Henrik Follmann, chief executive officer of Follmann & Co., said he wants to fully focus on making printing inks and wallpaper coatings in the northern German city of Minden. To his dismay, he now finds himself building a 3.5 million-euro ($4.8 million) power plant.
“My hand is being forced,” Follmann said in an interview, adding that the plant will reign in spiraling power costs. “The money used for that won’t be available for the expansion of what is our real business.”
Follmann is one of Germany’s three million small and medium-sized companies, accounting for about half of gross domestic product, that are being squeezed by Chancellor Angela Merkel’s 550 billion-euro switch to renewable energy. The so-called Mittelstand is paying a disproportionate amount to finance the project as bigger companies like BASF SE (BAS) and Lanxess AG (LXS) get exemptions where they generate their own electricity.
The health of the Mittelstand is not only important for Germany. The country is key to sustaining the recovery in the rest of the 18-nation euro area, its biggest trading partner, after the region’s longest-ever recession. While German business confidence in January rose to the highest level in more than two years, high energy costs add to rising taxes that are already higher than in other European countries.
Until now, companies that generate their own electricity have been exempt from the fees grid operators charge to fund Germany’s green-energy switch. The fee that companies without a power plant have to pay rose 18 percent on Jan. 1, and is now triple the amount it was four years ago.
Follmann paid 480,000 euros last year for the renewable-energy fee, the equivalent of 10 full-time salaries, or almost a fifth of his total energy bill. That helped drive his decision to build his own power plant.
Adding to the plight of the Mittelstand, the government’s latest proposal may force these companies to pay the renewable energy surcharge regardless of whether they operate a power plant, with the rule applying to all stations built after Aug. 1. 2014.
The government’s proposal to curtail the exemption in August may spark a flurry of construction before the deadline. Plants coming into operation afterward may pay 90 percent of the fee, or 70 percent if it is run on renewables or is a combined heat and power plant, according the economy ministry.
New legislation, to be drafted by April, still has to pass parliamentary votes in June and July. Uncertainty on what will eventually make it into the law is causing planning headaches.
“The big problem is that I’m depending on the German government not changing the rules,” said Follmann, who is the third generation of his family to run the manufacturer that generated 180 million euros in 2013 sales. “We have our permit. I think we are good.”
Last year 16 percent of German companies said they already built their own power sources, up from 10 percent in 2012, according to a DIHK chambers of commerce and industry survey. Another 23 percent are in the process or have plans to follow. About half of the Mittelstand say energy and raw-material cost is their top risk, according to another DIHK survey.
Suppliers of power plants and energy equipment are taking note. Siemens AG (SIE) merged its small and large gas turbine operations and carved out a separate energy sales unit in October, saying utilities are no longer the only customers. Stephan Reimelt, General Electric Co.’s head of energy operations in Germany, said in an interview that the energy switch is having a “fundamental impact” on the Mittelstand.
The Fukushima reactor accident in March 2011 in Japan prompted Merkel’s decision to phase out nuclear power. Under the current renewable-energy law called EEG, the government guarantees above-market prices for renewable generators and gives them precedence over traditional sources when supplying the grid.
That has spawned a splurge of wind and photovoltaic investments and turned Germany into the biggest solar technology market in 2009, 2010 and 2012.
Even some of Merkel’s allies in her Christian Democrat Union party are calling on her to help the Mittelstand.
“Reform is urgent,” Dieter Bischoff, a vice president of the CDU’s Mittelstand Business Association, said in an interview. “It will be a millstone around our necks that will drown us” if energy costs continue to rise as they have.
Since Jan. 1, consumers and companies that are not exempt pay 6.24 euro cents a kilowatt-hour in EEG surcharges, up from 5.28 euro cents in 2013. That takes this year’s renewable-energy subsidy to about 23.6 billion euros, according to Germany’s power grid operators.
Large companies are in a better position than most of the Mittelstand to escape energy costs by shifting production outside Germany, said Jakob Flechtner, a co-author of a DIHK energy report. Smaller firms resort to cutting costs or are forced into making bigger investments to become more energy efficient.
“It’s questionable whether Germany can remain competitive as an industrial location with its comparably expensive electricity,” Flechtner said in an interview. “As soon as measures are exhausted to cushion the higher power costs, industrial companies will have to think about shifting or limiting production.”
In a twist of the subsidy-driven system, some owners of renewable-energy power plants are actually making, not just saving, money from their stations. They get paid a subsidy to feed their electricity into the grid instead of routing it directly to their manufacturing facilities.
Wood-coatings maker Alfred Clouth Lackfabrik GmbH in Offenbach near Frankfurt and electrical-connector producer Harting Technologiegruppe in Espelkamp in northern Germany have built stations powered by renewable sources to become more climate friendly, and in doing so, will benefit from subsidies.
Harting, with 484 million euros in annual sales, would like to generate all its own electricity by 2020, up from about 12 percent now, should the political environment be supportive, board member Philip Harting said in an interview. The company may even erect its own wind turbine, after taking the interests of the region’s inhabitants into consideration, he said.
“For us as a company, it’s important to have continuity of electricity supply as well as some certainty on costs for planning purposes,” Harting said. “We are still thinking about adopting technologies that offer more energy saving possibilities. We have very specific goals.”
In response to the jump in cost, the government plans to cut aid, especially for on-shore wind parks, and has put an upper limit on generation goals. Germany wants green power to supply 40 percent to 45 percent of its needs by 2025, and 55 percent to 60 percent ten years later.
Renewables contributed 23 percent of Germany’s total power output last year, according to AG Energiebilanzen e.V., an association of energy lobbies and economic research institutes.
“It’s a cost-benefit calculation,” said Alfred Clouth, CEO of the family-owned company that bears his name. “With the building of the block heat and power plant we are able to save costs and get a positive environmental effect at the same time.”
Meanwhile Follmann, who along with his father owns the company he manages, has started talking to builders and has placed orders for machines. The power plant should be ready in November and cover two-thirds of his electricity needs.
“We’ve been waiting,” Follmann said. “It’s been like looking into a crystal ball. It’s a lot of money for something that isn’t our core business. It should be a utility company investing and not me.”
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