"Five to Twelve - The H2 Plain Talk: 'Hydrogen Stagnation Due to Budget Freeze?'"

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December 07, 2023

Due to the ruling of the Federal Constitutional Court on November 15, 2023, regarding the Climate and Transformation Fund and the subsequent budget freeze imposed by the Federal Ministry of Finance, many energy transition projects planned for the coming years have been deprived of their financial foundation. The range of impacts is broad.

Planned hydrogen initiatives in the industry are also significantly affected. At stake is not only Germany's economic location but also the decarbonization of this sector.

Which specific projects are affected, and what impacts on the ramp-up of the hydrogen economy can be expected?

What are the legal and political solutions being discussed?

Background:

In its decision on 15 November 2023, following a standard control application by the CDU/CSU, the Federal Constitutional Court declared the subsequent reallocation of unused credit authorizations to combat the effects of the Corona pandemic into the 'Climate and Transformation Fund' (KTF) unconstitutional, as it is incompatible with the debt brake anchored in the Basic Law. In reaction to the judgment, Federal Finance Minister Christian Lindner imposed a budget freeze a week later, instructing all federal ministries to no longer enter into any further payment obligations that extend beyond the current year. This step also affects planned expenditures from the 'Economic Stabilization Fund' (WSF), which has so far funded, among other things, gas and electricity price brakes and the subsidy for transmission network charges. Both the KTF and the WSF are special funds, partly funded by (subsequently) reallocated credit authorizations. Unlike the special fund for the Bundeswehr, for which an amendment to the Basic Law was decided by the Bundestag in the summer of 2022, stating that it is not applicable to the debt brake, this constitutional anchoring was not undertaken for the KTF and WSF. This approach to budget planning was deemed fundamentally unconstitutional by the Federal Constitutional Court in its judgment concerning the KTF. As a result, the subsequently reallocated credit authorizations in the KTF were annulled. The share of (unconstitutional) credit authorizations in the KTF amounts to 57.6 billion euros of 211.8 billion euros total volume until 2027. In the WSF, the credit authorizations even amount to 200 billion euros until 2024. Of the approximately 60 billion euros in credit authorizations in the KTF, projects of the Federal Ministry for Economic Affairs and Climate Action (BMWK) for the transformation of industry and the promotion of the hydrogen ramp-up were to be financed. As of today, the federal government now has around 60 billion euros less available for the necessary transformation of the industry and the promotion of the hydrogen ramp-up. However, already committed payment obligations from the KTF, such as the takeover of the EEG surcharge and building energy financing, remain in place.

Which planned expenditures for the ramp-up of the hydrogen economy are now in question? And what effects do the current developments have on the hydrogen project landscape?"

About 4 billion euros for the ramp-up of hydrogen in the next year are at risk.

According to the original economic plan for the KTF, a total of 3.7 billion euros were earmarked for 2024 for measures to ramp up the hydrogen economy and decarbonize the industry. The financing for these measures is currently unclear. This includes:

