What role does gas play in Germany' energy system?
Natural gas accounted for about 27 percent of Germany’s total energy consumption the first half of 2022, mostly for heating and industry purposes and to a much lower extent (around 15%) for electricity production. Germany managed to quickly reduce Russia's share in gas supply since the invasion, from around 55 percent in February to around 35 in May 2022. However, it still faces the significant challenge of replacing the remaining share with alternative sources. Other important suppliers include the Netherlands, Belgium and Norway, all of which have increased their export volumes but cannot fully fill the gap left by Russia.
Cheap gas from Russian pipelines has long been a boon to industrial companies in Germany who were able to operate at lower costs and gain competitiveness. Gas therefore has been regarded as a "bridge technology" to support the phase-out of coal, thanks to its relatively lower CO2 output, and also of nuclear power until renewables can fully carry the energy system.
Why and when could gas deliveries from Russia be stopped?
Russia and its key gas customers in Europe both insisted initially that gas trading will not be blocked by sanctions or other war-related measures, despite repeated calls from western allies to pull the plug on one of Moscow’s most important sources of income. However, Russia’s demand in March that gas shipments be paid in Russian roubles alarmed western importers, as it showed that the Russian government was ready to use natural gas as a tool to influence EU policymakers. In a joint G7 statement, leading EU governments said they would not accept a change to existing contracts that stipulate other currencies.
Since then, Russia has reduced deliveries to Europe step by step, completely halting supply through the key pipeline Nord Stream 1 in early September for an indefinite period.
As of September 2022, Russia had cut gas deliveries to several European countries -- for example Poland, Bulgaria, the Netherlands and Finland -- citing a failure to comply with rouble payments in each case. In May, the EU softened its stance on gas trading restrictions, leading several key customers to ultimately cave in to Russian demands and pay in roubles to keep supply stable in the short run. Germany has aimed to wean itself off Russian supplies to a large extent by 2024. But while bigger EU customers so far have not been cut off entirely, a significant reduction of flows to Germany as well as to Italy and France has raised worries the government in Moscow will ultimately also cut off its most profitable gas customers in Europe.
State-owned Russian gas provider Gazprom in mide-June announced gas flows from Russia to Germany through the key pipeline Nord Stream would be reduced by about 60 percent, arguing that German engineering company Siemens had failed to provide the equipment needed to carry out repairs. German economy minister Robert Habeck, who already in May said Russia would "weaponise" its fossil fuel resources, called Gapzrom's decision "political," as no technical or legal reason for the delay could be found. Since then, halting supplies through Nord Stream has become a key issue – starting with annual maintenance work, which brought flows to zero for about two weeks, and then further cuts which brought flows to 20 percent of full capacity. In early September, Gazprom announced that Nord Stream would remain shut indefinitely after some days of repair works, citing leaking engine oil as the reason. Russian gas being supplied via Ukraine, another major route, has also been reduced.
Economy minister Robert Habeck said that gas supplies from Russia "no longer play a role in my security considerations" and that Germany could not rely on Russia. "The only thing that is reliable from Russia is the lie," he said.
Already on 23 June, the government had launched the second of a total of three escalation stages of its national gas supply security plan, the "alert stage" that is supposed to prepare gas consumers for further rising prices and possible supply bottlenecks while still largely relying on market mechanisms.
How can stored gas reserves help if supplies dry up?
Gas storage facilities form a kind of buffer system for the gas market. The fuller they are at the time of a possible gas halt, the better. With all of its facilities completely filled, Germany could cover about a quarter of its annual gas demand. As of early September, filling levels stood at almost 85 percent. The government initially introduced a new law with ambitious minimum levels for gas storages by specific dates, then raised the targets even more with a decision from July. Storages must be filled to a level of 75 percent by 1 September (85% by 1 October; 95% by 1 November). Filling levels could reach 90 percent by 1 November even under the assumption that flows from Russia through the crucial Nord Stream pipeline remain curbed, the association of gas storage system operators in Germany INES told news agency dpa at the end of July.
Calculations in mid-August released by grid agency BNetzA had found that reaching the targets is severely at risk should gas deliveries through the Nord Stream 1 pipeline not pick up again considerably. Minister Habeck warned that Germany would face “very, very heated debates” if the country didn’t manage to fill gas storages before the heating season starts in October. He said the government might regulate gas retailing if the reduced flows mean gas storages cannot be filled according to plan.
What would be the immediate effects of a halt to Russian gas supplies?
