Balancing Immediate Relief and Structural Reform in the Electricity Market: Navigating the Intersection of Industrial Policy and Electricity Market Design in Germany

Electricity prices and markets are currently at the heart of debates about industrial competitiveness in Germany. Especially the energy intensive industry insistantly calls for immediate relief from high energy prices that constitute a disadvantage in global markets. At a time of rising geopolitical and economic competition, subsidising industrial electricity prices as a means of industrial policy is discussed as a key factor for industrial competitiveness. At the same time, the electricity market is undergoing a profound transition of its own. While recent geopolitical shocks, notably the Russian invasion of Ukraine, have caused significant price increases in the last years, the energy transition has progressed to the point where renewable energy now accounts for nearly 60 percent of the annual generation. Thus, renewable sources are no longer a niche component but a fundamental driver of the system, exerting structural influence on price formation and generation patterns. Consequently, two concurrent and interdependent discourses are unfolding and the policy debate is divided between short-term relief measures, such as electricity tax reductions and grid fee subsidies, and long-term structural reforms of the electricity market design aimed at reducing overall system costs. In this paper, we investigate synergies and trade-offs between industrial policy through energy prices and efficient long term electricity market design. Our aim is to identify policy options to reconcile the two competing objectives. To this end, the paper develops a set of criteria by merging principles of green industrial policy and electricity market economics. The criteria enable a structural analysis about the interdependencies between short term price reliefs and the feasibility of longterm, structural market reforms in a liberalised market. The paper follows a four-part analytical framework. First, the underlying objectives behind the two discourses are analysed and the core industrial policy goals are contrasted with fundamental economic requirements of the market. Then the current market design is analysed and the special market role of the energy intensive industry is discussed. Based on a literature review on both green industrial policy and economic electricity market design the set of criteria is developed. Lastly the current german proposal of a guaranteed industrial electricity price of 5 cent per KWh is discussed and evaluated using the developed criteria.