* Switch to green energy will be top domestic priority
* Exit of Free Democrats raises hopes of renewables sector
* Industry want subsidy cuts to bring down energy prices
By Madeline Chambers and Vera Eckert
BERLIN/FRANKFURT, Sept 26 Angela Merkel's best
hope of saving her bold energy revolution may lie in a coalition
with the centre-left Social Democrats (SPD), who could agree to
modest cuts to costly incentives for green power which are,
paradoxically, driving up energy prices.
The German chancellor's experiment to wean Europe's biggest
economy off nuclear and fossil fuels and push it into renewables
is at risk because generous subsidies have proved so popular
with investors in green power that the country is straining
under the cost.
While a boom in renewables has boosted supply and led to a
fall in wholesale power prices, the incentives, or feed-in
tariffs, are paid for by end users via surcharges added to their
electricity bills. These charges mean German consumers pay the
second highest power prices in Europe.
Powerful, export-oriented German industry has sounded the
alarm and warned that its competitive edge is at risk. Some
firms have even threatened to shift production abroad if the
government does not act to reduce energy prices.
Merkel has long said that a reform of renewable subsidies,
will be a top priority for a third term but it is a delicate
balancing act to reduce feed-in tariffs to help industry, while
ensuring investment in renewables does not grind to a halt.
Merkel's 'green revolution' is widely seen as her biggest
domestic policy and will be a crucial issue in any coalition
talks which are expected to be long and difficult.
"The energy shift is a legacy issue for Angela Merkel. She
has staked a considerable (amount) on it," said Miranda
Schreurs, director of Berlin's Environmental Policy Research
Centre and a member of a panel which advises the government.
After emerging victorious in an election on Sunday, Merkel
is searching for a coalition partner. On energy, the SPD looks
like a better fit than the alternative, the environmentalist
Greens, and her outgoing partner, the Free Democrats (FDP).
"The FDP's electoral loss could be a win for the energy
shift," said Schreurs.
The FDP, which failed to win enough votes to remain in
parliament, has run the economy ministry for the past four
years, acting as a brake on Merkel's "energy shift".
The FDP only reluctantly agreed to her decision to
accelerate the nuclear phase-out in 2011 after Japan's Fukushima
disaster and, as a champion of the free market, wanted to scrap
the subsidy system altogether.
The SPD, by contrast, introduced incentives for renewables
more than a decade ago when it ruled in coalition with the
Greens even though the SPD has deep roots in the coal industry.
The Greens, a less likely partner for Merkel's
conservatives, are against cutting renewables subsidies and have
fewer qualms than the SPD about making industry pay.
Regardless of which partner Merkel ends up with, the
departure of the FDP may also make it easier for Berlin to back
EU plans to withhold some CO2 trading permits. Brussels hopes
this idea, known as 'backloading', will save the Emissions
Trading Scheme, the EU's main tool to fight climate change.
Time is of the essence.
German industry, worried about competition from U.S. rivals
enjoying cheaper energy because of the shale gas boom there, is
threatening to move abroad if action is not taken fast.
Nearly two thirds of 2,000 companies surveyed by the
Chambers of Industry and Commerce, or DIHK, said affordable
energy was their top concern and called for radical reforms to
The industry group BDI said on Monday reducing energy costs
would be crucial for the survival of energy-intensive industrial
companies, which account for nearly 1 million jobs.
The surcharge for feed-in tariffs, which pay producers a
guaranteed price for green energy they provide to the grid for
up to 20 years, has risen sharply in the last few years.
It shot up 47 percent this year alone - and is expected to
increase further as more Germans install solar panels and invest
in wind turbines. This, say Merkel and the SPD, is unsustainable
for both households and industry.
"The conservatives and SPD agree ... that the
competitiveness of German industry is the most important thing,"
said Famke Krumbmuller of the Eurasia Group consultancy. "With
this in mind, they will address feed-in-tariffs."
There are some exemptions from the surcharge, to help the
steel, glass and building materials sectors, which are likely to
be reduced overall, but under pressure from the industry lobby,
the most important ones will stay, said Krumbmuller.
The trick will be not to reduce the incentives so much that
investment in renewables stops. The government wants renewables
to make up 35 percent of German power generation by 2020 and 80
percent by 2050 - from about 24 percent now.
The offshore wind industry, in particular, is clamouring for
continued support as its expansion has proven more costly than
The wind power industry association BWE said on Monday that
if support for green energy is cut back too much, areas of
Germany which have flourished due to new green investment would
suffer. The sector accounts for 120,000 long-term jobs.
Schreurs said that feed-in tariff reform could include
shortening the period of guaranteed payback to 10 instead of 20
years and a reduction in the price paid for photovoltaics or
electricity derived from onshore wind.
To help ensure a reliable supply of power, there could also
be a shift to what experts refer to as a 'capacity market
system'. This would ensure future supply by paying generators
for their readiness to supply capacity rather than for the