Germany’s International Competitiveness Threatened by Rising German Energy Prices and Low-Cost Energy in the United States, IHS Study Says

Rethinking the Energiewende in light of rising costs, implementation challenges and global shifts in energy resources

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Wednesday, October 9, 2013 5:30 am EDT

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BERLIN
"International competitiveness is particularly important to Germany and its standard of living, owing to the country’s high dependence on exports"

BERLIN--(BUSINESS WIRE)--Rising electricity costs pose a growing challenge to Germany’s export-based economy, says a major new study by global analytics firm IHS (NYSE: IHS). The country faces important choices about the pace of renewables development—and how it should be funded—that will have a significant impact on economic growth and Germany’s ability to remain competitive in the global economy.

The IHS study, called The Challenge to Germany’s Global Competitiveness in a New Energy World, examines the links among Germany’s energy costs, competitiveness and economic performance. The study concludes that transitioning to a lower carbon energy policy can be compatible with maintaining German global competitiveness, and lays out a competitive energy scenario that includes a more moderate pace of renewables development and an increased role for thermal power generation, especially natural gas.

“International competitiveness is particularly important to Germany and its standard of living, owing to the country’s high dependence on exports,” the study says. “Exports of goods and services made up 52 percent of German gross domestic product (GDP) in 2012. Germany’s ability to maintain its international competitiveness is not just an issue for some companies and some sectors. It will affect the entire economy, the German populace, and the fiscal position of the German state.”

Rising electricity prices in Germany and lower energy prices in North America are making German products less competitive and forcing firms to relocate to other countries, the study says. This “investment leakage” creates a ripple effect in Germany’s highly integrated and specialized economy as other companies in the supply chain follow suit and move out of the country, slowing overall economic growth and negatively impacting the standard of living of all households.

“Rising electricity costs present a challenge similar to one Germany faced a decade ago from a rigid labor market,” says Ralf Wiegert, Director, IHS Economics. “Solving that problem was key to enabling Germany’s formidable export performance in the years since. Today, a rigid and inefficiently organized energy market with rising costs—which have strikingly jumped nearly 10 percent in the past 12 months—puts Germany’s international competitiveness, and thus its economy, at risk.”

The study examines potential paths forward for the German economy by comparing economic impacts across two different energy price scenarios.

  • The high-price scenario models the rapid development of renewables and the removal of exemptions from the Erneuerbare Energien Gesetz (EEG) — the Renewable Energy Act — surcharge and tax discounts that have partially shielded energy-intensive German industry from the rising cost of renewables support.
  • The competitive energy scenario considers a more moderate pace of renewables development and an increased role for thermal power generation, especially natural gas. Industrial exemptions are maintained in this scenario.

The contrast between these two potential future paths demonstrates that the high-price scenario leads to considerable economic losses—with increases to electricity prices for large industrial consumers peaking at an increase of nearly 70 percent—while the competitive energy scenario generates both macroeconomic growth and industrial growth for the entire economy.

Significant differences in economic performance between the two scenarios include:

  • Germany’s 2030 GDP is projected at €211 billion, or 6.2 percent, higher in the competitive energy scenario than the high-price scenario.
  • Personal income is projected to be 6.3 percent higher and the average resident earns €1,590 more per year in 2030 under the competitive energy scenario compared to the high-price scenario.
  • The energy-intensive chemicals sector is projected to see only 0.7 percent growth in annual output under the high-price scenario. It grows at more than twice the pace – 1.8 percent – under the competitive energy scenario from 2015 through 2030 and is projected to contribute 40,000 more jobs in 2030 than in the high-price scenario.
  • Machinery and motor vehicles industries also benefit from the competitive energy scenario, as their supply costs decrease and their suppliers are not forced to relocate relative to the high-price scenario. The result is a projected additional output in 2030 between the two scenarios of €43 billion and €65 billion for the machinery and motor vehicle sectors respectively — equal to 87,000 and 85,000 more jobs for each industry relative to the high-price scenario alternative.

Under the competitive energy scenario, total power costs are lowered as the generation mix focuses primarily on mature renewable and thermal generation technologies. Offshore wind, the primary future policy cost driver, would see more moderate installation rates. Between 2012 and 2030, this would enable reduced overall system costs of almost €85 billion (in real 2013 euros). A mix of mature renewables such as onshore wind and solar would be accompanied by a cost effective mix and utilization of thermal generation from existing coal and gas capacity as well as new natural gas facilities.

In the competitive energy scenario, Germany still meets its 2020 target of 35 percent share for renewables and the share of renewables would grow to nearly 40 percent by 2030 (as opposed to the current target of 50 percent). Carbon dioxide (CO2) emissions in the energy sector would continue to decrease, albeit at a slower rate compared to the high-price scenario and not meet the targets.

Household energy prices are lower under both scenarios relative to today’s levels. Through 2022, electricity bills are on average 1 percent higher under the competitive energy scenario compared to the high-price scenario. However, under the competitive energy scenario all consumers benefit from progressively higher disposable income (reaching approximately €1385 by 2022) due to improved German competitiveness.

The study concludes that transitioning to a lower carbon energy policy can be compatible with maintaining German competitiveness. Key elements of such a transition include:

  • Maintaining the current EEG exemptions to avoid additional costs for energy-intensive industries: this has positive macroeconomic effects not just for these exempt consumers, but for the entire economy, as measured by additions to GDP, employment, personal income and government revenues.
  • Balancing overall system costs and CO2 emissions when deciding on a suitable mix of power generation: lower system costs come at the expense of higher CO2 emissions, but investing in gas-fired power generation can minimize this trade-off.
  • Expanding gas-fired power capacity as a bridging technology to Germany’s low-carbon future. As renewable technologies mature, gas would move into a back-up role, ensuring the security of Germany’s power supply.

About The Report

The Challenge to Germany’s Global Competitiveness in a New Energy World is a two-volume series examining German competitiveness. In volume 1, IHS examines the links among Germany’s energy costs, competitiveness and economic performance. The study considers alternative paths to transitioning to a lower carbon energy policy and quantifies the effects on German global competitiveness. This research was supported by the Verband der Chemischen Industrie (VCI). Additional sponsors were Bundesverband der Deutschen Industrie (BDI), Wirtschaftsverband Erdöl- und Erdgasgewinnung, BASF, Bayer, BP, Central European Petroleum, Dow, Evonik, ExxonMobil, Linde, Total, Vestolit, and Wacker. IHS is exclusively responsible for all analysis and content.

A forthcoming second phase of this study will provide further detail about Germany’s energy mix and its role in economic growth, specifically the role that increased European gas production could play in moving Germany toward a low-cost, low-carbon, economically competitive future.

Download The Challenge to Germany’s Global Competitiveness in a New Energy World at: www.ihs.com/GCS

About IHS (www.ihs.com)

IHS Inc. (NYSE: IHS) is the leading source of information, insight and analytics in critical areas that shape today’s global economic and business landscape. Businesses and governments in more than 165 countries around the globe rely on the comprehensive content, expert independent analysis and flexible delivery methods of IHS to make decisions and develop strategies. IHS has been in business since 1959 and is committed to sustainable, profitable growth. With global headquarters in Denver, Colorado, USA and German offices in Frankfurt, Dusseldorf, and Munich, IHS currently employs approximately 8,000 people in 31 countries around the world. IHS has acquired more than 60 companies in the last decade including companies with world-leading expertise in macroeconomics and energy.

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