EU heading for energy rationing this winter

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Energy rationing in Europe this winter is starting to look almost inevitable.

German officials insisted on Saturday that security of supply was guaranteed, at least for now, after Russia’s Gazprom PJSC took a last-minute decision not to restart the crucial Nord Stream pipeline after maintenance. Storage fills up and new sources of gas are purchased.

But Klaus Mueller, chairman of energy regulator the Federal Grid Agency, warned last month that even with gas storage 95% full, there would only be enough for 2.5 months of asks if Russia was cutting the feeds. German storage now stands at around 85%.

“The EU is now in the red zone as further demand destruction needs to take place,” said Thierry Bros, professor of international energy at Sciences Po in Paris. He estimates that an additional 3% of demand must be reduced.

The European Union has already created a voluntary target to reduce gas demand by 15%, with the possibility of making it mandatory if necessary. As energy ministers prepare to convene for an emergency meeting on September 9, moves that previously seemed unthinkable are now likely to be considered, EU diplomats say.

Germany has drawn up its own emergency plan. The final step, which has yet to be enacted, includes rationing.

European politicians have been preparing for weeks for the prospect of supply cuts and are scrambling to find ways to reduce demand. Industry is already shutting down and the euro is slipping due to the economic damage inflicted by Moscow’s energy war. As winter progresses, Europe’s resolve to continue supporting Ukraine against Russia may be tested.

While the 15% cut in gas demand the EU is pushing for could help the bloc avoid rationing, governments have so far been slow to act to reduce consumption. The European Commission warned in July that an unusually cold winter or a drop in gas imports from alternative sources would increase the risk of “further drastic cuts”.

Gas prices had fallen last week as traders increasingly expected Gazprom to reopen the link after signals from Moscow that a reopening was on the cards. Then, in a last-minute move, just hours after the Group of Seven agreed to pursue a Russian oil price cap, Gazprom said the link would remain closed because a breakdown was discovered during maintenance.

Already four times higher than a year ago, prices are set to jump on Monday, putting further pressure on industries and households – and policymakers to act.

The complete shutdown of Nord Stream, which runs under the Baltic Sea to Germany, leaves only two major routes supplying gas to the European Union: one via Ukraine and one via TurkStream across the sea Black. Flows through Ukraine were also severely curtailed, with only one of the two sections in service.

The indefinite loss of the key pipeline is also increasing pressure on Germany to keep nuclear power plants open longer than it had planned to close this year – a move that would be controversial. The government says it is still awaiting the results of the stress tests before making a decision, but that decision looks increasingly likely.

The extension of two nuclear power plants would save 2.3% of gas demand, calculates the BNEF. This represents 5.4 million cubic meters per day.

“Nuclear expansion is a no-brainer for Germany and it will definitely make a difference,” BloombergNEF analyst Kesavarthiniy Savarimuthu said. “Each mcm of gas is essential for security of supply and to further reduce gas demand in the electricity sector.”

With the closure of Nord Stream and the limitation of flows via Ukraine, everything now depends on the weather.

October, the start of the winter heating season, looks mild so far with above normal temperatures expected in northern and western Europe, according to Maxar Technologies LLC. How quickly it gets cold will determine how quickly Europe burns through its stored gas supplies.

Asia and Europe compete for liquefied natural gas and if the winter is particularly cold in both regions, there is a risk that the gas stored in Europe will run out towards the end of the winter. Policy makers are hoping spring will come early.

“It will be a challenge for Germany to get through the winter,” said Penny Leake, research analyst at consultancy Wood Mackenzie Ltd. “It will undoubtedly lead to a reduction in demand.”

–With the help of Anna Shiryaevskaya.

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