Germany braces for ‘more turbulent days’ on gas markets amid rising Russia tensions

With geopolitical tensions at their highest, German Vice-Chancellor Robert Habeck said he expects “more turbulent days” ahead on gas markets, and echoed calls from other politicians to establish a “national gas reserve” ahead of the next winter season.

“When you have a situation that is unstable in terms of foreign policy, big traders start to stock up on goods,” Habeck explained on Wednesday (23 February) in an interview with German radio DLF.

Stockpiling of commodities like “gas, oil and maybe coal means demand goes up, and then the prices go up” Habeck explained.

However, the market could quickly relax  as well, because “winter is slowly coming to an end,” he added.

Earlier this week, Russia officially recognised Ukraine’s two breakaway regions in the eastern Donbas, triggering a wave of sanctions by Western countries and prompting Berlin to halt the certification process of the Nord Stream 2 pipeline bringing Russian gas directly to Germany.

Germany halts Nord Stream 2

Germany has put a halt to the certification of the controversial Nord Stream 2 pipeline in response to Russia’s recognition of the two breakaway regions in the Ukrainian Donbas and announced that it would revaluate the procedure.

On Thursday (23 February), Russian President Vladimir Putin ordered a “military operation” in Ukraine, with the country’s foreign minister warning that a “full-scale invasion” was underway.

“We must expect some more turbulent days,” Habeck said, noting that energy had become “a matter of security policy” and that steps had to be taken. 

“First of all, we will make sure that the reservoirs are filled, and we will also take political measures to do so,” the minister said, echoing calls for a “national gas reserve” by German politicians.

In Germany, gas storage is left to private actors like the Russian state-owned monopoly Gazprom, whose reservoirs on German soil hit record lows last year ahead of the winter season.

The tensions with Russia come at the worst moment for Germany’s energy transition. Russian gas was expected to fill the gaps in the country’s energy supply as the country plans to close its last nuclear power stations by the end of the year and exit coal by 2030.

But on the surface, German policymakers remain calm. 

“The supply relationship with Russia has also survived other crises,” Habeck assured. Germany could do without Russian gas if it had to, he added, conceding however that it would drive prices up even further.

On Tuesday, Germany put a stop to the certification of the Russian-backed Nord Stream 2 gas pipeline, a move that prompted implicit threats from the Russian side to keep the price squeeze going.

“Welcome to the brave new world where Europeans are very soon going to pay €2,000 for 1,000 cubic meters of natural gas,” tweeted Dmitry Medvedev, a close ally of Russian President Vladimir Putin who is also former chairman of Gazprom. This would be roughly double the current price of gas, which is already sky-high.

And given Gazprom’s market share in the German and European gas market, those predictions may not be so outlandish, experts said.

“I believe that Russia, as a major supplier, could tighten volumes to increase the price of gas,” explained Michael Pahle, energy economics expert at Potsdam institute for climate science. 

But, much like Habeck and most German politicians, he too believes that “Gazprom is not expected to break contracts they already signed.”

Berlin looks for alternatives as German gas storage hits record lows

Germany has begun searching for alternative gas suppliers in the event that imports from Russia are interrupted due to tensions in Ukraine.

Keeping coal alive

For the German government, phasing out coal is a key priority. But the high price of gas has already caused a stoppage in the EU’s coal phase out, according to data published earlier this month.

“If the Ukraine-Russia conflict continues for longer, this could lead to increased coal-fired power generation, with future escalation levels to consider,” Pahle warned.

With high gas prices, the market incentive to replace coal plants vanishes, leaving only renewables to fill the gap. 

“The coal phase-out brought forward to 2030 would require the addition of a total of 23 GW of hydrogen-capable gas-fired power plants,” explains the energy economics research institute (EWI) at the university of Cologne. However, “the currently planned expansion is a mere 2.3 GW,” explains Max Gierkink of EWI.

However, shutting down coal power plants may prove more difficult than initially expected. In Germany, coal power plants cannot be taken off the grid unless operators can prove that security of supply in their absence can be preserved. 

Given the current uncertainty on gas markets, most energy utilities are therefore delaying their investment decisions. 

Gas crisis brought Europe’s coal exit to a halt in 2021: study

The European Union’s efforts to phase out polluting coal power was stopped in its tracks by the surge in gas prices, according to a new analysis of 2021 electricity market data by the financial think-tank Ember.

[Edited by Frédéric Simon]

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