German government to spend record €29.5 billion on electricity subsidies in 2026

The German federal government will spend €29.5 billion next year to reduce electricity prices for businesses and private households. This amount represents a record level.

This figure was determined according to calculations made by the German Economic Institute (IW) for the newspaper Handelsblatt. IW energy expert Andreas Fischer stated in an interview that very high subsidies are currently being paid to keep electricity prices under control.

“However, in the long term, this is a very expensive solution and does not solve the root of the problem,” Fischer said.

According to the IW executive, a more efficient expansion of electricity grids and renewable energies could help lower electricity prices.

Fischer is not alone in his criticism. A report published in early December by the expert commission for monitoring the energy transition states that affordable energy for households and businesses is extremely important to prevent industrial relocation and ensure broad acceptance of the energy transition.

However, according to the commission’s report, measures that reduce system costs and thus increase the efficiency of the energy transition should take priority over aid provided from state funds.

The Expert Commission on the Monitoring of the Energy Transition is an independent body appointed by the German government that evaluates the progress of the energy transition annually. The commission is chaired by energy economist Andreas Löschel, who is based in Bochum.

The €29.5 billion amount calculated by the IW includes the loss of revenue resulting from the German government’s reduction in electricity tax (€3.9 billion), funds allocated for the industrial electricity price that will be effective from 2026 (€1.5 billion), and the planned subsidy for transmission grid fees amounting to €6.5 billion.

In addition, €3 billion has been allocated for electricity price compensation. This tool has been in use since 2014.

Approximately 340 companies benefit from this compensation. These companies receive compensation because electricity producers pass on the costs of purchasing emission permits, which they need to operate gas or coal-fired power plants, to their customers.

Large industrial electricity consumers receive a portion of these costs back. The federal government plans to expand the scope of beneficiaries and increase compensation.

In addition, there is a financial requirement of €14.6 billion estimated by transmission system operators for the promotion of renewable energies under the Renewable Energy Sources Act (EEG).

However, the exact amount cannot be predicted with certainty. This amount depends largely on the state of wholesale electricity prices.

The total of €29.5 billion for 2026 is significantly higher than the amounts in previous years. According to the IW, public funds to finance the electricity system reached only €4.13 billion in 2020.

This amount consisted of €3.3 billion for exemptions from the electricity tax and €830 million for electricity price compensation. This analysis does not take into account the financial expenditures for emergency measures during the 2022 and 2023 energy price crisis.

Politicians want to help lower electricity prices with these payments of billions of euros. Electricity prices in Germany have been at very high levels for years compared to other European countries.

This situation applies both to the electricity prices paid by private households, businesses, trade, and service companies, and to industrial electricity prices.

There are various reasons for the high electricity prices. The expansion of electricity grids has become a major cost factor. Grid operators have already invested enormous amounts and will have to spend hundreds of billions of euros in the coming years to make them suitable for the energy transition. For electricity consumers, this is reflected in increasing grid fees.

In addition, tens of billions of euros are spent annually for the expansion of renewable energy. For this reason, one of the measures taken in the past to reduce prices was the complete removal of the surcharge under the Renewable Energy Sources Act (EEG) in mid-2022.

In 2021, an average household still had to pay an EEG surcharge of 6.5 cents per kilowatt-hour. For an average household with a consumption of 3,500 kilowatt-hours, this meant an EEG cost of €227.50. Today, these funds are provided from the Climate and Transformation Fund (KTF).

The current federal government has decided to take additional aid measures. These include the industrial electricity price, which will come into effect at the beginning of the year. However, the aid measures fall far below the expectations of companies. Companies will be able to reach the promised price level of 5 cents per kilowatt-hour for only a portion of the electricity they consume.

The federal government coalition also failed to fulfill its promise to reduce the electricity tax for all consumer groups to the minimum level allowed by European laws. Instead, it insisted on the reduction for industry, agriculture, and forestry, which had essentially already been decided by the previous government.

Last summer, Federal Finance Minister Lars Klingbeil (SPD) announced that there was not enough money for more comprehensive aid measures.

However, the government fulfilled its promised €6.5 billion subsidy to reduce electricity transmission grid fees.

Despite the record amount, the government is still unable to fulfill its promises. In this context, the warnings of experts to reduce the overall costs of the system instead of spending billions of euros for price reductions are becoming even more important.

Federal Economy Minister Katherina Reiche (CDU) is trying to take this point into account. In recent months, she has repeatedly emphasized that she wants to make the energy transition more efficient.

In mid-September, Reiche presented ten key measures designed to help reduce the costs of the overall system.

The measures include a change in the promotion of renewable energies and a greater focus on grid expansion in the expansion of renewable energies.