German plan to support industry could shake up energy market, experts warn

The German government’s plan to subsidise electricity prices for industry is raising concerns about market stability and the future of electricity trading. Experts say price guarantees could undermine market principles. The main criticism is that they could weaken price formation and incentives to manage consumption flexibly.

Germany is considering introducing a guaranteed electricity price of around 50 EUR/MWh for energy-intensive businesses. This is significantly lower than the current market price for the year-ahead contract, which is around 87 EUR/MWh. The government aims to help the competitiveness of German industry, which faces higher costs than its counterparts in the US or China.

However, according to the European Federation of Energy Traders (EFET), the move could have unwanted side effects on the electricity market. The main risk is that it could dampen interest in trading on forward markets or entering into long-term direct electricity supply contracts (Power Purchase Agreements – PPAs).

Experts say the planned intervention could have a “massive impact” in particular on the futures market, which serves as a benchmark for all of Europe.

“This has huge implications for the futures market”, which could “dry up” because the proposal is “complex” and “not in line with market principles,” warned Niclas Wenz of the German Chamber of Industry and Commerce (DIHK).

Andreas Fischer of the German Economic Institute (IW) noted that a guaranteed price could also weaken consumers’ incentive to adjust their consumption to the current supply of electricity, which is crucial for system flexibility as generation from renewable energy sources increases.

Rather than intervening directly, experts say the government should focus on supporting the development of cross-border infrastructure and reducing fixed costs, such as electricity taxes and transmission charges.

“These are areas where I can make a difference without directly distorting the market,” Wenz added.

Despite these reservations, some analysts believe the market impact could be limited if the measure is narrowly targeted and meets the EU’s conditions for state aid. Electricity trading volumes in Germany are high, so the market is unlikely to dry up completely, said Tobias Federico, chief analyst at Montel.

The German government is seeking to address the threat of deindustrialisation caused by high electricity prices at a time when industry is facing rising decarbonisation costs. Industry associations such as VCI (the German Chemical Industry Association) warn that stable prices are crucial to keeping production in the country.