Energy price shock: What a resilient energy transition must achieve

Energy price shock

In response to attacks by the U.S. and Israel on Iran, Tehran reacts with counterattacks on several Gulf states and a blockade of the Strait of Hormuz. This reaction hits global energy supplies at one of their most sensitive chokepoints: tanker traffic halts, supply chains are disrupted, markets price in higher risks – and the prices for oil and gas rise noticeably. The inflationary risk along global supply chains is increasing.

The effects are immediately apparent at German petrol stations. Although oil or gas shortages are not expected in Germany, the rising energy costs will have a negative impact on our overall economy the longer the war continues. And this in a situation where Germany has already had to cope with some of the highest energy costs in the world for years.

Against this backdrop, the public debate is dominated by the simplified equation: ‘more renewables = less dependence = cheaper electricity’. It is true that renewable energies reduce import risks. However, it is wrong to assume that this will automatically solve the cost issue in the short term. Renewable energies require infrastructure, which is now incurring enormous costs in Germany. The price of electricity is increasingly driven by government-induced system costs – grid fees, levies, interventions to stabilise the grid and the complexity of the subsidy and regulatory framework. It is not individual price spikes on the commodity markets that make electricity permanently expensive and threaten our economic substance, but structural inefficiencies.

Absorb costs

Politicians have already responded – among other things with subsidised relief on grid fees and industrial electricity prices, which cushion the costs for consumers and industry. At the same time, structural reforms are intended to link the expansion of renewable energies more closely to grid expansion in order to reduce system costs and ultimately subsidies.

A sustainable energy policy must therefore not only reduce emissions, but also secure the economic viability of future generations. This requires innovation and competitiveness instead of deindustrialisation and permanent state financing, so that the energy transition can be achieved without compromising the competitiveness of the economy. A sustainable energy policy must therefore not only reduce emissions, but also secure the economic viability of future generations. This requires innovation and competitiveness instead of deindustrialisation and permanent state financing, so that the energy transition becomes more resilient to external price shocks.

Cheap fossil energy

At the same time, the resilience of the energy transition will also have to be measured by how well it withstands falling prices for fossil fuels. While this is certainly hard to imagine in the current situation, a post-war scenario could see additional capacities and normalized trade flows increase the global supply of oil and gas.

Despite years of sanctions, Iran has achieved remarkable export volumes; a relaxation or de facto normalization would further ease the market. Venezuela could also become a relevant supply factor again – notwithstanding all operational uncertainties. Meanwhile, the U.S. is increasingly evolving into a dominant global energy exporter.

In an environment of cheap fossil energy, a costly organized power system acts like a self-imposed competitive disadvantage for our industrial location. A resilient energy transition must therefore ensure that cumulative system costs and government-induced price components do not permanently exceed the levels of global fossil competitors, in order to prevent deindustrialization and a loss of public acceptance at the site.

Affordable under stress

The lesson is therefore that it is not enough to obtain molecules and electrons from other sources. The decisive factor is whether the overall system remains affordable under stress and competitive without stress. This requires more precise price signals that reward flexibility rather than restricting it; grid operation that reduces bottlenecks at source; and a support and regulation system that is less complex. In other words: less repair via the federal budget, more market.

This also includes honesty in communication. Suggesting to the public that electricity will automatically become cheaper simply by adding more renewable energy plants raises expectations that the real system cannot meet. Ultimately, this jeopardises acceptance – and thus the speed of the transformation itself.

This current price shock is yet another wake-up call for a generationally equitable realpolitik that prioritises market resilience. If this succeeds, the energy transition will become a competitive advantage – even when oil and gas are cheap again. If it fails, the opposite threatens to happen: emissions will not fall through innovation, but through a decline in industrial value creation. Nobody can want that.