Germany enters into ‘alarm stage’ of gas emergency plan

Germany triggered the ‘alarm stage’ of its emergency gas plan on Thursday in response to falling Russian supplies but stopped short of allowing utilities to pass on soaring energy costs to customers in Europe's largest economy.

The measure is the latest escalation in the standoff between Europe and Moscow since the Russian invasion of Ukraine that has exposed the bloc's dependence on Russian gas supplies and sparked a frantic search for alternative energy sources.

The step is largely symbolic, signalling to companies and households that painful cuts are on the way. But it marks a major shift for Germany, which cultivated strong energy ties with Moscow stretching back to the Cold War.

Lower gas flows sparked warnings this week that Germany could fall into recession if Russian supplies halted altogether. A major survey on Thursday showed the economy losing momentum in the second quarter.

“We must not fool ourselves: The cut in gas supplies is an economic attack on us by (Russian President Vladimir) Putin,” Economy Minister Robert Habeck said in a statement.

Gas rationing will hopefully be avoided but cannot be ruled out, Habeck warned: “From now on, gas is a scarce commodity in Germany ... We are therefore now obliged to reduce gas consumption, now already in summer.”

Russia has denied the supply cuts being deliberate, with state supplier Gazprom blaming it on a delay in return of serviced equipment caused by Western sanctions. The Kremlin on Thursday said Russia “strictly fulfils all its obligations” to Europe.

Under its Phase 2 plan, Berlin will provide a EUR 15 billion credit line to fill gas storage facilities and furthermore will launch a gas auction model over the summer with the hope of encouraging industrial users to save gas.

The second ‘alarm stage’ of the three-stage emergency plan, kicks in when the authorities see a high risk of long-term supply shortages. It includes a clause which allows utilities to pass on high prices to industry and households without delay.

Habeck said Germany was not at that point yet, but that the clause may get triggered if the supply squeeze and price gains persist, pushing power companies deeper into the red.

“If this minus becomes so big that the companies can't bear it any more and they fall down, the whole market threatens to fall down at some point - so a Lehman Brothers effect in the energy system,” he said, referring to US investment bank's 2008 then collapse that rippled through global financial markets.

Germany's local utility association VKU asked the government to protect consumers with subsidies and ensure liquidity, or risk utilities going bust due to low-income retail customers defaulting on payments.

A move to Phase 2 has been anticipated since Gazprom cut flows via the Nord Stream 1 pipeline across the Baltic Sea to just 40 percent of capacity last week.

Facing dwindling deliveries from main supplier Russia, Germany has since late March been at Phase 1, which requires stricter monitoring of daily flows and a focus on filling gas storage facilities.

Potential for serious disruption
In the second stage, the market is still able to function without the need for state intervention, that would kick in at the final emergency stage.

Dutch wholesale gas prices, the European benchmark, rose as much as 8 percent on Thursday.

Nord Stream 1 is due to undergo maintenance on July 11-21 when flows will stop. Hanns Koenig of consultancy Aurora Energy Services in Berlin warned that Gazprom may find reasons to drag out the process.

“The reasons given so far for the delivery cuts already appear constructed,” he said, adding: “Extended maintenance of Nord Stream 1 would further tighten the market and make it harder to fill gas storage until winter. This is of course in Russia's strategic interest.”

Russia may yet cut off gas to Europe entirely to bolster its political leverage, the head of the International Energy Agency (IEA) warned on Wednesday, urging Europe to prepare now.

Russian gas flows to Europe via Nord Stream 1 and through Ukraine were stable on Thursday, while reverse flows on the Yamal pipeline edged up, operator data showed.

Several countries have outlined measures to withstand a supply squeeze and avert winter energy shortages or an inflation spike which could end up challenging Europe's resolve to maintain sanctions on Russia.

The supply cuts have also made German companies consider the spectre of painful production cuts, as well as resorting to pollution of energy sources previously considered unthinkable now that they embrace the prospect of running out of Russian gas.

On Wednesday, the European Union signalled it would temporarily turn to coal to plug energy shortfalls, while calling Moscow's gas supply cuts “rogue moves.” The bloc's climate policy chief Frans Timmermans said on Thursday that 10 of the EU's 27 member countries have issued an “early warning” on gas supplies - the first of the three abovementioned crisis levels verified by EU energy security regulations. “The risk of full gas disruption is now more real than ever before,” he said.