The German government coalition, led by Chancellor Olaf Scholz, is looking back on a turbulent first year in office, which was dominated by a reality check in connection with Russia's war in Ukraine and the European energy crisis. The global shocks have cost the government immense political and financial resources, and many policy projects planned for 2022 were postponed because overcoming the crisis – especially in the energy sector – took precedence over long-term policy-making. However, despite persistent pressure, the coalition remains committed to steering the country towards climate neutrality by mid-century and has pledged to take the decisive policy decisions needed to drive the transition in the energy, transport, heating, and industrial sectors by 2030. The Clean Energy Wire publication Preview 2023 attempts to provide an overview of the most important developments in Germany’s energy and climate policy in 2023.
In 2022, German energy policy underwent a serious test that shattered decades-old beliefs and strategic guidelines. Russia’s rejection of the principle of peaceful trade in the context of European and international political stability has hit Europe’s largest economy harder than many other countries. The belated and largely forced turn away from Russian energy sources has deprived the powerful German industry of its cornerstone of success and has caused significant damage to the credibility of German policy among its closest allies. Although the not-so-new German coalition government, led by Chancellor Olaf Scholz, took office only shortly before the start of Russia's war against Ukraine and the resulting European energy crisis, it now has to fix years of strategically flawed planning in energy and climate policy and its consequences.
On one hand, a new structure for the import of fossil energy, especially natural gas, must be established. On the other hand, the final abandonment of the use of gas, oil, and coal must be achieved even more decisively than ever before. Many influential participants in German energy and climate policy believe that the coalition of Scholz’s Social Democrats (SPD), the Green Party, and the Free Democrats (FDP) has not performed badly overall, although certain decisions, such as the reactivation of coal-fired power plants and the creation of new liquefied natural gas (LNG) import infrastructure for short-term supply security, are at odds with the decarbonisation goal. The so-called “traffic light” coalition, based on the colours of the three aforementioned parties, has launched some of the most ambitious projects in the fields of renewable energy, efficiency, and climate-friendly business that Germany has ever seen.
After a turbulent 2022, German politics must also undergo a real transition in 2023 from announcements and laws to the “Zeitenwende” (turning point of an era) proclaimed by the Chancellor. Clean energy infrastructure must be built, subsidies paid out, and new investors acquired so that the country can reach its ambitious energy transition goals by the end of this decade. Many observers agree that Germany cannot afford another year of changing priorities and stalling in essential areas—such as transport policy, construction policy, and especially the expansion of renewable energy sources—precisely due to the severity of the crisis.
Renewable energy sources
A strong expansion of renewable energy sources and corresponding infrastructure, especially transmission networks, is the most important energy transition measure that the government coalition must implement during its term. Its most ambitious climate-related legislative act to date – the “Easter Package” for renewable energy introduced in the spring of 2022 – fully entered into force on 1 January 2023, and the first tangible results should be visible this year. The reform package is designed to significantly accelerate the implementation of renewable energy and other measures to reach an 80% share in the energy mix by 2030, tripling expansion “on land, at sea, and on rooftops”. A key prerequisite for achieving this ambitious goal is the recently introduced principle that renewable energy sources serve public safety and are therefore more important than other public interests.
Although Germany set a new record for the share of renewable energy in 2022 – around 46% of electricity consumption – capacity increases are still not happening fast enough. The reformed Renewable Energy Sources Act stipulates that the average annual expansion of onshore wind energy should increase to 10 gigawatts (GW), compared to less than 2 GW in 2021, and 22 GW of solar energy capacity, which was about 5 GW in the year the government took office. The total planned onshore wind capacity for 2030 is 115 GW, and solar photovoltaic energy is 215 GW. However, there are no clear specifications on how average expansion volumes will reflect in actual construction in 2023, as annual expansion targets will only come into force in 2025.
The renewable energy expansion figures analysed by the German Institute for Economic Research (DIW) indicate that a major surge in construction rates will be needed very soon to stay on track. The DIW noted that the current rate of onshore wind energy expansion is less than 30% of what is required, and for solar energy, it is just under 40%. Regarding offshore wind, the current expansion rate at the end of 2022 reached only 6% of what is needed to hit the planned renewable energy share by the end of the decade.
