From ‘double whammies’ to an ‘energy war for prosperity and freedom’ – an overview of the German federal government’s €200 billion defensive shield

The electricity and gas crisis is at its peak. Reason enough for the German federal government to now take drastic measures to cushion the impact of the geostrategic conflict. On 29 September 2022, the government presented an energy aid package worth €200 billion. German Chancellor Olaf Scholz spoke of a ‘double whammy’, while German Finance Minister Christian Lindner referred to an ‘energy war for prosperity and freedom’. This €200 billion is now supposed to remedy the situation. And the controversial gas levy? Gone. This blog post will explain what this astronomical energy aid package covers.

# What is the €200 billion actually for?

On 29 September 2022, the German federal government announced that the package will be financed by the Economic Stabilisation Fund (ESF), which was originally set up to cushion the economic and social impact of the Covid-19 pandemic on the economy. Although the ESF officially expired in the summer, it will now be provided with an additional €200 billion worth of funding. The defensive shield includes the following measures:

1. Expand supply, reduce consumption:

According to the paper, expanding the energy supply and reducing consumption should cause gas prices to fall again. This will mainly be achieved by accelerating the expansion of renewable energies and exploiting its potential (especially in the area of offshore wind farms), coal-fired power generation, constructing liquefied natural gas terminals (LNG terminals) and continuing to keep all three of the country’s nuclear power plants running until April 2023. The concrete measures already taken include regulations to reduce energy consumption (we took a deeper look at this in our last blog post), the introduction of a balancing energy product, the launch of a comprehensive energy saving campaign and measures to save energy and increase energy efficiency.

2. Electricity price cap:

‘Basic consumption’ is to be subsidised for both consumers and traders. The old market prices will then apply for electricity consumed beyond this basic consumption amount. This will relieve the financial burden on consumers while simultaneously encouraging them to reduce their consumption. The electricity price cap will be financed by the ‘very strong windfall profits’ currently generated by ‘non-gas power plants’.

3. Gas price cap:

The gas price cap is intended to cushion the financial burden that households and businesses face during high-price phases. On 10 October 2022, the German government’s Expert Commission on Gas and Heating (Expertenkommission Gas und Wärme), which is composed of industry and trade unions representatives, scientists and legislators, presented an initial proposal to introduce a two-tier system. The tier concept only applies to ‘SLP’ customers (standard load profile, private households and small and medium-sized enterprises (SMEs)) and comprises the following core contents:

• Tier 1 (one-off payments): The Commission’s proposal states that gas customers will receive a one-off payment in December 2022 based on the consumption used to calculate the instalment payment for September 2022. This one-off payment will act as a financial bridge until the gas price cap is introduced across the board.
• Tier 2 (gas and heating price cap): From March 2023 to April 2024, private households and SMEs would pay €0.12 per kilowatt hour for the first 80 per cent of the previous year’s consumption. Customers would have to pay the standard market rates on excess gas and heating consumed above this amount.
• Regulation for industrial consumers: From January 2023, large industrial companies would pay a fixed rate of €0.07 per kilowatt hour for the first 70 per cent of their gas bill for 16 months.

4. Reactivation and reorientation of the Economic Stabilisation Fund:

The use of the ESF and its additional borrowing power of €200 billion will be limited to the following:

• Financing the gas price cap outlined above
• Providing liquidity and subsidies for the electricity price cap, in addition to levying the windfall profits of electricity producers
• Financing further support measures for companies not sufficiently covered by the electricity and gas price cap
• Covering replacement procurement costs for gas importers that are key to market stability, such as SEFE, Uniper and VNG.

5. EU solidarity levy for companies in the energy sector:

The government has welcomed the European Commission’s proposal to ‘introduce a solidarity levy on companies in the oil, gas, coal and refining sectors’.

6. Gas VAT reduction:

The VAT on gas and district heating is to be reduced to seven per cent by spring 2024.

7. Avoidance of disproportionate bureaucracy:

The federal government wants to ensure that no disproportionate additional bureaucratic burdens affect the economy.

The gas levy is no more

The Federal Minister for Economic Affairs and Climate Action reiterated that the gas levy had been introduced through a regulation and would be withdrawn through a regulation. The measures contained in the defensive shield make the controversial gas levy obsolete. It had become a political issue in society in recent weeks. The levy was set to come into force on 1 October 2022. This would have seen consumers pay an additional surcharge to secure the economic viability of the struggling energy companies. It has now been overturned again.

Nothing is certain yet

The €200 billion defensive shield is a powerful instrument. On paper, it seems that the package should be enough provide the relief it was created for. However, it is unclear how much money is to be spent on the individual sub-measures. It also remains to be seen how the two-tier procedure will look from both an administrative point of view and an operational one. Furthermore, it has drawn criticism from multiple directions. For example, leading economic research institutes warned that a gas price cap could further fuel the already high rate of inflation. Moreover, according to critics, the incentives to save the scarce amount of gas available are still insufficient. At the European level, too, people were indignant about the federal government’s plans. French President Emmanuel Macron, for example, summarised that the measures had led to tensions between countries that could not finance such a large package at the national level. The energy package creates an unfair advantage for German companies in the European energy market. Tension therefore remains high for the federal government – there seems to be a lot of education and persuasion work to be done both at national and European level. We will keep you posted with all the latest updates.

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