Transition state of play – Germany is emerging from the energy crisis

Published by

20 March 2023 12:10 PM

Source: BWE

A year after the launch of Russia’s attack on Ukraine, Germany appears to be emerging from the energy crisis relatively unscathed.

Russia’s war has dealt a heavy blow to Europe’s biggest economy, because it was particularly dependent on Russian fossil fuels.

But wholesale energy prices have retreated from their peaks, allaying fears of gas shortages, irreparable damages to the country’s prized industries, economic hardships for its citizens, and social unrest.

The long-term impact on the country’s landmark energy transition remains uncertain, as Germany redoubles efforts to roll out renewables, but also bets on liquefied natural gas (LNG), a temporary revival of coal plants and a limited runtime extension for its remaining nuclear plants to weather the storm.

This article provides an overview of the state of play of Germany’s shift to climate neutrality, which is now dominated by its response to the crisis.

What’s the energy crisis’ impact on the economy and households?

The energy crisis has slowed economic growth in Germany, as rising energy prices put a damper on industrial production and inflation means citizens will buy less. But Europe’s largest economy held up surprisingly well at the end of 2022, leading the government to expect it will dodge a widely expected recession. The government forecasts that inflation will slow to 6.0 percent in 2023 from 7.9 percent last year.
Many German industrial companies have relied on cheap Russian pipeline gas, among them key producers of basic materials needed for many other products. These firms remain concerned about the long-term effects of the energy crisis, as permanently higher gas prices threaten competitiveness and long-term survival.
The government has launched massive relief packages for citizens and companies (see below). Without these, many households could face additional energy costs running into thousands of euros per year. However, as market prices have decreased again, the government might have to spend much less on subsidies than planned.
Policymakers, consumer protection groups, and social care services warned that the energy price hike could result in social hardships and even unrest if households are overburdened. But so far, protests have remained limited in scope and scale, and mainly limited to regions notorious for their rejection of government policies.
Most citizens blame the energy price hike on external factors such as the pandemic and the war on Ukraine, and generally approve of the government’s handling of the crisis, according to surveys. They also say that they are ready to contribute to energy savings. But rising prices have become the biggest concern for a vast majority of the population.

How has the government responded?

Germany has responded to the crisis with a whole series of relief packages for households and businesses, which have continuously grown in size and scope. During its first year in office, the government presented a 200-bln euro “defence shield“ in September, which includes subsidies for reducing gas and electricity prices at a cost originally projected at 83 billion euros, which parliament adopted in December. Previously, it had already earmarked about 95 billion euros in support funds, spread out in three relief programmes, which included petrol tax cuts, a 9-euro flat-rate ticket for public transport, and a temporary freeze of the CO2-price for transport and buildings, which was meant to rise in early 2023. As wholesale prices have fallen, the cost of relief packages is set to be much smaller than originally anticipated.
The government urged citizens to save energy, ordered savings in public institutions, and helped to fill gas storages in order to avoid shortfalls in the winter, which are considered increasingly unlikely. In response to the crisis, Germany’s gas consumption dropped 18 percent in 2022. [The grid agency provides daily updates on the current status of Germany’s gas supply.]
To bring down the use of gas power plants, the country is temporarily reviving coal units that had already been retired, or were earmarked for decommissioning.
The country has also postponed its exit from nuclear energy by around three months, by keeping its remaining three operating nuclear plants on the grid until April 2023.
Germany is going full steam ahead in building up its own import infrastructure for liquefied natural gas (LNG) – with the first direct flows of LNG being fed into the country’s gas grid at the end of 2022 – and increasing trading or making new deals with other suppliers in order to replace Russian pipeline gas. Experts expect a significant import overcapacity if all LNG infrastructure projects are implemented as planned, but the government argues it needs a “saftey buffer” to ensure supply for Germany and neighbouring countries.

How will the crisis affect Germany’s shift to climate neutrality?

Many experts and the government hope that while the crisis might result in a short-term increase in emissions in the power sector, it will ultimately speed up the energy transition. Germany’s greenhouse gas emissions fell about 2 percent in 2022, as Germany increased use of dirtier coal electricity, but high energy prices also meant that industrial production went down. Germany’s overall energy transition and emission reduction targets remain in place.
The war has re-energized efforts to shift away from fossil fuels towards renewables, which have been dubbed “freedom energies” because they allow the country a greater degree of independence from Russia. But the increase in raw material and financing costs also threatens to slow the renewables roll-out, as investors become more reluctant.
Despite the short-term increase of coal use, the government is still planning to pull the country’s coal exit forward, “ideally” to 2030, from the currently legislated end date of 2038. However, while some coal regions have committed to the 2030 phase-out goal, others have said an early exit is too ambitious. Large-scale climate protests against the demolition of the small village Lützerath to make way for a lignite mine in early 2023 showed continued resistance against the government’s coal policies.
Environmentalists warn the government’s LNG infrastructure investments exceed necessities and could cement fossil-fuel dependency.
German industry has said it plans to stick to its existing decarbonisation targets despite the challenges posed by the energy crisis.
Household demand for low emission heating systems such as heat pumps has risen strongly in response to the crisis, challenging the dominance of gas-fired heating systems in German homes.

What’s the overall status of Germany’s energy transition?

There is a broad consensus among policymakers, businesses, and climate activists that speeding up the rollout of renewables must currently be Germany’s top priority to advance the energy transition, because they will also be key to electrifying other sectors such as transport and heating, and the country’s plans for a hydrogen economy.
Renewables provided 46.9 percent of Germany’s electricity consumption in 2022.
There are concerns that a lack of skilled workers will become a major obstacle to rapid energy transition progress. The government plans reforms to the country’s immigration law aimed at filling tens of thousands of vacant energy transition jobs.
For more details, see the factsheets Germany’s greenhouse gas emissions and energy transition targetsand Germany’s energy consumption and power mix in charts.