Green Suicide: German Industry Under Strain As Energy Costs Jump
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.
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.
Pay the bulk
Companies like BASF SE, the world’s biggest chemical maker, are exempt from the surcharge at sites like Ludwigshafen and Schwarzheide because these generate their own power, according to an employee newsletter. Lanxess AG, the Leverkusen-based chemical maker that joined the benchmark DAX Index in September, is also exempt, spokesman Daniel Smith said.
Yet, Germany’s chemical industry as a whole will have to fork out 800 million euros for the renewables surcharge this year, up from 550 million euros in 2012, according to estimates by the VCI lobby group, which represents 1,650 companies. Mittelstand companies will pay the bulk because most don’t qualify for exemptions, said the VCI.
Manufacturers aren’t the only ones buckling under the additional costs. Retailers like Oliver Krumholz, who owns seven Intersport stores in western towns including Muelheim-Kaerlich and Andernach, are also hit.
Krumholz is refitting his biggest store with a control system to ensure that the heating, air-conditioning and ventilation aren’t on at the same time. He’s also buying carbon dioxide monitors to measure how many customers are in the store so the heating will shut down when it gets too stuffy.
He estimates the investment will save 100,000 kilowatt hours of electricity, enough to cancel out the extra costs this year. The alternative was to fire staff, he said.
“I don’t know where this journey is going,” Krumholz said by telephone. “Consumers have made Germany’s economy strong in past years. If we keep piling on the burdens, I see a danger of us capsising our economy.”
Lawmakers can’t agree on how to mitigate the effects.
Economy Minister Philipp Roesler said in October he wants to lower a federal electricity tax to help counter the increase. In contrast, Environment Minister Peter Altmaier wants to offer consumers free advice on saving energy and said lowering the power tax as proposed by Roesler “doesn’t yet convince me.”
“The increase of the renewable energy surcharge at the level it happened was regrettable and problematic in my opinion,” Altmaier said Dec. 18 at a press conference in Berlin. The press department at the environment ministry, whose subsidies prompted the surcharge increase, declined to make Altmaier available for an interview for this article.
‘Torture the Mittelstand’
“I don’t think that politicians want to torture the Mittelstand knowingly,” Ludwig Veltmann, head of the ZGV Mittelstand lobby group representing 230,000 retail, skilled- trade and service businesses, said in an interview. “But on the other hand they aren’t offering enough constructive solutions. The allocation system, where the little businesses have to pay for the big ones, isn’t fair.”
Taxes and other government charges make up about half of household electricity bills, ZGV’s Veltmann said. In addition to the renewable energy surcharge, customers have to pay electricity tax, licence fees, a network surcharge and value- added tax. The cost for households and companies is rising even as electricity prices decline on the wholesale market, he said.
German benchmark power prices have fallen 20 per cent on the wholesale market in the past 12 months and reached an all-time low of 40.75 euros a megawatt-hour on January 25, according to broker data compiled by Bloomberg.
The extra charges are widening a gap between Germany and the rest of the world. The electricity cost for industry was 20 per cent higher than the European Union average at the end of 2011. Germany now pays twice as much for energy as the U.S., partly because of cheaper shale gas there but also because of lower surcharges and taxes, according to a McKinsey report.
“The fundamental question is whether we want to push through this crazy 80 per cent renewable energy share at the expense of the economy,” said Marc Tenbieg, managing director of the DMB Deutsche Mittelstands-Bund, which represents more than 14,000 small and mid-sized enterprises. “Why do we always have to be the trailblazer and show the other countries how it’s done? They are laughing their heads off.”
Uprooting German sites
If costs climb even more, Worlee may consider uprooting existing German production sites, CEO Von-Eben Worlee said.
The company, founded in 1851 to supply the German market with raw material imports, started production in Hamburg in 1936 with a factory to produce high-quality resins, according to its website.
The paint-ingredient maker, which today sells its products worldwide, has some experience of foreign production through a stake in a Greek maker of phenolic resins in the 1970s and a joint venture in China in the 1990s, Von-Eben Worlee said.
The 56-year-old CEO, who joined the family company in 1983 as a trainee, may look further afield than Turkey. During a 16-day trip to Asia last month, Von Eben-Worlee met with two potential partners, one in Malaysia and one in Indonesia.
“In the last two decades we have concentrated our activities at our German production sites,” Von Eben-Worlee said. “There was no reason to produce abroad. With energy cost inflation and the planned drastic tax increases, that is now changing.”