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By Henning Gloystein and Vera Eckert
LONDON/FRANKFURT (Reuters) - German households are paying for ever cheaper wholesale power supplies to industry as the government uses money from soaring domestic bills to subsidize renewable energy, in turn creating overcapacity on the country's grid.
Chancellor Angela Merkel accelerated the exit from nuclear in 2011, speeding the path towards a power sector that is increasingly dominated by renewables in a move that has been criticized as costly, hasty and damaging.
In order to boost renewables to 35 percent of output by 2020 and to 50 percent by 2030, Europe's biggest economy hands out huge subsidies that guarantee investors prices above market levels for up to 20 years.
Seen as a policy to push green energy, Germany's renewable law also has a distinct industrial aspect, stating that "the introduction of renewable energy should not be underestimated in terms of its importance for industrial policy."
These grants have boosted renewable generation and created a power glut that has helped pull down wholesale prices by around 30 percent in the past two years, to levels 10 percent below France's and 20 percent under Dutch prices, Reuters data shows.
The subsidies have also created an industry with 35,000 German companies active in the renewable sector, employing almost half a million people, according to industry and government statistics.
"Germany has done something very special and may prove to the world that renewables work on a large scale in a major, industrialized economy," said Jean-Marc Ollagnier of business consultancy Accenture.
Large engineering or chemical groups such as Siemens <SIEGn.DE>, Bayer <BAYGn.DE> or BASF <BASFn.DE>, which operate their own energy trading desks, stand to benefit most from low wholesale prices.
Yet even smaller businesses, such as Germany's numerous privately owned mid-sized manufacturing companies, have industrial tariffs that are beginning to see the effect of dropping wholesale prices.
German industrial tariffs are nearly 10 percent below the European Union (EU27) average, according to Eurostat, giving the bloc's biggest manufacturer another competitive advantage.
What's more, the industrial retail price rise of 15 percent since 2005 amounts to an annual rate of under 2 percent, in line with inflation, far less than the EU27 price jump of 45 percent.
In a further sign of government policy aimed at protecting its manufacturers, the German industry lobby BDI says that numerous energy intensive companies are exempt from paying for the subsidies.
Government data shows that over 2,200 companies benefit from such protective regulation.
TACKLING SOARING HOUSEHOLD COSTS
But the lower wholesale prices come at a huge cost as they are largely paid for by households; and politicians as well as analysts warn that the public mood, which has so far supported the policies, could change if costs cannot be controlled.
"Because we've seen German renewable supplies grow so much, the influence on reducing wholesale power prices has been very clear, but this drop is being paid for by a parallel rise in household bills," said Peter Osbaldstone of energy consultancy Wood Mackenzie.
At a summit in Brussels on Wednesday, the European Union will among other subject, discuss ways to halt the steep rise in household bills seen in recent years. The International Energy Agency (IEA) is due to highlight some of these issues in a country report on Germany on Friday.
"Politicians are very aware of soaring retail prices, and the focus will be on the need to manage costs to households," Wood Mackenzie's Osbaldstone said.
German retail energy prices have risen 60 percent in the last 10 years due to taxes and levies on power consumption with the latest push received early this year.
One way to remedy the cost explosion would be to cut value added tax (VAT) for energy to 7 percent from the current 19 percent, said the chief executive of agricultural and energy cooperative Baywa <BYWG.DE>, Klaus Lutz.
"This would take the burden off rising bills and act as a bridge until household energy bills drop because the subsidies are phased out and we can begin to benefit from plentiful domestic renewable power generation," he said.
Given that large-scale subsidies were introduced at the turn of the century, Germany's retail energy users will have to wait a while yet to begin to reap the rewards of their continued support for green energy.
(Editing by Keiron Henderson)