MNI INTERVIEW: EU Risks Winter Gas Squeeze -German Energy Head

Europe is in danger of gas shortages and high prices next winter as a result of Asian demand and insecure supply, the head of Germany’s energy agency told MNI, adding that bureaucracy and long-term contracts means a target for a 15% cut in European Union gas consumption this year may not be met.

While an all-out supply crisis later this year which would seriously hit growth looks unlikely, Russia’s war in Ukraine and a lack of coordination between EU member states remain serious challenges, Deutsche Energie Agentur (DENA) boss Andreas Kulhmann said in an interview.

“I am a bit concerned,” he said. “At the moment, we don't see high prices, so the market prices do not reflect any crisis coming up in the winter. But we’ve learned how fast it can change.”

A spike in demand from Asia would have a “huge” impact.

“Last year, we didn't care about money, we just bought the gas,” he said. “That meant higher gas prices and increased prices for electricity. So we created our own problem, to some extent. I would say it might come about the same way if the same situation were to pop up.”

FISCAL COSTS

Schemes to restrict prices for businesses and households will continue to add to fiscal costs with or without a demand squeeze. (See MNI SOURCES: ECB To Hold Rates At Peak Into 2024)

“All these breaks for prices in electricity and gas are running into spring next year, or even longer, depending on the country. So it will be very expensive. There will be problems and discussions. But it will be manageable.”

The danger of relying on gas piped through Ukraine means long-term contracts for replacement LNG supplies makes sense, Kuhlmann said - though governments may ultimately opt to rescind them despite financial penalties.

Meanwhile, as European nations struggle to meet a voluntary target, agreed last month, to cut gas consumption, suppliers will continue to be able to raise prices.

“[At a European level] we cannot reach a 15% reduction in the substitution of gas by just building renewables,” he said. “It's difficult to reach by just energy efficiency, as well. So it might end up with high prices. It might end up with changes on the demand side. It might have an influence on the growth. We’ll see. But not in a way that is really frightening, I believe.”

Gas substitution was a key theme of this year’s Munich Security Conference, Kuhlmann said, with industry players expected to roll out innovative technological solutions in coming years.

Eighty percent of the trillions of euros needed for Europe to meet climate neutrality goals must come from the private sector, he said, but it is not clear whether tools exist to leverage such investment.

“What we see in Germany, and partly in the EU, is that we're getting better step by step. Will it be fast enough? I don't know. I was hoping that the [U.S. Inflation Reduction Act], and also by the way, all the measures in China, and India and so on, would open our eyes here in the European Union, because we're still too complicated.

“We’re trying to plan every little technology from A to Z and so on. I can't tell you what will be on the top of the agenda in five years. Often [in the past] we were wrong. And so I would really wish that something like the IRA could be implemented in the European Union as well.”

GERMANY AND NUCLEAR POWER

Having closed its last three atomic power stations, there is little chance Germany will return to nuclear energy in coming years, Kuhlmann said, leaving it paying higher prices to import electricity.

Some German firms have relocated production to take advantage of cheaper U.S energy. But Germany can also profit from the energy transition.

“We are pretty strong at producing these technologies,” Kuhlmann said. “Some might say, ‘Great, let’s just export this stuff and do business,’ I would say we need [to be] both producers and consumers.” (See MNI INTERVIEW: Era of Shortages To Force Rates Up - Bill White)

Europe, however, risks a permanent loss of competitiveness if it fails to match much faster renewables development in China and India.

“Can we really compete on prices later on, or do we have to do some special instruments like carbon contracts? How much money would that cost? I’m a little bit nervous, I must say.”