The energy and climate politics of the German coalition agreement: Having the cake and eating it, too?

In the energy sector, the coalition agreement fulfils the negotiators' promise not to list too many measures in detail that in the end may not be implemented. Still, the coalition partners touch on many topics, but often remain so vague that not only the feasibility but also the scope of the planned measures remains unclear. 

The coalition agreement indicates a shift away from Germany’s previous stance to be a leading example in climate protection efforts. Affordability and increasing efficiency in the existing system are taking centre stage, while system transformation is taking a back seat. Only time will tell how the new government will manage to achieve this in detail and, above all, how it will be financed. 

Commitment to climate targets under mitigated conditions

The coalition partners want to stick to the goal of climate neutrality by 2045 and support the EU Commission's plan to set set the greenhouse gas reduction target for 2040, which is still to be determined in accordance with the EU Climate Law, at 90% compared to the 1990 emissions level. However, they are willing to support the European 90% target only if (1) Germany’s 88% target by 2040, as outlined in the German Climate Change Act, is upheld (2) it becomes possible to recognise the necessary emission reductions not only in Germany, but also to an extent of up to 3% in other countries outside Europe and (3) "effective carbon leakage protection" is guaranteed to safeguard industrial value creation. If the new government succeeds in asserting this position in Brussels, it would enable companies to have their own emission reduction efforts abroad recognised or to utilise foreign emission reduction certificates.

Furthermore, the coalition partners expressly commit to the agreed phase-out schedule for lignite-fired power plants by 2038, but do not mention hard coal-fired power plants. They also point out that the timetable for decommissioning or transitioning coal-fired power plants into reserve should depend on the speed at which controllable gas-fired power plants can actually be constructed.

Energy cost reductions 

For "energy" customers, the coalition wants to achieve cost decreases by 5 cents/kWh. The coalition agreement mentions various measures here, primarily in the electricity sector, but also in the gas sector. Strictly speaking, heating costs also fall under the generic term "energy". The range of planned measures indicates that the savings of 5 ct./kWh may differ based on the consumer type and sector, or that an averaged assessment would be appropriate:

Electricity

The proposed measures in the electricity sector will impact electricity prices differently for households, commercial, and industrial customers due to varying taxes, levies, and charges for each group. For example, the planned reduction in electricity tax to the European minimum rate will primarily benefit smaller consumers, since a reduced rate of 0.05 ct/kWh applies to many large consumers already. Similarly, the announced substantial reduction for levies and grid charges is mainly directed at smaller consumers who do not benefit from the exemptions and reductions available to industry customers. 

Regarding other measures, the coalition agreement does not fully acknowledge that the government's legislative power is sometimes limited beyond what the text suggests:

• Legislators cannot directly reduce grid fees, as the German Federal Network Agency (BNetzA) sets them independently under EU law. This includes maintaining fee reductions for large energy-intensive consumers, which the new government also proposes.
• The proposed continuation and expansion of the electricity price compensation (Strompreiskompensation) for emissions trading-related indirect CO2 costs to additional companies from other sectors currently not covered, including data centres, will be possible only if a significant extension of the existing approval under state aid law can be obtained from the European Commission. 
• This also applies to the planned industrial electricity price (Industriestrompreis), which the coalition partners intend to introduce "as a special relief" for "energy-intensive companies that cannot otherwise be further relieved" "within the framework of state aid regulations".
• The coalition partners' declaration that the unified German electricity bidding zone will be retained also conceals the fact that Germany cannot decide on this issue alone as long as there is insufficient capacity for cross-border electricity trading. Instead, it must reach an agreement with its neighbouring states. If this fails, the decision lies with the European Commission. And even though the European transmission system operators (TSOs) have just given their recommendation to split the uniform German/Luxembourg bidding zone into five(!) bidding zones, this is all but a powerful statement in favour of a bidding zone split: The TSOs themselves acknowledge that their findings are based on outdated data and a relatively small overall economic benefit from the proposed split. They also emphasize the need for a more thorough assessment of the potential negative implications related to market liquidity, transaction costs, and balancing before a final decision is made.

Gas

The government's plans to facilitate the purchase of renewable electricity via direct lines and to lower the costs of grid connections for companies on their path to transformation may therefore be more attractive for businesses. Here too, the coalition agreement lacks specifics on these plans.

Instead, the government appears to be pinning its hopes on strengthening the gas industry. It explicitly favours long-term import contracts for "affordable" gas from various (unnamed) countries and additionally supports the resumption of "conventional" gas production in Germany, which is expected to exclude using the controversial fracking technology.

