Can Berlin deliver by Christmas?

We follow up Friday’s preview with a discussion of the results of Sunday’s elections in Germany and the role the Green party could play in shaping the country’s energy policy. Will the fiscally prudent FDP be able to strike a deal with the Greens over financing a green shift, and could a new government be in place by Christmas?

Guest: 

• Tobias Federico, Managing Director, Energy Brainpool

Transcript

0:01

How do you mitigate your risk's? Forecasting services cover risks from hours ahead to years ahead. We welcome you to head your market exposure with our diverse forecasting portfolio.

Richard Sverrisson, Editor-in-Chief, Montel: 0:15

Hello listeners and welcome to the Montel Weekly podcast, bring You Energy Matters in an informal setting. In today's special, we discuss the results of Sunday's general election in Germany and what it could mean for the country's energy policy where we see a traffic light or a Jamaica Coalition. And what will the influence of the Greens be in government? Joining me, Richard Sverrisson, to discuss these matters is our old friend, Tobias Federico, owner and managing director of analysis firm Energy Brainpool. A warm welcome to you, Tobias.

Tobias Federico, Managing Director, Energy Brainpool: 0:45

Thank you, Richard. It's always a pleasure talk to you and to our audience.

Richard Sverrisson, Editor-in-Chief, Montel: 0:49

Great to have you on board again. Let's so cut to the quick here Tobias and talk about the election on Sunday. What are your first reactions? Were you surprised by the narrow SBD victory, especially after where they were polling, earlier this year?

Tobias Federico, Managing Director, Energy Brainpool: 1:02

With the polling this year, there was a big change in the last two to three months that the SPD would be one of the first groups. I was not really surprised. I was rather more surprised that it was so narrow between SPD and CDU. That was the surprise. The second surprise was really that there are only two, let's say two and a half options left for coalitions. And that's a very interesting situation we are having in Germany right now.

Richard Sverrisson, Editor-in-Chief, Montel: 1:27

Is German politics becoming more fragmented for example, in the Netherlands? And what's the implications for energy policy? Could it become less stable or what's your view here?

Tobias Federico, Managing Director, Energy Brainpool: 1:37

I don't think that policy will become less stable in Germany. It becomes much more fragmented than it used to be. Years ago. We have much more parties in the Parliament. Germany was used to three parties. It was C-D-U-S-P-D at ftp, and that's it for years. But since 30 years, it has changed quite a lot. It's interesting that the two major they call themselves people, parties for part. It seems that they're not covering all of the topics which are really necessary for the population, and there is a certain need in the population to focus stronger on certain topics. That's why they have been electing other parties rather than the big two ones. But I think despite of the first three party coalition, we are going to see most likely. It won't be really unstable.

Richard Sverrisson, Editor-in-Chief, Montel: 2:25

You talked about two and a half sort of scenarios there. Talk us through those and which do you think are most likely?

Tobias Federico, Managing Director, Energy Brainpool: 2:32

Usually the tra tradition is that the party with the most votes is starting to have the coalition talks with the other partner. Partners. Right now it's two of them. But interestingly they are starting now that also the second biggest party, the CDU, because it's only one percentage point or 1.5 percentage point behind the SBD is also quite keen to become the leading party in this whole process. So that's a bit new. So then we have the second ones or the third and fourth ones, which is the the green party, which is really likely they're going to be in the Parliament and the FDP. The others are not really important. So what's interesting I think, is that it's very likely that the two smaller parties are in the new government. And what's interesting to see right now that usually the biggest party starts to initiate the coalition discussion. But right now, the two smaller parties. Have started their own discussions to figure out what are our joint topics in all these different political fields. And then they start to choose the bigger one. And that's really interesting.

Richard Sverrisson, Editor-in-Chief, Montel: 3:44

So the, there's two smaller ones. You mean the FDP, the liberals and the Greens. Yeah. And the greens.

