Germany’s new, very ambitious plan to subsidize electricity bills for energy intensive firms is raising eyebrows and ire around the European Union. The proposal to only allow electricity prices to be set at the much cheaper marginal cost (Renewables) would cost around €10 billion until 2030. According to a broad consensus of journalists, advocates, and energy experts, the initiative is an enormous industrial subsidy or “state aid.” They claim that it goes against EU rules on allocating state money to sectors. Further, the European Commission is making sure to watch what happens there. In addition, they’re bracing to interact with German officials regarding any potential legal ramifications.
The main problem is the EU’s very strict prohibition on giving direct cash aid to companies. A leaked internal ministry document from Germany’s economy ministry recognizes that the proposal faces “considerable challenges” under EU law. Some EU diplomats have expressed concern that Germany’s actions could distort the single market, particularly worrying smaller member states that fear unfair competition.
A Closer Look at the Proposal
In effect, Germany’s plan would deliver significant relief in the long-term and immediate term to energy-intensive sectors struggling with skyrocketing electricity prices. By capping prices at a favorable market rate, the federal government would have to cover the loss, with enormous budgetary ramifications.
Even so, this course of action has raised alarm bells among EU officials. Under EU law, countries are generally prohibited from giving direct financial assistance to industries in ways that could distort competition. Germany’s initiative, if adopted, would run afoul of these common regulations. It largely provides perpetual operating support rather than incentivizing efficiency or greener capital investments.
Lea Zuber, a spokesperson for the European Commission, stated, “This is a complex issue where the German authorities have to engage closely with the Commission, to ensure full respect of EU rules which ensure competition on the merits between firms based in different Member States.”
EU officials have said they are ready to work with Germany to shape any proposal so that it fits within state aid parameters. Zuber added, “We are ready to assist Germany in developing their ideas and designing them in a way that complies with the state aid rules and sectoral legislation to avoid distortions in the Single Market.”
Legal Implications and Reactions
Germany’s economy ministry internal memo acknowledges that the plan likely violates EU law banning direct subsidies. Critics of this approach take note that subsidizing electricity prices is almost certain to be deemed operational aid by the European Commission. Oliver Bretz, an expert on EU regulations, commented, “Subsidizing electricity prices on an ongoing basis will be seen by the Commission as nothing more than operating aid.”
Such classifications would put Germany in a difficult position to defend its actions, both politically and legally. To address these issues, the European Commission is set to release new guidelines for assessing state aid late this June. Germany should change course as urgently as possible before the deadline passed.
EU diplomats and experts alike have lamented the broader implications of Germany’s plan. One diplomat remarked, “We have state aid rules for a reason — otherwise we jeopardize the internal market.” Another added, “I don’t think we can afford disunity right now, so hopefully there will be an EU response.”
The Road Ahead
Germany is hardly a stranger to stretching the limits of what is allowed under EU regulations. In the past, it has always been able to hold the line and win positive results even when going to court. Many advocates and experts believe that the tide is starting to turn on this issue. They sense increasing opposition inside the European Commission towards operational aid.
“Explicit state aid prohibitions by way of decision are rare, even more so now than in the past.” Meanwhile, Tomaso Duso cautioned that “the Commission tends to be more skeptical of operating aid, which might be more distortive of competition if not well designed.”
As Germany sails through these uncharted waters, it will have to balance their own economic interests with adhering to the EU’s rules of the road. If we fail to navigate this plan with great care, it will set a treacherous precedent. France and other member states would be encouraged to do the same, further raising tensions within the EU.
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