A resilient Germany faces the energy crisis

The writer is the German Finance Minister

German industry and society are again proving to be much more resilient and adaptable than some people feared. Scary scenarios of dangerous energy rationing or a massive collapse of our economy have often been conjured. But we’re nowhere near that. The difficult year is behind us, this is good news not only for Germany but also for Europe.

Companies and households quickly reacted to the sharp increase in energy prices. They installed more efficient heating or production facilities, switched to alternatives and imported intermediate goods. The results are encouraging. German households and businesses have significantly reduced gas consumption despite the recent cold weather. From the beginning of the war in Ukraine to mid-December, the consumption of industrial gas in Germany (adjusted for temperature) was about 20 percent lower than the average level of the previous three years. Even as some companies cut production, particularly in energy-intensive sectors, industrial output overall fell by only about 1 percent from the start of 2022. More than a third of German companies saw potential for further reductions in gas consumption without jeopardizing production.

Instead of imposing unnecessary laws and regulations, we’ve relied on price signals and the wisdom of market participants to create the right incentives and reduce gas consumption.

We will be following this approach in the coming months as energy conservation remains important. Our recent relief measures will not distort price signals. To this end, the Bundestag approved gas and electricity price brakes at its last session in 2022. They are designed to operate without any intervention in markets or prices. This system will pay a fixed amount compared to previous years’ consumption and the current difference to the reference price, regardless of current consumption.

Energy price brakes are a key component of Germany’s “protective shield”, which makes up to €200 billion available for measures between 2022 and 2024. Based on the size of the German economy, its previous high dependence on Russian energy imports and the fact that the measures will expire in 2024, these are balanced and appropriate mechanisms. Unlike tools used in other countries, our new arrangements will not affect the pricing process, which is driven by supply and demand, or incentives to conserve gas. Businesses and households will continue to save the full market price when they reduce consumption by one unit of gas or electricity. In this way, price brakes also avoid creating additional demand for gas at the expense of consumers in other European countries. No one needs to fear that competition will be disrupted or gas will be bought. Indeed, a recent IMF working paper on mitigating the impact of high energy prices on households openly praises Germany’s energy price brakes.

Current developments confirm the effectiveness of the market approach and show that we must also rely on price signals to reduce CO₂ emissions. Last year, households and companies only had a few weeks to adapt, but we’ve already seen a strong response. The effects of CO₂ prices may be stronger because adaptation is possible over a much longer period of time, and they additionally affect expectations and long-term decisions. Regulatory interventions and subsidy schemes, even if well-intended, cannot compete with market coordination and incentives that support individual decision-making and stimulate innovation.

Europe and Germany can overcome this crisis without the collapse of industrial production. We also have the opportunity to effectively engage in climate neutrality. In both cases, we must have confidence in price signals and the power of people and businesses to innovate and adapt.

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