Germany’s special fund: A renewed bid to be energy transition's champion

In this week’s Power Playbook: Germany last week approved a historic €500 billion ($538.3 billion) infrastructure and defence fund, with a fifth allocated to energy transition. Now, sector majors are giving input for the next legislative cycle to finance the energy transition.

Exactly a month ago I wrote on Germany’s uncertain regulatory future in light of the incoming conservative government and pressure to lower energy prices.

This uncertainty sparked E.ON, the country’s largest DSO, to prevent an increase to their investment plans.

At the time, the company’s CEO Leonhard Birnbaum said: “Like any company that operates sustainably…we never invest at any price.

“The prerequisite for this in Germany is a return on our network investments that‘s competitive by international standards.”

This week, E.ON - in an alliance of energy majors 1KOMMA5°, Octopus Energy, Schneider Electric, Rabot Energy, the Federal Association of New Energy Industries (bne) and the General Association of Housing Industry (GdW) – has called on the new federal government to take measures to fully exploit the benefits of flexibility within the next legislative cycle.

Their joint paper is released a week after a major win from Germany's conservative leader and chancellor-in-waiting Friedrich Merz, who got approval for the debt-financed special fund, earmarking €100 billion ($107.7 billion) to go into climate action, including energy infrastructure.

One thing is for sure: the financing and regulatory landscape for the country’s energy sector is undergoing substantial changes.

Germany's special fund: an historic fiscal package

As reported by Enlit’s Kelvin Ross, Germany's special fund was approved by parliament last week, hailed as a blueprint for climate neutrality, energy security and freedom.

More than 500 members of the Bundestag pushed through the proposed new laws, which secured approval at the end of the same week to become set in Germany’s constitution.

So, where does energy come in?

According to Clean Energy Wire, the €500 billion debt-financed special fund (‘special’, allowing it to be exempt from debt break rules in Germany) will transfer €100 billion into Germany's Climate and Transformation Fund (KTF): a pool for climate spending and green investments.

Investments such as building modernisations, grid expansion or steps to establish hydrogen infrastructure can all be subsumed under the ‘climate action’ label, although detailed plans and allocations are under development.

Many have welcomed it.

More on Germany's evolving energy landscape:
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Take TÜV, the country’s Technical Inspection Association, whose managing director Dr Joachim Bühler commented in a release: "The TÜV Association expressly welcomes the strengthening of the Climate and Transformation Fund.

“Investments in climate protection, green tech, e-mobility, and renewable energies act as an economic stimulus package and make Germany more independent of imports.

“A reform of the debt brake is necessary in the current situation. Spending on defence and infrastructure is an investment in the future of our country. Now it is important that the money actually reaches where it is most urgently needed."

Weeks prior to the fund’s approval, when it was part of exploratory talks, association BDEW’s Chair of the Executive Board Kerstin Andreae said: "The plans for a special infrastructure fund clearly demonstrate that the existing investment needs in infrastructure are being addressed constructively. Strengthening the business location and bringing climate protection and resilience together are important.

“Billions of dollars in investments are pending for grid expansion.

“One of the most urgent tasks of energy policy is…to create an efficient investment framework that enables economically attractive energy transition projects. For the grids, this means that the regulatory framework must be modernised and made future-proof as quickly as possible.

“The regulatory authority must finally clear the way for attractive investment conditions. The grid operators need a robust, future-oriented regulatory framework and a return on invested capital that is also internationally competitive.”

Indeed, now with the fund, Germany looks to be in store for an interesting year.

But is more needed?

More from the Power Playbook:
The energy workforce: A human capital conundrum
Managing the step-up in European distribution network investments 

Flexibility and efficiency

Beyond Merz’s package, bodies and lobbies are calling for flexibility and a double down on efficiencies, rather than only funnelling new euros into new projects.

For example, let’s go back to E.ON and the joint position paper, which calls on Germany’s incoming government to better integrate the enormous potential of variable energy sources into the energy system within the next legislative period.

Currently, they say, the topic of flexibility is not adequately considered in the coalition’s negotiations.

Said Marc Spieker, chief operating officer commercial, E.ON SE: "The flexibility potential of electric vehicles, heat pumps, and battery storage offers our customers a great opportunity to save costs individually through the right products and thus financially benefit from the energy transition. At the same time, the energy transition becomes more affordable for all customers because we can better utilise the existing infrastructure."

And 1KOMMA5°’s Philipp Schröder, CEO and co-founder: "Flexibility is the key to a cost turnaround.

“We can most effectively counter the volatility of wind and solar energy by making prices and grid fees more flexible. To achieve this, policymakers must simplify direct marketing, roll out smart meters faster and more cost-effectively, and counteract expensive grid expansion with flexibility. Decentralised flexibility in the electricity market immediately reduces energy prices."

Spending vs saving

Also at the end of last week, reported Reuters, a study from Germany’s BDI industry association and Boston Consulting Group found that Germany could save more than €300 billion ($326.49 billion at the time) by 2035 by implementing the energy transition more efficiently.

Current plans, they say, are expected to cost €1.57 trillion ($1.7 trillion) over the next 10 years in operation, expansion and maintenance of the energy system. Namely, investments currently planned in renewables, power grids and hydrogen far exceed foreseeable demand, resulting in avoidable additional costs.

So, is Germany’s special fund enough? At the very least it is to be lauded, but I don’t think we can ignore the savings potential from efficiencies rather than spending, which is pointed out by multiple authorities.

Its circumnavigation of the debt break, which has been a strict barrier to date for the country, is certainly a political win. But it is not without its controversy. According to Spiegel, a major criticism of this very mechanism came from the country’s own Federal Audit Office, saying the interest from the package alone represents ‘economic and social risk’.

There is a lot at stake for the country, which continues to face pressure to lower prices and regain its economic edge. But will this be its fiscal panacea? What do you think?

Cheers,
Yusuf Latief
Content Producer
Smart Energy International

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