Worse still, renewable energy project auctions in Germany repeatedly saw an insufficient number of applications throughout the past year. The Federal Network Agency (BNetzA) pointed out that the gap between the volumes auctioned and the volumes finally awarded largely arose because volumes were increased quite rapidly, and companies as well as project developers were not sufficiently prepared to increase their operations in parallel, while the renewable energy industry complains that higher costs have disrupted financial planning.
The average implementation time for a new onshore wind project in the country is currently about two years. The wind energy industry association BWE pointed out that in several federal states, it takes significantly longer, and for some turbines, it takes as long as six years from application to commissioning. “We are far from the six-month target promised in election campaigns,” said BWE head Hermann Albers, calling for a “real reckoning to solve the long-standing problems”. He added that the accelerated construction of liquefied natural gas import infrastructure “shows what is possible”. The head of the Renewable Energy Federation BEE, Simone Peter (Simone Peter), echoed these calls, adding that the government must also address comprehensive electricity market reform in 2023 and take precautionary measures to keep green energy investors in Europe, who could be lured to North America by the US Inflation Reduction Act – a subsidy programme for clean energy projects.
Measures coming into effect in 2023 regarding renewable energy:
- Introduction of higher capacities and support rates for wind and solar parks participating in auctions in 2023.
- Increase the allocated land area for a larger number of renewable energy installations, such as solar plants on agricultural land and turbines in less windy areas in southern Germany. The federal government has announced that the 16 federal states must now prepare legislation that paves the way for reserving two percent of the total land area for wind energy by 2032.
- Further regulations to help generate more electricity from solar panels and biogas plants, such as reducing value-added tax on solar panels and income tax on electricity sold from small arrays, as well as increasing support rates for biomethane production.
- Improve citizen participation in the energy transition by creating better conditions for municipal involvement and exempting citizen-led energy projects from participating in auctions.
The reform of Germany’s immigration law at the beginning of 2023 aims to attract labour, as the shortage of qualified workers is slowing down the construction of energy transition facilities.
A windfall profit tax, which applies to the exceptionally high profits of energy companies, was launched back in December 2022 but will enter into force next year. It is intended to help fund support programmes under energy crisis conditions, but the renewable energy industry has sharply criticised this measure, arguing that it will deter investors.
To help electricity consumers overcome financial difficulties, the government moved the abolition of Germany’s renewable energy surcharge from the originally planned 2023 to mid-2022. However, despite the surcharge—which enabled the expansion of renewables for two decades—no longer being in effect, electricity prices are likely to remain high in 2023, according to an analysis by the consulting firm Prognos. Wholesale prices in the analysed scenario will exceed 500 euros per megawatt-hour (MWh) – compared to about 200 euros/MWh in 2022 and just 38 euros in 2019. The main driver of the price increase is the expected long-term reduction in Russian gas supplies, as gas still covered almost ten per cent of the country’s net electricity generation last year. In the quite unlikely event that Russia resumes supplies and reaches pre-war levels, prices would still remain at around 100 euros/MWh, Prognos concluded.
Germany’s climate and energy policy
The government coalition plans to use 2022 to push policy and legislation towards a faster transition to climate neutrality. Although the energy crisis occupied a large part of ministerial resources, parliament passed a whole series of legislative reforms this year.
The government promised to submit a comprehensive climate action programme by the end of 2022 so that Germany could reach its 2030 targets. By mid-December, it had not done so. It already announced that it would submit the full second part of the programme with all proposals only in the spring of 2023 (including regarding the transport sector and the reform of Germany’s climate legislation).
The government will evaluate plans for abandoning the use of coal as early as 2030 (under current legislation, this is expected by 2038). Due to the “difficult situation” created by the energy crisis and efforts to temporarily run more coal power plants to reduce gas usage, the assessment, which was planned for August 2022, will be submitted “no later than the first quarter of 2023”.
Next March, UBA preliminary data will show whether emissions increased in 2022 due to the war and its consequences.
Gas
Germany’s natural gas supply in 2022 was one of the most unexpectedly pressing issues – not only in gas industry circles but also at the dinner table across Europe. While in 2021 Russia was the country’s main supplier (55%), in 2022 Germany stopped receiving Russian pipeline gas, leaving Central Europe with an insufficient supply and the world with high prices. Given that storage facilities are full and there were low temperatures before the start of this winter, the government and the gas industry have now turned their attention to the 2023/2024 winter, which could be much more difficult without Russian pipeline gas to fill the storage.
