Following a lengthy three-month negotiation marathon leading up to the coalition agreement between the centre-left social democrats and Merkel’s conservative CDU-CSU, a specific blueprint for Germany’s energy policy was set out by the German energy ministry on 22 January 2014.

As a centrepiece of this agenda stands what the government has labelled as a “relaunch” of the energy transformation (Energiewende) – an ambitious project launched in 2003 intended to reduce the country’s CO2 emissions, increase its energy independence and boost its innovative industry through an aggressive investment in renewable energy.

The transformation is the country’s first attempt at changing the basic tenets of its energy supply since the industrial revolution. By 2050, 80% of German electricity production is to be generated through renewables (up from the current 17%). As a key interim success, the reform has led Germany to expand the share of renewable energy in its electricity production to 25%.

Faced with mounting adaptation costs and fears of a loss of competitiveness, the government is expected, however, to significantly alter the framework through which this transformation is to take shape in the short and mid-term. A recent expert study confirmed the urgency of reform to achieve the above goals.

Heading the reform efforts, a newly created ministry for economic affairs and energy has presented the outline of a draft legislative proposal which was approved by the German cabinet and could become law as early as August 2014. What are the specific measures agreed to by the government as key pillars of the reform?

I. Core elements: Adapting targets & subsidy schemes

Overall, the new government will reconfigure the anatomy of its energy transformation to accommodate its environmental goals with those of resource security, competitiveness and affordable energy prices. Meanwhile, its targets remain ambitious:  Germany envisages a renewable energy share on its electricity consumption of 40%–45% by 2025 and 55%–60% by 2035 (now in 2014 it is 25%).

The government also seeks to turn renewable energy producers from recipients of subsidies to entrepreneurs.

Overall, the future incentive structure for renewables is presented as a shift away from an indiscriminate promotion of renewable energy to more targeted, selective and market-based criteria.

The unlimited feed-in priority for renewable energy would be kept.

The old reduction tariffs would only apply to those plants approved before 22 January 2014. Those renewable energy plants set to start operations after 1 August 2014 will see their subsidy reduced from an average €0.17/kWh to €0.12/kWh in 2015. A new level of subsidies for renewable energy will be determined through a bidding process starting in 2018, following a study of the competitiveness for such a move.

Furthermore, not all sources of renewable energy would be treated equally. While the off-shore wind power industry would continue receiving a €0.19/kWh subsidy from 2017-2025 in order to generate 6,5GW by 2020 and 15 GW by 2030, on-shore wind power plants would see their subsidies decrease. Until 2020, only those on-shore wind power plants with a capacity below 2500 Megawatt (some 1000 wind turbines) would continue enjoying full-scale benefit. Areas with strong wind exposure would see their reductions sink by 10 to 20% below their 2013 levels.

A maximum output is also set for the photovoltaic industry (2500 MW). The coalition plans do not contain major changes here, as existing laws already foresee the phasing out of subsidies upon reaching maximum output levels.

Moreover, by ending subsidies for biogas plants using sludge substrate, the new German government seeks to cap excessive maize production in order to end the “food for fuel” debate. Subsidies are to be significantly lowered if the maximum annual biomass output exceeds 100 MW.

These changes mean that owners of newly built wind and solar plants will gradually be required to become direct marketers of their energy rather than receiving a government-guaranteed feed-in tariff to achieve a more competitive price level of renewables.
To promote energy efficiency, the new government intends to launch a national action plan aimed at saving 30% of energy for companies and in building infrastructure. This plan could include incentivising the purchase of energy-saving home appliances, the “top runner principle” (according to which the standard is set by the most efficient appliance on the market) and extra cash for the German public investment bank’s (KfW) funding scheme for energy-focused building refurbishment.

Political Background: High stakes for a successful transformation

While the proposed reform efforts signal a lower level of substantive ambition, the ‘Energiewende’ still occupies a prominent spot on Germany’s medium-term political agenda.

First, with the newly created dedicated ministry, the energy transformation will receive an administrative upgrade. In the past, responsibility for Germany’s energy transformation was scattered across a patchwork of several ministries (including ministries of environment, economic affairs, development cooperation, transport and ministry of agriculture) as well as various agencies. While this configuration will still continue to a certain extent on cross-cutting issues, the top coordination function will be taken on by the new Federal Ministry of Economic Affairs and Energy, raising hopes for more transparency as well as efficiency.

Second, in addition to a more streamlined bureaucratic management, Germany’s energy transformation will receive stronger political clout. The new minister Sigmar Gabriel is expected to hold ambitions for higher political office – possibly aspiring to become the next candidate for Chancellor of the Social Democrats. As such, his chances will be measured in large part by how well he manages the antagonistic forces of this debate. On the one side, there is a powerful industry-friendly wing (led in his own party by Hannelore Kraft, minister-president of the SPD stronghold and powerful mining state of North Rhine-Westphalia) advocating for employment and energy affordability. On the other side stands the advocates for renewable energy (most vocally articulated by the opposition Green party) and the environment ministry, led by Gabriel’s party-ally and friend Barbara Hendricks.

Having previously served as the country’s Minister for Environment, and having campaigned for lower electricity prices, Gabriel has a record of knowing both sides of the debate:

Pessimists would argue that elections are won with low energy prices in the short-term rather than by incremental steps towards long-term visions. Similarly, fears could be voiced that the new ministry – as its title suggests – does little more than tying economic caveats to any ambitious energy agenda.

Yet these voices overlook a general “green” public consensus persisting since the events of Fukushima and high expectations for the success of the energy transformation in Germany. Political leaders eying higher office cannot ignore these expectations. In the future, Germany’s energy transformation will speak with one institutional voice, nurturing hopes for clearer political direction, a one-stop shop for investors and a possibility to keep raging disputes between industry and environmental advocates in-house, adding authority and weight to any decision taken.

