Natural gas is perhaps Russia's most important energy resource in the geopolitical battle following the invasion of Ukraine. While the EU and other Western allies agreed on an embargo on Russian coal and a far-reaching shutdown of oil supplies, the bloc has rejected a ban on natural gas imports. Several member states are too dependent on natural gas to overcome a sudden supply cut, given that replacing Russian pipeline gas is much more difficult in the short term than finding alternative sources of coal and oil. Therefore, stopping gas trade with Russia could have severe consequences for the European economy. The Russian government has already announced the cessation of gas supplies to several countries, forcing Germany and the EU to prepare for a sudden supply disruption. Concerns have grown since supplies via the Nord Stream 1 pipeline were halted in July. This article 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 EU have taken. It also lists experts who can be contacted, as well as important documents for journalists covering this topic. (9 August: German Chancellor O. Scholz claims there are "no technical reasons" for further supply reductions; the Federal Network Agency warns that without Nord Stream 1 gas, storage targets are unattainable; the government introduces a gas levy and takes over Uniper shares).
What is the role of natural 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 needs and to a much lesser extent (approximately 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 a significant challenge in replacing the remaining share with alternative sources. Other important gas suppliers are the Netherlands, Belgium, and Norway, which have increased export volumes but cannot fully fill the gap left by Russia.
Cheap gas from Russian pipelines was long a benefit for German industrial companies, which could operate at lower costs and be more competitive. Therefore, gas was seen as a "transition technology" to support the gradual phase-out of coal, due to its relatively lower CO2 emissions, as well as nuclear energy, 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 stop one of Moscow's most important sources of income. However, in March, Russia's demand to pay for gas supplies in Russian roubles alarmed Western importers, as it signalled that the Russian government was prepared to use natural gas as a tool to influence EU policymakers. Leading EU governments of G7 countries stated in a joint declaration that they would not accept changes to existing contracts that stipulated other currencies.
Since then, Russia has been reducing supplies to Europe step by step
As of July 2022, Russia had stopped gas supplies to several European countries, such as Poland, Bulgaria, the Netherlands, and Finland, in each case citing a failure to make rouble payments. In May, the EU softened its stance on gas trade restrictions, resulting in several key clients eventually giving in to Russian demands and paying in roubles to maintain supply stability in the short term. Germany has set a target of largely phasing out Russian supplies by 2024. But while the largest EU clients have not yet been fully cut off, the significant reduction in flows to Germany, as well as to Italy and France, has raised concerns that the Moscow government will eventually also cut off its most lucrative gas clients in Europe.
State-owned Russian gas supplier Gazprom announced in mid-June that gas flow from Russia to Germany via the main Nord Stream pipeline would be reduced by approximately 60%, arguing that the German engineering company 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. The announcement came just weeks before annual maintenance work began on the subsea pipeline, reducing flow to zero.
After maintenance work was completed in late July, gas flow resumed. However, after just a few days, Gazprom continued to reduce Nord Stream supplies, cutting flow to about 20% of full capacity. Chancellor Olaf Scholz personally visited the disputed gas turbine storage site in western Germany in early August, claiming that Russia had "no technical reason" to stop the gas turbine located in the storage facility in western Germany.
Already on 23 June, the government began the second of a total of three escalation stages of its gas security plan – the "alarm stage", which aims to prepare gas consumers for further price increases and potential supply bottlenecks while still relying largely on market mechanisms.
How can stored gas reserves help if supplies dry up?
Gas storage facilities form a kind of buffer system for the gas market. The fuller they are at the moment of a potential gas supply interruption, the better. If all storage facilities were completely filled, Germany could meet about a quarter of its annual gas demand. At the beginning of August, storage facilities were nearly 73% full. The government initially introduced a new law that provided for ambitious minimum gas storage fill levels by specific dates, but then raised 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 via the vital Nord Stream pipeline remain restricted, the German association of gas storage operators INES told the dpa news agency at the end of July.
