German energy ministry advisers warn about overreliance on carbon CfDs

Overreliance on carbon Contracts for Difference to drive industrial decarbonization risks creating a subsidy-dependent culture, according to a Feb. 8 report by the economic advisory council to Germany’s energy ministry, or BMWK.

Berlin plans to use carbon or climate CfDs to bridge the gap between market returns and the cost of energy transition projects.

“Climate CfDs could lead to a significant overfunding and hamper competition and the development of new technologies,” Klaus Schmidt, the head of the council, said.

He has recommended only limited use of the instruments, focused on pilot projects and issued through competitive tenders.

The state would fund the gas between market prices, specifically EU carbon allowances, and required project costs for 15 years in industries where decarbonization technologies such as hydrogen are not yet profitable with a focus on steel, cement, and ammonia.

Analysts at S&P Global forecast EUAs to average around Eur78/mt in 2023, down 4% on the 2022 average price, which was up 52% from 2021.

Decarbonization projects in hard-to-abate sectors like steel would require a higher carbon price to become viable, hence the need to bridge the gap.

The report also recommends defining new markets for green products through tradable guarantees of origin, with green steel used as an example.

According to media reports, energy minister Robert Habeck wants to see a double-digit billion euro sum funding a carbon CfD system.

The coalition government is also working on an updated national hydrogen strategy, which first proposed climate CfDs, to reflect new climate targets.

— Andreas Franke