Bloomberg: Germany has 3 months to avoid gas crisis

We may still be in the middle of summer, but for Germany the countdown has begun to avert an unprecedented – for a developed nation – energy crisis ahead of the coming winter.

Most European states are feeling the pressure from cuts in Russian gas supplies, but no other country is more exposed than Europe’s largest economy, where almost half of households rely on natural gas for heating.

Chancellor Olaf Scholz’s government has been slow to address Germany’s vulnerability, only recently setting targets to reduce demand as efforts to secure alternative supplies have failed. With Moscow continuing to cut supplies and France reportedly willing to export electricity to neighboring countries, the risk of an energy crisis in Germany is rising.

According to Bloomberg, the Kremlin will likely keep gas flows to Europe low as the standoff over the war in Ukraine continues. Doing so means that shortages will continue and the price of natural gas will continue to climb to historic highs.

Germany is threatened with gas rationing and economic recession, with authorities worried that social unrest will erupt if energy shortages spiral out of control. Berlin cannot count on help from Paris either, as France’s troubled nuclear reactors will exacerbate gas shortages.

Russia – historically the European Union’s largest supplier of natural gas, meeting around 40% of demand – has gradually cut deliveries in retaliation for sanctions. “Russia’s policy has always been to divide, because then it becomes stronger,” said Martins Kazaks, governor of Latvia’s central bank. “If we allow ourselves (ie: EU states) to be divided, then we will become even weaker.”

Last week, Gazprom attributed reduced flows through Nord Stream to a problem with the pipeline’s turbine that dropped capacity to 20 percent. Natural gas prices rallied more than 30% last week and electricity prices broke one record after another.

Hambek called Gazprom’s reasoning “ridiculous” but acknowledged the situation is critical and reiterated his call for companies and consumers to step up efforts to save energy. To bridge the gap, the economy ministry has announced it will allow the revival of decommissioned coal-fired power plants in a climate setback, and is recommending that Germans install more efficient systems in their bathrooms and wash clothes at lower temperatures.

If measures to balance supply and demand fail, the German government has the power to declare a “state of emergency”, which will mean the state will take control of gas distribution.

Households and important infrastructure, such as hospitals, gain time because of the summer, but no one guarantees that room temperatures will be as comfortable in winter as last winter.

Increases in energy prices will intensify the pressure on the economically weaker sections. Already about one in four Germans has fallen into energy poverty, meaning that the cost of heating and electricity affects the ability to cover other expenses, according to the Cologne Institute for Economic Research. The government is now working on programs to support low-income households.

The coming winter will force energy companies in Europe and Asia to fight for already limited LNG supplies. The surge in prices resulting from this scenario could reduce industrial demand for the fuel by 17%, estimates Wood Mackenzie analyst Penny Leake. “If the flows through Nord Stream remain at 20%, we are approaching the danger zone,” she stressed.

With natural gas storage infrastructure at 68% capacity and expected to fall further following reduced Nord Stream flows last week, Germany is at risk of missing its target of 95% capacity by November 1, especially if no further action is taken.

The business sector is reacting. A DIHK business lobby survey of 3,500 businesses found that 16% of industries are considering reducing production or abandoning some activities due to the energy crisis. Among them, BASF SE, with the chemical “giant” oriented towards reducing ammonia production, for which significant quantities of natural gas are needed, since the soaring costs make the company’s activity in question financially unprofitable.

The International Monetary Fund estimates that Germany risks losing 4.8% of its economic output if Russia cuts gas supplies, and the Bundesbank has pegged the potential loss at 220 billion euros.

Energy-intensive industries will likely shift to areas with reliable renewable energy resources, such as Germany’s windswept coasts or the solar-rich Mediterranean, potentially undermining industrial areas along the Rhine and in the German south. Some chemical industry officials say production could be moved to Turkey, where there is access to Azerbaijan pipelines.

“Our economic system is in danger of collapsing,” said Michael Kretschmer, prime minister of the state of Saxony. “If we’re not careful, Germany could deindustrialize,” he told Die Zeit newspaper.

As the Bloomberg article points out, after the Russian invasion of Ukraine, Berlin struggled to react, trapped by a long-standing political cooperation with Russia and the reluctance of the industrial sector to give up cheap natural gas. That era, however, has passed.

Germany now needs support after failing to follow EU guidelines on diversifying its energy mix, and may re-impose dividing lines in the bloc.

The country is at a disadvantage due to high demand for heating and industrial use, but also due to low levels of natural gas in storage infrastructure. Berlin is just now developing infrastructure for LNG, but the first floating terminal will not be ready in time to help this year, as the government had hoped, according to German energy giant Uniper, which is investing in the facility and receiving a bailout of 17 billion euros.

However, there are also optimistic signs. Mercedes-Benz has announced that the plant in Sindelfingen can now operate without natural gas. Moreover, European solidarity seems to be enduring. EU countries have reached a political agreement to cut gas use by 15% by this winter if Russia turns off the tap. Although there are some exceptions, the plan makes it mandatory to limit the use of natural gas in the event of an emergency.

In Ludwigshafen, an industrial center on the Rhine River, local officials are considering what infrastructure can remain open if the crisis worsens. They are also considering turning a municipal stadium into an “oasis of warmth” for hundreds of people to escape the heat for a few hours a day.

“We know that many people are worried right now and we take these concerns very seriously,” said Jutta Steinruck, mayor of Ludwigshafen. “Everyone can do something on their own and save energy where possible. Every kilowatt hour we save now will help us in the fall and winter.”