Calculations published by the grid agency BNetzA in mid-August revealed that achieving 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 the government could regulate gas retail if gas storage facilities cannot be filled according to plan due to reduced flows.
What would be the immediate consequences of a halt in Russian gas supplies?
If Russia were to completely cut off supplies via Nord Stream 1, German authorities would have up to 24 hours to detect that the pipeline was empty, said the head of the grid agency, Klaus Müller. The immediate reaction from Germany would depend on consumption levels at the time of the supply cut, the fill level of Germany's gas storage facilities, and available substitutes from other countries, he said. To prevent market turmoil, it would have to be decided quickly whether or not Germany would need to declare a state of emergency, Müller said. Therefore, a supply cut in winter will cause greater difficulties than in summer, when gas consumption is much lower.
In the event of a severe gas crisis, so-called "protected customers" will be considered a priority if gas consumption limits are introduced. These are households, small businesses such as bakeries and supermarkets, as well as essential social services such as hospitals, schools, police stations, or food producers. If a gas supply restriction is introduced, gas supplies will first be cut to companies that have so-called "interruptible contracts", and then to gas power plants that are not essential for grid stability. Next in line are large industrial consumers, which accounted for approximately 37% of the country's gas demand in 2021.
However, BNetzA head Müller said that depending on the exact circumstances of a gas supply cut, there is a wide range of factors, making it a very difficult task to set a clear disconnection schedule in advance. "Unfortunately, it is not possible to arrange 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 prevails will be quite individual", namely, the exact circumstances of a gas supply cut are not known in advance. Setting an "abstract gas supply cut-off order" would not be possible, even if market participants request it for greater planning certainty.
The Federal Network Agency warned that even a short-term gas supply cut in a region could have long-lasting consequences for private households. As soon as the pressure in a given region drops below a minimum threshold, hundreds of thousands of gas boilers will automatically switch off, and qualified personnel will have to restart them individually, warned BNetzA head Klaus Müller. His agency will therefore 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 municipal government indicated that this could also require the rationing of hot water or the lowering of maximum temperatures in the district heating network. Several cities have already introduced measures to quickly reduce energy consumption.
Production cuts caused by gas shortages could also disproportionately affect producers of energy-intensive basic materials such as chemicals, steel, fertilisers, or glass. Some industrial equipment would be permanently damaged if it had to be shut down for an extended period. Company executives have therefore warned of "dramatic" domino effects in supply chains that could occur if their products were no longer available. They argue that this would spread damage throughout the economy similar to the collapse of the Lehman Brothers bank, which triggered the 2008 financial crisis.
What precautionary measures did Germany and the EU take?
As early as late March 2022, Germany triggered the first of three stages of its national gas supply emergency plan, fearing that Russia's demand to receive payments from foreign buyers in roubles could lead to a trade cut-off. The "early warning" stage was declared as a precautionary measure as supplies were not yet threatened, the ministry said at the time. Activating this stage had no direct immediate consequences for end-gas consumers, but it served to place preparations for a crisis escalation on firmer legal and organisational footing. To monitor developments and prepare appropriate response measures, a crisis response group was formed, consisting of representatives from the Ministry of Energy, the grid agency, network 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 unbalance the market. Several companies have already argued that they cannot afford sharp price increases, which is a regular market development, and industry heavyweights such as chemical manufacturer BASF have warned that prices could "massively" increase after supply reductions via the subsea pipeline.
At this stage, direct government intervention in gas distribution is not yet taking place, but the government introduced a new levy on gas that 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 designed to support gas importers struggling with difficulties, but it will increase already elevated energy bills for households. The government also agreed to take a 30% stake in Europe's largest importer of Russian gas, Uniper, whose insolvency could have caused a domino effect, triggering turmoil across the entire German gas industry.