2023 could prove to be an even tougher test for Europe, as Russian supplies could drop further, global liquefied natural gas supplies will be limited, especially if demand from China recovers, and it is not guaranteed that the unusually moderate temperatures observed at the start of the European winter will last long, the International Energy Agency (IEA) writes in its recent report “How to avoid gas shortages in the European Union in 2023”. The IEA pointed out that Europe will need to do much more in terms of energy efficiency, renewable energy, heat pumps, and simple energy-saving measures.
Weather in the first quarter of 2023 will play a huge role in how well-prepared the European energy system will be entering the new year. Wayne Bryan, LSEG gas researcher in Europe, said that the warm autumn of 2022 has perhaps “lulled us into a false sense of security”, suggesting that everything will be fine because storage can be refilled quickly. The longer the cold months drag on – household consumption is still the main driver of gas usage – a serious gas deficit could arise by early spring, he said at a panel discussion organised by Montel News.
The time-tested European policy doctrine of free markets with little government intervention was turned upside down in 2022, ICIS analyst Andreas Schröder told Clean Energy Wire. “In 2023, the European gas market will be shaped by nationalised utility companies, state-backed investments, fixed price caps, regulated profit margins, and mandatory storage targets.”
The first floating liquefied natural gas terminal began operating at the end of December, and several others will follow in 2023, allowing Germany to import this fuel directly – a significant step towards “guaranteeing sovereignty”, as Economics Minister Habeck put it. Methane leaks and local environmental risks associated with LNG infrastructure are currently being mitigated, but they may soon become a problem, notes ICIS representative Schröder.
As all this infrastructure is implemented – often with state support – the government will have to say how much natural gas Germany will need in the coming years and what role it plays in the energy transition process, also taking into account its impact on the climate.
Phasing out coal and nuclear energy
Last year, Germany experienced failure in both coal and nuclear energy phase-outs, as the energy crisis required additional power plant capacity in the short term to secure the electricity systems of the country and neighbouring states.
The originally planned phase-out of nuclear energy at the end of 2022 was postponed until April 2023 after internal government disputes and pressure from Chancellor Scholz. Then, according to the Chancellor’s wishes, the last three remaining power plants will be finally shut down and subsequently dismantled. According to power plant operators, the planned phase-out can no longer be delayed any further, as important technical prerequisites, such as the purchase of new nuclear fuel rods, had to be met several months ago. However, parts of the opposition, the industry, as well as representatives of the ruling FDP party are trying to hold on to the debate about further extensions to the phase-out until the end, arguing that continuing operations according to plan is irresponsible while the energy crisis no longer threatens energy supply security.
Regarding the coal phase-out, the situation is more complex: in a hurry, the coalition agreed to postpone the decided closure of lignite and hard coal power plants in the spring of 2022, allowing some of them to return to the market and determining that others must remain in reserve longer than planned. Although Germany’s energy consumption and emissions noticeably decreased in 2022 due to the energy crisis, the rising share of coal energy production as a replacement for lost gas capacity is essentially at odds with the government’s climate policy intentions. And higher coal consumption seems possible in 2023 as well, driven by the continued need to replace gas. The government tried to limit the revival of coal power plants by setting a deadline for the use of reserve capacities, but industry representatives have pointed out that the significant contribution of these power plants to supply security must be linked to a long-term perspective.
The crisis has also caused a split between the western and eastern coal regions, which is likely to persist in the new year, as the former promised to largely adhere to the earlier 2030 coal phase-out deadline and only temporarily restore lignite capacity, while the latter argue that the new situation makes the accelerated phase-out of Germany’s largest domestic fossil energy source ill-considered from a national perspective and directly harmful from a regional one.
Transport and mobility
Germany has been trying to reduce emissions in the transport sector for decades. Many experts argue that the government’s first 12 months were another lost year in the transition to climate-friendly mobility, and the Ministry of Transport, led by Free Democrat (FDP) Volker Wissing, is blamed for the inaction. The transition will need to accelerate rapidly to reach the sector’s climate targets: Emissions will have to drop from 148 million tonnes of CO2 in 2021 to 85 million tonnes by 2030. This will affect not only the country’s mighty automotive industry but also many other policy areas, such as public transport, cycling, and walking, as well as issues of a just transition.
The government plans to agree on policy needed to meet climate targets in the transport sector by spring. In the first vague proposals, which many mocked as insufficient, the Ministry of Transport proposed incentives for the transition to “clean” passenger cars and trucks, including charging infrastructure, the expansion of rail transport, and support for public transport, among other measures.
