To save the declining industry, Germany has introduced a "maximum electricity price cap."

To prevent high energy costs from continuously eroding its industrial base, Germany is taking a significant policy intervention by planning to set a price cap on electricity for energy-intensive enterprises.

According to energy media OilPrice, the coalition partners of the German federal government have reached an agreement on an electricity price subsidy plan. This plan aims to support Germany's heavy industry by capping electricity prices for energy-intensive sectors such as steel, chemicals, and automotive manufacturing at around €0.05 per kilowatt-hour from 2026 to 2028.

German Chancellor Merz stated last Thursday that the agreement was reached after months of debate, and discussions with the European Commission regarding approval have been "basically completed." This statement indicates that this highly anticipated industrial support policy is taking a crucial step toward final implementation.

High Energy Costs Pressure Industrial Competitiveness

For Germany, the industrial heart of Europe, electricity prices have become a lifeline determining its competitiveness. Germany is the largest electricity market in Europe, with an annual consumption of about 500 terawatt-hours. Since the energy crisis in 2022, its electricity prices have been volatile, putting immense pressure on the industrial sector.

The hardest-hit sectors are energy-intensive industries such as steel, chemicals, and automotive manufacturing. Representatives from these industries have repeatedly emphasized that high electricity costs are severely undermining their global competitiveness and increasing the risk of production lines relocating overseas. The government's move to set a price cap on electricity is a direct response to the survival challenges faced by these industries, aiming to prevent the hollowing out of Germany's industrial base.

Unstable Renewable Energy Increases Dependence on Fossil Fuels

Recent dynamics in the energy market have further heightened the urgency for the German government. This autumn, due to insufficient output from renewable energy sources such as wind and hydropower, coupled with grid bottleneck issues, German electricity prices surged again. To stabilize supply, Germany has been forced to increase the burning of natural gas and coal, with natural gas generation reaching its highest level since 2021.

This situation highlights the challenges Germany faces in its energy transition. Despite setting ambitious climate goals, the intermittent and unstable supply of renewable energy means that Germany still heavily relies on fossil fuels to ensure grid stability. Energy security has thus become a core political issue.

Temporary Subsidies May Not Solve Structural Problems

Opinions on this three-year subsidy plan vary. Industrial groups believe it is a necessary measure to prevent large-scale outflow of manufacturing. However, critics warn that this subsidy merely "cosmetics" the surface of the problem and does not address deeper structural contradictions.

These critics point out that Germany's energy system faces multiple challenges, including aging infrastructure, slow project approvals, and unstable renewable energy output. Unless these fundamental issues are resolved, temporary subsidies are akin to putting a band-aid on a boiling pot. Berlin hopes that this three-year buffer period will buy time to expand grid capacity and increase flexible power sources. However, analysts believe that if these supporting projects do not materialize quickly, German industry may face a new round of contraction by the end of this decade