After a lengthy three-month negotiation marathon, leaders of the centre-left social democrats and Merkel’s conservative CDU-CSU defined their path to facing Germany’s challenges over the next four years in a coalition agreement in December 2013.

As one centrepiece of this agenda stands what the government has labelled a “relaunch” of its energy transformation (Energiewende). The project launched in 2003 intends to reduce the country’s CO2 emissions, increase its energy independence and boost its innovative industry through an aggressive investment in renewable energy. By 2050, 80% of German electricity production is to be generated through renewables (up from the current 17%).

Faced with mounting adaptation costs and fears of a loss of competitiveness, the “relaunch” is expected, however, to significantly alter the framework through which this transformation is to take shape in the short and mid-term.

Heading the reform efforts, a newly created ministry for economic affairs and energy will present a legislative proposal by Easter. Some specific measures have already been agreed as its key pillars.

Blueprint of Germany’s new energy policy

The new government will shift the pace of energy transformation into lower gears. To accommodate its ecological goals with those of resource security, competitiveness and affordable energy prices, the new German government has agreed on new overall targets of the renewable energy share on German electricity consumption to 40%-45% until 2025 and 55% – 60 % until 2035.

Structurally, German energy policy will seek to turn renewable energy producers from recipients of subsidies to entrepreneurs. The level of subsidies for renewable energy will be determined through a bidding process starting in 2018 following a study of the competitiveness of such a move.

Subsidy commitments to existing wind, solar and biogas plants are intended to be kept just like the unlimited feed-in priority for renewable energy. Yet the future will see both winners and losers in the German renewable sector heavily dependent on federal subsidies:

While the off-shore wind power industry will continue benefiting through 2019 to create 6,5GW by 2020 and 15 GW by 2030, on-shore wind power plants will see their subsidies decrease.

Moreover, by ending subsidies for those biogas plants using sludge substrate, the new German government seeks to cap excessive maize production in order to end the “food for fuel” debate.

No major changes for the photovoltaic industry are foreseen in the government’s coalition treaty.

To promote energy efficiency, the new government intends to launch a national action plan aimed at saving 30% of energy in companies and in building infrastructure. This plan could include incentivising the purchase of energy-saving home appliances and a “top runner principle” (according to which the most efficient appliance will be declared the standard) and extra cash for the German public investment bank’s (KfW) funding scheme for energy-focused building refurbishment.

Overall, the future incentive structure for renewables is presented as a shift away from a once-ambitious but lopsided promotion of renewable energy to a more strategic and targeted re-balancing towards “classic” priorities of competitiveness and resource security.

New opportunities: Transparency & Political ambition

There are, however, two positive signs indicating that shifting to a lower gear on renewable energy will not completely derail the Energiewende and that it will likely be on a good track.

  1. 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 (among them 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 and efficiency.
  2. In addition to a more streamlined bureaucratic management, Germany’s energy transformation will receive a stronger political clout. The new minister Sigmar Gabriel has aspirations of becoming the next candidate for Chancellor of the Social Democrats and his chances will be measured in large part by how well he manages the energy transformation. 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: the SPD`s powerful industry-friendly wing (led by Hannelore Kraft, minister-president of the powerful mining state of North Rhine-Westphalia, which is also the core constituency of the social democrats) advocating for employment and energy affordability on the one side and a strong public support (most vocally articulated by the opposition Green party) for renewable energy and the environment ministry, led by Gabriel’s party-ally and friend Barbara Hendricks, on the other.

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.

Key challenges: balancing costs & European law

Yet seizing these new opportunities will require 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.

At the domestic level, the question is one of domestic burden-sharing of the annual €23 billion in adaptation costs, namely: who should pay for the expansion of renewable energy? The debate concentrates 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. It is set to increase continuously in the coming years.

In order to maintain their international competitiveness, an estimated 2300 enterprises enjoy an exemption from this surcharge totalling around five billion Euros for 2014.

Through its electoral stronghold in North Rhine-Westphalia with a traditional mining industry, the SPD is pushed by an industry-friendly wing to extend these renewable surcharge discounts for the production sector. And rather than expanding renewable energy, Mr Gabriel’s SPD also campaigned for lower electricity prices for German consumers. The SPD’s record in government will be assessed by its voters by how well it can bring electricity prices under control.

At the same time, the SPD has declared multiple times that the energy transformation is the most consequential long-term national project since the German reunification of 1989–1990. Thus, the political and structural costs of halting the project altogether are likely to be too high.

A potential fourth option for this issue has recently been raised by the Bavarian minister for economic affairs Ilse Aigner of the conservative Bavarian party CSU (the CDU’s sister party in government). The minister proposed to cap the renewable surcharge at 4.9 cent and outsourcing of any extra costs to a special fund. The debt burden is intended to be paid for by future generations. Adding an estimated € 75 billion in new debt by 2025, a federal proposal of this kind is likely to face strong resistance by Germany’s minister of finance Wolfgang Schäuble.

The debate over who should pay the bill of 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: this is still very much an open battle.

The second key conflict is a legal dispute at the European level: After months of investigations, the European Commission’s DG Competition has announced that it would launch an official investigation into the renewable surcharge exemption scheme benefiting Germany’s energy-intensive industries. Commissioner for Competition Joaquín Almunia suspects that these unilateral exemptions may constitute a form of illegal state aid.

If the charges are warranted, billions of 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 the Renewable Energy Act dating to the year 2003, this is a scenario the German government and Mr Gabriel seek to prevent at all costs.

Formally, it is the Commission’s mandate and responsibility to implement EU law and impose penalties if it sees it 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 ensuring EU competitiveness and to promoting the precursor of renewable energy in Europe. In short, both sides share an interest in a workable compromise.

This is why on-going negotiations in Brussels are currently shifting attention to viable settlement options which could include elements of the following scenarios:

  1. German energy-intensive industries benefiting from the reduction scheme could be required to invest heavily in energy efficiency. There could be a deal brokered under which German companies would say that they would strive to make their operations energy efficient (targets and other milestones imposed) and in result not paying the penalty. While no side has officially expressed itself on the option, it was circulated amidst the first round of negotiations in Brussels during the then on-going coalition talks in Germany.
  2. Rather than sacking the overall Renewable Energy Act, the Commission could rule that the energy surcharge be more targeted to those international companies facing international competition. These conditions would have to be enforced with more stringent application criteria for such a surcharge.

A first indication by Easter

Sigmar Gabriel will make a proposal for a reform of the surcharge compensation scheme as well as for the government’s energy priorities by Easter 2014. The Commission is expected to consider the reform proposal in its evaluation of the renewable energy act’s overall conformity with EU law.

While there will likely be many hiccups on the way to seeing Germany achieve its 2050 goals of reducing its CO2 emissions by 80% and others, the new government is not only EU-friendly but has also committed itself to EU energy goals.

As with many transformative political projects there are centrifugal pressures emanating from the 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.

Whether the complete realisation of Germany’s energy transformation will take the full 45 years, equivalent to the German reunification, is still an open question.