Energy Shock - Is Germany Facing Deindustrialization?

The global energy crisis and rising prices have put Germany’s industrial regions under stress. But how substantive are fears that Germany’s industrial sector will be weakened and lose its competitive edge? We invited Janek Steitz and Michael Hüther to discuss insights from an ongoing research project by Dezernat Zukunft and iw Consult at our XII New Paradigm Workshop that analyzes the situations energy intensive industries in Germany will face in the long run.

The study models long run energy costs for industrial production in Germany (hydrogen and electricity) and compares it to other countries with a high share of renewables (e.g. Marocco, Chile, Norway, Spain, US). What the researchers found, according to Steitz, is that Germany ranks very poorly in comparison, both for the years 2030 and 2045. Even in the optimal scenario, companies will face a cost premium of 50% for electricity and 20% for hydrogen compared to cheaper countries.

To identify how these differences feed through to production costs, the iw consult and Dezernat Zukunft study models four use cases: domestic production versus the outsourcing of various input factors over to full relocation. The latter, according to the study, would yield the highest savings, while local production with imported hydrogen would be most expensive.

In terms of policy, the implications are as follows: upstream energy intensive industries may become less competitive as the transition proceeds. But it would be very costly to keep them all in Germany via subsidies and other measures. The good news however is, that there may be sweet spots for selective relocation protection along value chains, targeted at less energy intensive and more value creating and labor intensive mid and downstream segments of the supply chains.

So – will we face a broad wave of deindustrialization?

Adding to the discussion, Michael Hüther pointed out that besides energy costs, other factors, such as the availability of infrastructure, cluster effects, regulations, and demography are crucial in determining the future of the German industrial sector.