Gas prices to determine Germany’s upcoming policy decisions – lobby group chairman

LONDON (ICIS)–Germany is close to a price level where natural gas trading may not be sustainable anymore, the chairman of the country’s gas industry lobby group Zukunft Gas told ICIS.

Timm Kehler said record-breaking whoesale gas prices could prompt the German government to raise the alert level to emergency, which would entail the rationing of gas and lead to a drop in demand.

On Monday afternoon, the September ’22 benchmark TTF price was trading at €295.00/MWh, nearly €50.00/MWh higher than Friday’s ICIS assessment, amid news that Russia would completely stop gas supplies via Nord Stream 1 for a three-day maintenance from 31 August.

Dr Kehler said the most important parameter to watch over the upcoming days and weeks would be the evolution of prices on the gas market as these would determine German government decisions.

The market is still expecting further guidance on how gas would be rationed and who exactly would receive curtailment orders.

RATIONING

Kehler said Germany may be six to eight weeks away from gas rationing but added that the government was yet to publish a study on the merit order that would be implemented for curtailments.

Germany consumed 1003TWh of natural gas in 2021, of which 366TWh were used in the industry and another 306TWh by households, based on a report published by Zukunft Gas.

Gas-intensive chemical producers of methanol or ammonia may be some of the first in line to receive curtailment orders in case gas rationing kicks in, Kehler said.

Nevertheless, he said the energy regulator Bundesnetzagentur (BNetzA) was still due to publish the results of a survey that would inform the market on curtailment procedures.

The survey was carried out in May and the results are still pending.

STORED GAS

Kehler explained Germany was on track with gas injections into storage sites despite the fact that Russian gas supplies stopped in July during the Nord Stream 1 maintenance and will stop again from 31 August.

However, he pointed out that even if the country were to meet the storage targets of 95% fullness by 1 November, it would be difficult to assess how long reserves would last.

“Reserves are usually for two months but this is only a figure because gas can only be used to a certain extent. The speed of taking gas out is limited technically. We can’t rely on storage only. The number of days [of how long stored gas will last] is only a theoretical exercise, the proof will come [from] October when gas demand will double or triple.”

Kehler said he was not optimistic about full reliance on stored gas and added that other supplies would be needed including gas imports or gas-substituting fuels to meet winter demand.

EXTENDING NUCLEAR

On 22 August, economy minister Robert Habeck said Germany may not extend the lifespan of the last three nuclear power plants which have been scheduled for closure at the end of the year.

However, Kehler said it was difficult to distinguish between the ideological arguments put forward by Habeck’s Green Party and practical issues.

“There are many arguments supporting the prolongation of nuclear power plants. It will help but it will not be a decisive factor in terms of helping gas markets.

“Gas power generation in Germany is running at high levels to support France right now because of their difficulties in producing electricity.

“We might see a situation where European solidarity will be required not in the direction we’re used for it to be. We might expect someone else to bail us out. Right now we are bailing out France and Switzerland.”

Even so, Kehler said Habeck may be mindful of the results of a stress test that is currently conducted to assess the impact of closing nuclear power plants.

“He may be advising to shut down nuclear power plants in order to be corrected by the results of the independent survey.

“The debate around nuclear power plants has left the technical arena completely and it’s very strongly extended in ideology,” he added.

IMPORTANCE OF LEVY

Kehler pointed out that one of the key factors in helping to reduce demand as well as supporting gas importers was the introduction of a €2.41/MWh levy, which is due to kick in on 1 October.

He said the tax would persuade consumers to reduce demand and prepare them for rising bills which have to capture soaring wholesale prices.

Also from 1 October, the value added tax is to drop from 19% to 7%, which will help to reduce end-consumer costs.

CHANGING BEHAVIOUR

Kehler said the gas crisis facing Germany and Europe as a whole has already prompted a change in consumer behaviour as customers are now looking at optimal ways to rein in demand.

He said the most important change brought by the gas crisis was the fact that Germany has now turned to the LNG market and will be expected to play a major role globally.

Germany has been discussing the possibility of bringing online five floating storage and regasification units (FSRUs) and one onshore terminal by the middle of the decade.

Two of the FSRUs are due to be operational as early as the first quarter of 2023 and could supply around 12.5bcm/year or 13% of the country’s demand in 2021.

In the longer term he expects the gas crisis to lead to as much as a 10% reduction in gas demand by 2030 depending on the country’s coal phaseout.

RUSSIA

Kehler also expects Germany to reconsider its relationship with Russia, on which it has historically depended for 50% of imports.

“Russia is a country with vast resources, geographically close to Europe and we should have hopes to come to terms with Russia, even though not in the foreseeable future right now.

“However, we have to come up with a strategy with Russia. We have to ask ourselves how can we bring down the share of Russian gas to a sustainable level by introducing taxes or quotas. Whoever wants to bring gas from Russia would have to be taxed.

“Gas exports from Russia to Europe are not regulated. We could imagine the complete opposite from what we see right now. If Russia were to flood the market with gas it would bring down prices immediately and destroy the value of gas storage these days.”

Kehler said that even though some German politicians have been calling for the launch of the controversial Nord Stream 2 which was abandoned following Russia’s war in Ukraine, the 55bcm/year pipeline was “history,” and would not make a comeback.