Coal exit on hold: Statutory update Germany to prepare for potential gas shortage

The changes further strengthen the government’s role in gas supply. The coal exit will be put on hold to conserve gas and secure power supply. There will be a new mechanism to adjust prices in gas supply agreements, a basis for new levies to reallocate increased gas supply costs, possibilities to limit the use of gas for power generation, and a framework for state intervention to prevent companies that are critical for energy supply from collapsing. Today, the Bundesrat (Federal Council) went even further and asked the government to look into a broad umbrella protecting the whole energy supply chain, as well as limited moratorium for power and gas prices.

Background

Russia's attack on Ukraine continues to trigger strong uncertainty for the supply of primary energy resources, especially natural gas. In addition to restriction on the operation of pipelines through Ukraine, the (scheduled) halt of supply via NordStream 1 is currently a cause for concern. There are doubts as to what extent the the already reduced supply chain will resume, if at all.

Reduced supply quantities were the reason why the Federal Ministry of Economics and Climate Action (“Bundesministerium für Wirtschaft und Klimaschutz, BMWK”) activated the “alert level”, the second of three stages of the national emergency plan for gas last week.

The alert level alone does not include state intervention in the gas market. The Federal Network Agency (“Bundesnetzagentur, BNetzA”) has not yet declared a so-called gas shortage, i.e. a significant reduction in the total gas import volumes to Germany that would trigger certain mechanisms, in particular to adjust prices in existing gas supply agreements. The right of energy supply companies to adjust gas prices to an appropriate level (§ 24 of the Energy Security Act – “Energiesicherungsgesetz, EnSiG”) therefore does not (yet) apply.

In preparation for potential issues, additional legal foundations for state intervention mechanisms in the gas market are currently being established.

(Further) amendment of the Energy Security Act

On the one hand, a further amendment to the Energy Security Act, which was only amended in May, has been decided. The draft law (EnSiG n.v.) cleared the Bundestag (Federal Parliament) on 7 July and the Bundesrat (Federal Council) on 8 July. It essentially contains the following points:

• As an alternative to the (existing) option of allowing energy supply companies to adjust prices, the Federal Government is authorised to introduce a levy in the form of a balanced price adjustment by ordinance (§ 26 para. 1 EnSiG n.v.). The revenue from the levy is intended to compensate for the higher costs incurred by the energy supply companies as a result of the increased world market prices for natural gas. The prerequisite for both measures is that the Federal Network Agency (BNetzA) determines that there is a gas shortage.
• Energy supply companies are also restricted in the exercise of their contractual and statutory rights to refuse performance. Section 28 (1) EnSIG n.v. provides that the exercise of such rights in natural gas supply contracts requires the approval of the BNetzA if the refusal to supply is justified by the failure or reduction of gas supplies under supply contracts concluded by the energy supply company. Approval is not required if the company proves that it is impossible to procure replacing volumes.
• Finally, the implementation of so-called stabilisation measures is facilitated. Section 29 EnSiG n.v. - already been described as the lex Uniper in view of their challenging position - provides that a company providing critical infrastructure in the energy sector may apply for measures which serve to secure or restore a positive prognosis for the company's continued existence or to finance the liquidation of the company (stabilisation measures).
  It will also be easier for the Federal Republic of Germany to take an equity share in those companies. In this context, parts of the measures established in the rise of the financial market crisis by the previous Economic Stabilisation Acceleration Act (“Wirtschafts¬stabilisierungsbeschleunigungsgesetz”) are transferred to companies in the energy sector. The procedure is thus similar to that which enabled the Federal Republic of Germany to acquire a stake in Lufthansa AG during the Corona pandemic.
  The measures require application by the company to the BMWK, which decides on the applications in agreement with the Federal Ministry of Finance (“BMF”) and the Federal Chancellery. There is no legal entitlement to the stabilisation measures. The law also provides for a time limit on the instrument until the end of 2027.

Expansion of the grid reserve (coal)

Natural gas is used to generate electricity, in addition to its use as a fuel for heat generation and as a raw material in industry. In this respect, the accelerated expansion of renewable energies planned as part of the currently discussed “Easter package” shall solve the dependence on fossil fuels in the medium to long term.

In the short term, the imminent loss of gas-fired power plants for electricity generation shallbe cushioned by extending the grid reserve to include coal-fired power plants. In practice, this means putting the German coal exit on hold. The necessary amendments to the Energy Industry Act (“Energiewirtschaftsgesetz, EnWG”) have also been passed within the framework of the Substitute Power Plant Act (“Ersatzkraftwerkegesetz”, EnWG n.v.).

The Act provides for the temporary participation of these power plants in the electricity market in the event that the federal government determines by statutory order "a disruption or threat to the safety or reliability of the gas supply system" or that "a future threat to the safety or reliability of the gas supply system cannot be ruled out" (§ 50a para. 1 EnWG n.v.). This also applies to those plants for which a ban on coal firing actually would have taken effect in 2022 and 2023 (section 50a (2) EnWG n.v.). Operators are prohibited from permanently decommissioning such plants until 31 March 2024, provided that continued operation is technically and legally possible (section 50a (4) EnWG n.v.).

Plant operators must ensure operational readiness from 01.11.2022 and, among other things, maintain a fuel reserve for 30 (coal) or 10 (mineral oil) days for this purpose (section 50b (1) and (2) EnWG n.v.). Operators of old plants (commissioned before 1970) can apply to be exempted from the obligation (Article 50b (5) EnWG n.v.). Similarly, all system operators may prematurely terminate their temporary participation in the electricity market by notifying the BNetzA (section 50c (1) EnWG n.v.).

The Act also provides for regulations on the provision of lignite-fired power plants as a supply reserve (section 50d EnWG n.v.).

Specification of measures of the emergency level of the emergency plan for gas

Finally, further measures have been adopted - also through an amendment to the EnWG – for when the “emergency level” of the emergency plan for gas has to be activated.

In this case, the federal government can issue regulations by ordinance to reduce or completely exclude the generation of electricity from natural gas. In particular, the operation of plants may be prohibited, or penalties may be imposed per MWh of electrical energy generated (section 50f (1) no.2 EnWG n.v.). These measures are to be limited to nine months.

Outlook

The current developments, and the measures for which the legal basis has now been created, show how serious the situation is. The liberalisation of the gas market as well as the coal exit will have to make room for state intervention and coal to somehow ensure security of supply. The nuclear power exits – for the time being – has not be touched.

After the law has passed the Bundestag and Bundesrat, it will enter into force after being signed by the President of the Federal Republic of Germany (Bundespräsident) and published in the Federal Law Gazette (Bundesgesetzblatt).

The next weeks will show, whether or which interventions will be necessary. In any case, the current legislative activity and also its speed show that the government is trying to prepare for an emergency.

Please contact us if you need further advice on how to deal with price adjustments or on legal obligations or possibilities resulting from the new regulations.