Germany girds for gas rationing, Europe on edge in Russia standoff

Germany triggered an emergency plan to manage gas supplies on Wednesday that could see Europe’s largest economy ration power if a standoff over a Russian demand to pay for fuel with roubles disrupts or halts supplies.

Moscow’s insistence on rouble payments for the Russian gas that meets a third of Europe’s annual energy needs has galvanised others in Europe: Greece called an emergency meeting of suppliers, the Dutch government said it would urge consumers to use less gas and the French energy regulator told consumers not to panic.

The demand for roubles, which has been rejected by G7 nations, is in retaliation for the West imposing crippling sanctions on Russia following its invasion of Ukraine.

Moscow, which calls its actions in Ukraine a “special military operation”, says the Western measures amount to “economic war”.

Russia’s most senior lawmaker said on Wednesday Russia could widen the demand for rouble payments to other commodities including oil, grain, fertilisers, coal and metals, raising the risk of recession in Europe and the United States.

Moscow is expected to make public its plans for rouble payments on Thursday, although it said it would not immediately demand that buyers pay for gas exports in the currency.

Western countries have said payment in roubles would breach contracts that can take months or more to renegotiate, a prospect that has driven commodity markets higher.

It would also soften the impact of sanctions on Russia by bolstering the currency after it was hit by Western restrictions on Moscow’s access to its foreign exchange reserves.

Berlin’s unprecedented move is the clearest sign yet that the European Union is preparing for Moscow to cut gas supplies unless it gets payment in roubles. Italy and Latvia have already activated warnings.

Germany Economy Minister Robert Habeck implemented the “early warning phase” of an existing gas emergency plan, meaning that a crisis team from the economics ministry, the regulator and the private sector will monitor imports and storage.

Habeck told a news conference that Germany’s gas supplies were guaranteed for now but urged consumers and companies to reduce consumption, saying that “every kilowatt hour counts”.

INDUSTRY FIRST IN LINE FOR CUTS

If supplies fall short, Germany’s network regulator can ration gas, with industry first in line for cuts. Preferential treatment would be given to private households, hospitals and other critical institutions.

Even without the threat of gas shortages, Germany could face recession and energy costs have already forced companies, including makers of steel and chemicals, to curtail production.

German industry is at particular risk, the BDI association said on Wednesday, asking for measures, including loans and state participations, to prevent firms from going bust.

This could cause industrial production to shrink by as much as 9%, depending on the length of any disruption, Deutsche Bank senior economist Eric Heymann told Reuters.

The government’s council of economic advisers on Wednesday more than halved its growth forecast for this year to 1.8%.

Half of Germany’s 41.5 million households heat with natural gas while industry accounted for a third of the 100 billion cubic metres of national demand in 2021.

Russia is Germany’s top gas supplier, accounting for 40% of imports in the first quarter of 2022. Berlin has pledged to end its energy dependency on Moscow but it will not achieve full independence before mid-2024, according to Habeck.

Europe faced an energy crunch even before Russia invaded Ukraine. Gas storage levels in the European Union are about 26% of total capacity, below normal levels at this time of year.

The European Commission, which said on Wednesday it would work closely with member states to prepare for any gas shortages, has proposed legislation requiring countries to fill levels to at least 80% by November but that would be almost impossible if Russia halts supplies.

The target to fill storage would not apply if the European Commission declared an EU-wide or regional gas supply emergency – which it can do if at least two countries declare an emergency first.

‘EVERYTHING WILL BE FINE’

Jean-François Carenco, head of the energy regulator in France, which is far less reliant on Russian gas than Germany, due to pipeline and liquefied natural gas from other origins and a predominance of nuclear for power generation, said the country should not encounter any supply issues.

“Everything will be fine, the gas storage facilities are well filled, we’ll make it through the winter,” he told BFM TV.

Greece was set to hold an emergency meeting of its energy regulator, gas transmission operator and its biggest gas and power suppliers on Wednesday to assess its supply security in case Russia stops supplies.

The Dutch government said it would launch a campaign to get consumers to use less gas.

Investors are watching to see how the dispute over Russia’s insistence on rouble payments plays out as consumers in Europe grapple with energy prices that have forced governments to announce fiscal relief measures.

This month has been the most expensive month for power prices in European history, although markets are set to end the month at lower levels than at the start of March.

After Germany’s announcement, German year-ahead wholesale electricity set a three-week high of 185 euros per megawatt hour, up 6.3%..

Kerstin Andreae, head of the Federal Association of the Energy and Water Industry (BDEW), said Germany should have clear plans for how the government would deal with a gas delivery stoppage that forced rationing.

“We must now take concrete measures to prepare for the emergency level, because in case of a stoppage things would have to move fast,” Andreae said.