The government intervenes directly in physical distribution only at the third and final escalation level – the "emergency stage", which is triggered as soon as a "significant deterioration" in the supply situation is considered inevitable. At this stage, the grid agency BNetzA becomes the so-called "federal load distributor", which effectively means that gas distribution is introduced and the state agency takes over distribution from network operators according to predefined criteria.
To help decide what the rationing and cut-off sequence could look like, BNetzA asked gas grid operators and industrial consumers on the "Gas Security Platform" to indicate their consumption levels and future gas needs. Companies with very high gas demand – more than 10 megawatt-hours (MWh) per hour, can be handled individually in the event of gas rationing, while those consuming less than the threshold will have to be handled with a "lawnmower method" sweep, said agency head Müller. Approximately 2,500 large clients consuming more than 10 MWh account for the majority of industrial gas demand. The goal would be to allow companies to control the volume of gas they receive during a shut-down to avoid equipment damage, he said. Many companies have started taking precautionary measures themselves, reducing natural gas demand and seeking 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, encouraging citizens to save energy. Lower heating temperatures and reduced hot water usage featured prominently as advice on how to reduce gas demand in households, which accounted for about one-third of total demand in 2021.
Immediate supply reductions could be partly mitigated by the EU regulation on security of gas supply introduced back in 2017, which provides that member states help each other with gas supplies in the event of a shortage. EU countries must develop the necessary technical, legal, and financial measures to make "solidarity gas" supply possible in practice. So far, Germany has concluded legal agreements on providing gas assistance only with Denmark and Austria, and as of late July was negotiating with Poland and Italy.
To prevent severe consequences of a shortage, EU member states decided to voluntarily reduce gas consumption by 15% until the next winter.
What could be the long-term consequences of the reduction?
In April, Germany's leading economic research institutes pointed out in a joint analysis of the country's economic prospects in the conditions of an energy crisis that stopping supplies "would threaten to push the German economy into a severe recession". A halt in gas supplies could reduce gross domestic product (GDP) by almost one percentage point – from the 2.7% expected in 2022 to 1.9%, they concluded. In their previous analysis in the autumn of 2021, before the Russian invasion began and the energy crisis hit full throttle, researchers still forecast GDP growth of 4.8%. For 2023, a halt in gas supplies could even cause an economic downturn of more than 2%, while a scenario with continued gas trade forecasts GDP growth above 3%. The cumulative GDP losses caused by a gas supply halt could reach 220 billion euros by the end of next year, which is about 6.5% of Germany's annual economic output, economists noted.
A study published by the University of Mannheim found that the consequences of a gas supply halt could be much more dramatic than those of the 2008 financial crisis or the COVID-19 pandemic that began in 2020, estimating GDP losses at around 8%. "Such an energy shock will directly hit the core of German industry and strongly reduce production potential," the study concluded.
Other analyses suggest that warnings of a deep recession are too pessimistic. Daniel Gros (Daniel Gros), an economist at the Centre for European Policy Studies (CEPS), argued that "cheap gas imports are unlikely to be a significant growth factor", as pipeline gas imports 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 warned that policymakers must be careful not to distort necessary structural changes while trying to avoid short-term losses. These changes will affect gas-intensive industrial sectors regardless of a halt in Russian supplies, as the phase-out of gas that German companies have so far received at advantageous prices is inevitable in any case, economists noted. Energy experts who testified at a hearing in the German parliament on the consequences of a gas supply halt said that prices will rise regardless of a cessation of gas trade.
Energy economist Andreas Löschel (Andreas Löschel), head of the government's expert commission on energy transition, told "Neue Energie" magazine that in principle, a rise in fossil fuel prices would be a much-needed phenomenon 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 vulnerable companies struggling to overcome price increases should be provided with help, but overall prices should be set based on market developments, he argued. "Most of the price increase is yet to come," said the head of the expert commission, arguing that high prices are necessary to promote an understanding of the "urgency" of the situation, and they should trigger large-scale energy saving programmes. Regarding alternatives to Russian gas supply, 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 need smaller quantities than at present," he noted.