KPMG Law Weekly Update on Energy Market Developments as a Result of the Ukraine War (Week 23/24)

New laws and regulations

Draft of a “Substitute Power Plant Readiness Act”

On June 8, 2022, the German cabinet approved a draft law aimed at responding to the increasingly tense gas supply situation resulting from Russia’s war of aggression against Ukraine. The aim of this draft law is to make power generation less dependent on natural gas and thus less dependent on the recently unpredictable Russian gas imports, and to make Germany capable of acting in the event of an (imminent) gas shortage. To this end, in the event of such a gas shortage, the power supply is to be secured by the possibility of resorting to coal (especially lignite and hard coal) and mineral oil-fired power plants. Corresponding power plants that would soon be decommissioned, have limited availability or are integrated into the grid reserve should therefore be upgraded and placed in a reserve stage that enables the federal government to reactivate these power plants for the electricity market at short notice. To this end, plant operators must create the technical prerequisites for permanent operation on the electricity market by November 1, 2022 in the event of a call-up by the federal government. The cost of the upgrade will be reimbursed by the federal government. In addition, power plant operators will be required to keep a certain amount of fuel in stock for recommissioning by a deadline.

On call by statutory order of the Federal Government, the power plants concerned are allowed to return to the market. This call-off only occurs when there is a gas shortage or threat of one. This would be ensured by appropriate trigger criteria. The operation on the electricity market is voluntary. Opportunities and risks of operation would lie with the operator.

These measures will be implemented mainly through amendments to the EnWG and the CHP Act. The draft contains further measures in this respect: Among other things, the federal government is to be authorized to significantly reduce the use of gas-fired power plants at short notice and for a limited period of 6 months by means of a statutory order in the event of a threat to the gas supply system. The draft does not yet provide for compensation for these reduction measures. In addition, electricity producers for gas-based electricity generation should be able to be charged a “penalty” (fines) per MWh generated (Section 50f EnWG-E). These measures basically concern also CHP plants unless they cannot generate heat in any other way (Section 50f No. 4 EnWG-E). These regulations, which are possible in the event of a crisis, and the increases in energy prices that can be expected as a result, could be associated with the risk of significant cost increases for municipal utilities, particularly in view of the high level of their energy purchases from the CHP plants that are also affected by the rules.

Furthermore, Section 50g of the German Energy Industry Act (EnWG), declares agreements between a gas supplier and an end consumer that prohibit the resale of unconsumed minimum purchase quantities to third parties under a contract for the minimum supply of gas to be invalid. In the event that an end consumer waives the right to purchase the minimum purchase quantity of gas for a system with a connected load of more than 10 MWh, the end consumer is also entitled to offsetting of the corresponding purchase quantities under this standard.

Under the draft, the measures would largely be limited in time until March 31, 2024. The goal of ideally completing the coal phase-out in 2030, as well as the climate targets, would remain unaffected, according to the draft justification.

Official or other sovereign activities

1. Management Report Gas Supply (as of 06/13/2022)

The Federal Network Agency published another status report on gas supply on June 13, 2022.

Current state of affairs

According to the Federal Network Agency’s situation report, nationwide gas supplies remain stable and unchanged. While gas flows are at a normal level, the decline in gas flows from Nord Stream 1 is due to consequences of market events and trader behavior. In particular, the decline follows from the absence of gas volumes as a result of the supply freeze vis-à-vis the Netherlands and Denmark from June 01, 2022. The Danish energy company Ørsted and Shell Energy Europe are affected by Gazprom Export’s export ban. The supply freeze against Shell Energy Europe also affects Germany, but due to the small volume, a total of 1.2 billion cubic meters of gas, it has no impact on supply security in Germany. The current levels of gas storage in Germany are 54.22%, which is higher than the levels in 2015, 2017, 2018, and 2021.

Trading Hub Europe has also started filling Germany’s largest gas storage facility in Rehden. Until the spring, the gas storage facility was owned by the Russian gas company Gazprom, whose subsidiary Gazprom Germania has since been placed under the control of the German Federal Network Agency (see briefing from week 22). Within a month, the level rose to just over 3%.

2. Inspection of Nord Stream 1

Current state of affairs

A two-week inspection is scheduled for the Nord Stream 1 pipeline starting July 11, 2022. This maintenance is the annual and scheduled inspection of the pipeline. Already in the past, maintenance was scheduled in July because gas consumption is lower in the summer months. During the work, the pipeline can not transport gas. The result of the maintenance work is compared with the results of the previous year.

Implications for Germany

The lack of gas transport from Russia during the maintenance period has a negative impact on gas storage levels. Not only can no additional gas be stored during the two weeks, but the pipeline’s missing gas volumes must be made up during maintenance to meet ongoing gas demand. The maintenance work may make it difficult to reach the levels to at least 80%.

Political developments

Reduction of the minimum temperature for heating systems

Due to the throttling of gas supply volumes by Nord Stream 1, Klaus Müller, President of the Federal Network Agency, is in favor of lowering the minimum temperatures in apartments. Currently, landlords are required to set the heating system to achieve a minimum temperature of 20 to 22 degrees Celsius during a heating season. According to Müller, these heating requirements for landlords are to be lowered by the legislature, at least temporarily, in order to save gas in winter. Such a reduction is currently being discussed in the political arena. At the same time, however, the proposal is also facing headwind from, among others, the Federal Minister for Building, Klara Geywitz, and also from the President of the German Tenants’ Association, Lukas Siebenkotten.

EU gas agreement with Israel and Egypt

On Wednesday, the Israeli Energy Ministry announced that the EU, Israel and Egypt signed a memorandum of understanding for a natural gas agreement. The agreement is to be concluded for a period of three years and automatically renewed for another two years. The amount of gas to be delivered is unclear so far. There is only talk of significant deliveries. Israeli gas is to be liquefied in Egyptian liquefaction plants and then shipped to Europe.

Economics Minister Habeck reacts to throttled gas flows

Economics Minister Habeck has announced steps to compensate for declining gas supplies from Russia.
In doing so, he expressed confidence that supplies for the coming winter could be secured through purchases and thrift. The decisive factor, he said, was that gas storage facilities would be topped up from the current 57 percent to 90 in the run-up to winter. This is to be achieved with gas purchases from abroad.

Furthermore, Habeck plans to reduce the use of gas for power generation and industry and to use more coal-fired power plants. They are intended to replace electricity generation in natural gas-fired power plants as much as possible (e.g., with oil) in order to save natural gas. Russian state-owned Gazprom had significantly reduced the flow of gas through the Nord Stream Baltic Sea pipeline in recent days.
Habeck has received broad support from industry for his initiative.

As a medium-term goal, the Vice Chancellor again named finding many other sources of energy in order to break away from dependence on Russia.