Russia has announced supply cuts via Nord Stream 1 in advance. The immediate reaction on the German side has depended on the situation at the time: consumption levels when the supply gets cut off; on filling levels of Germany’s gas storages; and on available substitutes from other countries. Until now, Germany has not declared the third of a total of three escalation stages of its national gas supply security plan, the "emergency stage", which could lead to rationing of supplies.
In the event of a severe gas crisis, so-called “protected customers” would be treated with priority if gas rationing is enforced. These include households, small businesses like bakeries, supermarkets, and essential social services, such as hospitals, schools, police stations or food producers. Companies with so-called “interruptible contracts“ would be the first to see their gas supply cut if rationing is enforced, followed by gas power plants that are not essential for grid stability. Next in line are large industrial customers, which accounted for about 37 percent of the country’s gas demand in 2021.
However, BNetzA head Müller said there is a wide range of factors at play, depending on the gas cut’s exact circumstances, which makes establishing a clear shutdown schedule beforehand a very challenging task. “Unfortunately, it’s not possible to bring all these criteria in a clear-cut order,” he argued. Decisions ultimately would have to be taken on a case-by-case basis, “since the situation that prevails will be a rather individual one,” meaning the exact conditions of a gas cut are not previously known. Establishing an “abstract cutoff order” would not be possible even if market actors are calling for it to have greater planning security.
The grid agency warned that even a temporary regional gas supply shortage could have lasting effects on private households. As soon as the pressure in a certain region falls below a minimum threshold, hundreds of thousands of gas boilers would automatically switch off and would have to be restarted individually by qualified personnel, BNetzA head Müller warned. That’s why his agency would always aim to avoid this scenario by ordering cuts in industrial use. Almost half of Germany’s 43 million households are heated with natural gas.
Müller said saving energy is key, and ultimately supply would have to be limited to certain users. He said in case of a shortage, products and services that are not essential rank lower in the priority list. “Swimming pools are not critical, nor is the production of chocolate buiscuits.” Hamburg’s city government said this could also require a rationing of warm water, or lowering the maximum temperature in the district heating network. Several cities already have introduced measures to reduce energy consumption quickly.
Production cuts due to gas shortages could also disproportionately affect producers of energy-intensive basic materials like chemicals, steel, fertilisers or glass. Some industrial installations would be permanently damaged if they have to be turned off for an extended period of time. Company leaders have therefore warned against “dramatic” consequences of a domino effect in supply chains that could set in if their products are no longer available. This, they argue, would spread the damage across the economy in a way akin to the Lehman Brothers bank collapse that triggered the 2008 financial crisis.
Which precautions did Germany and the EU take?
Already in late March 2022, Germany triggered the first of three stages of its national gas supply emergency plan over fears that Russia’s demand to receive payments from foreign buyers in roubles could lead to a halt in trading. The "early warning" stage was declared as a precautionary measure, as supplies were not yet threatened, the ministry said at the time. Triggering this stage had little immediate consequences for the end-users of gas but served to put preparation for an escalation of the crisis on a more solid legal and organisational footing. A crisis response team consisting of representatives from the energy ministry, the network agency, grid and storage operators and gas retailers was formed to monitor developments and prepare adequate responses.
The second stage of "alert" was triggered following supply reductions via Nord Stream 1 in mid-June under the assumption that this could bring markets out of balance. Several companies have already objected that they cannot tolerate a drastic spike in prices as regular market developments and industry heavyweights like chemicals producer BASF have warned prices could rise "massively" in the wake of reduced supplies through the offshore pipeline.
Direct state intervention in gas distribution does not yet take place at this stage, but the government introduced a new levy on gas that allows affected suppliers to pass on part of the price increases to customers - even if they had entered into fixed-price contracts beforehand. The levy is meant to support struggling gas importers but will add to already inflated energy bills for households. The government also agreed to take a 30 percent stake in Europe’s largest Russian gas importer Uniper, whose insolvency could have triggered a domino effect throwing the entire German gas industry in turmoil.
The government only directly intervenes in physical distribution in the third and last escalation level, the “emergency stage,” which is triggered once a “significant deterioration” of the supply situation is considered imminent. In this stage, the network agency BNetzA becomes the so-called “federal load retailer,” effectively meaning gas rationing sets in and the state agency takes over allocation from grid operators according to pre-established criteria.
To help decide how a rationing and shutdown sequence could look like, the BNetzA requested gas grid operators and industrial customers to specify their consumption levels and future gas needs on the “Gas Security Platform.” Companies with a very high gas demand of more than 10 megawatt hours (MWh) per hour can be treated individually in case of gas rationing, while those consuming less than the threshold value will have to be processed with a sweeping “lawnmower method,” agency head Müller said. Roughly 2,500 large customers that consume more than 10 MWh account for the bulk of industrial gas demand. The aim would be to allow companies to have control over the gas volumes they receive during the shutdown to avoid damage to their machinery, he said. Many companies have started taking precautions themselves by reducing natural gas demand and finding alternatives fuels, such as oil or propane gas, a by-product of refinery processes.