The so-called climate protection contracts ("carbon contracts for differences") for start-up financing of the transformation of energy-intensive industries. The first bidding round was already planned for the end of this year, but the EU's state aid approval is still pending. Two more bidding rounds were to follow next year. In each round, about 15 projects for the conversion to climate-friendly industrial plants based on hydrogen were to be funded with approximately 15 million euros each for a period of 15 years according to the differential cost principle. During the preliminary procedure conducted by the BMWK in the summer, more than 300 companies expressed interest in the funding instrument.
The Hydrogen IPCEI ("important projects of common European interest"). Only a fraction of the total 62 German hydrogen IPCEIs have already received a funding notice and thus the necessary funding from the federal and state governments. For 45 companies, the future of their projects is now uncertain. 25 of these 45 projects have already been granted a premature start of measures, triggering investments in technology procurement measures. A binding funding commitment is only expected after approval by the EU Commission. The hydrogen IPCEIs are intended to financially secure initial projects that will lay the groundwork for the market ramp-up of green hydrogen. The 62 selected major projects cover areas such as production, infrastructure, industrial applications, and transport.
The upcoming auction rounds for hydrogen imports of the German trading platform H2Global. On behalf of this foundation, the company Hintco concludes government-financed differential contracts with future producers of green hydrogen and hydrogen derivatives abroad and with industrial consumers of these products domestically. However, the deliveries from the first auction round for the import of green ammonia and methanol, as well as sustainable aviation fuel, are financed. H2Global already has a grant notice for 900 million euros from the federal government. The quantities of hydrogen derivatives to be imported from the first auction round will be available to German consumers in the next two years. In principle, the double auction mechanism of the German trading platform H2Global is also to be applied at EU level for future imports of the European Hydrogen Bank (EHB). In May of this year, EU Commissioner for Energy, Kadri Simpson, selected the H2Global Foundation to assist the EHB in conducting joint European auctions for hydrogen imports. A workshop took place at the end of September with the participation of the EU Commissioner, members from 17 European member states, H2Global, the EHB, and industry representatives.
The funding planned under the yet-to-be-decided Power Plant Strategy (KWS) for the construction of hydrogen and H2-ready gas power plants with a capacity of up to 25 GW by 2030. Originally, the BMWK wanted to start the first tender rounds for the hydrogen power plants, which are to take over the residual load of the coal power plants to be shut down from 2030, already at the end of this year. The EEG contains a corresponding legal basis for the tender of a total of 4.4 GW of installed capacity of "EE hybrid power plants" by 2028 and 4.4 GW of capacity of "hydrogen sprinter power plants". However, the BMWK is still waiting for the EU's state aid approval for the planned tenders. The EU Commission had raised competition law concerns about the planned funding system, as the federal government planned compensation for holding capacity instead of actual performance, which - according to the Commission - would be equivalent to introducing a capacity market "through the back door". At the beginning of August, the BMWK agreed on key points of the power plant strategy with the Commission. Further steps were to be a public consultation of the KWS and a formal state aid procedure at the EU Commission. At the end of November 2023, the BMWK now admitted that the timetable for the KWS is further delayed due to the unclear budget situation of the federal government. The advancement of the strategy will be "temporarily shelved to clarify relevant issues at the KTF", according to ministry circles. Apparently, the KTF was also intended as a source of financing for the planned funding. However, since the KWS has not yet been adopted, the planned funding is not yet effective in the budget. The BMWK recently estimated the total funding needed for the construction of the planned backup power plant capacities at a total of 60 billion euros, which the coalition partners FDP and SPD criticized as too expensive.

Assessment: What are the consequences for the hydrogen ramp-up?

To briefly answer the question of the direct effects of the budget gap on the hydrogen ramp-up, it becomes apparent that the problems of the often unclear financing and the associated planning and investment uncertainty for companies overlap greatly with the problem of missing state aid approvals from Brussels. In the case of the climate protection contracts for energy-intensive industry, as well as most of the hydrogen IPCEI and the power plant tenders planned in the KWS, the required EU state aid procedures have so far been the reason for the delays in measures. However, when it comes to the causes of these state aid delays, a distinction must be made between the lack of capacity to process applications and substantive legal reservations in the approval, as is the case with the German KWS by the Commission. With regard to the KWS, it is not yet clear whether the financing or the compatibility with EU law represents the bigger hurdle. The consequence of a (timely) failure of the KWS would be nothing less than the endangerment of the early phase-out of coal power by 2030 and the associated timely transformation of the power system towards climate neutrality.

The unclear financing of the measures is thus anything but trivial. The challenge for the government is not only to plan the federal budget for next year anew and in accordance with the constitution but also to agree on majority-capable solutions – both within the traffic light coalition between the Green Party, SPD, and FDP, as well as possibly within the Bundestag and Bundesrat, which would be necessary in the case of a reform of the debt brake or a constitutional anchoring of a new special fund.

