An employee takes a sample at the blast furnace at the ThyssenKrupp plant in Duisburg, Germany on Nov. 16, 2021.INA FASSBENDER/Getty Images
Major German manufacturers say the country’s high energy prices and a lack of reliable energy sources are forcing them to consider restricting domestic production or moving their operations abroad.
Fifty-one per cent of large companies in Germany with 500 or more employees and 45 per cent of firms with high electricity costs are considering relocating abroad and cutting domestic production or are already doing so, according to the 2024 Energy Transition Barometer survey by the German Chamber of Commerce and Industry.
These figures are up 8 and 7 per cent respectively from last year, underscoring growing pessimism at a time when the country is trying to turn around its struggling economy, while dealing with high energy prices in the aftermath of Russia’s invasion of Ukraine.
“The confidence of the German economy in energy policy has been severely damaged,” DIHK deputy general manager Achim Dercks said in the chamber’s report, warning that the country was starting a process of deindustrialization. “We are still at the beginning of this process, and politicians can take countermeasures. But the clock is ticking.”
In the survey, companies said that as a result of the uncertain policy future, they were less competitive on the global market and less able to invest money in environmental research and development. The chamber’s survey was conducted between June 10 and 30, and included responses from 3,283 companies.
Germany aims to reach net greenhouse gas neutrality by 2045, and has set a legally mandated coal phase-out date of 2038.
The country has committed billions of dollars into the energy transition, including a new 15-year-long federal subsidy totalling about $6-billion, announced this March, for companies in energy-intensive industries (steel, glass, chemicals and paper production) to switch to renewable energy sources.
But several high-profile companies including chemical company BASF and aluminum supplier Spiera GmbH have already cut back production in the country, citing high energy costs.
Germany’s industry has long depended on cheap energy from Russia, but prices soared following a slump in Russian energy imports in 2022. Market prices for gas have nearly returned to preinvasion levels, but still remain nearly twice as expensive as in prior years, according to the International Monetary Fund (IMF).
This is an added challenge for a country whose economy is forecasted to have the slowest growth of all G7 countries this year by the IMF. The ZEW Indicator of Economic Sentiment for Germany, a market survey of 152 financial analysts, recorded a steep decline in August, with only a third of analysts expecting the economy to improve in the next six months.
Nonetheless, the IMF has held to a more optimistic interpretation of Germany’s energy situation: that headwinds from energy prices from gas prices are “temporary” and that concerns about deindustrialization are overblown. It noted in an analysis in March that while the country’s energy-intensive industries – those most affected by higher prices – were indeed contracting, those companies only make up 4 per cent of the country’s economy.
But the loss of those companies has a larger impact on German industries than merely 4 per cent, countered Dr. Ulrike Beland, head of the German chamber’s energy and climate economics department. If those companies move their industry elsewhere, she said, the country stands to lose the networks of firms that supply those companies, and the skills they impart to workers.
Over all, manufacturing still accounted for about a fifth of the country’s economy as of 2021, according to the German federal statistics office.
In order to support those companies, the country is now scrambling to build solar and wind farms and prepare for hydrogen to replace liquefied natural gas.
“While we’re on the right path with solar energy, investments in wind energy aren’t happening quickly enough to produce sufficient power,” Dr. Beland said. “This is a basic problem for many manufacturing processes: Will there be enough cheap electricity, and will there be a network in place to handle the increased load?”
Canada has signed on as a hydrogen export partner to Germany, but the infrastructure to transport hydrogen to companies’ facilities is still at least several years out, and the question of network costs, she said, has not yet been fully addressed.