Germany's infrastructure: Who pays for green energy shift?

Chemical company BASF is one of Germany's industrial powerhouses. Operating worldwide, it has around 230 production sites and almost 112,000 employees. A third of them work at its German headquarters in Ludwigshafen, an hour's drive south of Frankfurt am Main. "It is the largest chemical plant in the world," said CEO Martin Brudermüller.

But it's also a plant in trouble. "In 2023, we made money everywhere else in the world, but in Ludwigshafen, we lost €1.5 billion ($1.6 billion)," Brudermüller reported at an event organized by the Market Economy Foundation in Berlin in March. Rising energy costs and climate change regulations have been the main reasons for the company's difficulties.

The demand for electricity in manufacturing is expected to increase dramatically, but it's unclear where the energy will come from. "We have to shut down our highly efficient gas-fired power plants in Ludwigshafen," said Brudermüller, adding that they must find alternatives. "If I have to, I'll even build wind turbines in the North Sea."

The company has already invested in a wind farm off the Dutch coast. But in January, German grid operators doubled their prices for the use of the power lines. It now costs more to transmit electricity to Ludwigshafen than it does to produce it in the North Sea.

Energy transition costing billions

Power grid operators need the money to expand their energy infrastructure. To date, around 14,000 kilometers (8,699 miles) of new high-voltage lines have been planned, with thousands more kilometers to be added in the foreseeable future. But billions in state subsidies are no longer available after the Federal Constitutional Court declared the government's budget management to be partially unconstitutional.

Now, the federal government has to cut costs, and consumers and companies are being asked to pay more. Brudermüller isn't the only one who is skeptical. Together with the CEOs of Deutsche Telekom and the energy giant E.on, he has written a letter to the government sounding the alarm, demanding that the restructuring costs for the energy transition be financed differently. Especially since grid fees are likely to rise even higher.

For decades, Germany's international competitiveness has been built on a very strong and reliable infrastructure, particularly in the areas of energy, transportation and telecommunications. 

"Infrastructure is a matter of survival," said Brudermüller. If roads, bridges and waterways are in a state of disrepair; if the national rail system remains unreliable, if the expansion of power lines and fiber-optic expansion doesn't go ahead and if digitalization of public administration keeps lagging behind, "then no more companies will come to Germany," he predicted.

German infrastructure in a state of disrepair

The federal government is well aware of this criticism. Volker Wissing, the digital affairs and transport minister, sees a considerable need for infrastructure improvements in Germany. First and foremost, he sees the need to upgrade the country's transportation systems, above all the railroads and highways. Some 4,500 highway bridges alone are in such a state of disrepair that many of them can only be pulled down and rebuilt.

On 40 rail lines, Deutsche Bahn's tracks and overhead lines are so worn out that they will need to be completely rebuilt, totaling around 4,000 kilometers in length. Subsidies from the federal government amount to around €27 billion through 2027. But it's already clear that this will not be enough.

Federal, state and local governments have nowhere near the resources to address the backlog of renovation and modernization projects, especially since the so-called debt brake enshrined in the German constitution stipulates that the state may only spend as much money as it earns.

Budget negotiations for 2025 are set to be controversial. The center-left Social Democrats (SPD) and the Greens would like to suspend the country's debt brake again, as was recently done during the crisis caused by the COVID pandemic and the war in Ukraine.

Their neoliberal coalition partner, the Free Democrats (FDP), are opposed and have demanded that all ministries start making cuts from 2025. Even without major spending on infrastructure, there will be a foreseeable gap of €25 to €30 billion in the budget.

In search of private investors

But the FDP's Wissing remains committed to the debt brake. He believes if necessary investments can't be covered by the budget, then other options are needed.

"We need to mobilize private capital," he said. To do this, he wants to set up an infrastructure fund worth billions, in which resources could be collected and pooled for several years.

While Wissing envisages that money to be used primarily for transport infrastructure, FDP leader and Federal Finance Minister Christian Lindner can see employing the same strategy for other infrastructure as well. In a recent interview with public ARD television, Lindner pointed out that insurance companies, for example, manage huge sums of money for their customers.

"It would be well worth the effort to mobilize this money for the expansion of electricity grids, for example, or for the expansion of hydrogen grids," he said.

But how should such a fund work? After all, private investors will only invest in the long term if they can expect a satisfactory return. Will there be tolls for the autobahns, will there be tolls to cross a bridge? The Transport Ministry has not yet provided any answers to such specific questions.

The SPD and the Greens would prefer to reform the debt brake to allow infrastructure investment to be financed by borrowing. This idea has gained support from a wide range of economists. There is even growing sympathy for a more flexible interpretation of the debt brake among conservative regional politicians and the business community, where strict fiscal discipline is normally championed.

Michael Hüther, head of the German Economic Institute, which works closely with employers, has proposed setting up a special €500 billion fund for infrastructure and transformation on top of the federal budget. His proposal is modeled on the special fund for the German armed forces, for which the state borrowed €100 billion enshrining it in the constitution with the required two-thirds majority. 

This article was originally written in German.

This article incorrectly said that 4,000 kilometers was equivalent to 8,699 miles. We have corrected the error on April 24, 2024.

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