Germany Faces Pivotal Election: Will Nation Successfully Navigate Energy Revolution?
Germany, with a population of over 80 million and a GDP of €4.5 trillion, is at a critical juncture in its energy transition. The country aims to become carbon neutral by 2045, five years ahead of the EU's 2050 goal. This transition, however, is fraught with technical, regulatory, and economic challenges.
The government is focusing on phasing out coal by 2038 and nuclear power by 2023, relying heavily on renewables alongside a transitional role for gas and hydrogen. Renewable energy expansion, hydrogen development, and infrastructure upgrades are central to this plan. However, intermittent renewable output drops, grid expansion difficulties, and energy security concerns pose significant challenges.
To secure electricity supply during low renewable generation periods, Germany plans large-scale construction of gas-fired power plants—up to 20 GW by 2030. The ambition is to convert many of these to hydrogen-ready plants later. However, state aid approval from the European Commission is pending, and progress on auctions for these plants has been delayed for years.
Hydrogen is a strategic focus, seen as a key solution for decarbonizing industry sectors such as steel, cement, and chemicals, and providing flexible backup power. Germany’s hydrogen strategy has been updated recently to support this development.
The automotive industry, a major energy consumer, plays a critical, though indirectly referenced, role in this ecosystem. The move toward electric vehicles (EVs), hydrogen fuel cell technology, and sustainable production methods aligns the automotive industry closely with climate policy and renewable energy expansion. Given Germany’s leadership in automotive manufacturing, the transition also presents opportunities and pressures to innovate and reduce sector emissions as part of national climate goals.
The German automotive sector is currently in crisis, with German car manufacturers struggling to adapt to the shift to electric vehicles and facing plummeting share prices. Reviving the automotive sector is key to restoring the German economy, according to Michael Field, chief equity strategist at Morningstar.
Policy needs to be collectively supportive of electric car adoption for the German auto industry to prosper. The conservative-leading Christian Democratic Union (CDU), currently leading in the polls and expected to enter a coalition with the Social Democratic SPD and the Greens, is expected to introduce a higher carbon price to incentivize producers and consumers to shift away from higher-emitting products.
However, the CDU is critical of the new European Corporate Sustainability Due Diligence Directive (CSDDD) and has made it a priority to dismantle the legislation. The far-right Alternative for Germany (AfD) has seen its share of the vote surge to more than 20%. This political landscape, marked by disagreements on how to tackle climate change, unbridgeable rifts, and a shift to the right, complicates the energy transition.
Investor demand for sustainably labelled funds is not slowing down in Germany, with SFDR funds reporting €743bn in net assets in Q3 2024. Institutional investors are concerned about the lack of policy certainty and are unwilling to take on the risks of significant private market exposures in the energy transition.
On the other hand, German pension funds are 20 years behind their peers in the Nordics, Netherlands, or the UK in investing in the energy transition. Family offices, led by a younger generation committed to tackling climate change, are identified as a force more ready to commit to the energy transition in Germany.
The CDU places its hopes on nuclear fusion, a technology that energy experts warn is not advanced enough to be scaled up in time to meet Germany's 2045 net zero targets. Germany is not well adapted to coping with change, as evidenced by its slow transition to net zero.
In conclusion, Germany's energy transition and the revival of the automotive sector are crucial for the country's economic future. Continued policy clarity, infrastructure investment, and technological innovation will determine the transition’s success going forward. The political landscape, however, presents significant challenges that need to be navigated for a successful and timely transition.
- In the ongoing energy transition, Germany seeks to invest heavily in hydrogen as a key solution for decarbonizing industry sectors and providing flexible backup power, a strategic focus outlined in the updated hydrogen strategy.
- Amid the rise of the far-right Alternative for Germany (AfD) and disagreements on climate change policy, the conservative-leading Christian Democratic Union (CDU) is expected to introduce a higher carbon price to incentivize the shift away from higher-emitting products, aligning with the push for electric vehicles and renewable energy expansion.
- Despite increasing investor demand for sustainably labelled funds in Germany, German pension funds are lagging behind their peers in the Nordics, Netherlands, or the UK in investing in the energy transition. On the other hand, family offices—led by a younger generation committed to tackling climate change—are more ready to commit to the energy transition in Germany.