Tobias Federico, Managing Director, Energy Brainpool: 3:49

So therefore we have two options. One option is that either they choose the SBD, which will become then the Traffic Light Coalition. So red. Green and yellow, and which I think is most likely. But they also have the option to go to the Jamaica flag, which is then the black party, which is the CDU, green and yellow, but still there is. A third option, which I always call a half option, right from the numbers. We could continue the great coalition between CDU and SPD just from the numbers. Nobody really wants it, but I think it's an interesting political pressure instrument from the bigger party to say, Hey, listen guys, if you two smaller parties are really going into a direction, which I really don't want to, I still could go with the bigger other one, which is then the CDU. It's very unlikely, but it's still possible.

Richard Sverrisson, Editor-in-Chief, Montel: 4:41

The two main options, they involve the Greens and the FTP. And you said they're already starting to chat together and negotiate. I think that's very interesting. But what kind of power do you think the Greens will exert and what are their negotiating points?

Tobias Federico, Managing Director, Energy Brainpool: 4:55

They have definitely different topics, but I think that the biggest topic and the most important one, which won't be the most crucial one, I think. In the sense of a potential finding potential partners is climate change and fighting climate change. I think all four parties do agree that they have to do something. But the way how to do it, that's a bit different. So climate change is a topic and then also to reinforce renewable energies. It's clear for all parties they have to do something. We have to have higher growth rates in fluctuating renewables in Germany. But how to do that exactly. Do we want to increase? Taxes and have a new feed in tariff, or do we want to find another way? And the Greens really wanted to go much more into this. We want to plan something, we want to support financially something, and then it'll grow. And the liberals, the FDP says, no, we need to have market instruments. Which will incentivize investments into that direction. So that's a crucial point, but it's not really a point where I do think that it'll be very critical that they will find a solution in that.

Richard Sverrisson, Editor-in-Chief, Montel: 6:09

That's interesting.'cause on the one side. The FDP, the liberals are a party of small governments of fiscal prudence of very little government spending, whereas the greens, want to roll out massive investments. So how can you merge those two elements, those different strands?

Tobias Federico, Managing Director, Energy Brainpool: 6:24

I think you can do both. Thinking about it yesterday, I thought there could be a certain way because if you. Support a special financial tax reduction for investments in renewable energy. That's the plan of the liberals. You can incentivize a huge growth rate in fluctuating renewables. We had this in Germany beforehand. There was this special tax reduction for eastern Germany in the nineties until 2000, and in that period there was a huge investment into onshore wind farms in eastern Germany. This was just due to tax reduction. And there is a certain way because then you have massive investments with a certain state guarantee, which is not a feat in tariff, which is rather on the tax side rather than on the energy side. The second thing which might support all this huge investment is the potential growing inflation rate in the Euro area where investments need to have. A much quicker cashflow breakthrough within a few years rather than a long-term cash out. Right now. The feeding tariffs or at least as they have been in the last 10 years was a 20 year payoff period. And after, I think after 14 years have been break, even the high inflation rate, you have an issue there, so you need a much shorter break even period. But the tax deduction could do that, and that's nothing really, which is going to hurt. The greens.

Richard Sverrisson, Editor-in-Chief, Montel: 7:53

That's a very interesting scenario there, Tobias. But who do you think would get the energy and climate ministry? Are the greens the front runners for that, even in a Jamaica or a traffic light coalition?

Tobias Federico, Managing Director, Energy Brainpool: 8:04

Absolutely. So I think, that will be covered by somebody from the green party. I don't know who in detail, but that's covered by the greens. There, there might be a fight of the finance ministry who's going to get that, but I think if it's something with green and yellow, then it might be for the liberals. There was a certain tradition in Germany that deliberates, or the smaller party always did get the foreign ministry. Now it becomes interesting who of those smaller parties going to get that and the FDP. So deliberates have been very good in that and I think they covered that position for almost two third of the whole existence of the Federal Republic of Germany. So therefore, it's quite likely it goes into that direction. Lots of the Ministry of Economy, which then is. We're really covering that because it's also climate is the Ministry of Climate or is the Ministry of Economy, that's still a question. So right now it's joined into one ministry. It's a ministry of economy and energy issues. But will they separate that? Will there be a separate climate ministry? That's an interesting discussion, and it's quite likely that we might go also into that direction that we have a ministry for economy and we have a ministry for climate change or against climate change

