German Industry Under Strain As Energy Costs Jump

  • Date: 28/01/13
  • Bloomberg

There is a “real danger” that Germany’s green energy transition will destroy energy-intensive industries.

Worlee-Chemie GmbH, a family-owned company that has produced resins in the city of Hamburg for almost a century, is trying to escape the spiraling cost of Germany’s shift to renewable energy.

A 47 per cent increase on January 1 in the fees grid operators set to fund wind and solar investments is driving the maker of paint ingredients to Turkey, where next month it will start making a new type of hardening agent at a factory near Istanbul.

The levy will cost Worlee 465,000 euros ($600,000) this year, the equivalent of 10 full-time salaries, or one-third of the company’s tax bill. As German labor costs rise at the fastest pace in a decade, the price of weaning the country off nuclear energy by 2022 is crushing the so-called Mittelstand, the three million small and medium-sized businesses like Worlee that account for about half of gross domestic product.

“It could be the proverbial straw that breaks the camel’s back,” Chief Executive Officer Reinhold von Eben-Worlee said in an interview. “It comes on top of tax, general production costs, raw-material availability and bureaucracy, which have led to a deterioration of the investment climate in Germany.”

The Bundesbank expects the German economy, Europe’s biggest, to expand by as little as 0.4 per cent over the course of 2013 as the three-year sovereign debt crisis takes its toll.

While business confidence rose more than economists forecast in January, adding to signs that the economy is recovering from a slump at the end of last year, unit labor costs have risen more than 3 per cent since 2009, figures from the European Union’s statistics arm show.

Dutch advance

That’s chipping at Germany’s competitive position and the country has been overtaken in the World Economic Forum’s competitiveness index by The Netherlands, which moved up to fifth place in the 2012-2013 ranking compared with Germany’s sixth.

In the aftermath of the financial crisis sparked by the collapse of the U.S. housing market, the Mittelstand helped hold down the unemployment rate, which has sunk to the lowest since reunification in 1990. Small and medium-sized companies added 104,000 jobs from 2007 to 2010, while bigger companies cut 120,000 positions, according to a study by Ashwin Malshe of the ESSEC Business School and Johann Eekhoff of the University of Cologne.

The Fukushima reactor accident in March 2011 in Japan prompted Chancellor Angela Merkel’s decision to phase out nuclear power. The government guarantees above-market prices for wind, biomass and solar power that helped build Europe’s biggest renewable energy complex.

Adds to cost

While accelerating the push to alternative energy, the goal to make renewables the source of 80 per cent of German power generation by 2050 from about 25 per cent now is adding to the cost for users.

Following the January surcharge increase, customers pay 5.28 euro cents a kilowatt-hour, up from 3.59 cents in 2012. That will take this year’s total renewable-energy subsidy to about 20.4 billion euros, according to power grid operators 50Hertz Transmission GmbH, Amprion GmbH, TenneT TSO GmbH and TransnetBW GmbH.

Germany’s nuclear exit is “one of the most ambitious projects since the war in terms of size and implications,” said Wolfgang Falter and Joerg Fabri of AlixPartners, a U.S. consulting company. Success could help the country to a leading position in an important growth market, though there is a “real danger” that it will destroy energy-intensive industries, Falter and Fabri said in a December report.

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