Germany's "gas price brake" could lead to supply chain disruptions – report

Germany's planned gas price subsidies for industrial consumers – the so-called "gas price brake" –could lead to supply chain disruptions, a report by the Hans Böckler Foundation’s Macroeconomic Policy Institute found. The subsidy scheme for businesses, put forward by an expert commission in view of high gas costs, proposes that the government subsidise 70 percent of consumption from 2023 to seven cents per kilowatt hour. The government cabinet has decided to largely implement the proposals. Overall, the expert gas commission had "made very good proposals" but the recommendations might provide misguided incentives leading to production cuts, thus disrupting supply chains, the authors say. The recommended gas price cap for industry and blanket regulation would allow companies to sell their entire subsidised gas quota on the market, which could wrongly incentivise many firms to partly or completely shut down production and instead earn bigger profits on gas sales, according to the authors. Such a “false incentive” could lead to massive disruptions in supply chains, loss of growth and higher inflation, concludes the report.

The report instead offers an alternative plan to better reconcile gas-saving incentives and measures to stabilise economic activity by focusing on targeted buybacks for needed reserves on an ongoing basis. This means that companies would only get subsidies for gas that they actually use in production. However, should an extreme situation arise in which Germany’s gas reserves fall to insufficient levels, the federal network agency (BNetzA) could buy gas from companies in a targeted manner at higher prices if they temporarily reduce their production without endangering essential supply chains. Experts have called on greater diversification supply chains, especially for key energy transition technologies, to better manage external shocks, such as the pandemic or the war against Ukraine.