Will high energy prices cause a German winter of discontent?
Prices for natural gas have hit record highs in recent weeks.
Since January, the price for a Megawatt hour of gas on the European Energy Exchange has risen from €20 to over €100 today.
At the same time, European gas storage facilities are only 72 percent full ahead of the winter in comparison to a ten-year average of 85 percent. These reserves are a crucial buffer for meeting demand during cold spells between October and March.
Market observers say that the low gas reserves could unsettle spot prices even further, especially if Europe is hit by a prolonged cold snap.
The main driver of the shortage is a surge in demand in Asia. Countries like Japan, China and South Korea currently pay more than Europe does, meaning that exporters like the US and Russia are delivering there rather than to us.
According to Handelsblatt, China’s liquified natural gas (LNG) imports increased by 26 percent year-on-year for the first six months of 2021 and it will soon overtake Japan as the world’s largest importer. Beijing is trying to move away from coal as an energy source, while also fueling half a million trucks with natural gas.
Meanwhile, industry in the US is pressuring the White House to curb exports due to the fact that US storage facilities are also emptier than normal.
This is all bad news for Europe, where the Netherlands have accelerated plans to end local gas production, leaving only Norway as a significant player.
Several European countries have already been impacted. In the UK, a dozen smaller utility companies have filed for bankruptcy; Spain has pledged to cap utility costs to protect consumers.
In Germany, analysts are split on just how much of the costs will show up in heating bills this winter.
But this is about more than just utility bills.
Natural gas is used across industry as an energy source. Higher production costs will drive up the costs of goods, thus stoking inflation, which is already hitting levels not seen since the early 1990s.
If prices start to run far ahead of wages for a sustained period of time, trade unions could start calling workers onto the streets in order to test the nerve of any new government.
Are there conditions in Germany that are exacerbating the problem?
Yes, several.
Germany has become more reliant on natural gas for its energy needs over the past few decades due to the so-called Energiewende - the move away from fossil fuels and nuclear power to renewables.
Natural gas is often referred to as a Brückentechnologie. It emits less CO2 than coal or oil and is thus seen as a stop-gap until some point in the near future when renewables will (allegedly) supply all our energy needs.
There are three significant factors here. 1) The decision to shut down the last six nuclear reactors next year means that substitute energy sources are needed on the electricity grid. 2) A move to reduce carbon emissions in heating means that oil and coal have been replaced by gas. 3) Increased reliance on wind and solar requires gas power stations as back up during windless and cloudy days.
Gas now makes up 27 percent of Germany’s primary energy mix, as opposed to 15 percent back in 1990; although energy consumption has fallen overall over the past 30 years, natural gas demand has gone up by 35 percent.
One of the main problems is that, unlike with coal, Germany is almost entirely dependent on imports. This not only creates a reliance on the autocrats in Moscow (our main supplier), it leaves Germany vulnerable to price fluctuations on global markets.
Unreliable renewable production has added to German woes.
A general lack of wind in the first half of the year meant that wind-based electricity dropped by a fifth up to the end of June. That slack had to be picked up by coal and natural gas.
Clean energy subsidies are also keeping prices high.
Between a third and half of utility costs are actually taxes that are meant to deter companies from using fossil fuels, or that subsidize fixed feed-in prices for renewables.
A new “climate pact” signed off by the German government this summer will push up the tax on a tonne of CO2 from €25 to €30 at the turn of the year. Analysts say that these costs will be passed on to the consumer in the form of higher utility bills.
Meanwhile, a doubling in the cost of the EU’s CO2 certificates since before the pandemic is pushing up the cost of fossil fuel-based power production. Those certificates are supposed to create incentives to tap energy from ‘cleaner’ sources. But coal was nevertheless the primary source for electricity production in the first half of this year due to the aforementioned lull in wind.
“It almost makes you dizzy,” Carsten Rolle, head of energy at the Federation of German Industries (BDI) told Die Welt newspaper.
“A kind of perfect storm has formed in the international energy markets, and its effects are being exacerbated by climate protection legislation in Germany and Europe. It’s really scary.”
