Federal Ministry of Economics presents concept for an industrial electricity tariff

On May 5, the German Federal Ministry of Economics (BMWK) presented a concept for an industry electricity tariff. The aim is to enable energy-intensive companies to continue to produce competitively in Germany against the background of increased electricity costs and to foster the deployment of plants generating electricity from renewable energy sources (RE-plants). According to this concept, the electricity tariff for energy-intensive companies is to be capped at six cents per kWh for 80% of a company’s electricity consumption. This so-called Transition Electricity Tariff (“Brückenstrompreis”) is to apply until 2030, in particular to bridge the period until the targeted expansion of RE-plants is more clearly reflected in electricity prices. For the period thereafter, industrial companies should be able to obtain electricity through subsidized Power Purchase Agreements (PPA) and contracts for difference (CfD) close to the cost price (Transformation Electricity Tariff, “Transformationsstrompreis”).

• Generation of electricity close to the place of consumption is being supported by the Transformation Electricity Tariff by means of grid levy reductions. Projects near RE-plants avoiding grid congestion areas could become particularly attractive.
• For energy-intensive companies and their electricity generation plants, this would likely have a significant impact on location decisions in favor of decentralized electricity supply models.
• Operators and developers of RE-plants should start considering possible grid levy reductions when concluding long-term PPAs and choosing offtakers.
• In addition, state support for PPAs is likely to give the PPA market a further boost.
• Flexible business models for variable loads (heat and hydrogen generation) close to renewable energy plants would become significantly more attractive.

Even if the Transition Electricity Tariff is not directly linked to the purchase of renewable electricity, the obligation to achieve climate neutrality by 2045 will likely have a positive effect in the long term. In addition, those industrial companies that secure low-cost PPAs (usually from renewables, then also with corresponding guarantees of origin) would benefit in particular, since state support would not be based on the actually incurred electricity costs. It remains to be seen whether and how this will affect the PPA market.

According to media reports, the Transition Electricity Tariff could apply as early as January 2024. The current electricity price cap will then expire. However, the German “Ampel”-coalition would have to agree on the necessary legislative changes by then. This is not a mere formality: The German Federal Ministry of Finance has already raised objections to the proposal, and approval at the EU level is not expected without further ado. If there is no agreement in the short term, the proposal could rather unsettle market participants and be an obstacle to the desired rapid expansion of renewable energy plants.

Medium-term Transition Electricity Tariff until 2030

The BMWK’s concept for the Transition Electricity Tariff provides for the following mechanism:

• Support will only be granted to energy-intensive industrial companies that are already eligible under the Special Compensation Regulation (“Besondere Ausgleichsregelung”) in the Renewable Energies Act (“EEG”) respectively in the Energy Financing Act (“EnFG”). In Germany, this means around 1,500 companies.
• The Transition Electricity Tariff shall cover only 80% of a company’s consumption in order to preserve incentives for savings. In addition, the consumption shall be determined according to Europe-wide electricity efficiency benchmarks instead of individual consumption.
• If average annual electricity prices at the electricity exchange exceed 6 cents/kWh, companies will be reimbursed for the difference. In other words, the difference will not be determined on the basis of the individual electricity prices each company is paying.
• Companies that take advantage of the Transition Electricity Tariff will be obliged to implement (otherwise voluntary) measures in accordance with the Energy Efficiency Act (“EnEfG”). They shall also undertake to become climate-neutral by 2045, provide a location guarantee and comply with collective agreements.
• The Economic Stabilization Fund shall bear the projected costs of the Transition Electricity Tariff of around EUR 25-30 billion.

Even though the concept of a Transition Electricity Tariff has been positively received by industry, energy-intensive companies would still be required to individually ensure the most cost-effective electricity supply available. The purchase of renewable electricity would not be a requirement, but it might be the economically more attractive option. The concept would also have to be cleared by the European Commission, which must approve such an aid scheme in advance on the basis of CEEAG (see here). The Commissioner in charge has already expressed concerns.

Long-term Transformation Electricity Tariff

The long-term Transformation Electricity Tariff includes often discussed and demanded measures for the expansion of renewable energies (acceleration of permitting, additional areas for wind energy plants, reduction of capital costs). In addition, it would be based on two further pillars in particular:

• The expansion of renewable energy plants is to be financed by means of CfD, thus enabling electricity prices close to production cost for industrial consumers. For offshore wind farms, the necessary changes to the legal framework could already be implemented by government ordinance for pre-surveyed areas. For other renewable energy plants, the EEG would have to be amended beforehand.
• Based on the so-called Norwegian model, the conclusion of PPAs is to be facilitated for industrial companies by state guarantees to decrease the risk premiums. Other support measures for the PPA market are also being explored.

Further, according to the concept, the Federal Network Agency (“BNetzA”) will be able to reduce grid levies regionally in times of congestion, thus enabling the use of renewable energy electricity in the affected regions instead of curtailing renewable energy production. In addition, network operators are to be enabled to sell electricity inexpensively for heat or hydrogen generation in the event of imminent curtailment. Finally, the BNetzA is to be enabled to reduce gird levies for industrial companies that purchase electricity via PPAs from renewable energy plants in close proximity.

What to expect next?

For offshore wind projects (for centrally pre-surveyed areas), auctions could be switched to or amended by the CfD model swiftly by means of a government ordinance pursuant to Section 96a WindSeeG. However, this will not yet apply to the auctions taking place in 2023, but rather for the 2024 auction rounds at the earliest – provided an agreement is reached by the Federal Government. Again, approval under state aid law by the European Commission will be required in accordance with the CEEAG.

The conclusion of renewable PPAs will be easier in the future if state guarantees (“Bürgschaften”) or comparable measures as proposed by the BMWK are provided to reduce financial risks. PPAs with industrial installations in close proximity could be particularly attractive in view of the proposed grid levy reductions.

Finally, the announced measures to combat curtailment of electricity generation could provide incentives for the development of flexible loads in the heat and hydrogen sector. In particular, renewable electricity generators could benefit from their experience with curtailments to early on identify and develop business opportunities for flexible power-to-heat or power-to-gas installations.