With the tense situation on the gas market that has been seen for some months following the Russian invasion of Ukraine, the German government announced its Early Warning Level on 30 March 2022 before moving to the Alarm Level of its “Emergency Gas Plan for the Federal Republic of Germany” on 23 June 2022. Irrespective of whether the German government announces the Emergency Level (as the third and last level), a gas shortage cannot be completely ruled out in the coming winter months in spite of very full gas storage facilities and all the other efforts undertaken. This raises the question of what means the German government is deploying to still try to prevent a gas shortage and how a gas shortage will impact the supply to gas consumers.

Attempts to prevent imminent gas shortage

Even shortly before the war began, the German government started political efforts to find new sources of gas supply as well as to increase gas purchases from Norway, the Netherlands and Belgium. At the same time efforts are being stepped up considerably to create the infrastructures in Germany that will be needed for future LNG purchases. Moreover, since the end of April 2022 the statutory requirements for fill levels at German gas storage facilities have applied for the coming winter months, levels which fortunately are being reached. The Trading Hub Europe, a joint venture of German pipeline network operations responsible for the operation of the German market area, was tasked with procuring additional gas supply options, including assisting with gas storage. Only recently the German legislator, by its Act on the Provision of Replacement Power Plants [Ersatzkraftwerkebereithaltungsgesetz], also made it possible to bring back coal and oil power plants to reduce gas consumption use to produce electricity. Currently, there is also a very heated political and social debate – in addition to the longer operating life of the nuclear power plans still in operation – on the question of whether the state should lower gas consumption of final customers by introducing compulsory measures, e.g. by legally mandating a reduction in heating temperature for homes.

Impact of looming gas shortage on gas consumers

Despite the utmost efforts taken by all market participants, there are still not unjustified doubts as to whether it will be possible to completely eliminate the risk of a gas shortage in the winter months. This will impact final gas consumers in both volume and cost terms.

In terms of the volume effects of a looming gas shortage in Germany, it is first important to know that under the currently applicable Sec. 53a of the German Energy Industry Act [Energiewirtschaftsgesetz – EnWG] gas supply companies are legally required, at every level of the Gas Emergency Plan, to give priority to ensuring gas supply to household customers and (up to certain consumption limits) also to commercial customers as well as to fundamentally social services. For all customer groups, the policy in force since the alarm level was announced on 23 June 2022 is that gas suppliers may refuse to supply their customers on the grounds of a gas shortage as a general rule only after this is approved by the Federal Network Agency (BNA).

Even if in the context of current legislation the risk of gas delivery volumes being throttled can be reduced and ideally even excluded, final consumers sooner or later will have to face a (further) increase in the gas they purchase. That is because gas suppliers for months have been confronted steadily increasing procurement costs.

So far, suppliers have passed on increases in gas procurement costs to their customers using the tools of price adjustment clauses, unless these are excluded by fixed prices agreed in the individual contracts. However, the exclusion of price adjustment clauses and the – in some cases significant – time lag before the applicable price adjustment clauses allowing for costs to be passed on kick in is giving rise to considerable liquidity problems for suppliers. In specific cases – especially large customers and long-term supply contracts – it is also conceivable to adjust prices using what are known as general revision clauses or the frustration of contract principles laid down in Sec. 313 of the German Civil Code [Bürgerliches Gesetzbuch – BGB].

The possibility of passing on higher procurement costs to gas consumers will become even more relevant given the liquidity impacts that will arise if the German government does not take any further stabilisation measures under Sec. 29 of the German Energy Security Act [Energiesicherungsgesetz – EnSiG], leaving gas suppliers nowhere else to turn for support. What will then be especially important is the statutory regulations provided for in Secs. 24 and 26 EnSiG which may also be applied after activation of the alarm level or emergency level. The most important precondition for both alternative tools is the BNA’s determination of a significant reduction in gas import volumes to Germany.

A few weeks ago the German government opted for the alternative of Sec. § 26 EnSiG excluding exercise of the price adjustment right under Sec. 24 EnSiG. The provision of Sec. 26 EnSiG opens up the possibility of the higher procurement costs being socialised and levied on all gas consumers. The legal regulation required for this entered into force in the middle of August and the amount of the gas levy was set at 2.419 cents/kWh. It is currently hotly debated whether charging the gas levy from October will actually be allowed. Regardless of what the outcome of this dispute is, gas consumers can expect to face huge increases in gas prices.

Outlook

Despite all efforts, it will in no way be possible to prevent increases in gas supply costs. For that reason, all gas consumers should act early to take account of this factor in their financial planning for the coming year. Especially those gas consumers not falling under a protected customer group as defined in Sec. 53a EnWG should moreover examine different scenarios of a reduced gas supply and notify the network operators as well as the competent authorities of their findings where appropriate.