A campaign launched by the government and an alliance of business and civil society groups in early June aimed at reducing dependence on Russian imports and accelerating the transition to renewables by encouraging citizens to save energy. Lower heating temperatures and reduced warm water use featured prominently as advices for reducing gas demand in households, which accounted for about one-third of total demand in 2021.
An immediate cut to supplies could be partly cushioned by the EU’s Secure Gas Supplies regulation, already introduced in 2017, which stipulates that member states assist each other with gas supplies in case of a shortage. EU countries are required to put in place the necessary technical, legal and financial arrangements to make the provision of ‘solidarity gas’ possible in practice. So far, Germany has made legal arrangements for gas assistance only with Denmark and Austria, and was in talks with Poland and Italy by the end of July.
To prevent severe effects of a shortage, EU member states decided to cut their gas use by 15 percent on a voluntary basis through next winter. European Commission president Ursula von der Leyen has calld for an "emergency intervention" in the electricity market to bring down soaring prices.
What could be the long-term effects of a cut?
In a joint analysis of the country’s economic prospects in the energy crisis, Germany’s leading economic research institutes in April said halting deliveries would “threaten to throw the German economy in a severe recession.” A gas cut could reduce gross domestic product (GDP) by nearly one percentage point, from 2.7 percent expected in 2022 to 1.9 percent, they found. In their previous analysis in autumn 2021, before Russia’s invasion started and the energy crisis gained full steam, the researchers still expected GDP to grow by 4.8 percent. For 2023, a gas cut could even lead to economic contraction of more than 2 percent, while a scenario with continued gas trading predicts GDP growth in excess of 3 percent. The cumulative loss of GDP of an end to gas deliveries could amount to 220 billion euros by the end of next year, roughly 6.5 percent of Germany’s annual economic output, the economists said.
A study published by the University of Mannheim found that the repercussions of a gas cut could be much more dramatic than those of the 2008 financial crisis or the COVID-19 pandemic that started in 2020, gauging the loss in GDP at about 8 percent. “This energy shock would directly strike at the core of German industry and strongly reduce the production potential,” the study found.
Other analyses found warnings of a deep recession to be overly pessimistic. Economist Daniel Gros from the think tank Centre for European Policy Studies (CEPS) argued "cheap gas imports are highly unlikely to be a major growth factor," as gas imports via pipeline cost Germany only 0.75 percent of its GDP, and the overall value of the country’s gas consumption was below 2 percent of GDP.
However, leading research institutes have warned that policymakers should be careful not to distort necessary structural change in an attempt to avoid short-term damages. This change would affect gas-intensive industries irrespective of an end to Russian supplies, as a pivot away from the gas German companies have so far received at favourable prices is inevitable in any event, the economists said. Energy experts testifying in the German parliament in a hearing about the effects of a gas cut said prices will be rising irrespective of a halt to gas trading.
Energy economist Andreas Löschel, head of the government’s expert commission on the energy transition, told Neue Energie magazine that in principle rising prices for fossil fuels would be a much-needed development to facilitate the transformation towards clean energy sources. The government’s current policy of quickly reducing costs for customers would not be sustainable, Löschel said. Poorer customers and threatened companies that struggle to weather the price rise should be assisted but prices should generally be set by market developments, he argued. “The biggest part of the price hike still lies ahead of us,” the expert commission head said, arguing that high prices are needed to raise awareness of the situation’s “urgency” and that these should initiate large-scale energy saving programmes. Regarding alternatives for Russian gas supplies, Löschel said the aim should not be to replace long-term contracts with Russia with long-term contracts for liquefied natural gas (LNG) deliveries from other countries. “Gas will remain important for many years to come – but we will also need lower quantities than we do now,” he said.
Who to talk to in the event of a gas crisis?
Tom Krebs, University of Mannheim: firstname.lastname@example.org
Documents and readings
Federal Network Agency’s Gas Supply Status Report (in English)
Climate and Economy Ministry’s Gas Emergency Plan (in German)
Climate and Economy Ministry’s July 2022 Energy Security Report (in German)
Joint analysis (Gemeinschaftsdiagnose) of Germany’s leading economic research institutes on energy crisis (in German)
Bruegel Opinion: “Europe Must Get Serious About Cutting Oil and Gas Use”