By 2030, the construction of gas-fired power plants with an overall capacity of 20 GW is to be incentivised within the framework of a revised power plant strategy that is "technology-neutral" and calls for their establishment at system-supportive locations, including existing power plant sites. In addition, a "market-based" capacity mechanism is to be created, consisting of a "system-supportive mix of technologies, including power plants and generation facilities (e.g. bioenergy and combined heat and power (CHP)), storage facilities, and flexibility measures". The new government can build on the preparatory work of the previous government and, like its predecessor, will be faced with the requirements of European state aid law and the internal electricity market rules, which led the previous government to propose different segments of power plant capacity: one to ensure the security of supply and one to achieve decarbonisation (with the help of H2-ready power plants). Although the coalition agreement does not address these aspects, it includes two other propositions that are currently the focus of discussion:

• In future, reserve power plants, including the new gas-fired power plants, could be "utilised" to lower electricity prices. Whether this involves allowing plant operators to sell their electricity freely on the market (which they currently may not) or a centralised call-off in the event of electricity price spikes remains open. In any case, such an approach is risky, as it could distort the market signal and hinder climate-friendly investments.
• Furthermore, gas-fired power plants shall be permitted to capture carbon for further use or permanent storage (CCUS). CCUS has the potential to improve the emissions balance of power plants, but it is costly due to the necessary CO2 transport infrastructure required to connect to future storage facilities off the German coast. Also, such investments could potentially impede the development of more climate-friendly alternatives. The previous government also intended to allow CCUS for H2-ready gas-fired power plants – but only if a transition to hydrogen failed due to a delayed connection to the hydrogen core network.

Finally, the government plans to abolish the so-called gas storage levy (Gasspeicherumlage), which obliges gas consumers to bear the costs of the government-initiated storage of natural gas into German gas storage facilities to achieve the statutory minimum filling levels for crisis prevention. In addition, the new government wants to ensure that gas storage facilities are filled more cost-effectively through (unspecified) "new instruments". Current indications of a relaxation of the EU rules for minimum fill levels of gas storages at the EU level may provide the new government with the flexibility to introduce its "new instruments".

Hydrogen

The new government reaffirms its commitment to ramping-up the hydrogen economy. It is committed to expanding the hydrogen core network beyond current plannings to also encompass industrial regions in southern and eastern Germany. Additionally, it endorses the development of a hydrogen distribution network. However, at EUR 25/kWh/h/a the recently proposed grid fees for the future hydrogen core network are already significantly higher than those for the natural gas network - an early expansion would probably increase them even further.

The coalition partners have proposed that hydrogen of all colours should be utilised during the ramp-up phase. It is likely that they are referring to funding opportunities for hydrogen products, which are typically restricted to renewable ("green") and low-emission hydrogen (excluding "brown" and "grey"). The use and transport of hydrogen are influenced by its production method. 

Finally, the new government is planning to "scale back" excessive regulation in the hydrogen sector, but without providing further details. Whether, for example, the requirements for renewable hydrogen and its derivatives (so-called RFNBOs), which are often perceived as too demanding, can be relaxed, again depends on the EU. As part of its "Omnibus Initiative", the EU is currently relaxing or postponing various regulations that are perceived as burdensome by industry (see our blog post). According to the latest information, the European Commission intends to publish a more specific omnibus paper for the energy sector at the end of May 2025. 

Renewable energies

The federal government plans to implement the latest EU Renewable Energy Directive reform (RED III), well aware that the implementation deadline for certain amendments had already passed last year. The directive includes, among other things, provisions to simplify the planning and approval processes of renewable energy and grid expansion projects. Furthermore, the current funding system under the German Renewable Energy Act (EEG), whose state aid clearance expires in 2026, will require modifications to continue beyond that year. Further simplifications are to be introduced for climate and environmental protection measures by downgrading the necessity of compensatory measures under nature conservation law and applying the population-based approach nationwide assessing prohibitions under species protection law.

Irrespective of the technology used, the coalition partners are planning to incentivise the expansion of large renewable power plants and of storage facilities at grid-supportive locations. Besides, the coalition agreement mentions the following technology-specific points:

• Operators of existing PV systems should be incentivised to provide grid- and system-supportive feed-in. Dual uses, such as agri-PV, should be further facilitated.
• Most of the specific planned measures relate to onshore wind energy 
  • The binding area targets for the federal states in the Wind Energy Area Requirements Act (Windenergieflächenbedarfsgesetz) which aims at designating a sufficiently large and usable area for the construction of wind turbines to achieve the wind capacity targets in the EEG is to be retained for the year 2027, but to be evaluated and potentially revised for the year 2032.
  • The new government wants to examine whether the synchronisation of wind power and grid expansion can be improved, e.g. by designating temporary congestion zones.
  • The so-called reference yield model (Referenzertragsmodell), which provides higher subsidies for less windy locations, is to be reviewed, which could jeopardise projects, particularly in the less windy southern regions of Germany.
  • Finally, a cap for lease payments to landowners is to be introduced for onshore wind facilities subsidized under the EEG.
• In the area of offshore wind energy, the coalition partners want to address the competition for wind between neighbouring wind turbines (so-called wake effect). The spatial framework with neighbouring states is to be optimised, and the Offshore Wind Energy Act (WindSeeG) is to allow the dual connection of wind farms to both the power grid and an electrolyser, as well as a hydrogen pipeline.

