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ENERGY

EXPLAINED: Will Germany set a gas price cap and how would it work?

Rocketing energy prices in Germany have the government looking into a cap on the price of gas this winter. What’s not clear yet is how exactly it would work. We explain some of the possibilities.

EXPLAINED: Will Germany set a gas price cap and how would it work?
A person turns the knob on their heating device (Photo by Ina FASSBENDER / AFP)

What’s happening?

Over the last few months, Germany’s federal traffic light coalition has been busily putting together relief packages totalling €100 billion to help residents deal with rising inflation and rocketing energy bills.

So far, the money has gone into everything from cheap public transport—such as the nationwide €9 ticket and its planned successor—to one-off energy relief payments.

But that may not be enough this winter. 

Over the past year, the price of electricity has doubled. Meanwhile, the price of gas—which supplies around a fifth of the country’s electricity and heats around half of German households—has nearly quintupled. 

Politicians outside the federal government, from the opposition conservatives federally to Berlin’s Social Democrat Mayor Franziska Giffey, have been calling for a cap on either the price of gas specifically or the price of energy overall.

Last week, reports emerged that Finance Minister Christian Lindner had set up a working group looking at a possible cap. Chancellor Olaf Scholz has since confirmed that a commission had started work and would come back with proposals soon.

READ ALSO: KEY POINTS: Everything Germany is doing to help relieve rising energy costs

What might a cap look like?

There’s many different forms gas price cap—or Gaspreisdeckel—could take.

Some politicians, like Berlin Mayor Franziska Giffey, have even called for an Energiepreisdeckel—or a cap on the price of all energy.

Berlin Mayor Franziska Giffey has been one of the major state leaders calling for a cap on energy prices. Photo: picture alliance/dpa | Wolfgang Kumm

However, most political discussions so far in both the governing coalition and opposition involve whether and how to cap the price of gas—not whether to cap the cost of energy as a whole.

READ ALSO: German word of the day: Deckel

Some countries, like Spain and Portugal, set a maximum price that producers—which generate the actual gas or electricity—can charge to suppliers. These are the firms that then deliver the electricity or gas to consumers, whether they’re private households or companies.

The other way of capping the price is to set a maximum amount that suppliers can charge consumers. The risk with either model is that electricity companies could end up paying more in costs than what they get back from consumers, making their business model unviable.

That’s why the German government is looking at setting a cap on what consumers would pay per kilowatt hour of consumption. Consumers pay everything up to that cap. If and when the market price of gas goes above the set cap, the government would step in and pay whatever the difference is between the capped amount the market price.

For example, German price comparison website Check24 estimates that a model German household is using 20,000 kWh a year at a price of 21.9 cents per kilowatt hour. That would cost that family €4371 annually now compared to €1316 a year ago.

If the federal government capped that price at 19 cents per kilowatt hour, for example—the family in question would pay 19 cents to their provider while the government would pay the 2.9 cent difference.

Will people still be encouraged to save energy if gas prices are capped?

The conservative Christian Social Union (CSU), which sits together in the Bundestag with the Christian Democrats (CDU), wants a gas price cap that still encourages consumers to do their part to save energy.

Their proposal is to cap 75 percent of what consumers use, designating that amount a “basic” level of consumption that consumers can’t be expected to reduce.

It would then be up to consumers to pay the remaining 25 percent at market price. The CSU argues that allowing the last 25 percent to fluctuate would incentivise people to save energy.

Under a plan like that, a household which cuts out a quarter of their use would, theoretically, pay nothing above the capped level.

CSU Leader and Bavarian Premier Markus Söder is in favour of a gas price cap. Photo: picture alliance/dpa | Nicolas Armer

The SPD-led government of Mecklenburg-West Pomerania and national Green co-leader Ricarda Lang advocate a similar model, but want 80 percent of what households use to be declared a basic consumption requirement. That means that share would be capped.

What’s not clear yet is precisely what amount the government would declare as a basic level of consumption. Experts are currently working on proposals for an amount based on what German households have used over the past few years.

READ ALSO: EXPLAINED: When should I turn on my heating in Germany this year?

How will it be paid for?

This is one of the major questions before the government right now.

Reducing the price of gas by one cent per kilowatt hour is likely to cost around €2.5 billion, but there could be fluctuations based on market prices.

The German Institute for Economic Research’s Marcel Fratzscher told broadcaster RTL and ntv that the government was looking at a price tag of anywhere between €30 billion and €50 billion to have a real impact on household budgets.

Both CSU Leader Markus Söder and Berlin Mayor Franziska Giffey have called for the federal debt brake, which limits the amount the government can borrow, to be suspended to pay for the gas price cap.

Many in the SPD and Greens, which form part of the Scholz government, agree.

But the liberal Free Democrats, led by Finance Minister Christian Lindner, are opposed so far. However, Lindner has recently acknowledged that he is largely alone in rebuffing the plans. 

A possible tax on windfall profits by energy companies is also being floated to pay for any possible gas price cap.

Although the debt brake is enshrined in the German constitution, it can be suspended in emergency situations—such as in March 2020, when the Bundestag suspended it to pass its first Covid-19 rescue package.

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ENERGY

Is now a good time to switch energy providers in Germany?

The market prices for electricity and gas in Germany are cheaper now than they have been for a long time, leading some consumer advisors to recommend customers shop around for lower tariffs.

