ICIS Power Perspective: Germany’s election – difficult coalition talks ahead

The German federal election resulted in Angela Merkel’s Conservative CDU/CSU winning the election and building the biggest parliamentary group in the next Bundestag.

This can be seen as Merkel winning her fourth term as chancellor. As the Social Democrats (SPD) have already ruled out a continuation of the Grand coalition, the only democratic coalition option for CDU/CSU remains with a cooperation with the Liberals (FDP) and the Greens – a so-called “Jamaica coalition”.

Main points

• The Conservative CDU/CSU dropped 8.6 percentage points compared to the 2013 elections to result in the worst result in decades with 32.9 percent

• The Social Democrats reached the worst post-war election result (20.5 percent) and have decided not continue the Grand coalition but to lead the opposition

• Given these results, all other coalition options (CDU/Greens, SPD/Left/Greens, SPD/FDP/Greens) don’t have a majority

• The third-largest political faction (12.6 percent) will be the right-wing AfD, denying climate change and aiming to stop the 2050 climate action plan and the Energiewende

• The Liberals (FDP) re-entered the Parliament after four years of absence with 10.7 percent followed by the Left (9.2 percent) and Greens (8.9 percent)

The preliminary results:

Analysis

• Given the election campaigns, the coalition talks between CDU, FDP and Greens will be difficult and potentially lengthy

Overall reflection

• We think that climate and energy will be one of the central discussion points for the coalition negotiations

• However, we would expect that the Liberals and the Conservatives can move towards the Greens – as the Green membership will eventually have to vote on the coalition treaty

• Other dominant topics for the coalition talks besides energy are immigration, inner security, asylum politics, taxes and EU politics

• The three parties are under pressure to avoid snap elections, as it could strengthen the right-wing AfD further

• Angela Merkel highlighted to aim for a coalition agreement by around Christmas

Party positions

Conservatives

• Merkel mentioned in the run-up to the elections that a coal phase-out is not off the table in the long-run in case the social transition in the mining regions is ensured

• Generally committed to Energiewende – use more market-based solutions and less federal regulation

• Further, she re-affirmed that Germany’s domestic 2020 targets of reducing emissions by 40 percent compared to 1990 levels would be reached

• ETS (emissions trading system): against a price floor of any kind, have asked for more industry protection

Liberals

• Prefer market solutions in the first place and will not like the idea of putting regulation on a specific fuel – to the contrary, the FDP aims to cut subsidies for renewables

• Generally against bans on any technology

• Against a capacity mechanisms – in favour of energy-only market design

• ETS: against a price floor of any kind, expand the ETS into further sectors, prevent market interventions

Greens

• Climate and energy topics are at the heart of the Green party – consequently, we expect that the Green Party will likely use these themes as red lines for the upcoming coalition talks

• It was also re-affirmed by the Green candidates yesterday after the elections that the absence of a coal phase-out would be a deal breaker

• The Greens demanded before the election the closure of the 20 dirtiest power plants and a complete coal phase-out by 2030

• 100% renewables share in electricity by 2030 and 100% share in all sectors by 2050

• ETS: domestic floor price, discontinuation of free allocation and cancellation of all surplus allowances in the market

Potential concessions on climate and energy

• We think that the coal phase-out will be a red line for the Greens, if no concession is reached on that topic, they will likely rather crash the coalition talks and allow snap elections than to betray the core part of their campaign

• For the Liberals, energy and climate is not the central point – we expect that they will be able to give ground and can move steps towards the Greens on this questions

• However, as markets are a centre-pillar of the Liberal party position, we expect that a compromise will not be easy to reach and that a carbon floor price if off the table

• The Conservatives have to be pretty flexible in the negotiations if they want to stay in charge and enable a coalition – we also expect climate and energy not playing the central role for them

• Coal phase-out: a long-term planned coal phase-out could be in the coalition agreement (beyond 2030) with immediate closures of some of the most emitting power generation assets (however, not the 20 demanded by the Greens) – this would likely also be acceptable for the Conservatives, as Angela Merkel has announced that the domestic 2020 targets will be reached and many observers see the shutdown of coal/lignite plants as the only option to bridge the current gap

• Carbon floor price: we do not expect to see a carbon price floor (regional or EU-wide) in Germany, even with the Greens in a coalition as the Greens will put much more emphasis on the coal phase-out and the Liberals will be strict on market-based measures – however, we do believe that the Greens will use a floor price as bate in the negotiations

Market impact

• If the Greens will be part of the new government, the decarbonisation of the German power (coal phase-out) sector is very likely to put into law in the next 4 years. The overall resulting wholesale power price impact would be ambiguous, with coal plant closures supporting prices and renewables expansion pressuring them, but a quicker Energiewende could support spot price volatility

• No immediate market impact as the coalition negotiations will take some time and currently no clear direction is visible Philipp.ruf@icis.com and Marcus.ferdinand@icis.com

This analysis was originally published as part of the new ICIS power analytics product – Power Perspective. For more info and to get a free trial set up, please contact justin.banrey@icis.com