Clean mobility experts argue that the country needs a coordinated general set of measures that would include a fundamental reform of national taxes and fees to promote the transition to more climate-friendly cars, complemented by comprehensive efforts to expand public transport.
The impact of the energy crisis on the transition to electric cars remains unclear, as both petrol and electricity prices have risen sharply. The government wants to have 15 million electric cars on the country’s roads by 2030.
The increase in the share of new cars with low-emission engines slowed to about 12 per cent in 2022. Of all new cars, almost half had an alternative drive, and 28% were solely battery-electric or plug-in hybrids.
The international IAA Mobility exhibition in early September will provide insight into the future of zero-emission transport.
Industry and hydrogen
The war in Ukraine has brought energy issues to the forefront of the German industrial agenda for 2023. The crisis diverted many companies’ attention from urgent emission reductions but also forced them to accelerate efforts to end dependence on fossil fuels. Many energy-intensive companies will find it difficult to adapt to price levels that were considered unimaginable a few years ago – about a third of industrial companies claim they are facing existential threats. In response to the crisis, the industry has stepped up calls to accelerate the implementation of renewable energy sources and the development of a “hydrogen economy”. To launch the transition to a climate-neutral manufacturing sector, which many German companies see as a huge business opportunity, close coordination with European Union policy will be essential. Industry will need to reduce emissions from 181 million tonnes of CO2 in 2021 to 118 million tonnes by 2030.
The Ministry of Economics pointed out that given high energy prices, loss of competitiveness, and a shortage of skilled labour, the main task in 2023 will be to keep industry in Germany. Economics Minister Robert Habeck said that next year’s political debates and focus will be on preserving Germany as an industrial location, establishing a system that allows industry to remain and produce in the country, and increasing the procurement of goods for future markets. The government has high hopes for the electrification of industrial processes and the use of green hydrogen to reduce emissions.
German industry announced that despite the energy crisis, it plans to adhere to decarbonisation targets, as they are “in the companies’ own interests”. The industry association BDI listed six key measures to reach industrial climate goals: Promoting the use of renewable energy sources, the hydrogen economy, carbon contracts for difference (CCfDs), investments in rail and charging infrastructure, building renovation, and circular economy value chains.
The government is currently developing legal and financial prerequisites so that companies can be compensated with CCfDs for the higher operational costs associated with low-emission investments. Hydrogen and other decarbonisation technologies will be widely presented at one of the world’s largest industrial trade fairs, Hannover Messe, taking place at the end of April.
Buildings
The decarbonisation of the construction sector, while ensuring that housing remains affordable and buildings are constructed in accordance with biodiversity protection measures, will be crucial not only in 2023 but also for many years to come. Since Germany has missed its national emission reduction targets in the building sector for the last two years, both climate-friendly new construction and the renovation of old buildings will be one of the most important items on the agenda for the now one-year-old Ministry of Housing, Urban Development and Building, led by Social Democrat Klara Geywitz (SPD).
Chancellor Scholz announced an “ambitious” energy efficiency law with binding targets for the construction sector, but the bill was temporarily postponed because the business-friendly Free Democrats (FDP) objected to it. The “traffic light” coalition hopes that the bill will be passed by the end of January.
Germany resumed its slowly dragging implementation of smart meters to help better integrate renewable energy sources, electric cars, and heat pumps into the electricity grid. In addition, the Ministry of Economics has proposed making smart meters mandatory for large and medium-sized enterprises and expects the plan to be approved in the first quarter of next year. So far, the installation of devices has been slow due to complex approval and certification procedures.
Electrification in the heating sector is another important factor in achieving the country’s net-zero targets. To accelerate the implementation of heat pumps, a shareholder alliance was formed, which set a goal of installing 500,000 new units per year from 2024. Therefore, the legal framework will be amended next year to make this possible, including by addressing supply chain issues and the shortage of qualified workers.
The new differentiated CO2 cost split between landlords and tenants, agreed upon at the end of the year, will come into force in 2023. Under the new model, the less energy-efficient a building is, the more landlords will pay for CO2 emissions caused by burning fossil fuels. The aim of the price split is to relieve tenants of rising CO2 costs and to incentivise property owners to renovate buildings and make them more energy-efficient.