Is now a good time to switch energy providers in Germany?

Why are energy prices going down? 

Last year, energy prices in Germany rose to record heights following the Russian invasion of Ukraine. But now, partly thanks to a milder winter than initially feared, market prices for gas and electricity have taken a downturn.

READ ALSO: ‘Over half’ of Germans heating homes less or not at all

So far, however, most consumers are yet to benefit from the lower prices, as they are still being supplied with the electricity and gas that suppliers bought at higher prices last year.

This is particularly the case with the so-called basic suppliers (Grundversorger) – the companies that supply most customers in a region (such as Vattenfall or GASAG) – as they tend to buy electricity and gas on a long-term basis, in some cases years in advance. 

Last year, this meant that the basic suppliers could still offer the lower prices of the past, but gradually, they have had to raise their tariffs. 

“As a result, they now have some catching up to do and are passing on the high procurement prices to customers,” Christina Wallraf, an energy expert at the consumer advice centre in North Rhine-Westphalia explained.

Who is offering low prices?

Gas and electricity prices from so-called alternative suppliers – energy companies other than the basic suppliers – are now falling across the board.

This is because such suppliers have a short-term procurement strategy, which means they can “pass on favourable market prices more quickly than the basic suppliers buy for longer periods”, Hans Weinreuter from the Rhineland-Palatinate consumer centre explained.

For new customers – energy shoppers who join a new provider – prices are considerably cheaper than they were a few months ago. 

A green plug in front of an electricity bill. Photo: picture alliance / Jens Kalaene/dpa-Zentralbild/dpa | Jens Kalaene

The current average price of a kilowatt hour of gas for new customers is currently around 14.3 cents – 64 percent less than the average at the beginning of September last year when it reached a peak of around 40 cents. 

Electricity prices for new customers have also dropped by around 24 percent since mid-October, when a kilowatt hour of electricity for new customers still cost an average of 56 cents, whereas the current price is 42.7 cents.

For basic suppliers, the prices have moved in the opposite direction. Since the beginning of September, basic gas supply prices rose on average from 12.7 to 17.7 cents per kWh, while the price of basic electricity supply rose by 27 percent – from 36.8 to 46.6 cents per kWh since mid-October.

When does it make sense to switch?

Numerous consumer advisors recommend those who are currently stuck in very expensive tariffs to look around for alternatives.

“That’s where a look at possible alternatives makes sense,” says Hans Weinreuter from the Rhineland-Palatinate Consumer Center.

Udo Sieverding, an energy expert at the consumer advice centre in North Rhine-Westphalia, told the Berliner Taggespiegel: “Anyone who wants to switch now has a good chance of finding a cheaper tariff.”

He added that there is no rush, however, and said that he considers “the risk of prices at discounters going up again in the next few months to be low”.

A man turns up the thermostat on a radiator.

A man turns up the thermostat on a radiator. Photo: picture alliance/dpa | Hauke-Christian Dittrich

However, Julia Schröder, an energy law expert at the Lower Saxony consumer advice centre, recommended that consumers should not take the decision to switch suppliers lightly, as this usually means being bound to a new provider for one or two years when “nobody can foresee” how prices will develop over the next 24 months. A change would therefore be worth it only if it resulted in substantial savings, she advised. 

However, Ingbert Liebing, CEO of the Association of Municipal Enterprises (VKU), recently criticised the appeals of experts to consumers to switch from basic suppliers to discounters with cheap tariffs.

READ ALSO: Energy prices could double long-term in Germany, utilities companies warn

“It was foreseeable that now again soldiers of fortune would enter the energy market and think they can make a quick deal, at the expense of the municipal utilities and basic suppliers,” he said of the lower tariffs currently on offer by alternative providers. 

He warned against cheap tariffs that lure customers in with low prices for a short period of time and then raise them again in a matter of months. 

Can I switch from a basic to a discount provider?

Theoretically, switching from a basic to an alternative energy provider should be straightforward. Unlike those in contracts with special tariffs, customers of basic suppliers generally have the legal right to cancel at any time with two weeks’ notice and look for another supplier.

READ ALSO: EXPLAINED: How to change electricity and gas providers in Germany

Those who are not with a basic supplier should look at their documents and check for how long their current gas supply contract is still valid. If there is a supplier with more favourable conditions, it may be worthwhile to terminate the contract. 

Oncoming price brakes

Another thing to bear in mind when considering whether to switch energy suppliers is the oncoming price brakes for gas and electricity. 

READ ALSO: 7 reasons to be optimistic about life in Germany in 2023

In the case of electricity, 80 percent of consumption will be capped at 40 cents per kilowatt hour from March, backdated to January. The same applies to gas: from March, backdated to January, natural gas customers will receive a state-guaranteed price of twelve cents per kilowatt hour for 80 percent of their previous annual consumption.

A person holds a wallet with cash.

A person holds a wallet with cash. Photo: picture alliance/dpa | Lino Mirgeler

Despite the price brakes, it can still be worth switching if the contractually agreed energy price with your current supplier is over 40 cents per kilowatt hour for electricity and over twelve cents per kilowatt hour for gas.

That’s largely because the price brakes for electricity and gas are currently limited to just one year.

“If the price brakes are not extended, every kilowatt hour consumed will cost the regular contract price again next year. This is another reason why it will be important for consumers to choose the cheapest possible tariff this year,” said Thorsten Storck from Verivox.

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