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ENERGY

EXPLAINED: Will Germany set a gas price cap and how would it work?

Rocketing energy prices in Germany have the government looking into a cap on the price of gas this winter. What’s not clear yet is how exactly it would work. We explain some of the possibilities.

EXPLAINED: Will Germany set a gas price cap and how would it work?
A person turns the knob on their heating device (Photo by Ina FASSBENDER / AFP)

What’s happening?

Over the last few months, Germany’s federal traffic light coalition has been busily putting together relief packages totalling €100 billion to help residents deal with rising inflation and rocketing energy bills.

So far, the money has gone into everything from cheap public transport—such as the nationwide €9 ticket and its planned successor—to one-off energy relief payments.

But that may not be enough this winter. 

Over the past year, the price of electricity has doubled. Meanwhile, the price of gas—which supplies around a fifth of the country’s electricity and heats around half of German households—has nearly quintupled. 

Politicians outside the federal government, from the opposition conservatives federally to Berlin’s Social Democrat Mayor Franziska Giffey, have been calling for a cap on either the price of gas specifically or the price of energy overall.

Last week, reports emerged that Finance Minister Christian Lindner had set up a working group looking at a possible cap. Chancellor Olaf Scholz has since confirmed that a commission had started work and would come back with proposals soon.

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

What might a cap look like?

There’s many different forms gas price cap—or Gaspreisdeckel—could take.

Some politicians, like Berlin Mayor Franziska Giffey, have even called for an Energiepreisdeckel—or a cap on the price of all energy.

Berlin Mayor Franziska Giffey has been one of the major state leaders calling for a cap on energy prices. Photo: picture alliance/dpa | Wolfgang Kumm

However, most political discussions so far in both the governing coalition and opposition involve whether and how to cap the price of gas—not whether to cap the cost of energy as a whole.

READ ALSO: German word of the day: Deckel

Some countries, like Spain and Portugal, set a maximum price that producers—which generate the actual gas or electricity—can charge to suppliers. These are the firms that then deliver the electricity or gas to consumers, whether they’re private households or companies.

The other way of capping the price is to set a maximum amount that suppliers can charge consumers. The risk with either model is that electricity companies could end up paying more in costs than what they get back from consumers, making their business model unviable.

That’s why the German government is looking at setting a cap on what consumers would pay per kilowatt hour of consumption. Consumers pay everything up to that cap. If and when the market price of gas goes above the set cap, the government would step in and pay whatever the difference is between the capped amount the market price.

For example, German price comparison website Check24 estimates that a model German household is using 20,000 kWh a year at a price of 21.9 cents per kilowatt hour. That would cost that family €4371 annually now compared to €1316 a year ago.

If the federal government capped that price at 19 cents per kilowatt hour, for example—the family in question would pay 19 cents to their provider while the government would pay the 2.9 cent difference.

Will people still be encouraged to save energy if gas prices are capped?

The conservative Christian Social Union (CSU), which sits together in the Bundestag with the Christian Democrats (CDU), wants a gas price cap that still encourages consumers to do their part to save energy.

Their proposal is to cap 75 percent of what consumers use, designating that amount a “basic” level of consumption that consumers can’t be expected to reduce.

It would then be up to consumers to pay the remaining 25 percent at market price. The CSU argues that allowing the last 25 percent to fluctuate would incentivise people to save energy.

Under a plan like that, a household which cuts out a quarter of their use would, theoretically, pay nothing above the capped level.

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

The SPD-led government of Mecklenburg-West Pomerania and national Green co-leader Ricarda Lang advocate a similar model, but want 80 percent of what households use to be declared a basic consumption requirement. That means that share would be capped.

What’s not clear yet is precisely what amount the government would declare as a basic level of consumption. Experts are currently working on proposals for an amount based on what German households have used over the past few years.

READ ALSO: EXPLAINED: When should I turn on my heating in Germany this year?

How will it be paid for?

This is one of the major questions before the government right now.

Reducing the price of gas by one cent per kilowatt hour is likely to cost around €2.5 billion, but there could be fluctuations based on market prices.

The German Institute for Economic Research’s Marcel Fratzscher told broadcaster RTL and ntv that the government was looking at a price tag of anywhere between €30 billion and €50 billion to have a real impact on household budgets.

Both CSU Leader Markus Söder and Berlin Mayor Franziska Giffey have called for the federal debt brake, which limits the amount the government can borrow, to be suspended to pay for the gas price cap.

Many in the SPD and Greens, which form part of the Scholz government, agree.

But the liberal Free Democrats, led by Finance Minister Christian Lindner, are opposed so far. However, Lindner has recently acknowledged that he is largely alone in rebuffing the plans. 

A possible tax on windfall profits by energy companies is also being floated to pay for any possible gas price cap.

Although the debt brake is enshrined in the German constitution, it can be suspended in emergency situations—such as in March 2020, when the Bundestag suspended it to pass its first Covid-19 rescue package.

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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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