Richard Sverrisson, Editor-in-Chief, Montel: 9:17

if then the greens were to assume that ministry or have the minister for climate change and energy. What can you expect there? Can you expect them to roll out renewables in a much larger manner and faster as well? Would that be one aspect? Absolutely.

Tobias Federico, Managing Director, Energy Brainpool: 9:32

I think rolling out and having a higher growth rate of renewable energies is definitely a need to cover our climate goals. And even the climate golds we have today cannot be covered with the current growth rates. So we need much more there. That's clear, and I think that's clear between all the three or four parties. Again, only the instruments, how to achieve that goal. It's there, there might be a discussion about what's another topic is to reduce CO2 emissions, which is then will be the coal exit.

Richard Sverrisson, Editor-in-Chief, Montel: 10:03

Yep.

Tobias Federico, Managing Director, Energy Brainpool: 10:03

Right now we do have the plan, which is the last coal power plan will exiting in phase out in 2038. In the official plan, it's interesting that they wanted to review this path in 2025, whether they might exit in 2035. 35 was already on the table. The greens wanted to be exiting the coal in 2030. And that might be an issue for the ftp and I think they will bargain and meet somewhere in the middle, which will be then a coal exit in 2032. July,

Richard Sverrisson, Editor-in-Chief, Montel: 10:38

2032. Yep. Yep.

Tobias Federico, Managing Director, Energy Brainpool: 10:39

It may, maybe in the middle of July or July. Yeah. And then the, have the 15th of July or the 1st of July. No joking. But in the end is that they have to bargain there, but it's somehow clear when you look into the coal exit in Germany. Although they say it was a bit climate driven, it was much more policy driven because it from the emissions, it doesn't really make sense that you face out high efficient. Coal power plants and let the lignite power plants with much higher CO2 emissions run much longer. So looking into CO2 emissions, it would be vice versa that we will shut down lignite power plants and still run on hot coal power plants.

Richard Sverrisson, Editor-in-Chief, Montel: 11:20

And this would be policy driven, this would be driven from Berlin. In terms of just legislation forcing shutdowns,

Tobias Federico, Managing Director, Energy Brainpool: 11:26

yes, but the only issue is that you still have the federalism there and the lender and you will have a huge structural change, especially in those areas where we'll still have lignite production and lignite mining. And that was the main goal, why they really have a late night phase out because they wanted to have the structure change in that area. Discussing this right now at the very high energy prices means that the financial compensation will be much higher.

Richard Sverrisson, Editor-in-Chief, Montel: 11:54

Of course. And that's gonna hit the finance ministry. To be as, on, on the FDP side, wouldn't they like just the market dynamics to detect the coal exit? And the way we're looking at the moment, maybe there won't be that many online by, by 2030, looking at the price of carbon and the price of coal.

Tobias Federico, Managing Director, Energy Brainpool: 12:11

Yeah, but there's still the price of natural gas.

Richard Sverrisson, Editor-in-Chief, Montel: 12:14

Yeah. Yeah, of course.

Tobias Federico, Managing Director, Energy Brainpool: 12:15

That's, which right now is an issue. Yeah,

Richard Sverrisson, Editor-in-Chief, Montel: 12:17

for sure.

