindt argues that allowing the last quarter to fluctuate would incentivise people to still save energy.

Who else wants it?

Söder’s CDU colleagues in the Bundestag say they’re also in favour of a short-term cap on gas prices to get through the winter.

Berlin Mayor Franziska Giffey also called for a cap this week.

She says she’s in favour of a Energiepreisdeckel – or a cap on electricity prices that goes beyond simply gas prices, and intends to take the matter to a meeting the 16 federal state bosses will have with Chancellor Olaf Scholz and his federal government on September 28th.

READ ALSO: German word of the day: Deckel

“The government needs to put an energy price cap in and give people the security they need to sleep peacefully again,” said Giffey, who unlike opposition politicians like Söder, comes from the same Social Democratic Party as Chancellor Olaf Scholz.

Berlin Mayor Franziska Giffey, from Olaf Scholz’s Social Democrats, wants an electricity price cap for both households and businesses. Photo: picture alliance/dpa | Wolfgang Kumm

She says that businesses threatened by rising costs should also benefit from a cap, alongside private households. She says the national debt brake should be suspended to pay for this.

In an interview with public broadcaster ZDF, economics professor and member of the federal government’s economic experts committee Veronika Grimm also called for a gas price cap, provided it still be set up to give people an incentive to save energy.

The Federal Association of German Housing and Real Estate Companies (GdW) is also calling for a federal gas price cap, warning that many tenants may not be able to pay their utility costs.

READ ALSO: Tenants in Germany need eviction protections during energy crisis, says housing boss

What is the government doing about it?

Energy and Economics Minister Robert Habeck of the Greens ruled out a cap on gas prices earlier this week, but Finance Minister Christian Lindner of the liberal Free Democrats has set up a working group that will look at capping gas prices.

The expert group will examine whether a gas price cap is possible, how it might be put into place, and how such a cap would be paid for, ahead of consultations with the federal state heads next week.

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