II. Burden Sharing: Domestic and European challenges

A successful conclusion of the energy transformation will depend on mastering two key challenges which will define the mid-term trajectory of the German energy transformation: one at the domestic and one at the EU level.

Ensuring affordable electricity prices for households & industry

At the domestic level, the question is one of domestic burden-sharing of the annual €23 billion in adaptation costs: this debate focuses on the so-called renewable surcharge (“EEG Umlage”). This surcharge, currently paid mostly by electricity consumers, compensates for the gap between the government-guaranteed feed-in tariff for all renewables and their market price. This surcharge has tripled since 2010 to amount to 6.24 cent per kWh in 2014 and is on a trajectory to gradually increase over the coming years. German households pay 48% more for electricity than the European average.

On the other side, an estimated 2300 German enterprises enjoy an exemption from this surcharge totalling around 5.1 billion euros for 2014, up from €4 billion in 2014 to protect their international competitiveness.

Here, Germany’s energy minister Gabriel will have to reconcile the concerns over competitiveness of an influential industrial base – vocal also within his party and his campaign commitments to lower electricity prices.

The issue is further complicated by the influence of the German Laender, individual federal states which have voiced their opposition to individual funding cuts of the proposed reform (Bavaria/Lower Saxony for biomass and Hesse, Rhineland-Palatinate, Schleswig-Holstein for wind power).

A domestic debate over who should pay the bill for the German energy transformation is already in full swing with its four main contenders – industry, the renewable sector, electricity consumers and the next generation – each equipped with powerful lobbies. While progress has been made towards a compromise, important issues remain to be resolved.

Playing by European rules

At the European level, the domestic re-distribution of costs has led to a legal dispute with the European Commission.

After months of investigations, the European Commission’s DG Competition has launched an investigation into the renewable surcharge exemption scheme unilaterally benefiting Germany’s energy-intensive industries, suspecting an illegal form of state aid.

If the EU charges are enforced as stated, an estimated  five billion euros in penalties could be levelled against Germany’s large energy-intensive companies including demands to pay back benefits already granted under the exemption scheme since 2012. Although this period is significantly shorter than if the penalty accounted for since the beginning of Germany’s energy transformation in the year 2003, this is a scenario the German government seeks to prevent at all costs.

In addition to bearing the penalties, the absence of an agreement will see Germany being unable to grant reductions to its industry for the year 2015.

To suspend its concerns, the Commission requires that the number of eligible industries be considerably reduced, the total capacity of energy consumption be limited and that all companies pay a minimum of 15-20% of the surcharge.

The Commission also wants Germany to switch to a public-bidding process sooner than the currently announced starting date of 2017.

Meetings between Gabriel and Almunia on 18 February resulted in an agreement that the German energy-intensive steel, aluminium and zinc industry will continue to benefit from exemptions on principle. However, a decisive disagreement concerns the level of reductions, for while Germany seeks full exemption for these industries; Almunia favours a maximum reduction from the surcharge of 80%.

Overall, Gabriel announced the introduction of an “appropriate” contribution by industries to the renewable energy infrastructure. Total annual industry reductions worth € 5.1 billion may be cut by a mere € 0.7-1 billion. The definite number will be announced in the third quarter of 2014.

While an agreement with the EU level appeared in reach, on 20 February, Sigmar Gabriel scattered the optimism by speaking out with a stern warning against the Commission: “Those who do not handle the burdening of the German industry extremely sensitively, is dealing with explosives”.

Germany favours a negotiated outcome. However, it has kept all legal remedies in case such an outcome cannot be achieved. On 28 February, Germany officially filed an action for annulment against the Commission’s on-going investigation into exemptions from the renewable surcharge of industries as illegal forms of state aid before the European Court of Justice.

EU-Germany Legal Dispute  – Background

Broadly, the EU seeks to balance concerns over a De-industrialization of Europe globally with a level-playing field on state aid policies inside its internal market.

Formally, it is the Commission’s mandate and responsibility to implement EU law and impose penalties if it sees EU low violated. Politically, the supranational body will also seek to avoid appearing to condone sweetheart deals for the EU’s largest member state.

Economically and strategically however, the Commission also has a strong stake in a successful energy transformation in Germany, both with a view to ensure EU competitiveness and to promote the precursor of renewable energy in Europe.

While agreeing on the need for harmonized rules across Europe, Germany argues for the special status of its industry as other member-states do not subject this sector to levies comparable to its EEG scheme.

In short, both sides share an interest in a workable compromise.

III. High stakes – Tight timeline

Resolving the remaining areas of tension between Berlin and Brussels is a matter of legislative urgency.

After resolving German domestic conflicts, Sigmar Gabriel will make a legislative proposal for a reform of the German renewable energy act (EEG) including its surcharge compensation scheme on 8 April.

On the following day, 9 April, the European Commission is scheduled to propose guidelines on environmental and energy state aid – determining the EU legal framework through 2020. In making its proposal, the Commission is expected to consider the reform proposal in its evaluation of the renewable energy act’s overall conformity with EU law.

Given the transformative nature of the project, there are high stakes and strong pressures weighing on the German energy transformation plan over the coming months. These originate from a need to rebalance costs domestically and overcome legal hurdles at the European level. Politically, a grand coalition government has historically proven to be in a unique position to tackle such challenges.

While there will likely be many hiccups on the way to seeing Germany achieve its ambitious 2050 energy goals, the new German government appears determined to reach a European solution.

Whether Germany’s largest project since reunification will take the latter’s full 45 years until completion, is therefore still an open question.