KPMG Law weekly update on developments in the energy market as a result of the Ukraine war (Week 30/31)

New laws and regulations

No innovations in KW

Official or other sovereign activities

Federal Ministry for Economic Affairs and Climate Protection initiates departmental coordination on price adjustment mechanism pursuant to section 26 EnSiG

Due to continued curtailed gas supplies from Russia, resulting in non-fulfillment of existing supply contracts, the German government has decided to prepare the gas apportionment mechanism provided for in Section 26 of the German Energy Saving Act (EnSiG) in order to secure gas supplies and relieve the burden on gas importers, and has initiated a corresponding draft ordinance, which is expected to be approved by the German Cabinet shortly. The ordinance is expected to take effect by mid-August 2022 and be effective as of Oct. 1, 2022.

The relief mechanism through the gas levy is necessary because the energy shortage artificially created by Russia and the resulting necessary high costs for replacement purchases are not ordinary fluctuations that the market can easily absorb.

The amended EnSiG basically provides for two mechanisms to prevent defaults or, in the worst case, insolvencies in the energy market and to maintain security of supply, we reported. These are, on the one hand, the gas levy within the meaning of Section 26 EnSiG and the right to adjust prices pursuant to Section 24 EnSiG. The difference between the gas levy under Section 26 EnSiG and the price adjustment under Section 24 EnSiG is that under Section 24 EnSiG, prices are passed on individually between the participating suppliers and their respective customers, whereas under the levy under Section 26 EnSiG, higher prices are passed on to all gas suppliers and their customers. In § 1 para. 2 of the legal ordinance now stipulates that financial compensation in the form of a netted price adjustment in the form of a gas procurement levy shall take the place of the right to adjust prices.

Functioning of the gas apportionment

The levy is based on the fact that the costs of replacement procurement for gas are determined and the market area manager passes these on to the balancing group managers (usually gas suppliers), who ultimately (can) pass them on to all gas end consumers. The German government has already announced that this will involve close monitoring of procurement prices in order to be able to calculate the amount of the levy appropriately and to ease the burden on suppliers and consumers.

Requirements of the legal regulation

The prerequisite for activating Section 26 EnSiG is that a “significant reduction in gas import volumes to Germany is imminent.” This statement is made in § 1 para. 1 of the Regulation. Since June 14, 2022, Russia has initially reduced supply volumes through the Nord Stream 1 pipeline to about 40%. After completion of the maintenance work on 21.07.2022, the low level of 40% was initially maintained and then lowered again to 20%, without any apparent technical reason for this.

Entitlement to financial compensation

The beneficiaries of the financial compensation are the energy suppliers (gas importers) directly affected by additional costs due to the significant reduction in total gas imports. The additional costs of replacement for the missing gas volumes from Russia will be determined (and certified by auditors) in the procedure specified in the regulation.

In this context, it is particularly relevant from our point of view whether entitled parties within the meaning of the Ordinance should also be municipal utilities that have concluded gas supply contracts with household and other end customers, i.e. whether the increased costs can be passed on along the entire supply chain. Indeed, according to the wording of the regulation

“the gas importers within the meaning of section 26(5) of the EnSiG directly affected by the significant reduction in total gas import volumes are entitled to financial compensation for the additional costs of a replacement procurement in accordance with the Ordinance.”

The claim may be asserted pursuant to sec. 2 para. 2 of the Ordinance may be asserted against the market area manager. The latter is in turn entitled to pass on to the balancing group managers the costs incurred in connection with the levy for the balancing claims, § 3 par. 1 of the draft regulation. In our opinion, according to the wording of the law and the explanatory memorandum to the Ordinance, municipal utilities do not fall within the scope of § 2 of the Ordinance and are therefore not eligible for financial compensation. The regulation’s explanatory memorandum states:

“The first sentence of paragraph 1 reflects the definition of ‘gas importers’ in section 26(5) of the Energy Security Act and specifies that the persons entitled to financial compensation are the gas importers directly affected by the significant reduction in the total gas import volume.” These are all gas supply companies that procure gas directly from abroad, regardless of whether the contracts regulate the transfer at the border crossing point into Germany or at the Trading Hub Europe virtual trading point in the German market area. Gas importers also include energy supply companies that are not based in Germany, provided that supply contracts for delivery in the German market area are affected. The financial compensation will be based on the additional cost of the replacement.”

Even according to the current state of the draft and its explanatory memorandum, in our opinion only the large importing companies that have concluded existing supply contracts with Gazprom and whose supply is interrupted or restricted due to the unavailable quantities are to be subsumed under the term.

From the point of view of the municipal utilities and other suppliers, which are not gas importers within the meaning of the standard, additional costs cannot therefore be rolled into the levy.

Passing on the new levy to utility customers

The draft regulation initially provides that the market area manager will invoice the balancing group managers for the new levy (presumably from 1.10.0):

“The market area manager shall be entitled to allocate the costs incurred in connection with the payment of the compensation pursuant to Section 2 to the balancing group managers in the market area within the meaning of Section 2 No. 5 of the Ordinance on Access to Gas Supply Networks as a gas procurement levy as of 01 October 2022.”

However, it is still questionable how the transfer from the balancing group manager to the end consumer takes place, especially if the balancing group manager and the gas supply company supplying an end consumer are not identical. It may be possible to pass on the apportionment costs if the existing (end) customer contracts contain an adequately designed price adjustment clause. This would have to be examined on a case-by-case basis. If there is no price adjustment clause, it could be considered to adjust the GTC in compliance with the deadlines of § 41 EnWG as well as the previously agreed contractual provision while at the same time granting special termination rights. Urgency is required in that the levy is expected to be imposed from 01.10.2022.

Entry into force and expiry of the ordinance/processing of the gas levy

The levy is expected to take effect from 01.10.2022 and be limited until 30.09.2024. According to information from the BMWK, reimbursement claims by companies that have arisen, been asserted and examined by 01.04.2024 are to be taken into account.

Only gas volumes that have already been sold to end customers (existing contracts) are covered by the regulation.

Expected amount of the levy

At present, no binding figures are available on the amount of the levy. This also depends on the number and amount of financial compensation claims made. The height should be published on THE’s homepage by mid/late August.

However, recent announcements suggest that the levy will range between 1.5 and 5 cents per kilowatt hour. Whether this will be possible remains to be seen.

Effects on the district heating supply

As already reported in the briefing from week 26/27, there is now a discrepancy between the newly introduced regulation of section 24 para. 5 AVBFernwärmeV, which allows costs to be passed on to end consumers for the application of Section 24 EnSiG. However, since the passing on of costs is now also based on § 26 EnSiG and a legal ordinance based on it, this possibility is ruled out in our opinion due to the exclusion relationship between § 24 EnSiG and § 26 EnSiG. For details, please refer to our briefing from week 26/27.