Heat 

The increasingly contentious and subjective debate regarding the reform of the Building Energy Act (GEG) in late 2023, often referred to as the "Heating Act" (see our blog post), was a significant factor contributing to the substantial loss of support for the traffic light coalition. Now, the new government intends to repeal the "Heating Act" – while at the same time reforming and simplifying the Building Energy Act. In the future, the achievable CO2 reduction of a heating solution shall become the key control metric, and the German classification of building classes is not to be more ambitious than the European requirements.

The new government intends to revive the stalled reform of the rules for heating supply agreements and for district heating, taking into account the interests of both consumers and district heating providers but with the overarching aim to create secure investment conditions. Feeding technically unavoidable waste heat into district heating networks should be made easier but it is unclear whether this might involve introducing a right of third-party access to heating grids.

Carbon Capture and Utilisation (CCUS)

As additional instruments to achieve climate neutrality, the coalition intends to significantly improve the framework conditions for carbon capture and storage (CCS) and carbon capture and utilisation (CCU) technologies. In terms of content, the plans of the traffic light coalition are essentially to be continued, particularly with regard to enabling CO₂ storage in the exclusive economic zone and the continental shelf. Furthermore, the new government intends to introduce a federal state liberalisation clause, allowing the states to store CO₂ onshore. In addition, the construction of CCS/CCU facilities and pipelines is now to be legally classified as being of overriding public interest. A deviation from the plans of the previous government also consists in the fact that the use of CCS/CCU will no longer be limited to hard-to-avoid emissions from the industrial sector but will also be permitted for gas-fired power plants. This represents a departure from the restriction to process-related emissions, such as those that increasingly occur in steel and cement production.

Power grids

The expansion of the necessary electricity grids is also to be further accelerated, whereby an "inventory" is also to be carried out to determine requirements. It therefore seems quite conceivable that the expansion plans for additional energy transmission lines will be scaled back in the long term, with the network development plans initially being developed under the responsibility of the TSOs and the Federal Network Agency. New high-voltage direct current transmission grids to be planned (the so-called "electricity highways") may in future be realised as overhead lines to save costs, as was the case until 2015. It is to be hoped that generous transitional periods will be granted so as not to jeopardise projects already in the planning stage and to rule out costly duplicate planning, as has occurred with the introduction of underground cable priority in 2015 and which has led to dramatic delays.

The role of the state 

At various points in the coalition agreement, hints emerge as to how the coalition partners envision the role of the state in the energy sector, including through

• the reduction of the state shareholdings acquired during the gas crisis to a "strategic" stake - this relates in particular to the shareholdings in the energy companies Uniper and SEFE (formerly: Gazprom Germania), 
• considering strategic investments in the energy sector, specifically also in grid operators. This is likely to relate to grid operators on TSO level, for which increased state involvement has been repeatedly discussed in recent years, 
• the commitment to the funding instruments of the climate protection agreements (see also our blog post) for the decarbonisation of industry, above all through the use of hydrogen or CCUS and the H2Global hydrogen import programme (see our blog post),
• the establishment of an investment fund for energy infrastructure, which is intended to mobilise equity and debt capital for investments through a combination of public guarantees and private capital,
• the coverage of the exploration risk for geothermal projects and the complete coverage of damage claims, although it is not clear whether the state would step in here.

Next steps and conclusion

When the new government is to be sworn in on 6 May 2025 Katherina Reiche from the Christian Democratic Union is going to become the new minster for the economy and energy. Ms Reiche has an extensive background in the energy sector having had roles in both industry associations as well as in the private sector.

As a next step, the coalition agreement announces the commissioning of monitoring on the expected electricity demand, the status of supply security, grid expansion, the expansion of renewable energies, digitalisation and the hydrogen ramp-up. The results of the monitoring shall then serve as a basis for further work. However, even such a monitoring paper will not be able to resolve the uncertainties that arise simply because the coalition agreement leaves many variables open or places them beyond the reliable control of policymakers (such as the future of the German electricity bidding zone or the grid fee system). At least, the new federal government's room for manoeuvre could increase if the simplifications currently being discussed at EU level, for example as part of the Omnibus Initiative, take effect.

Overall, the coalition agreement remains disturbingly silent when it comes to ensuring the financial viability of its proposed measures in the energy sector, the most obvious measure being the future import of “cheaper” natural gas, looser emission accounting methods and otherwise hoping for efficiency pay-offs. How grid fees could possibly sink in spite of the massive infrastructure investment needs ahead also needs further explanation. Not to mention that maintaining the existing gas infrastructure next to the new (and bigger than planned) hydrogen and CO2-transport infrastructure will also come at cost. If the coalition agreement did not include the limitation that all measures cited are subject to financial feasibility, it could be interpreted as the future government hoping for having the cake and eating it, too.