In recent months, Russia has reduced supplies to Europe step by step, stressing that this energy commodity is perhaps its most important asset in the geopolitical struggle following its invasion of Ukraine. While the EU and other Western allies agreed on an embargo on Russian coal and a far-reaching suspension of oil supplies, the bloc has rejected a ban on natural gas imports. Several member states are too dependent on gas to weather a sudden supply cut, given that replacing Russian pipeline gas is much harder in the short term than finding alternative sources of coal and oil. Therefore, ending gas trade with Russia could have severe consequences for the European economy. The Russian government has already announced the suspension of gas supplies to several countries, forcing Germany and the EU to prepare for a sudden supply stoppage. At the beginning of September, Russia announced that one of its main gas pipelines to Europe – Nord Stream 1 – would be closed indefinitely. This factsheet explains why and when gas supplies could be cut off, what the immediate and long-term consequences might be, and what precautionary measures Germany and the European Union have taken. It also lists experts who can be contacted, as well as important documents for journalists covering this topic.
What is the role of gas in Germany's energy system?
In the first half of 2022, natural gas accounted for approximately 27% of Germany's total energy consumption, mainly for heating and industrial purposes, and to a much lesser extent (about 15%) for electricity generation. Since the invasion, Germany has managed to quickly reduce the Russian share of gas supply – from about 55% in February to about 35% in May 2022. However, it still faces significant challenges in replacing the remaining share with alternative sources. Other important suppliers are the Netherlands, Belgium, and Norway, all of which have increased export volumes but cannot fully fill the shortfall created by Russia.
Cheap gas from Russian pipelines was a long-term benefit for German industrial companies, which could operate at lower costs and gain competitiveness. Therefore, gas was considered a “bridge technology” to support the gradual phasing out of both coal, due to gas’s relatively lower CO2 emissions, and nuclear power, until renewable energy sources fully take over the energy system.
Why and when could gas supplies from Russia be cut off?
Both Russia and its main gas consumers in Europe initially insisted that gas trade would not be blocked by sanctions or other war-related measures, despite repeated calls from Western allies to halt one of Moscow’s most important sources of income. However, in March, Russia’s demand that gas supplies be paid for in Russian roubles alarmed Western importers, as it suggested that the Russian government was willing to use natural gas as a tool to influence EU policymakers. In a joint statement, the leading EU governments of the G7 countries indicated that they would not accept changes to existing contracts that stipulate other currencies.
Since then, Russia has gradually reduced supplies to Europe, cutting off supplies completely via the main Nord Stream 1 gas pipeline indefinitely at the beginning of September.
As of September 2022, Russia had stopped gas supplies to several European countries, such as Poland, Bulgaria, the Netherlands, and Finland, in all cases citing failure to meet payments in roubles. In May, the EU softened its stance on gas trade restrictions, resulting in several key clients eventually bowing to Russian demands and paying in roubles to maintain supply stability in the short term. Germany has set a target to largely phase out Russian supplies by 2024. However, although the largest EU clients have not yet been fully cut off, the significant reduction in flow to Germany, as well as to Italy and France, has raised concerns that the Moscow government will eventually cut off its most profitable gas clients in Europe as well.
The state-owned Russian gas supplier Gazprom announced in mid-June that the gas flow from Russia to Germany via the main Nord Stream pipeline would be reduced by about 60%, arguing that German engineering firm Siemens had not provided the necessary equipment to carry out repairs. German Economy Minister Robert Habeck, who had already announced in May that Russia was “weaponising” its fossil fuel resources, called Gazprom's decision “political”, as no technical or legal reason had been found for the delay. Since then, the suspension of supplies via Nord Stream has become a key issue – starting with annual maintenance work that reduced flow to zero for about two weeks, and then with subsequent reductions that cut flow to 20% of full capacity. In early September, Gazprom announced that after a few days of repairs, Nord Stream would be shut down indefinitely, citing engine oil leaks as the reason. Russian gas supply through Ukraine, another important route, has also been reduced.
Economy Minister Robert Habeck said that gas supplies from Russia “no longer matter in the context of my security considerations” and that Germany cannot rely on Russia. “The only thing you can count on from Russia is lies,” he said.
As early as 23 June, the government had initiated the second of three escalation stages in the national gas supply security plan – the “alarm stage”, which aims to prepare gas consumers for further price increases and potential supply bottlenecks while still relying heavily on market mechanisms.
How can stored gas reserves help if supplies run out?
Gas storage facilities act as a kind of buffer system for the gas market. The fuller they are at the moment of a potential gas supply disruption, the better. If all storage facilities were completely filled, Germany could meet about a quarter of its annual gas demand. At the beginning of September, storage facilities were nearly 85% full. The government initially introduced a new law that set ambitious minimum gas storage fill levels by specific dates, but then increased the targets even further with a July decision. By 1 September, storage facilities must be filled to 75% (by 1 October – 85%; by 1 November – 95%). By 1 November, the fill level could reach 90%, even assuming that flows from Russia through the important Nord Stream pipeline remain limited, the German gas storage operators association INES told the dpa news agency in late July.