Tobias Federico, Managing Director, Energy Brainpool: 12:18

But that's interesting because the Greens never said that market mechanisms. Are really bad. They only say that the steering element is missing. But right now we have that in the market. The price levels, especially of the CO2 certificates are so high that they change the merit order or have the potential to change the merit order, which is really interesting. And that's a political instrument. And it's a very interesting political instrument because once you reduce the amount of CO2 certificates, either on the EU ETS trading part. Or you do that on the national fuel emission certificates. We have that in Germany since this year. And the prices are fixed given by the government. If you are going to increase the price levels on the national part and maybe on the European level going to reduce the certificates, you will have much higher CO2 certificate prices in total. What's interesting is there that. The primary emitter of those certificates is still the government of Germany. So they do have a positive cash flow from higher EA slash CO2 certificate prices. Which is an income which they could spend maybe into the investment and it's not a tax.

Richard Sverrisson, Editor-in-Chief, Montel: 13:33

I think that's, there could be some common ground there between the greens and the FDP then.

Tobias Federico, Managing Director, Energy Brainpool: 13:37

Absolutely. And I think this is, that's why I think climate and the discussion for the collision with climate is important, but it's not so crucial. I think they will agree and the way they're going to agree is why are emitting certificates in any ways. Maybe we will also talk about the new green certificates. What's really green? What does green mean? So certificates a very interesting way to steer the energy production into the right way. At least what they think is the right way. And secondly to, gain some cashflow from the governmental side.

Richard Sverrisson, Editor-in-Chief, Montel: 14:11

Absolutely. And then the, that brings in the whole green certificates debate as well. Maybe on, on the EU level. But that's, we'll maybe save that for another discussion Tobis, but you mentioned gas and I also want to return to the high prices we're currently seeing. But what about Nord Stream two? So any, if the Greens come into government, what will they do about Nord Stream two? Can they, will they stop it?

Tobias Federico, Managing Director, Energy Brainpool: 14:34

I think they would like to stop it for two main reason. One reason is of course, we are still speaking about the fossil fuel, although the C two emissions of this fossil fuel is compared to the others, the lowest one. And secondly, it's a direct connection between Germany and Russia. And the greens are not really Russia. Friendly. So they on their own would like to stop that, but still we have a coalition and they have to negotiate that. It's interesting how the new government, how, let's say Russia friendly, the new government would be, can they stop it? I don't think so. We are very found down the way the construction is finished, they are still missing some licenses from the German part. Which I think it's not a national license. It's rather a. A lender license and even though the, we also had election in that area where North is really connecting and manik from the SPD who was reelected in that area is very north wind, too friendly. So North two will start production quite soon and can't be stopped.

Richard Sverrisson, Editor-in-Chief, Montel: 15:41

When you say quite soon, can I can

Tobias Federico, Managing Director, Energy Brainpool: 15:43

I think

Richard Sverrisson, Editor-in-Chief, Montel: 15:43

pin you down a little bit of it?

Tobias Federico, Managing Director, Energy Brainpool: 15:45

That's the million dollar question right now. Of course, if I, of course, if I know it, I could help the whole energy market within Europe and I, it just can give you a timeframe and then it's great. But whether I'm right or not, I will see then on someone next year. But I think we are talking about month. And not weeks and not half a year. So it might start in winter, which is great because the winter is crucial for gas in Germany. But I, I don't know.

Richard Sverrisson, Editor-in-Chief, Montel: 16:10

Yeah, I think that's absolutely the million dollar question. If we had a crystal ball, that obviously would help matters enormously in terms of the current high price situation. But if I stick with the high prices at the moment, to be honest, what's the discussion on the political level about these enormous price swings north in term for power and for gas? Unprecedented. How sustainable is it? Is there a risk of political intervention that the new government may decide to step in and do something about this?

