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Securing the gas supply in light of the Russia-Ukraine crisis | Hengeler Mueller News
Geopolitics

Securing the gas supply in light of the Russia-Ukraine crisis

The Ukraine conflict has led to a substantial curtailment of the gas deliveries from Russia, resulting in high prices on the gas market. Since the risk of the situation deteriorating further cannot be ruled out, the German Federal Ministry for Economic Affairs and Climate Action (BMWK) unveiled an additional package of energy-securing measures on 21 July 2022 that basically has three components: raising gas storage facilities' filling level targets, cutting natural gas consumption in electricity generation, and expanding the measures to boost energy efficiency and saving. The measures are to be implemented step-by-step in the coming weeks and after the summer recess.

Already on 23 June 2022, the BMWK declared the second of the three crisis levels under Germany's Emergency Plan for Gas. Now, at this "alert" stage, which followed the announcement of the "early warning" level on 30 March 2022, there is a disruption of the gas supply or an exceptionally high demand for gas which has resulted in a significant deterioration of the gas supply situation. In this scenario, however, the market is still able to manage the situation without the need to apply non-market-based measures.

Only at the "emergency" level can the government intervene directly because the gas supply would no longer be sufficient to meet the remaining demand for gas in spite of all relevant market-based measures having been implemented. In an emergency, the Federal Network Agency (FNA) assumes the role of national supply coordinator and may take sovereign measures to increase gas production or imports on the supply side or reduce gas consumption on the demand side. One possible measure would be ordering the reduction of gas consumption.

According to the FNA, there are no abstract criteria that can be used to determine which companies may be affected by a gas consumption reduction. Instead, the FNA would decide after balancing relevant interests in such a way as to avoid or compensate for any under-supply in the gas supply network. However, in its 17 May 2022 notification on the supply distribution of gas, the FNA identified concrete measures that could be taken to increase gas production and imports as well as to decrease the demand for gas, including the possibility of ordering gas consumption reductions on non-protected end consumers, including industry consumers. In the notification, the FNA outlines certain criteria to be considered if an order to reduce gas consumption is being contemplated, in particular whether or not the relevant consumers are essential to ensuring that vital needs are met.

The key legal framework to Germany's Emergency Plan for Gas is provided by Regulation (EU) No 2017/1938 concerning measures to safeguard the security of gas supply and repealing Regulation EU No 994/2010 (the SoS Regulation – the three crisis levels mentioned above are defined in Article 11 (1)). On a national level, the SoS Regulation is implemented by the Energy Industry Act (EnWG), the Energy Security Act 1975 (EnSiG) and the Regulation on Securing Gas Supplies in the Event of a Supply Crisis (GasSV).

With an amendment of the EnSiG in May 2022, Sec. 24 of the law has created a price adjustment mechanism in order to prevent companies along the energy supply chain from collapsing in the event gas prices become extremely high. For this mechanism to be used, the FNA must have determined that overall gas import quantities to Germany have dropped significantly, and that finding must be published in Germany's Federal Gazette (Bundesanzeiger). This has not yet happened. 

As an alternative to the price adjustment rights under Sec. 24 EnSiG, in early July 2022, Sec. 26 EnSiG gave the Federal Government the authority to issue an ordinance instituting a surcharge mechanism for a "balanced price adjustment" ("saldierte Preisanpassung"). That authority can be used as soon as a significant reduction in the quantities of gas imported to Germany is imminent. The "balanced price adjustment" pursuant to Sec. 26 EnSiG is designed to enable energy companies to allocate their additional costs for procuring gas equally to all gas customers. On 22 July 2022, the Federal Government announced that it intends to utilise this authority and, from no later than 1 October 2022 onwards, to allow gas importers to pass on 90% of the increased procurement costs to gas consumers by means of a surcharge procedure. The ordinance is currently being drafted.

Companies are advised to collect and substantiate as early as possible the necessary information that may be relevant for the FNA's decisions whether or not to order a reduction of gas consumption. In particular, it is sensible for companies to assess the impact that a gas supply reduction would have on the goods they produce that serve vital needs of the public. Either in case of a gas shortage or as an entirely preventive measure, companies should provide the relevant information to the FNA so that the authority can consider it in potential future decisions on gas consumption reductions. 

At present, the FNA considers the gas supply in Germany to be stable, but the overall situation to be tense and very volatile. After the maintenance work on Nord Stream 1 was completed, the gas flows from the pipeline were at around 40% of maximum capacity. A reduction of delivery quantities to 20% was announced on 27 July 2022. As the current factual and legal situation is evolving so rapidly, our assessment might change.

At the European level, there are also designs to reduce the risks that might arise from a complete stoppage of Russian gas deliveries through an emergency gas plan that sets out an array of measures. Although the EU Commission's 20 July 2022 proposal for an emergency gas plan was agreed upon by the EU energy ministers on 26 July 2022, it includes considerably more exemptions and higher hurdles for the introduction of binding gas savings targets. The planned EU regulation provides for the national consumption of gas to be reduced voluntarily by 15% from August 2022 to March 2023. In the event of a major supply crunch, an EU-wide alarm is to be sounded and binding savings targets set by the EU Council.

If you have any specific questions on the legal regulatory framework for the gas supply, please reach out to one of our experts.

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