German firms reduce, halt production over high energy prices

Due to high prices of natural gas and electricity, German companies are switching to other energy sources, reducing output, but also shutting down production facilities, according to Economy Minister Robert Habeck.

The halting of production because of the high energy prices is seen by the German government as an alarming situation, while the Federation of German Industries (BDI) says the economy is experiencing a dramatic drop in output. Businesspeople also believe that the government is late in adopting measures to alleviate the situation.

The country’s industry has been working hard to reduce gas consumption over the past few months, partly by switching to alternative fuels such as oil, increasing business efficiency, and reducing production, according to Habeck, Financial Times reported.

However, some companies have completely halted production, which he described as alarming because it can mean that the industries in question aren’t just being restructured but are experiencing a structural rupture, one that is happening under enormous pressure.

Habeck: a good part of German production is based on sufficient supplies of cheap gas from Russia

Of note, gas prices on the Dutch exchange TTF at one point last month exceeded EUR 300 per MWh, and they are currently below EUR 240, which is seven times more than before the onset of the energy crisis in mid-2021. Electricity prices currently range from EUR 400 to EUR 700 per MWh, compared to EUR 50-75 per MWh before the crisis.

Habeck says that rising gas prices are affecting everyone from large industrial groups to small trading companies and medium-sized businesses. Firms where energy is an important part of the business model are experiencing sheer angst, according to him.

Habeck emphasized that a large part of German manufacturing based its business model on sufficient supplies of cheap gas from Russia. This competitive advantage won’t come back any time soon, if it ever comes back at all, he added.

Russwurm: it’s not a success, it’s a big defeat

Firms, however, do not completely share Habeck’s opinion. Earlier this week, Siegfried Russwurm, head of BDI, Germany’s main business lobby, said that gas consumption in industry was down 21% in July compared to the same month last year.

This has nothing to do with increasing firms’ efficiency, but with a dramatic decline in output. It is not a success, but the expression of a huge problem, he said.

Unreasonable price increases

Russwurm said the price of electricity for 2023 has risen to over EUR 700 per MWh, or more then 15 times the level seen in previous years.

For many companies, the situation is or will soon be toxic because of gas shortages and especially because of unreasonable price increases, Russwurm said.

Businesspeople believe the measures are late

Businesspeople expect a move by the German government, which they believe is acting too slow. Namely, the third package of measures has been announced, but nothing has happened yet. Of note, Germany has so far backed  businesses and households with EUR 60.7 billion.

Minister of Finance Christian Lindner has said the next package will bring aid that will amount to “single-digit billions” for 2022, and “double-digit billions” for 2023.

Lindner called for a reform of the electricity market, given that rising gas prices are the cause of the high electricity prices. Habeck said this move could eliminate the cause, instead of just mitigating the consequences with other measures.

The reform of the electricity market was rejected several months ago at the EU level, but now the idea has been renewed. It should be discussed at the meeting of EU energy ministers on September 9.