Replacing Russian pipeline gas to Europe in the short term is much more difficult than finding alternative sources for coal and oil. It’s why the EU hasn’t banned Russian gas. But what if Russia cuts off the supply? Benjamin Wehrmann at Clean Energy Wire looks at what the consequences and options are for Germany. Though Germany aims to wean itself off Russian supplies almost entirely by 2024, a sudden cut would have serious consequences. Storage targets for this coming winter would not be met. Gas would have to be rationed between “protected customers” and the rest. Citizens would have to lower thermostats and cut hot water usage. Non-essential industries may have to temporarily shut down production. Points would be knocked off GDP, risking a recession. Wehrmann frames his article using four questions: why and when could gas deliveries be stopped?; what would be the immediate effects of a halt to gas supplies?; what precautions have Germany and the EU taken?; what could be the long-term effects of a cut?
Natural gas arguably is Russia’s most important energy asset in the geopolitical scramble following the invasion of Ukraine. While the EU and other western allies agreed on an embargo on Russian coal and a far-reaching halt to oil deliveries, a ban on natural gas imports has been rejected by the bloc, despite numerous calls to implement it.
Several member states, including heavyweights such as Germany and Italy, say they are too reliant on gas to cope with a sudden stop of supplies given that replacing Russian pipeline gas in the short term is much more difficult than finding alternative sources for coal and oil. Therefore, a collapse of gas trading with Russia would entail severe consequences for European economies.
The Russian government already announced an end to gas deliveries to a range of countries, forcing Germany and the EU to prepare for a sudden supply cut. This factsheet explains why and when gas deliveries could be stopped, the immediate and long-term effects, and what precautions Germany and the EU have already taken.
Why and when could gas deliveries 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.
…Russia has already cut gas deliveries to some EU nations
As of mid-June 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. Bigger EU customers like Germany and Italy so far have not been cut off, even though Russia refused to accept payments in euros from a German customer in at least one instance. 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. This concession could keep European gas customers’ supply stable in the short run. Germany has aimed to wean itself off Russian supplies almost entirely by 2024.
However, state-owned Russian gas provider Gazprom in mid-June announced gas flows from Russia to Germany through the key pipeline Nord Stream would be reduced by about 40 percent, arguing that German engineering company Siemens had failed to provide the equipment needed to carry out repairs. The announcement came just weeks before the offshore pipeline is scheduled to undergo its annual maintenance work, and Gazprom did not specify how long flows will be reduced. 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.
According to Germany’s Federal Network Agency (BNetzA), the planned shutdown implies that the country’s gas storages cannot be filled further for the first time since the war broke out. The operator company said the pipeline will not be available between 11 and 21 July. Depending on the course of the war and the course of mutual sanctions between western countries and Russia, a halt to supplies thus may occur before storages can be filled sufficiently before winter.
What would be the immediate effects of a halt to gas supplies?
Natural gas accounted for nearly 27 percent of Germany’s total energy consumption in 2021, mostly for heating and industry purposes and to a much lower extent (around 15%) for electricity production.
Germany managed to quickly reduce its dependence on Russian gas 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. As of mid-June 2022, the country’s gas storages were filled to 55 percent of capacity. A new law obliges storage operators to fill their facilities to at least 90 percent of capacity by November and retain at least 40 percent by February.
If Russia cuts deliveries through Nord Stream 1, authorities in Germany would have up to 24 hours to detect that the pipeline is running empty, network agency head Klaus Müller said. The immediate reaction on the German side would depend on consumption levels when the supply gets cut off; on filling levels of Germany’s gas storages; and on available substitutes from other countries, he said. Whether or not Germany will have to declare a state of emergency would then have to be decided quickly to prevent market turmoil, Müller said. An end to deliveries during winter could thus lead to greater difficulties than in summer, when gas consumption is much lower.
In the event of a severe gas crisis, so-called “protected customers” will 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.
…and unprotected customers
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 cut-off order” would not be possible even if market actors are calling for it to have greater planning security.
Production cuts due to gas shortages could 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.
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 threatened at the time, the ministry said. 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 in the government’s gas emergency plan is the “alarm stage,” which would be triggered when there is a disruption in supply or an extraordinarily high demand that might bring markets out of balance, even though the market is still functioning at that point. However, several companies have already objected that they cannot tolerate a drastic spike in prices as regular market developments. Direct state intervention in gas distribution would not yet take place at this stage.
This changes 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.
…EU regulations say members must assist each other
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 with Denmark and Austria.
…The “Gas Security Platform”
To help decide how a rationing and shutdown sequence could look like, the BNetzA has 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 — more than 10 megawatt hours (MWh) of gas 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.
…Getting citizens to save energy
A campaign aimed at reducing dependence on Russian imports and accelerating the transition to renewables launched by the government and an alliance of business and civil society groups has been launched to encourage citizens to save energy. Lowering heating temperatures and cutting back on warm water use could significantly reduce gas demand in households, which accounted for about one-third of gas demand in 2021.
In a joint analysis of the country’s economic prospects in the energy crisis, Germany’s leading economic research institutes 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.
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 because 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.
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.
Maintaining long term goals
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.
Benjamin Wehrmann is a staff Correspondent for Clean Energy Wire
This article is published under a “Creative Commons Attribution 4.0 International Licence (CC BY 4.0)”