EXPLAINED: Will Germany set a gas price cap and how would it work?

What’s happening?

Over the last few months, Germany’s federal traffic light coalition has been busily putting together relief packages totalling €100 billion to help residents deal with rising inflation and rocketing energy bills.

So far, the money has gone into everything from cheap public transport—such as the nationwide €9 ticket and its planned successor—to one-off energy relief payments.

But that may not be enough this winter. 

Over the past year, the price of electricity has doubled. Meanwhile, the price of gas—which supplies around a fifth of the country’s electricity and heats around half of German households—has nearly quintupled. 

Politicians outside the federal government, from the opposition conservatives federally to Berlin’s Social Democrat Mayor Franziska Giffey, have been calling for a cap on either the price of gas specifically or the price of energy overall.

Last week, reports emerged that Finance Minister Christian Lindner had set up a working group looking at a possible cap. Chancellor Olaf Scholz has since confirmed that a commission had started work and would come back with proposals soon.

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What might a cap look like?

There’s many different forms gas price cap—or Gaspreisdeckel—could take.

Some politicians, like Berlin Mayor Franziska Giffey, have even called for an Energiepreisdeckel—or a cap on the price of all energy.

However, most political discussions so far in both the governing coalition and opposition involve whether and how to cap the price of gas—not whether to cap the cost of energy as a whole.

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Some countries, like Spain and Portugal, set a maximum price that producers—which generate the actual gas or electricity—can charge to suppliers. These are the firms that then deliver the electricity or gas to consumers, whether they’re private households or companies.

The other way of capping the price is to set a maximum amount that suppliers can charge consumers. The risk with either model is that electricity companies could end up paying more in costs than what they get back from consumers, making their business model unviable.

That’s why the German government is looking at setting a cap on what consumers would pay per kilowatt hour of consumption. Consumers pay everything up to that cap. If and when the market price of gas goes above the set cap, the government would step in and pay whatever the difference is between the capped amount the market price.

For example, German price comparison website Check24 estimates that a model German household is using 20,000 kWh a year at a price of 21.9 cents per kilowatt hour. That would cost that family €4371 annually now compared to €1316 a year ago.

If the federal government capped that price at 19 cents per kilowatt hour, for example—the family in question would pay 19 cents to their provider while the government would pay the 2.9 cent difference.

Will people still be encouraged to save energy if gas prices are capped?

The conservative Christian Social Union (CSU), which sits together in the Bundestag with the Christian Democrats (CDU), wants a gas price cap that still encourages consumers to do their part to save energy.

Their proposal is to cap 75 percent of what consumers use, designating that amount a “basic” level of consumption that consumers can’t be expected to reduce.

It would then be up to consumers to pay the remaining 25 percent at market price. The CSU argues that allowing the last 25 percent to fluctuate would incentivise people to save energy.

Under a plan like that, a household which cuts out a quarter of their use would, theoretically, pay nothing above the capped level.

The SPD-led government of Mecklenburg-West Pomerania and national Green co-leader Ricarda Lang advocate a similar model, but want 80 percent of what households use to be declared a basic consumption requirement. That means that share would be capped.

What’s not clear yet is precisely what amount the government would declare as a basic level of consumption. Experts are currently working on proposals for an amount based on what German households have used over the past few years.

READ ALSO: EXPLAINED: When should I turn on my heating in Germany this year?

How will it be paid for?

This is one of the major questions before the government right now.

Reducing the price of gas by one cent per kilowatt hour is likely to cost around €2.5 billion, but there could be fluctuations based on market prices.

The German Institute for Economic Research’s Marcel Fratzscher told broadcaster RTL and ntv that the government was looking at a price tag of anywhere between €30 billion and €50 billion to have a real impact on household budgets.

Both CSU Leader Markus Söder and Berlin Mayor Franziska Giffey have called for the federal debt brake, which limits the amount the government can borrow, to be suspended to pay for the gas price cap.

Many in the SPD and Greens, which form part of the Scholz government, agree.

But the liberal Free Democrats, led by Finance Minister Christian Lindner, are opposed so far. However, Lindner has recently acknowledged that he is largely alone in rebuffing the plans. 

A possible tax on windfall profits by energy companies is also being floated to pay for any possible gas price cap.

Although the debt brake is enshrined in the German constitution, it can be suspended in emergency situations—such as in March 2020, when the Bundestag suspended it to pass its first Covid-19 rescue package.