Updated on 20 November.

As Germany’s headline-making diplomatic stand-off over US spying efforts is handled by a caretaker government, negotiations to form a future grand coalition government are underway. Despite a wild card lying in the fact that any outcome needs the approval from a social-democratic party-member-only referendum to be concluded by 12 December, most observers expect the current negotiations to pave the way for the new German government.

As EU leaders are standing by to assess the future priorities of its largest Member State, several important clues for the future trajectory of Germany’s energy transformation (“Energiewende”) have already emerged from the first rounds of negotiations.

The September polls had given Angela Merkel’s CDU/CSU 41.5% of the vote with the SPD coming in a distant second with a 25.7% vote share. Negotiations involving these parties are organised through twelve working groups each staffed with 17 politicians drafting topic-specific proposals.

Outstanding financial issues will be first discussed on Thursday and finally resolved by party leaders Angela Merkel, Sigmar Gabriel und Horst Seehofer next Monday and Tuesday. A body of 75 members will formally approve these proposals as part of a draft coalition agreement to be submitted on 27 November.

German 2030 energy policy goals

The working group on energy is led by the Minister-President of the influential industrial state of North Rhine-Westphalia Hannelore Kraft (SPD) and the incumbent Federal Environment Minister Peter Altmaier (CDU).

Hovering over the negotiations was the credo that, only if Germany marries its ecological transformation with economic competitiveness will it be sustainable and a role model for others. After the first rounds of negotiations, both sides declared that the goal was to make energy “secure, clean and affordable” by reforming Germany’s Renewable Energy Act (REA). With changes expected to be effective in early 2015, the new REA is intended to devise a regulative framework valid for the next fifteen years.

The proposed reform of Germany’s energy transformation includes less ambitious targets and will introduce more market-based instruments to promote renewables. Negotiators have agreed to lower target of the renewable energy share to 40% (from 45%), while capping subsidies for wind turbines at high-yield locations, correcting their 2020 targeted outputs from 10 to 6.5 gigawatt, and ending subsidies for photovoltaics. By also ending subsidies for those biogas plants using a sludge substrate, the negotiators seek to cap excessive maize production in order to end the “food for fuel debate”.

At the same time, the REA reform pursues the goal of turning renewable energy producers from recipients of subsidies to entrepreneurs. Accordingly, it is planned that the current government-guaranteed feed-in tariff will be replaced by a mandatory market premium model by 2017. According to this model, the premium that producers of renewable energy will receive will no longer be fixed, but dependent on the market price. On the other side subsidy commitments to existing wind, solar and biogas plants will be kept just like the unlimited feed-in priority for renewable energy.

The challenge: burden-sharing of energy transformation

A key challenge for the working group lies in re-shuffling the distribution of the economic burden of Germany’s ambitious energy transformation and bringing down soaring consumer electricity prices at the same time. Under the current REA, German electricity consumers pay a surcharge which compensates for the gap between the guaranteed feed-in tariff paid to producers of renewable energy sources and the market price of this energy. This gap has recently widened considerably, as such the surcharge is expected to rise by 1% this year. 2,300 German companies are exempt from paying this surcharge giving rise to a fierce debate over whether these privileges should continue.

According to an informal background paper drafted by the German environment ministry, a cancellation of the exemptions for some key industries, ranging from coal to food, is currently under review. The draft also includes provisions to double minimum charges for industries, including the national railway company.

Given strong opposition from a powerful coalition of industry and unions, threats of job losses and relocation of German industries, any efforts to end the compensation scheme may be derailed.  A final decision on the amended eligibility criteria has been postponed until a working group has drafted concrete proposals over the coming weeks.

Continuation of the scheme is certain to face scrutiny from a Commission probe considering whether the reductions as an illegal form of state-aid. Media reports indicate that the Commission will launch an official investigation in the German scheme on 18 December, as negotiators’ efforts to dissuade Competition Commissioner Almunia from such an investigation have failed. In particular, the government seeks to prevent the Commission from imposing penalties on German industries, and want to keep exemptions for the highly competitive German engine construction sector.

As a minimum result of this investigation, the Commission is expected to require German companies to compensate for reductions through additional efforts in operational energy-savings.

Support for EU carbon emission initiatives

The new German government has also endorsed the Commission’s “Backloading” plans. These plans foresee temporarily removing 900 million excess quotas from the carbon market in the 2013-2015 period, in order to strengthen the EU Emissions Trade System. Negotiators added that this intervention should be singular and temporary, with certificates re-introduced onto the market between 2016 and 2020. After Germany allowed an agreement in the Council, the Lithuanian EU presidency is set to begin trialogue talks with the European Parliament and the European Commission, with no date yet set for the meeting. Moreover, German negotiators have agreed to aim at cutting carbon emissions by at least 40% by 2030 – on track to achieve the long-term milestone at the EU level of 80% carbon reduction by 2050.

A coalition government with the SPD is also “most likely” to back EU plans for renewable energy and energy efficiency. Pledging ambitious initiatives in line with EU 2030 targets to promote energy efficiency, German negotiators also agreed on programmes which could include plans to incentivise the purchase of energy-saving home appliances. Similarly, they endorsed the “top-runner-principle”, according to which the most efficient appliance will be declared the standard. The overall goal was to save 30% of energy in companies and in building infrastructure. Negotiators rejected calls for a scrapping bonus for old heating appliances, since such measures were deemed unsustainable.

A Ministry for energy transformation?

During the election campaign, the SPD had called for streamlining Germany’s many scattered energy agencies into a single ministry dedicated exclusively to managing the country’s energy transformation. Its creation could be part of a deal propelling SPD Chairman Sigmar Gabriel to be its head – in a party trade-off with the Federal Ministry of Finance, which could be left to CDU’s current Finance Minister Wolfgang Schäuble.

After the first rounds of negotiations, it is apparent that the next German government will stay on course towards its goal of achieving 80% renewable energy in 2050. Faced with budgetary constraints, as well as pressures from both industries and households, it will, however, likely shift gears to navigate a narrow path that balances costs, complies with EU law and ensures all stakeholders are on board in the management of its transformation.