Gas is scarce in Germany, and it is potentially becoming even scarcer. German gas demand has been steadily increasing, driving up prices and causing a growing concern for a gas scarcity. Russia curbing gas supplies since last summer has then further fueled fears of a gas shortage during the winter, pushing prices to unprecedented levels.
German and European gas consumers have been hit hard by the unfolding crisis. Russia has shut down most of its gas pipelines to Europe, and the Nord Stream 1 pipeline has been supplying just 20% of its potential capacity since the end of July 2021. Further reductions in Russian gas supplies to Europe seem likely in the future. Therefore, Germany is trying to fill its gas storage facilities as much as possible.
In response to the looming shortage, German policymakers first focused their attention on getting more gas supplies from other sources. LNG terminals are being built as a top priority and German Energy Minister Robert Habeck visited Norway, Qatar and the United Arab Emirates to negotiate new gas offtake contracts. Now, however, attention is turning to demand. The EU-agreed plan is to reduce gas consumption by at least 15%.
While the power sector is only responsible for 12% of gas demand, compared to 37% for industry and 31% in households, it is often central to the German discussion about the reduction of gas demand. Reducing the power sector´s gas demand is connected to other highly debated topics, such as phasing out nuclear and coal plants.
The current French nuclear power plant outages are intensifying the situation on the power market and increasing Germany´s and Europe´s usage of gas to produce electricity. At the moment, only about half of French nuclear power plants are available, both due to low levels of necessary cooling water in French rivers and security issues in the plants themselves. It does not seem unlikely that still in 2023 25% of French nuclear reactors will not be able to generate electricity. Based on our latest simulation analyses, this reduction of French nuclear capacity would increase the annual gas demand in the power sector by about 12 bcm at the European level and by about 1 bcm in Germany. By comparison, the total demand for gas in Europe in 2021 was about 400 bcm. Germany´s share of this was about 100 bcm.
So what can Germany do to reduce gas-fired power generation (see also THEMA's analysis for BDEW from March 2022).The Minister of Finance, Christian Linder (FDP), is calling for regulatory restrictions on gas-fired generation. However, it is not possible to end gas-fired generation completely, at least not without extreme restrictions. First, many gas-fired power plants also produce heat for industry and households that is difficult to replace in the short term. Second, gas-fired power plants in Germany contribute to the security of power supplies. Without gas-fired generators, power shortages in the winter would become more likely.
Taking into account the failure of the French reactors, we have carried out new simulations to estimate the impact of measures to reduce gas consumption in the electricity sector. We have examined the following measures:
- A reactivation of German oil, coal and lignite-fired power plants as is currently being discussed. This entails the re-introduction of reserve capacity to the market, as well as the continued operation of plants which had planned to shut down in 2022 and 2023.
- The continued operation of Germany’s three remaining nuclear power plants.
Particularly the option of prolonging nuclear power to reduce gas consumption, is of concern to politicians. According to our analyses, focusing purely on the German electricity market is likely to be misleading here, as electricity flows across borders on a large scale and the European electricity sector is well integrated. The relevance of cross-border transmission is likely to remain high, as there are currently no discussions in Germany to restrict exports of electricity.
The figure below shows how much gas consumption could be reduced using these measures in 2023. Two modelling shows that while both the reactivation of old power plants and the continued operation of nuclear power plants reduce gas consumption, the bulk of the savings take place outside Germany. This highlights the need to see measures in a European rather than a national context. Our analysis also shows that the size of the impact is roughly the same, whether or not French nuclear plants are available.
The re-entry of coal and nuclear in the electricity market or their continued operation would also lower electricity prices. Moreover, for Europe as a whole, the nuclear power generation would roughly compensate for the additional emissions from coal-fired generation – leaving total emissions broadly unchanged.
THEMA is continuously following developments and will address gas-saving measures in the upcoming special edition of the European Market Outlook in September.
If you have any questions about our calculations or would like to discuss the specific price effects of German policy measures in the power sector, please feel free to contact us. We look forward to hearing from you.