Europe braces for winter of discontent as Germany moves one step closer to energy rationing
Fears of supply shortages across Europe have escalated as Germany moved one step closer to energy rationing amid escalating tensions with the Kremlin.
The country has triggered the “alarm stage” of its emergency gas plan in response to falling supplies from Russia – including a 60 per cent drop on the key Nord Stream 1 pipeline last week.
It is the second phase of a three-stage emergency plan, which is activated when authorities see a high risk of long-term supply shortages.
It includes a clause allowing utilities to immediately pass on high prices to industry and households – although this has not been triggered.
Germany’s Economy Minister Robert Habeck has accused Russian President Vladimir Putin of launching an economic attack on Germany by reducing gas flows into the country.
He said: “It is obviously Putin’s strategy to create insecurity, drive up prices and divide us as a society. This is what we are fighting against…Gas is a scarce commodity from now on. Prices are already high and we have to be prepared for further increases. This will affect industrial production and become a big burden for many consumers. It is an external shock.”
Habeck concluded that Germany was now obliged to reduce gas consumption, and did not rule out the prospect of rationing this winter.
This second step follows the triggering of the “early phase” in March and signals to companies and households that painful cuts are on the way.
Germany’s Government will also provide a €15bn credit line to fill gas storage facilities and launch a gas auction model this summer to encourage industrial users to save gas.
However, the Berlin stopped short of allowing utilities to pass on soaring energy costs to customers in Europe’s largest economy.
The final emergency stage – if enacted – would require the state to intervene in the market and determine the distribution of gas supplies – with a priority going to households over industry.
Germany turns to fossil fuels to meet energy demand
Germany has been scrambling to ensure secure energy supplies this coming winter, and passed laws earlier this week to ramp up coal supplies and offer heavy subsidies to gas giants.
It currently relies on Russia for around 50 per cent of its gas imports – considerably above the 40 per cent European Union (EU) average, and previously enjoyed decades of trading with country – even during the cold war.
The Kremlin has denied the supply cuts were deliberate, and that Russia “strictly fulfils all its obligations to Europe” with state supplier Gazprom blaming a delay in return of serviced equipment caused by Western sanctions.
However, the country has cut off or restricted supplies to Poland, Bulgaria, Finland, Netherlands and Denmark after energy firms operating in those EU countries refused to comply with demands for rouble payments.
Earlier this year, Putin signed into law requirements for “unfriendly nations” such as companies operating in EU member states to pay for gas in roubles – a retaliatory move after the bloc targeted Russia with sanctions, that now include a pledged phase-out of coal and seaborne oil shipments.
While some companies, including German energy giant Uniper, complied through a murky conversion process that technically evaded EU sanctions – plenty of others refused leading to further disruption across the continent.
EU climate policy chief Frans Timmermans now estimates that a dozen EU nations have now been affected by cuts to gas supply from Russia, and revealed said 10 of the bloc’s 27 member countries have issued an “early warning” on gas supply.
The issue is likely to be exacerbated in the coming days, as Nord Stream 1 is due to undergo maintenance on July 11-21 – causing flows to stop completely into Europe from the key pipeline.
EU looks to shore up supplies ahead of winter
The head of the International Energy Agency warned earlier this week that Europe should prepare for Russia to cut off gas supplies into Europe – as Putin seeks political leverage amid continued conflict in Ukraine.
The EU is currently pushing for member states to raise storage levels to 80 per cent this October to stave off supply shortages – with the bloc only holding out against blackouts last winter thanks to a huge boost in US liquefied natural gas supplies.
Storage levels are currently sitting at 56 per cent across the bloc heading into the summer.
Craig Erlam, senior markets analyst at OANDA told City PM Europe is “potentially facing a very tough winter,” and that its dependence on Russia means “we’re left crossing our fingers and hoping for warmer weather.”
He explained: “Russia may not turn the taps off altogether but it’s unlikely to make life easy for those slapping sanctions on it, which means prices will remain very high. Nothing is off the table when it comes to countries managing the situation although power cuts will be a last resort.”
Nevertheless, he doubted Russia would full cut off supplies into Europe, with the continent remaining Gazprom’s most important customer- and a lack of significant infrastructure to route supplies.
| Natural Gas | Oil | Coal |
| €30.6bn | €31.4bn | €1.8bn |
The EU has spent €30.6bn on Russian natural gas supplies since the country invaded Ukraine, significantly more than it has pledged in aid.
Nathan Piper, head of oil and gas research at Investec, also played down the complete power cuts in Europe.
Speaking to City A.M., he said: “It is more likely that industrial users reduce their use of gas once the price makes using it as a feedstock uneconomic , such as for cement and fertiliser manufacture “
He also questioned whether Russia could reroute supplies – but considered its oil trading to be more lucrative bringing in €31.4bn from European buyers over the same time period.
Piper explained: “Russia sends some gas east to China, but not from the same fields that service European markets. However Russia makes much more from oil than it does from gas in addition lower volumes to Europe can be compensated for through higher prices
Meanwhile, Ole Hansen, head of commodity strategy at Saxo Bank, told City PM there will be gas shortages if Nord Stream 1 supplies continue to dwindle.
He argued that LNG was also more of a challenge following the explosion at Freeport LNG in the US – which provides around 20 per cent of the country’s gas exports, of which three-quarters went to Europe.
Hansen said: “With Norway being close to maxed out, other suppliers such as Qatar can and will dictate the terms for delivering more gas to Europe, one condition being European buyers signing up to 20-year delivery contracts. This leaves firing up coal plants as the only other short-term viable option to avoid disruptions.”
UK well stocked for crisis but not immune to price hikes
The UK only imports four per cent of its gas needs from Russia, and while it has not phased out Kremlin-backed supplies in line with its coal and oil bans, it is working on plans for similar restrictions.
Nevertheless, Downing Street has been keen to ramp up supply security, with Business Secretary Kwasi Kwarteng revealing the UK is looking to draw out more gas supplies from ageing fields.
In a speech earlier today he revealed the Government is exploring “potential regulatory options to extract more gas from existing fields” alongside further energy efficiency measures.
Currently, the Prime Minister is weighing up plans to open a new coal mine in Cumbria, while a geological survey on fracking is due next week – three years after a moratorium on the practice.
Earlier this month, it also extended the life of coal power plant West Burton A Power Station, and encouraged a massive gas deal between Equinor and Centrica that will provide power to 4.5m British homes over the next three winters.
Centrica has also filed for permission to reopen the UK’s biggest storage site off the East Coast, after it was closed four years ago for commercial reason
Downing Street has also unveiled a supply security strategy calling for the ramp up of renewable power generation and a “big new bet” on nuclear power.
Contrasting the UK’s situation to the EU’s, Erlam said: “The UK isn’t as vulnerable as much as those on the continent but it’s still exposed to price movements which are already wreaking havoc on the economy.”
Piper also noted that the UK’s supply security was more substantial than the EU’s, but warned prices would still remain elevated – as markets remained influenced by global shortages.
He said: “UK has good security of supply through domestic production, Norwegian piped gas, LNG terminals and interconnectors with Europe, however this does not insulate the UK from price rises.”