The now missing financing of the measures to promote the hydrogen ramp-up means a serious additional uncertainty for the hydrogen-focused industry and energy sector. This is evident in the hydrogen IPCEI. Many of the companies directly involved in the projects have already made advance payments for their investments, as the state aid approval of the IPCEI funding is usually only a matter of time, and many players expected the funding notices by next year at the latest. The now missing financing of the funding amounts increases the planning uncertainty and further delays investment decisions for companies that have not yet made advance payments. Similarly unsettling and further delaying investment decisions of the energy-intensive industry are the hitherto absence of tenders for the climate protection contracts, which are mainly aimed at energy-intensive industries. The delaying or absence of these necessary investments naturally also has effects on upstream or downstream value chains of the still young hydrogen industry. The hydrogen imports from the auctions of the H2Global platform are financially secured in the first round, giving German consumers planning security in this case. However, it is clear that without secured state start-up financing for the described measures, the industry cannot master the transformation, and projects for the initial ignition of the hydrogen market ramp-up and thus the green hydrogen economy as a whole cannot get started. In addition, the measures discussed here only refer to the hydrogen project landscape. The extent of the current budgetary disruption affects many other measures of the energy transition, which – should they fall through due to a lack of financing – could unfold as yet unforeseeable interactions on the ramp-up of the hydrogen economy, for example, if measures to keep electricity prices low no longer work.

Report and assessment by Benita Stalmann.

Reasons for the Ruling from Karlsruhe:

The Federal Constitutional Court ruled in its decision on 15.11.23 that the Second Supplementary Budget Act 2021 is incompatible with the debt brake enshrined in the Basic Law - regulated in Article 109(3), Article 110(2), and Article 115(2) of the Basic Law - and is therefore null and void. The CDU/CSU parliamentary group had filed an application for norm control due to the retrospective amendment of the Budget Act and the Federal Budget Plan 2021 by the Second Supplementary Budget Act 2021. This law was intended to transfer the credit authorization, planned in the federal budget for 2021 as a response to the Corona pandemic but not exhausted in the fiscal year 2021, of a total of 60 billion euros, to the "Climate and Transformation Fund" (KTF; then still titled "Energy and Climate Fund" (EKF)). This special fund was to be available for measures in this area in the coming years. The transfer was made retrospectively in February 2022 for the completed fiscal year 2021.

The court particularly criticized:

The legislator did not sufficiently demonstrate the connection between the identified emergency situation and the crisis management measures taken. The climate crisis cannot be considered an emergency situation, as it has been known for many years and is therefore not a sudden event.
The temporal decoupling of the declaration of an emergency situation according to Article 115(2) Sentence 6 of the Basic Law from the actual use of credit authorizations contradicts the constitutional mandates of annuality. The de facto unlimited further use of emergency-related credit authorizations in subsequent fiscal years without counting towards the "debt brake" while simultaneously being counted as "debt" in the fiscal year 2021 is therefore impermissible.
The adoption of the Second Supplementary Budget Act 2021 after the end of the fiscal year 2021 violates the budgetary principle of priority from Article 110(2) Sentence 1 of the Basic Law.

Defining Climate Crisis as an Emergency Situation - What Solutions are Being Discussed?

The turmoil and uncertainty that the ruling has caused in the "world of energy transition" is high and stabilization is imperative:

To realize the mentioned projects, as well as the other pillars of the energy transition affected by the ruling, society depends on sufficient funding for the transition.

The discussed solution proposals range from declaring a climate emergency to reforming the debt brake. If the federal government were to declare a climate emergency, this could allow for the suspension of the debt brake. This path is proposed by economist Claudia Kemfert from the German Institute for Economic Research (DIW). She argues that the climate crisis, like the Corona crisis, is an emergency situation and, accordingly, a suspension of the debt brake would be justified for the climate emergency. Apart from the factual situation, there is also a legal understanding of climate change as an increasingly clear and now acute danger. On the one hand, climate change leads to global warming due to the accumulation of greenhouse gases in the atmosphere, undoubtedly increasing the likelihood of natural disasters. Even though this connection has been known for a long time, it does not yet lack an immediate danger or emergency situation. According to the concept of danger in police law, an immediate danger also exists if events are likely to lead to damage if left unchecked. It should be noted that climate change has long since begun and is already manifesting itself in various forms today. For example, in the summer of 2020, according to current findings, numerous people in Germany died as a result of heat waves caused by climate change. Consequently, the same must apply to the climate crisis as to the Corona pandemic, as both crises lead to immediate dangers, for the management of which protective measures must be taken.

