Energy Supply and Price Development - Influences and Effects

The "German Angst" is sweeping Germany and Europe. German consumers in particular are rushing into electricity-based heating devices such as infrared heaters, radiators and wood-burning stoves as if there were no tomorrow. On the one hand, it is understandable that people do not want to sit in the cold in winter, but many do not consider that it is precisely the electric radiators and hot-water boilers that consume a lot of electricity. And electricity, like all other energy sources, is becoming more and more expensive.

This brings us to the real issue - the ever-increasing energy prices. Heralded by the Ukraine war, the misguided energy policies of past governments have put Germany in severe straits. Harmonized inflation (calculated according to European standards) is provisionally put at 8.5% for July 2022 by the German Federal Statistical Office, while in the Eurozone inflation reached a record 8.9%, according to Eurostat. The main driver of these developments is the high energy price, which rose by a further ~40% in July compared to the previous month, although the increase slowed down somewhat compared to June.

Development of energy prices in Germany since June 2021 to June 2022

The enormous price increases since summer 2021 can be attributed to concerns about a very tense supply situation (e. g. Nord Stream II, Ukraine war). There is currently no end in sight.

The question we are all asking ourselves is whether the natural gas supply will remain guaranteed in the coming months or whether Putin will turn off the tap. As this continues to drive up energy prices, solutions for private households and industry are being worked on frantically. Germany's high dependence on natural gas in industry (in 2020, natural gas was the most important energy source in industry with 31.2%) and private households (in 2019, 41.2% of residential energy was covered by natural gas) is ruining the possibilities of quickly obtaining new and sufficient energy sources by winter 2022.

Liquefied natural gas terminals on Germany's coasts are suddenly being approved in a rush and in some cases are already being built. New supply agreements are being concluded, renewable energy sources are being pushed and interim solutions of coal-fired power generation instead of natural gas or the extension of the operating times of nuclear reactors are being discussed. Demands for savings programs for natural gas are getting louder and louder and it can already be observed that less is being consumed - both by private households and industry. An emergency plan to reduce gas consumption was adopted in Brussels at the end of July, in which the EU states voluntarily commit to reducing gas consumption by 15% between 1 August 2022 and 31 March 2023 compared to their average consumption over the last five years through measures of their choice.

The Spanish government has already taken action on this and will adopt a package of energy-saving measures next week, valid until 1 November 2023. Public institutions, department stores, workplaces, hotels, train stations and airports will not be allowed to cool their air-conditioning systems to less than 27°C and will not be allowed to heat them to more than 19°C in winter. Lighting is also to be switched off from shop windows, monuments, and offices from 10pm and doors are generally to be kept closed. In Germany, cities, and municipalities as well as the industrial sector are also active with individual measures to save energy, however, there are no overarching binding approaches "yet". A German emergency plan provides for households and critical facilities such as hospitals to be supplied with gas as a priority, while industry would be the first to be affected by rationing. This is a major concern for the industrial sector, which is trying to emphasize its relevance and importance to the government in order not to be rationed first.

Our vulnerability is also shown by the case of Uniper, which the German government has now saved from insolvency with financial support. It took just two weeks for Germany's first gas importer to run into difficulties. A bankruptcy would have caused hardship for many municipal utilities, and end customers would no longer have been supplied with gas.

Uniper’s problem is the legal situation in Germany, which regulates the passing on of higher prices to consumers. As a result, Uniper could not pass on the costs to the municipal utilities and was faced with financial difficulties. The government has defused this situation with its intervention, but the costs will eventually be passed on to the municipal utilities and thus to the end consumers. An end to the price increase has not yet been reached.

It can be assumed that the trend of energy price increases will continue this year. It will probably remain unclear until the beginning of winter whether the uncertainties will persist and whether further price increases are to be expected. In the medium term, Germany and Europe will have to put their energy supply on a completely new footing, which on the one hand will lead to overall higher costs for households and industry that we will have to deal with. On the other hand, however, it will also support new investments that can, for example, give the domestic wind and solar industry a new boost in the longer term.

Author: Silke H?nisch, Market Intelligence Senior Expert

Sources: ifo Institut, Statistisches Bundesamt, Eurostat, EU Kommission, RedaktionsNetzwerk Deutschland, Reuters