German government officials have voiced cautious optimism about financing the country's industrial decarbonisation, as the economy ministry this week disclosed the results of its €5bn ($5.7bn) tender for carbon contracts for difference.
Germany's government is advancing in its aim to get more private capital involved in the green transformation, finance ministry official Anna Klabunde said at an industry event in Gelsenkirchen this week. Klabunde, who is head of the ministry's sustainability, decarbonisation and carbon pricing unit, flagged the three new programmes launched or planned by the government's "Germany fund", under the auspices of state-held bank KfW, that are designed to make it easier for private-sector investors to get involved.
The first of the programmes is an investment loan scheme for energy supply, aimed at district heating and cooling networks. The second is a hedging instrument for "industries in transition". Both were launched last month, with German turbine manufacturer Enercon already making use of the new hedging instrument for its €1bn green loan syndicated guarantee facility, arranged with banks including KfW.
The third scheme has not yet been launched. It targets the construction sector and aims to push private investments in residential construction.
Half of all applications for state guarantees in the industry-heavy German state of North Rhine-Westphalia are for transformation projects such as biogas plants or electrolysers, auditing firm PWC director Rainer Holtmann said at this week's event. The firm audits and manages state guarantees for loans on behalf of the economy ministry. But it is difficult to arrange state guarantees for hydrogen or steel projects, given the lack of "expectations", Holtmann said. Such projects are considered loss-making businesses that will be dependent on subsidies for the foreseeable future.
Hydrogen projects will typically need 100pc equity, Holtmann said. Financing for steel is difficult too, and there is massive competition from areas such as the armament industry, which promises better returns in the short term, Holtmann said.
German research institute Oeko Institut's Felix Matthes called for a more encompassing approach. Germany needs a hydrogen strategy and a carbon capture and storage (CCS) strategy, and sufficient funding, he said. The cost gap for transformation projects will not be bridged through insurance instruments alone or the EU emissions trading system (ETS) price, Matthes said. He pointed out how the UK, a country with a "different attitude to the financial markets", supports its green hydrogen industry.
Klabunde suggested there might be a case for extending to other sectors Germany's "inter-temporal" funding mechanism for its hydrogen core grid — through which the state broadly advances the investment costs. And she defended the government's much-criticised decision to shift billions of euros from Germany's climate transformation fund to the general budget. Finance minister Lars Klingbeil has said the changes were necessary owing to budgetary constraints, but Klabunde clarified that they were also carried out as part of an overall focus on raising efficiency and enabling the most emissions reductions at the lowest costs. Many European states do not even have such a fund, she said.
Green lead markets — another much-debated support mechanism for industrial decarbonisation — can be "hard work" as they must be implemented at the European level, economy ministry official Verena Lauber said. Lauber leads the ministry's decarbonisation funding programmes unit.
Local content rules planned under the European Commission's proposed Industrial Accelerator Act would only come in 2030, which would be too late for "many", think-tank the Jacques Delors Centre senior policy fellow Philipp Jaeger said.
North Rhine-Westphalia's junior economy minister, Silke Krebs, voiced her "joy" at the plans for public green procurement mooted by the EU, and stressed that "we continue with confidence and hope that everything will fit together". North Rhine-Westphalia is actively driving forward Germany's hydrogen starter grid. The "key" problem facing the state's industrial decarbonisation is that "the timelines no longer match" on areas such as CCS, along with the voices placing doubt on the need for decarbonisation in the first place, Krebs warned.
There is always a risk that policy makers cave in, crashing EU ETS prices, research institute Wuppertal Institut's Lukas Hermwille said. This makes the restrained reaction of the EU ETS to the commission's revision proposal in July all the more remarkable, he said. It shows how market participants had correctly anticipated and priced in the "waning credibility", Hermwille said.
It is precisely the massive delays in infrastructure deployment that made ETS adjustments necessary, Jaeger said, stressing that the delays were not expected 2-3 years ago. And the lack of a Europe-wide consensus on decarbonisation and ensuing political insecurity make investment decisions more difficult, Jaeger said.
Germany's government is also working on a carbon management strategy and a long-term negative emissions strategy, which are expected to be presented by the end of this month.
