Germany activates gas ‘alert phase’ amid Russian ‘economic attack’

On Thursday, Germany launched the “alarm phase” of its gas emergency plan in response to cut supplies from Russia, but prevented utilities from passing on rising energy costs to consumers in Europe’s largest economy.

The move is the latest escalation in the standoff between Europe and Moscow since Russia’s invasion of Ukraine, which exposed the bloc’s dependence on Russian gas supplies and sparked a frantic search for alternative energy sources.

The decision is largely symbolic, signaling to companies and households that painful cuts are coming. But it marks a major shift for Germany, which has maintained strong energy ties with Moscow since the Cold War.

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The slowdown in gas flows sparked warnings this week that Germany could slip into recession if supplies from Russia were completely cut off. The S&P Global Purchasing Managers’ Express Index (PMI) released on Thursday showed the economy was losing momentum in the second quarter.

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“We must not fool ourselves: the reduction in gas supplies is an economic attack on us by (Russian President Vladimir) Putin,” Economy Minister Robert Habeck said in a statement, adding that the Germans would have to cut consumption.

We hope that gas rationing can be avoided, but it cannot be ruled out, Habek said and warned:

“From now on, gas is a scarce commodity in Germany… Therefore, we are now obliged to reduce gas consumption, now in the summer.”

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Russia denies that the reduction in gas supplies was deliberate, and state supplier Gazprom blames the delay in returning repaired equipment caused by Western sanctions. The Kremlin said on Thursday that Russia remains a reliable energy supplier and “strictly fulfills all its obligations” to Europe.

Under its Phase 2 plan, Berlin will provide a €15 billion ($15.76 billion) credit line to fill gas storage facilities and launch a gas auction model this summer to encourage industrial consumers to conserve gas.

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The government activates the second “alert stage” of the three-phase contingency plan when it sees a high risk of long-term supply shortages. It includes a clause allowing utilities to immediately pass on high prices to industry and the public and thereby help curb demand.

Habeck said that Germany is not at the moment, but the point could work if prices continue to rise due to supply cuts, exacerbating losses for energy companies.

“Every day, every week you make a minus. And if this minus becomes so big that the companies can no longer withstand and collapse, at some point the entire market threatens to collapse – this is the effect of Lehman Brothers in the energy system.”

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The move to the next stage has been the subject of speculation as last week Gazprom cut Nord Stream 1 pipeline flows across the Baltic Sea to just 40% of capacity.

Faced with supply cuts from a major supplier in Russia, Germany has been in phase 1 of its contingency plan since late March, which includes stricter monitoring of daily flows and a focus on filling gas storage facilities.

“Declaring an alert stage does not immediately change the fundamental status quo,” said German energy supplier E.ON. However, it was important that the government was preparing for a significant drop in imports and was taking steps to stabilize markets and gas supplies, according to a statement emailed to Reuters.

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In the second stage, the market can still function without the need for government intervention, which could trigger the last emergency stage.

“The recent reduction in gas flows to Germany via the Nord Stream 1 pipeline, if it remains at this level, will lead to gas shortages this winter,” said Ole Hansen, head of commodity strategy at Saxo Bank.

Wholesale gas prices in the Netherlands, the European benchmark, rose 8% on Thursday.

Russia may completely cut off gas supplies to Europe in order to increase its political influence, the head of the International Energy Agency (IEA) said on Wednesday, adding that Europe needs to prepare now.

Russian gas flows to Europe via Nord Stream 1 and through Ukraine were stable on Thursday, while reverse flows via the Yamal gas pipeline increased, according to the operator’s data.

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Several European countries have outlined measures to counter the supply crunch and prevent winter energy shortages and a surge in inflation that could test the continent’s resolve to maintain sanctions on Russia.

Supply cuts have also forced German companies to consider painful production cuts and resort to polluting forms of energy previously thought unthinkable as they adjust to the prospect of running out of Russian gas.

The European Union on Wednesday signaled it would temporarily switch to coal to cover the energy shortfall, calling Moscow’s cuts in gas supplies “fraudulent”.

The bloc’s climate policy chief Frans Timmermans said on Thursday that 10 of the 27 EU member states have issued an “early warning” on gas supplies – the first and least severe of three levels of crisis defined in EU energy security rules.

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“The risk of a complete shutdown of gas is now more real than ever before,” he said.

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