Energy Shock - Is Germany Facing Deindustrialization?

How will the global energy transition affect the competitiveness of the German industry? Janek Steitz and Michael Hüther discussed this question at our XII New Paradigm Workshop.




12. MAY 2023



Rewatch the discussion

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.

“We have seen a dramatic shrinkage of employment potential. Whether we will be able to create a sufficient employment backbone, will determine if the transformation succeeds.”
Michael Hüther

He also stressed that with the energy intensive industries as an important basis for employment, innovation, and value creation, a lot is at stake. If the government considers forms of subsidization, according to Hüther they should be OpEx rather than CapEx focused.

“We need an interaction between traditional supply side policies and a new kind of OpEx orientation. And let us not forget decarbonization. The German law is clear on the timelines.”
Michael Hüther



During the high point of market orthodoxy, economists argued that the most 'efficient' way to combat climate change was to simply let markets determine the price of carbon emissions. Today, there is a growing consensus that prices need to be regulated and that a carbon price on its own might not be enough.