Calculations published by the grid agency BNetzA in mid-August had revealed that meeting the targets is seriously jeopardised if gas supplies via the Nord Stream 1 pipeline do not increase significantly again. Minister Habeck warned that Germany faces “very, very heated debates” if the country fails to fill its gas storage facilities before the heating season begins in October. He said that the government could regulate gas retail if reduced flows mean gas storage facilities cannot be filled according to plan.
What would be the immediate consequences of stopping Russian gas supplies?
Russia has previously announced reductions in supplies using Nord Stream 1. The immediate reaction from the German side depends on the situation at the given moment: on the level of consumption at the time of the supply cut, the fill level of Germany’s gas storage facilities, and available substitutes from other countries. To date, Germany has not announced the third of three escalation stages in the national gas supply security plan – the “emergency stage”, which could lead to supply rationing.
In the event of a severe gas crisis, so-called “protected consumers” would be considered a priority if gas rationing were introduced. These include households, small businesses such as bakeries and supermarkets, and essential social services such as hospitals, schools, police stations, or food producers. If a gas supply restriction were introduced, gas supplies would first be cut to companies with so-called “interruptible contracts”, followed by gas power plants that are not essential for grid stability. Next in line are large industrial consumers, who accounted for about 37% of the country’s gas demand in 2021.
However, BNetzA head Müller said that depending on the precise circumstances of a gas cut-off, there is a wide range of factors, which makes setting a clear shutdown schedule in advance a very difficult task. “Unfortunately, it is not possible to put all these criteria in a clear order,” he argued. Decisions would ultimately have to be taken on a case-by-case basis “because the situation that will prevail will be quite individual”, i.e., the exact circumstances of a gas cut-off are not known in advance. Setting an “abstract order of gas supply cessation” would be impossible, even if market participants demand it for greater planning certainty.
The grid agency warned that even a short-term gas supply interruption in a region could have lasting consequences for private households. As soon as pressure in a given region drops below the minimum threshold, hundreds of thousands of gas boilers will automatically shut down, and qualified personnel would need to start them individually, warned BNetzA head Müller. Therefore, his agency will always try to avoid such a scenario by forcing a reduction in industrial use. Almost half of Germany’s 43 million households are heated with natural gas.
Müller said that energy saving is key, and ultimately, supply to certain users would have to be restricted. He said that in the event of a shortage, non-essential products and services rank lower on the priority list. “Swimming pools are not critical, nor is the production of chocolate biscuits.” The Hamburg city government indicated that this could also require the rationing of hot water or lowering maximum temperatures in the district heating network. Several cities have already introduced measures to quickly reduce energy consumption.
Reducing production due to a gas shortage could also disproportionately affect producers of energy-intensive base materials, such as chemicals, steel, fertilisers, or glass. Some industrial equipment would be irreparably damaged if it had to be shut down for an extended period. Business leaders have therefore warned of “dramatic” domino effects in supply chains that could occur if their products are no longer available. They argue that this would spread losses across the economy, similar to the collapse of Lehman Brothers bank, which triggered the 2008 financial crisis.
What precautionary measures have Germany and the European Union taken?
As early as late March 2022, Germany triggered the first of three stages of the national gas supply emergency plan, fearing that Russia’s demand for payments from foreign buyers in roubles could lead to a trade shutdown. The “early warning” stage was declared as a precautionary measure because supplies were not yet threatened, the ministry stated at the time. Activating this stage had no direct immediate consequences for end-stage gas consumers, but it served to place preparation for a crisis escalation on a firmer legal and organisational footing. To monitor developments and prepare appropriate response measures, a crisis response group was formed, comprising representatives from the Energy Ministry, the grid agency, grid and storage operators, and gas retailers.
The second “alarm” stage was initiated after supply through Nord Stream 1 was reduced in mid-June, assuming that this could destabilise the market. Several companies have already argued that they cannot afford steep price increases, which are a regular market development, and industry heavyweights such as chemical manufacturer BASF have warned that prices could rise “massively” following supply reductions through subsea pipelines.
At this stage, direct government intervention in gas distribution is not yet taking place, but the government is introducing a new gas levy, which allows affected suppliers to pass on part of the price increase to customers – even if they have previously signed fixed-price contracts. This levy is intended to support gas importers struggling with difficulties, but it will increase already high energy bills for households. The government also agreed to take a 30% stake in Uniper, Europe’s largest importer of Russian gas, whose insolvency could have triggered a domino effect, causing shockwaves throughout the German gas industry.
