Municipalities are being hit by rising energy prices and responding in different ways

• Around half are struggling to handle higher energy prices
• Additional pressure is affecting municipal budgets
• Rising energy prices reinforce incentives for municipal energy transition

The impact of the war between Russia and Ukraine and the resulting tension in international commodity markets have led to an increase in energy prices of unprecedented scale. Already in February 2022, consumer prices for electricity and a range of fossil fuels in Germany were up to 40 % above the average of the pre-pandemic year 2019. These developments have also affected municipalities through the cost of heating, electricity and fuel. Whereas the municipalities interviewed under a supplementary survey to the KfW Municipal Panel reported that in 2020 around 1.5 % of their expenditure went to pay for energy, that figure has risen to 2 % up to 2022. Around half the participating municipalities responded that these additional burdens were “difficult” (46 %) or even “impossible” (5 %) for them to shoulder.

Municipalities are being forced to respond to energy price increases both by making cuts to other budgetary items and by adjusting their energy consumption. Thus, nearly 70% of the surveyed municipalities reported stepping up their investment in energy efficiency in order to reduce energy consumption and costs. Measures focus particularly on the use of renewable energy sources for electricity supply (80 %), reducing consumption by raising energy efficiency (73 %) developing energy efficiency skills (68 %) and using more alternative heating sources (50 %).

Many municipalities stay on familiar ground with their planned measures. After all, they implemented a range of projects aimed at achieving climate action targets even before the outbreak of the war in Ukraine. One particular focus was on investments in photovoltaic systems and energetic redevelopment measures.

“Most municipalities are significantly impacted by higher energy prices, and for many they present a substantial burden. Mitigating this burden is of course the first priority. Just as important is that municipalities now take lasting measures to reduce their dependence on fossil fuels. This would help protect municipal budgets from further volatility in energy prices. Furthermore, investment in energy efficiency and renewables can also represent a relevant contribution by municipalities to achieving Germany’s climate targets,” said Dr Fritzi Köhler-Geib, Chief Economist of KfW.

The current study can be downloaded from www.kfw.de/fokus