Energy efficiency in new buildings is also promoted by the Building Energy Act (GEG) reforms, which will start in 2023. Efficiency targets for building renovation have been raised for next year, and the reform planned for 2023 will increase them further and stipulate that from 2024, every newly installed heating system will have to operate with 65% renewable energy, a requirement that will come into force in 2024. Building solar energy systems on commercial buildings must also become mandatory, and rooftop solar systems must become the “rule” for private households.
Municipal heating planning could become mandatory for municipalities, but so far, the government has not submitted key proposals or bills.
Sustainable urban development together with urban resilience and transformation will be one of the key issues on the Building Ministry’s agenda after one of the hottest summers since records began. Urban development will be focused on climate protection and urban adaptation to climate change.
Electricity grid and electricity market
With the increasing share of renewable energy sources in Germany’s energy mix, the country needs to modernise its electricity grid to be able to address new challenges caused by fluctuations in energy production from renewable sources. Furthermore, considering that Germany’s renewable energy capacity is mostly located in the north, while much energy is needed in the industrialised south, a modern electricity grid is vital, as is a more even distribution of renewable energy installations.
The government hopes that the opening of the rapid liquefied natural gas terminal will set a new pace for infrastructure modernisation. This also includes grid expansion, especially in cases where projects involve several federal states or cross national borders.
Alongside the European Commission’s plans to propose a revision of the EU internal electricity market rules in the first quarter of 2023, the German government promised in the coalition agreement to develop a new electricity market design, involving a stakeholder group (Plattform Klimaneutrales Stromsystem). This platform is planned to start work with a delay in the first quarter of 2023, and it is expected that it will maintain only the energy market but complement it with capacity mechanisms, reports Tagesspiegel Background. Energy market reform has also been a frequent demand of the energy sector. The Energy Transition Monitoring Commission plans to publish a report in January.
By May 2023, the TSOs will make available the new grid development plan, in the scenarios of which climate neutrality in 2045 is included for the first time.
Agriculture and forestry
For a long time, it was believed that the agricultural sector was “difficult to decarbonise” because food production is associated with unavoidable emissions. However, the role of farmers in achieving climate targets is increasingly being taken into account. Cem Özdemir (Green Party), who has been heading the Ministry of Agriculture for a year, places great emphasis on climate protection and resilience also because climate change poses major threats to agriculture and its ability to provide food production in the future. The goal of the new nutrition strategy is to reduce the environmental impact of food, from production to consumption and waste. Measures to create better conditions that would facilitate healthier and more sustainable nutrition are planned to be set during the next year, and the government hopes that the strategy will be adopted by the end of 2023.
In the new Common Agricultural Policy (CAP) funding period, more emphasis will be placed on the services that farmers can provide in the field of environmental and climate protection. A new “national CAP strategic plan monitoring committee” has been established to ensure that the CAP becomes an even more effective core tool for the sustainable transformation of agriculture. The goal of the CAP will be to protect natural resources, ensure future food supply, and better utilise the potential of rural areas.
European climate and energy policy
Next year, European countries will continue to address the energy crisis and strive to achieve sufficient gas supply in global markets, while promoting the use of renewable energy sources and key technologies such as heat pumps. European institutions reached an agreement in mid-December 2022 on the key elements of Fit 55, such as emissions trading systems and carbon border taxes, which must now be incorporated into law and implemented.
International climate and energy policy
The main issue will remain the development of the global energy landscape, which is strongly influenced by Russia’s war against Ukraine.
The main issue in 2023 will be to what extent countries will succeed in avoiding the creation of stranded assets and leveraging the synergies offered by renewable energy sources regarding energy supply security and emission reduction, Mariana Feist, a researcher at the German Institute for International and Security Affairs (SWP), informed Clean Energy Wire.
The COP28 climate change conference will take place in the United Arab Emirates (UAE) from 30 November to 12 December. At the conference, progress on a global scale since the entry into force of the Paris Agreement will be officially assessed for the first time – the so-called “global stocktake”.
The UN Secretary-General will convene a “climate ambition summit” in 2023, before the assessment is completed next year at the COP28 conference. Loss and damage fund: After the initial agreement at COP27, the decisive details must now be agreed upon.
After Indonesia and Vietnam, the G7 and partner countries still need to agree on two of the Just Energy Transition Partnerships (JETPs), which were decided during Germany’s 2022 G7 presidency: India and Senegal. India will hold the G20 presidency in 2023, so it has a favourable opportunity.
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