Tobias Federico, Managing Director, Energy Brainpool: 16:36

We don't have such a short term reaction as in the uk, so therefore the government really doesn't need to step in as they did in the UK market with certain private companies for crucial productions. I think the government is not really stepping in and they will not step in this winter period unless we will really have a critical situation, which I don't expect because we still have quite high storage volume in Europe. I think Germany is the second or first country with the highest working gas storage volume in Europe. We still can compensate even though the storages are only 60% full, one and a half month of total consumption in wintertime. If there is really a shutdown of gas production from Russia, which I don't expect, so from the physical side, I don't see a critical situation from the price level side. There might be one, as we will see, maybe a few higher price spikes depending on the weather, but I think the government will only interfere if the end user is affected by that in a strong way due to the fact that most of the end users on the gas side and on the power side. The electricity will be bought by the utilities in a yearly or two yearly average price levels. Of course, price levels might be higher for the last trenches and power price levels from the energy side will increase, but we will still have the. Total cost of energy slash gas for the end user, especially on the electricity side. We still have the EEG fee, which might be reduced. And on the gas side you might see that on the end user side a little bit. It's a bit more crucial on the industrial side. Especially because you have a much higher energy price percentage in your total energy cost compared to grid costs and all the other costs. And especially for those industry who have not procured yet for next year. There are a few and there are on under certain pressure on the financial side, but it's not on that level that I expect the new government that they. Must interfere or the old government, depending on how long the coalition talks will take.

Richard Sverrisson, Editor-in-Chief, Montel: 18:42

But that sort of brings on the next question, I think. Tobias, how soon do you think a government could be formed? How long will the negotiations last and when will the new company be in place?

Tobias Federico, Managing Director, Energy Brainpool: 18:51

It depends on on, on two things. One is that first the two smaller parties must agree on their coalition behavior and energy is not the most critical part. I think foreign policy becomes interesting there. And also the tax and the spending levels of the government. So these might be the points, how long to discuss and to set up the borderlines. And then they have to talk with the bigger ones. And interestingly the two smaller ones parties together have a higher percentage than the SPD or the CDU. Meaning that they recover more ministries than the bigger ones. And then it becomes interesting. They say they want to start quickly, and we are in October. I do not expect, honestly, that we will end before December or it will. Would be a quite interesting miracle. Could be four or five months, also. Half a year. Quite possible. And there's still the joke that Angela Merkel will still make her New Year's speech for us because he's still enforced then, and I think it's quite likely. So we will see Angela Merkel again on television screen,

Richard Sverrisson, Editor-in-Chief, Montel: 19:57

but by the new Year, certainly over the coming months. That brings me to my final question then, to Beza who will represent Germany at the COP 26 in the uk. Will there be some representation from the Greens or,

Tobias Federico, Managing Director, Energy Brainpool: 20:08

yes, I think so. I would say it will be someone from the Greens, from the Energy Climate Ministry and from the foreign ministry.

Richard Sverrisson, Editor-in-Chief, Montel: 20:16

Okay.

Tobias Federico, Managing Director, Energy Brainpool: 20:16

Those two be, because I think climate change is not only a national question it's a worldwide question and the shifting around and the geopolitical importance of. Climate change is so big that the foreign minister will also cover that. And that might be the FTP

Richard Sverrisson, Editor-in-Chief, Montel: 20:34

and maybe even Merkel as well. Maybe depends on how these negotiations go. I, it could be her sort of swan song her, a final entrance. Yeah. This is certainly that something we'll be covering very closely in Montel News. But, tobias, thanks. Thanks for a fascinating discussion on all the different elements in place. I think it's quite a big puzzle, but there are certain strands, trends emerging there. So thanks again Tobias for being a guest on the Montel Weekly podcast special.

Tobias Federico, Managing Director, Energy Brainpool: 20:57

It's always a pleasure, Richard.

Richard Sverrisson, Editor-in-Chief, Montel: 20:59

So listeners, you can now follow the podcast on our own Twitter accounts. Aply named the Montel Weekly podcast. Please direct message. Any suggestions, questions, or let us know if you think you have a good idea for a guest on the show, you can also send us an email to podcast@montenews.com. Lastly, remember to keep up to date with all that's happening in energy markets on Montel News. You can subscribe on Apple Podcasts and Spotify or wherever you get your podcasts from. Thank you and goodbye.