Special equalization scheme ensures competitiveness of the energy-intensive industry

August 04, 2015

In order to finance the energy transition, the expenditures to promote renewable energies in Germany are predominantly passed on to the end consumer by levies leading to rising electricity prices. These levies as well as the electricity tax also increase electricity prices for companies. The German government has created a number of exemption clauses to limit the costs particularly for the energy-intensive industry. The Fraunhofer Institute for Systems and Innovation Research ISI and Ecofys have investigated the consequences in an international comparison: Their comparison of electricity costs for the energy-intensive industries in eleven countries shows that the existing exemption clauses for electricity-intensive companies support the competitiveness of the German industry and have a positive overall economic effect.

For the study "Electricity Costs for the Energy-intensive Industry – an International Comparison" the Fraunhofer Institute for Systems and Innovation Research ISI and Ecofys examined the price components of electricity prices and their levels in Germany and ten other countries with different regulatory approaches: the Netherlands, the United Kingdom, France, Italy, Denmark, Canada, USA, China, Korea and Japan. The scientists investigated electricity procurement charges and network charges as well as privilege criteria for taxes and costs and applied these to six energy-intensive industries: chemical, paper, steel, aluminum, copper and textile.

This showed that the electricity-intensive major consumers from the metal processing and chemical industries in all countries pay the lowest electricity prices, i.e. no or significantly reduced taxes and levies as well as low network charges. An important reason is that aluminum and copper producers, steel production in electric arc steel furnaces and chemical reduction processes come under almost all privilege criteria, which are intended to relieve companies threatened in their competitiveness by state-regulated electricity price components. To enjoy privileged levies, companies have to fulfill specific criteria, for example  to consume a minimum level of electricity, to reach a certain ratio of electricity costs to total turnover,  to face fierce international competition, to process electricity-intensive products , to apply energy efficiency measures, to reach an absolute cost threshold and generate on-site electricity.

In a number of countries – besides Germany particularly in China, Denmark and Italy – taxes and levies increasingly create costs for industry. Compared to the other countries which were investigated Germany raises particularly many and high taxes and levies, which make establishing privileges crucial: Without these, the electricity prices for individual companies in 2014 would have been almost 8 cent higher per kilo watt hour. Dr. Barbara Breitschopf of the Fraunhofer ISI points out, “Without the special equalization scheme the production of aluminum and chlorine in Germany would not be worthwhile and would be stopped in the long run. This also applies to many producers of paper and steel“. In addition, the analyses show that besides electricity prices also other location factors such as the integration of different processing steps as well as the closeness to important markets can be significant and make up for some price disadvantages.

The study also investigated how current prices and production would change if the exemption clauses were to disappear and the resulting higher electricity prices were to be passed on to the consumer. Particularly the prices for products in the paper industry and the non-ferrous metal industry would increase significantly – on average by about five percent. The increased prices would also lower the demand for exports in these electricity-intensive industries by 16 to 18 percent, in the short term their production would drop by 11 to 18 percent.

Last but not least the research team and the Institute of Structures Research have estimated the long-term macroeconomic effects of the exemption clauses in Germany until 2020. If the special equalization scheme (BesAR) was scrapped the average production prices would increase by up to roughly 3.5 percent while German exports would in total turn out to be up to roughly 0.3 percent lower which is the equivalent of 4.5 billion euros. Moreover, if all privileges for electricity tax and levies were eliminated 104,000 jobs would be lost, more than 70,000 in the manufacturing industry.

The abolishment of the exemption clauses would reduce the levies for the non-privileged sectors and thus lead to lower electricity prices for households and commercial customers as well as for less energy-intensive industrial enterprises. However, the negative effects of the abolishment of privileges outweigh the positive effects for the consumers in the model. This is particularly due to decreasing international competitiveness in terms of price: According to the study the overall effect on the gross domestic product would amount to four billion euro or 0.15 percent in the year 2020.

A summary of the final report of the study “Electricity Costs of the Energy-intensive Industry – an International Comparison“ and more detailed studies of the individual work packages can be downloaded at the project's website.

The Fraunhofer Institute for Systems and Innovation Research ISI analyzes the origins and impacts of innovations. We research the short- and long-term developments of innovation processes and the impacts of new technologies and services on society. On this basis, we are able to provide our clients from industry, politics and science with recommendations for action and perspectives for key decisions. Our expertise is founded on our scientific competence as well as an interdisciplinary and systemic research approach.