In reaction to declining Russian supplies, Germany activated the “alarm level” of its emergency gas plan on Thursday. However, it refrained from enabling utilities to pass on rising energy bills to consumers in Europe’s largest economy.
The move is the most recent in a series of escalations in the standoff between Europe and Moscow following Moscow’s invasion of Ukraine, which exposed the region’s reliance on Russian gas imports and triggered a mad dash for other energy sources.
The action is mostly symbolic, warning businesses and individuals that tough budget cuts are coming. However, it represents a significant turnabout for Germany, which had developed close energy relations with Moscow during the Cold War.
This week, lower gas flows prompted worries that Germany would experience a recession if Russian supplies were completely cut off. A significant study released on Thursday revealed that the economy slowed down in the second quarter.
Economy Minister Robert Habeck stated in a statement, “We must not deceive ourselves: The reduction in gas supplies is an economic attack on us by (Russian President Vladimir) Putin.
Habeck cautioned that gas rationing could happen but hoped it wouldn’t: ” “Gas is now a rare commodity in Germany going forward. Therefore, since it is almost summer, we must now minimize our gas consumption.”
With state supplier Gazprom (GAZP.MM) blaming Western sanctions for the delay in returning serviced equipment, Russia has denied that the supply restrictions were intentional. Russia “strictly fulfills all its responsibilities” to Europe, according to the Kremlin on Thursday.
‘Phase II: The Gas Auction Model’
Berlin will introduce a gas auction model this summer to encourage industrial customers to conserve gas, as part of its Phase 2 plan, and will also provide a 15-billion-euro ($15.76 billion) credit line to fill gas storage facilities.
When there is a strong probability of ongoing supply shortages, the second “alarm stage” of a three-stage emergency plan goes into effect. A provision in it permits utilities to promptly pass on excessive costs to businesses and consumers.
Germany wasn’t there yet, according to Habeck, but if the supply crunch and price increases prolonged and drove power companies further into the red, the clause might be activated.
“A Lehman Brothers effect in the energy system,” he said, alluding to the 2008 collapse of a U.S. investment bank that had an impact on the world’s financial markets. “If this minus becomes so big that the companies can’t bear it anymore and they fall down, the whole market threatens to fall down at some point.”
The local utility association in Germany, VKU, urged the government to provide subsidies and liquidity to protect consumers or risk utilities going out of business as a result of low-income retail customers missing payments.
Since last week, when Gazprom reduced flows via the Nord Stream 1 pipeline that crosses the Baltic Sea to only 40% of capacity, a transition to Phase 2 has been anticipated.
Germany has been in Phase 1, which entails closer monitoring of daily flows and an emphasis on filling gas storage tanks, since late March in response to declining deliveries from key supplier Russia.
‘Risk of Complete Destruction’
The market can continue to operate in the second stage without government intervention, which would otherwise cause the situation to enter the last emergency stage.
The benchmark for European gas prices, Dutch wholesale prices, increased by as much as 8% on Thursday.
On July 11–21, flows will stop while Nord Stream 1 is undergoing repair. According to Berlin consultant Hanns Koenig of Aurora Energy Services, Gazprom could come up with excuses to delay the procedure.
“He continued, “Extended maintenance of Nord Stream 1 would further compress the market and make it more difficult to replenish gas storage till winter. The justifications stated so far for the delivery cuts already appear to be manufactured. Of obviously, Russia has a geopolitical interest in this.”
The head of the International Energy Agency (IEA) warned on Wednesday that Russia may completely cut off gas to Europe in order to increase its political clout and urged Europe to start making preparations.
On Thursday, Russian gas shipments to Europe via Nord Stream 1 and through Ukraine were constant, while reverse flows on the Yamal pipeline slightly increased, according to operator statistics.
A number of nations have laid out plans to survive a supply crisis, prevent winter energy shortages, and prevent price increases that may put Europe’s commitment to keeping sanctions on Russia to the test.