On the other hand, the Federal Constitutional Court has already judged in its Kalkar I decision of 08.08.1978 that assessing a danger situation is primarily the responsibility of the legislator - and not the courts. Consequently, classifying the climate crisis as an emergency situation is a political assessment based on scientific data, which can only be reviewed by the courts but not replaced by their own assessments. In this context, the legislator must then also demonstrate how the legal measure taken is conducive to climate protection.

Alternatively to declaring a climate emergency, the debt brake could also be reformed. However, this requires an amendment to the Basic Law. The possibility of an exception to the debt brake for climate protection being constitutionally enshrined, as in the case of the special fund for the Bundeswehr, is unlikely due to the lack of approval from the FDP and CDU/CSU parties and thus the lack of a 2/3 majority required for a constitutional amendment. Similarly, strengthening the self-financing of the KTF from the European and national emissions trading could be considered. However, this would require a legislative increase in the CO2 price, which presupposes the corresponding political will.

Finally, eliminating climate-damaging subsidies would also be possible and climatically desirable.

According to a list by the Federal Environment Agency, abolishing 41 state subsidies for company cars, diesel, or air travel would bring in more than 60 billion euros. However, only half of these subsidies can be cut in the short term for legal reasons. The budget for the year 2024 and the financial planning until 2027 are to be decided by the government only next year - at least this is evident from a letter from Federal Finance Minister Lindner dated 27.11.2023 to the coalition partners. In it, he proposes to conduct the budget planning with "sufficient care and time for parliamentary consultations" since he assumes that "structural changes" are inevitable. In the case of reforming the debt brake, the opposition would also have a duty to take responsibility, as this would represent a constitutional amendment requiring a 2/3 majority in the Bundestag and Bundesrat.

Report and assessment by Cäcilia Gätsch.

Source citation:

[1] https://www.bundesverfassungsgericht.de/SharedDocs/Pressemitteilungen/DE/2023/bvg23-101.html.

[2] https://www.bundesregierung.de/breg-de/aktuelles/ktf-sondervermoegen-2207614.

[3]https://www.bundesregierung.de/breg-de/schwerpunkte/entlastung-fuer-deutschland/wsf-kreditermaechtigung-2132830.

[4] https://www.bmwk.de/Redaktion/DE/Pressemitteilungen/2023/08/20230809-bundeskabinett-beschliesst-wirtschaftsplan-des-ktf.html.

[5] https://background.tagesspiegel.de/energie-klima/industrie-brennt-auf-die-klimaschutzvertraege.

[6] https://background.tagesspiegel.de/energie-klima/experten-warnen-vor-wegfall-der-ktf-programme.

[7] https://www.bmwk.de/Redaktion/DE/Downloads/I/ipcei-standorte.pdf?__blob=publicationFile&v=4.

[8] https://energy.ec.europa.eu/news/joint-statement-commissioner-simson-and-german-minister-habeck-energy-issues-2023-05-31_en.

[9] https://www.h2-global.de/post/kicking-off-import-leg-european-hydrogen-bank.

[10] Ausführliche zu den im EEG verankerten Ausschreibungen der Wasserstoff-Kraftwerke und der Kraftwerksstrategie siehe den Artikel „Die Rolle von Wasserstoff im Stromsystem“, unter: https://www.linkedin.com/pulse/die-rolle-von-wasserstoff-im-stromsystem-cruh21%3FtrackingId=ZESvTMfuTe%252BAWQWbI2xshA%253D%253D/?trackingId=ZESvTMfuTe%2BAWQWbI2xshA%3D%3D.