Constitutional debt brake threatens to crush Germany's hydrogen dreams

Germany has had a fairly clear plan for how its electricity generation would become emission-free over the years. By 2035, Germany wants to produce 100% of its energy in a climate-neutral way. In the same package, the country would move away from coal power, dependence on imported natural gas and nuclear power.

The aim was to significantly increase electricity generation from wind farms and solar panels. However, as wind and solar power generation varies wildly with the weather, the country had a plan to use zero-emission hydrogen over time to take care of the inevitable moments when renewable electricity production falls below consumption.

Renewable energy production in the country has increased. Last year in 2023, Germany produced 137 terawatt hours of wind power and production is still growing. In the same year, Finland, which is roughly the same size and where wind power has rapidly grown into a key source of electricity, produced only 14 terawatt-hours of wind power. Solar PV is behind wind in terms of volume in both Finland and Germany, but correspondingly, solar PV growth rates are now particularly high in both countries.

EU allows Germany to subsidise hydrogen power plants

Last August, the German government announced that it had received permission from the European Commission to implement its plan for publicly subsidised backup power plants for windless and dark moments. Under the plan, Germany would build nearly 9 gigawatts of hydrogen power plants and 15 gigawatts of natural gas power plants, which should switch to hydrogen by 2035 at the latest. Together, this represents about one-third of Germany's peak electricity demand in 2023. By comparison, Olkiluoto 3 has a capacity of 1.6 gigawatts.

Under the debt brake in the German constitution, new public debt must not exceed 0.35% of annual economic output. This rule has kept Germany's debt low and guaranteed the state new borrowing on very favourable terms.

Constitutional Court takes away hydrogen subsidies

The German constitution allows for higher government borrowing in the event of an unforeseen crisis requiring emergency action, and therefore, the rule did not have to be applied from 2020-2022. However, spending during the pandemic did not rise as high as feared, so the potential loan money was not completely used and the government of Chancellor Olaf Scholz decided to transfer €60 billion of the funds earmarked for pandemic years to the state climate fund. In November, however, the German Constitutional Court ruled that Scholz's government's stunt was illegal. In effect, it threw out a large part of the new measures in the climate fund to finance the energy transition because the debt brake prevented them from taking on the additional debt they needed. At the same time, the planned subsidy payments for hydrogen power plants, €7 billion a year, were also lost.

Hydrogen only for peak times is still too expensive

If a hydrogen turbine is only used when renewable electricity is scarce, electricity generation can easily become expensive: the price of a new turbine has to be paid only for a relatively small number of hours of operation. Without subsidies, therefore, there is no way to get going.

"As long as there are no new hydrogen-based backup power plants on the horizon, the solution in Germany is to continue using coal-fired power plants," Siegfried Russwurm, President of the Federation of German Industries (BDI), said last week in Berlin.

Conventional natural gas turbines, on the other hand, cannot burn hydrogen as such because hydrogen burns with a much hotter flame than natural gas and practically melts the parts of a conventional turbine.

If no flexible energy production system is built, the price of electricity will sometimes jump to disastrous levels for industry, and households will become poorer. In the worst case, the situation will lead to blackouts. In Finland, the fluctuations in renewable energy production are currently balanced in particular by hydropower, which, as a country with thousands of lakes, is used to a considerable extent.

No agreement on replacement money

The importance of climate action in Germany has not been questioned. In government, the Greens and Social Democrats would still be prepared to tackle the issue through additional debt or tax increases, but the Liberal Party (FPD) is blocking this. Liberal Finance Minister Christian Lindner says that Germany's problem is not too little revenue but too much spending and would be prepared to cut social security, for example, but that is not an option, especially for the Social Democrats.

Robert Habeck, the Greens' Economics Minister, believes that subsidies for energy production and companies are important because he says that half the world is making this transition with subsidies. The current cut of 60 billion from the climate fund is, according to government forecasts, cutting 0.5 percentage points from Germany's economic growth this year.

Stimulus projects are not the only ones to suffer from budget cuts. In order to bring new government debt within the constitutional limits, subsidies to farmers for diesel use were also cut. This prompted farmers to organise large demonstrations across Germany and block roads with tractors.