New findings on fossil fuels and recent inflation in Germany
New Cambridge Econometrics analysis for the European Climate Foundation explores the role of energy prices in recent consumer price inflation in Germany, with a view to understanding the potential for faster energy transition measures to ease inflationary pressures and risks.
Cambridge Econometrics analysed energy system and inflation data from a variety of sources to understand the role of energy prices in German consumer price inflation.
The report also takes stock of Germany’s wider energy transition strategy, the German government’s response to the recent energy price increases and discusses how the future energy system can better protect consumers from sudden price hikes.
Key findings
Fossil fuels, including natural gas, are responsible for a large share of consumer price inflation in Germany in the past 12 months.
- Fossil fuels contributed around a third of annual inflation rate, which stands at over 8.5%
The increase in energy prices currently makes an average German household €735 worse off in 2022 compared to 2020, mostly due to higher gas prices.
- The lowest income households now spend around 50% more on electricity and gas than in 2020.
- It’s estimated that the share of energy costs in total household expenditure has risen to 9.1% in 2022 for the lowest income households, from 6.0% in 2020.
- In response to rising energy prices, the German government has intervened heavily in retail markets to support consumers, by cutting taxes and providing subsidies as well as direct cash transfers and price caps, at a cost of roughly 5% of GDP.
Renewables are now much cheaper than fossil fuel-based electricity production and the cost of renewables is forecasted to fall further.
- Recent IRENA figures show that, in Germany, the lifetime cost per MWh of onshore wind and solar PV is now 81% and 77% lower than the cost of natural gas-based electricity.
- A further expansion of renewables appears to be the right policy choice to:
- increase energy independence
- reduce the exposure of domestic consumers to global fossil fuel prices
- bring down electricity prices in the long run
- Accelerating the deployment of renewables is key as Germany plans to close the last remaining nuclear power plants next spring.
- This should be coupled with increased electrification of transport, industry and heating, which would further reduce household and business consumers’ exposure to volatile fossil fuel prices. In the long term, this will also limit the need for costly government intervention during times of high fossil fuel prices.