Where necessary, the government only intervenes directly in so-called physical distribution in the third and final escalation level – the “emergency stage”, which is initiated as soon as a “significant deterioration” of the supply situation is deemed inevitable. At this stage, the grid agency BNetzA becomes the so-called “federal load retailer”, which effectively means that gas rationing is introduced and the state agency takes over distribution from grid operators according to pre-defined criteria.
To help decide what the rationing and shutdown sequence might look like, BNetzA asked gas grid operators and industrial consumers in the “Gas Security Platform” to indicate their consumption levels and future gas needs. Companies whose gas demand is very high – more than 10 megawatt hours (MWh) per hour – can be handled individually in the event of gas consumption restrictions, while companies with consumption below the threshold will have to use an all-encompassing “lawnmower method”, said agency head Müller. About 2,500 large clients consuming more than 10 MWh account for most of the industrial gas demand. The goal would be to allow companies to control the volume of gas they receive during a shutdown to avoid equipment damage, he said. Many companies have begun taking precautionary measures themselves, reducing natural gas demand and looking for alternative fuels such as oil or propane gas, which is a by-product of oil refining processes.
In early June, the government and a coalition of business and civil society groups launched a campaign aimed at reducing dependence on Russian imports and accelerating the transition to renewable energy sources by encouraging residents to save energy. Lower heating temperatures and reduced hot water use featured prominently as tips on how to reduce gas demand in households, which accounted for about a third of total demand in 2021.
Immediate supply reductions could be partially offset by an EU regulation on secure gas supplies introduced in 2017, which provides for member states to help each other with gas supplies in the event of shortages. EU countries must develop the necessary technical, legal, and financial measures to make the supply of “solidarity gas” possible in practice. To date, Germany has concluded legal agreements on providing gas assistance only with Denmark and Austria, and was in negotiations with Poland and Italy until late July.
To prevent serious consequences of gas shortages, EU member states decided to voluntarily reduce gas consumption by 15% until next winter. European Commission President Ursula von der Leyen called for an “emergency intervention” in the electricity market to reduce skyrocketing prices.
What could be the long-term consequences?
In April, Germany’s leading economic research institutes, in a joint analysis of the country’s economic outlook under energy crisis conditions, pointed out that a supply cut would “threaten to plunge the German economy into a severe recession”. A gas supply interruption could reduce gross domestic product (GDP) by nearly one percentage point – from the 2.7% expected in 2022 to 1.9%, the experts concluded. In their previous analysis in autumn 2021, before the Russian invasion began and the energy crisis hit full throttle, researchers were still forecasting GDP growth of 4.8 percent. For 2023, a gas supply interruption could even cause an economic downturn of more than 2 percent, while a scenario with continued gas trade predicts GDP growth of over 3 percent. The cumulative GDP losses caused by a gas supply interruption could reach 220 billion euros by the end of next year, which is about 6.5 percent of Germany’s annual economic output, the economists noted.
A study published by the University of Mannheim found that the consequences of a gas supply interruption could be much more dramatic than the aftermath of the 2008 financial crisis or the C19 pandemic that began in 2020, estimating GDP losses at around 8%. “Such an energy shock will directly hit the core of German industry and severely reduce production potential,” the study concluded.
Other analyses suggest that warnings of a deep recession are too pessimistic. Economist Daniel Gros (Daniel Gros) from the think tank “Centre for European Policy Studies” (Centre for European Policy Studies (CEPS)) argued that “cheap gas imports are unlikely to be a significant growth factor”, because gas imports via pipelines cost Germany only 0.75% of GDP, and the total value of gas consumption in the country is less than 2% of GDP.
However, leading research institutes have warned that policymakers must be careful not to distort necessary structural changes in an attempt to avoid short-term losses. These changes would affect gas-intensive industrial sectors regardless of the interruption of Russian supplies, as the phasing out of gas that German companies previously received at favourable prices is inevitable in any case, the economists noted. Energy experts testifying at a hearing in the German parliament on the consequences of a gas supply cut said that prices would rise regardless of whether gas trade is halted.
Energy economist Andreas Löschel (Andreas Löschel), chair of the government’s expert commission on energy transition issues, told Neue Energie magazine that, in principle, rising fossil fuel prices would be a much-needed trend to encourage the transition to clean energy sources. Current government policy, which aims to quickly reduce costs for consumers, would not be sustainable, Löschel said. Poorer clients and distressed companies struggling with price increases should receive assistance, but overall, prices should be set with regard to market developments, he argued. “Most of the price increase is yet to come,” the head of the expert commission said, arguing that high prices are necessary to foster an understanding of the “urgency” of the situation, and they should launch large-scale energy saving programmes. Regarding alternatives to Russian gas supply, Andreas Löschel said that one should not seek to replace long-term contracts with Russia with long-term contracts for liquefied natural gas (LNG) supplies from other countries. “Gas will be important for many more years, but we will also need smaller quantities than at present,” the economist noted.