How is the issue being handled by the media and politicians?
The gas crunch is most noticeable for its absence from public discussion.
The liberal press tends to discuss it with a sole focus on the UK. Die Zeit titled its article on the issue “The UK brought its energy crisis upon itself” highlighting the additional pressure that Britain’s exit from the EU’s energy market has put on prices there.
Some media have attempted to pin all the blame on Russia, claiming that the Kremlin is seeking to blackmail Germany into quickly granting a licence to the recently completed Nord Stream 2 pipeline. An opinion piece in Deutsche Welle claims that the crisis is made in Moscow, alleging that Russia is intentionally throttling gas deliveries to Europe.
Whether the Kremlin is really engaging in such tactics is a matter of dispute. Gas deliveries from Russia are similar to what they were last year although down on 2019.
The spike in energy prices has barely been discussed in mainstream politics either.
According to Murielle Gagnebin, an analyst at the Agora Energiewende think tank, the lack of public attention to the issue reflects the fact that the German government has things under control.
“Currently, the German government is not so worried, but if this seems to become too big of a problem, the government could for example decide to reduce taxes on energy for a given period in time,” says Gagnebin.
“The EU commission is currently working on a toolbox for the EU governments to cope. There are ways to temper this short term increase in prices,” she assures.
On the political fringes though, this is very much a topic of discussion.
Sahra Wagenknecht, grand dame of the socialist left, has long railed against CO2 taxes, which she sees as a form of wealth distribution from the bottom up.
This week she accused the Greens and FDP parties of “negotiating the latest round of energy price hikes,” in coalition talks “while workers and pensioners are having their incomes eaten up by the highest inflation rate in 30 years.”
Her party, Die Linke, are calling for the government to block utility companies from turning off the heating if a customer can’t pay their bills this winter.
The far-right Alternative for Germany have also latched onto the issue.
“The current energy crisis is no coincidence, it is a political failure,” AfD chairman Jörg Meuthen said in a statement. “For the purpose of supposedly saving the world's climate, prices have been artificially inflated.”
The AfD wants a last-minute U-turn on the nuclear power shutdown.
How will the public respond when price increases hit their pockets?
Rising gas prices are already having a significant effect on consumers. Price comparison website Verivox concludes that heating costs have increased by 28 percent since last October.
“In the coming weeks, we expect a major price increase in natural gas costs,” says Thorsten Storck, energy expert at Verivox, who adds that “many gas suppliers are passing these costs directly on to their customers.”
This will come on top of record electricity prices, which were already the highest in Europe.
Meanwhile, inflation went up to four percent in September - its highest rate since 1993 - on the back of the energy price rises. The Bundesbank expects it to hit the five percent mark by the end of the year.
The worst case scenario for a new government is that Germany has its own version of the yellow vest demonstrations that rocked France in the winter of 2018/19 after Paris imposed a ‘climate tax’ on diesel.
But there are no signs yet that a similar revolt is brewing in Germany.
“I somehow don’t believe the same phenomenon as the yellow vests would take place in Germany, at least not for the same reasons,” Murielle Gagnebin of Agora Energiewende told me by email.
“Nobody reacted to the introduction of carbon emission certificates in January for example. I think it is more realistic for it to happen if the new coalition were to first introduce speed limitations on highways. But I can’t imagine it reaching the scale of the yellow vest movement.”
She cites the fact that most households are on fixed, long-term utility contracts as meaning that they won’t be directly hit. “Many households might realize the price increase only when they receive their annual bill.”
Quentin Ravelli, a Paris-based social scientist who has researched the yellow vest movement, has a different opinion. He told me that “it is always extremely hard to predict social movements. However, stagnating wages combined with the increase in the price of basic necessities (gas, fuel, etc.) in the context of a post-lockdown society makes a similar explosion quite possible.”
He points out that the yellow vest movement caught the French government off guard in 2018. “The massive social upheaval of the yellow vest movement - roundabout occupations, weekly demonstrations without trade unions - did not look like other protests we had experienced in the past.”
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