German energy prices have skyrocketed over the past year, leading several companies to consider relocating to cheaper locations. Siegfried Russwurm, the head of the German Industry Federation (BDI), stated that the energy situation is bad enough for companies to seriously consider relocating their operations. Russwurm explained “A lot of family-owned companies... have very operational plans to relocate” due to the plethora of obstacles they are facing in Germany.
While a lot of Germany-headquartered businesses are seeing success on a global scale, many are finding it difficult to operate within Germany. The slow and complex German bureaucracy has further exacerbated the challenges. This week, Economy Minister Robert Habeck discussed the issue of companies looking to relocate. Habeck stated: “In my view, Germany is an attractive location for both new and existing companies… Of course, materials industries are under pressure as a result of higher energy prices, but there are political decisions to be made.”
Germany is not the only country to be facing high energy prices, with many European states experiencing high oil and gas prices following the Russian invasion of Ukraine early last year. Sanctions on Russian energy, as well as OPEC+ production cuts, have led to oil and gas shortages, driving the prices sky-high. Several governments across the region were forced to impose higher taxes on energy companies to support consumer utility subsidies as monthly costs were unmanageable for a lot of people, particularly during a time of high inflation.
But Germany’s situation has been especially bad due to the heavy reliance on Russia for its gas. While some countries, such as the U.K., were able to shift fairly easily to supplies from other countries, Germany found it difficult to wean itself off of Russian energy, which provided 60 percent of its gas supplies before the war. Nevertheless, having massively reduced its reliance on Russian energy over the last year, as sanctions came into place, Germany’s energy situation has been gradually improving. This has been supported by a fall in oil prices this year.
Earlier this year, an economic survey of 21,000 companies from all industries by the German Chamber of Commerce and Industry (DIHK) showed that companies continued to see energy prices as a business risk for the coming months. The number of companies concerned had fallen slightly from the beginning of the year, from 72 percent to 65 percent of firms surveyed, but the figure is still worrying.
In 2022, the government introduced price caps on electricity and gas to shield industry and consumers from soaring energy prices, but many companies believe electricity prices are still too high. Taking this into account, in May, Germany’s government announced plans to earmark $4.4 billion a year in electricity subsidies for energy-intensive industries to support businesses facing unusually high energy costs. The funding would come from the Economic Stabilisation Fund (ESF), which was originally established in 2020 to bail out airline Lufthansa during the pandemic. If approved, the subsidies would run until 2030.
And despite plans for new subsidies, not everyone agrees that the government should be absorbing the additional costs, with the finance ministry opposing the idea. However, Habeck believes the funds would help cap prices at 6 cents per kilowatt hour (kWh) and cover 80 percent of the consumption of industrial companies. The economic minister also believes that while the subsidy would encourage companies to stay in Germany, it could also promote the use of cheaper renewable energy sources in operations, supporting the country’s green transition. Habeck stated of the subsidy: “We want the industry ... to stay home in Germany and be given a transformation perspective. The industry electricity price is intended for this.”
But several companies do not have time to wait and see whether the subsidies will come through and are set on relocating to countries where the energy costs are lower. In May, the BDI announced a negative GDP growth of -0.3 percent for Germany in the first three months of the year. The federation expects Germany to see flatline growth this year, much lower than the global GDP growth estimate of 2.7 percent. And if companies begin exiting the country, it could rapidly become worse.
With more and more companies discussing the idea of relocating from Germany to countries offering lower energy costs, the German government must rapidly respond to the challenge to prevent a recession, which it is already on the cusp of. One option is an additional subsidy for industries battling with extremely high energy costs, which could also spur a gradual shift to the use of renewable alternatives. However, the government and finance ministry will have to come to an agreement for subsidies to be approved and rolled out before companies begin to leave.
By Felicity Bradstock for Oilprice.com
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