Germany remains highly dependent on Russian gas and its industry's supply chains are vulnerable to a shortage of gas and high energy prices. The reliance on Russia is exacerbated because Germany receives all of its gas via pipelines and it does not have any working terminals to import liquified natural gas. If Russian supplies were cut off, the country's six leading economic research institutes have warned that gas would have to be rationed by late winter causing its economy to spiral into a deep recession.
Little wonder that Germany's biggest companies are lobbying German officials on who will be top and bottom of the list should Russia call a halt to gas supplies. The German government has already announced plans to put idled 'dirty coal' plants on standby in case of gas supply disruption – just months after it trumpeted its commitment to decarbonise by 2035. Turning idle coal plants back on is a huge task and such a decision would not be taken lightly.
Germany, Primary energy consumption by fuel type, % of total
Germany, Primary energy consumption by fuel type, % of total
In June, Germany’s top energy regulator urged consumers and industry to scale back natural-gas consumption to help fill storage sites ahead of the next heating season while many outdoor swimming pools have told would-be bathers to expect a slightly chillier experience this summer, with water temperatures being lowered by 2°.
The announcement on 23 June this year by the German Government to move to Phase 2 of its gas emergency plan, known as the 'alarm level', suggests that it now believes there is a high risk of Russia cutting off gas supplies traditionally sourced across the Baltic Sea via Nord Stream. The second phase of its three-stage emergency plan includes a clause that enables gas distributors to reprice their contracts with consumers in the hope that the market-based negotiation would create a natural reduction in energy usage as costs inflate – but also includes the ability to sell back unused gas.
The gas bottlenecks are putting pressure on several key industries reliant on gas, such as chemicals, base metals, refined metal products, aluminium, and glass. Their vulnerabilities could have detrimental ramifications for other industries too.
Germany, Final consumption of gas by industry subsector, % of industry total
Germany, Final consumption of gas by industry subsector, % of industry total
The utilities sector faces a potentially huge challenge in meeting customer obligations if they no longer have access to Russia's gas supply. Collectively they are urging the German Government to impose a levy on consumers so that companies can be reimbursed for the extra costs associated with replacing missing Russian gas flows.
Calls for Government bailouts are also in the pipeline if companies are unable to pass on extra costs to traders and consumers. Yet any such Government intervention would likely unnerve investors – it is often perceived as negative. When India moved to impose a windfall tax on oil and gas companies at the beginning of the month, shares in the sector swiftly fell – as did many oil and gas stocks when the UK introduced its 25% windfall tax in late May this year.
The chemicals sector, which consumes the most gas in Germany, faces two challenges: the electricity used in their processing plants is gas-fired, and natural gas is a feedstock for their products. If gas supplies fall dramatically, some chemical plants may face little option but to shut down. Meanwhile, the market has already seen the cost of fertilisers soar to above $1,000 a tonne amid the rising cost of energy and transport, while sanctions imposed after Russia's invasion of Ukraine have compounded the problem.
Energy-intensive aluminium processing plants are also under pressure. Around 40-50% of the cost of running a smelter is attributed to power, and the balance of passing these extra costs down the supply chain will likely be met with a reduction in production in an effort to reduce energy usage (and costs).
Before the Ukraine crisis sparked this year's gas supply issue, Germany's strategic goal was to reduce its heavy reliance on Russia for energy, and this is where many long-term investment opportunities lie. Over recent decades Germany has been seen as a global pioneer in applying renewable energy and environmental technologies. And at the beginning of the year, it announced it was overhauling legislation to reach the new government targets of having 80% renewable power by 2030 and almost 100% green electricity by 2035.
But for want of a better phrase, such plans are now 'on the back burner'. Germany stresses that gas storage capacity is on par with levels last year, but in firing up its coal-burning power stations as a precautionary measure for winter gas storage, we may see their carbon footprint grow.
The outlook is precarious. Germany's economy is already suffering as its manufacturing industry grapples with supply chains disrupted by the pandemic and the war in Ukraine. If its struggling economy is pulled down further by a full-blown energy shortage crisis, it could shake other eurozone countries too, including Italy, France, Poland, and Spain.
And its economy could be put to the test sooner rather than later. On 11 July 2022, the Nord Stream pipeline is to shut down for two weeks to undergo its annual maintenance. Some fear that once turned off, Russia could find an excuse not to turn supplies back on (it has recently limited supplies citing technical problems). It is a situation Germany’s Climate Minister Robert Habeck has admitted is "tense", and certainly one that needs to be monitored closely.
