Germany’s energy bazaooka worth half a trillion dollars may not be sufficient

Germany needs cash in order to continue its lights. Since the Ukraine war nine months ago, Germany has lost nearly half a billion dollars.

This is the sum of all the schemes and bailouts that the Berlin government launched in order to support the country’s economy since it lost gas supply from Russia and prices soared.

It may not suffice.

According to Michael Groemling, German Economic Institute (IW), “How serious this crisis will become and how long it will continue greatly depends upon how it develops.”

The national economy is experiencing a massive loss of wealth.

According to calculations, the money saved amounts to up to 440billion euros (or $465 billion). These figures are the first total of all German drives that aim to avoid running out of fuel and secure new energy sources.

This amounts to approximately 1.5 billion Euros per day, since Russia invaded Ukraine in February 24. This is approximately 12% of the country’s economic output. For each German citizen, it is approximately 5,400 Euros.

Europe’s leading economy and a symbol of prudent planning has fallen prey to the forces of nature. In the case of long, cold winters in Germany this winter (the first since half a century) energy rationing could be a possibility.

To replace the Russian supply, the country is turning to the more expensive spot or the cash market for energy. This has helped drive up inflation to double-digits. With the push for two alternative fuels to Russian oil – Liquefied Natural Gas (LNG), and renewables, there is no security. Targeted levels are years away.

Stefan Kooths (Vice President and Research Director Business Cycles and Growth at the Kiel Institute for the World Economy), stated that the German economy is in an extremely critical stage because the future energy supply is uncertain.

Where is the German economy? It is high-fever if we take a look at the price inflation.

When asked about the Reuters tally, the German finance minister referred to the data available on the ministry’s website. According to the economy ministry (which is responsible for energy security), it continues to diversify supply and added that LNG and terminals required to import it are a crucial part of this.

For an already shrinking economy among G7 countries next year, the International Monetary Fund predicts that the more expensive power will prove to be very painful.

According to the Kiel Institute data, Germany’s combined energy import bill for this year and the next will rise by 124 billion euro each, up from 7 billion in 2020 and 2021. This presents a significant challenge to the country’s energy-intensive industries.

According to VCI, the country’s chemical sector is most vulnerable to rising energy costs. It expects that production will fall 8.5% by 2022. VCI warns about “huge structural gaps in Germany’s industrial landscape”.

Already, the 440 billion euro earmarked for fighting the energy crisis is close to the roughly 480 miliarde euros the IW claims Germany has spent from 2020 onwards to safeguard its economy against the effects of the COVID-19 pandemic.

There are four packages of relief worth 295 billion Euros, which include the bailout of Uniper, power company, and a rescue package for Sefe at 14 billion. The liquidity includes up to 100 million in liquidity to utilities, to ensure their sales against default, and about 10 billion for infrastructure for import LNG.

According to KfW data, Reuters also found previously unknown commitments totaling 52.2 billion euro by KFW, to aid traders and utilities fill up their gas caverns with gas, purchase coal and replace gas sources, as well as to cover margin calls.

These efforts are not certain, but Germany imports around 58 Bcm, of Russian gas every year. This is approximately 17% of Germany’s total energy consumption, according to Eurostat data and BDEW.

Germany’s goal is for renewables to make up at least 82% of its electricity generation by 2030. This compares with 42% in 2021. This is a distant goal, despite the recent expansion rates.

Germany only installed 5.6 gigawatts of solar power and 1.7GW of offshore wind capacity in 2021. This is the latest record year.

According to a report released by Germany’s state governments and the Federal Government in October, the new onshore wind installation must increase sixfold to 10 gigawatts annually to reach the goal of 80%. It stated that solar installations should quadruple each year, to reach 22 GW.

Susi Dennison (ECFR senior policy fellow) stated that Germany has done a good job replacing natural gas volumes with spot-market power, but it was losing its status as a leader in clean energy.

To me, what is missing in Germany’s strategy? A similar focus on rapid scaling-up of renewables. Now is the right time to invest into the infrastructure for hydrogen and wind power to replace gasoline.

Robert Habeck, the Economy Minister, set in March a goal to replace Russian energy by 2024. However, many power industry professionals and economists think this ambitious.

Marcel Fratzscher (president of the German Institute for Economic Research) and Markus Krebber (CEO of Germany’s largest power producer RWE, RWEG.DE), both believe it won’t happen before 2025 and only then, if alternate sources are found or expanded quickly.

There’s still a lot to do on the LNG front.

Germany does not have an LNG infrastructure because of its dependence on Russian gas. It is now building its LNG import capabilities.

It will rely on six floating terminals for gas import diversification. The first one is expected to arrive Thursday. The three that are expected to go online in the winter will be followed by the remaining four at the end 2023. This would bring the total annual capacity of the terminals to 29.5 bcm.

RWE, Uniper, and EnBW, a smaller peer have committed to coming up with enough volumes to ensure that the terminals are running at maximum capacity through March 2024. It is not yet clear where these volumes will be sourced.

According to the ECFR data, Germany only has two LNG contracts, and these are short-term deals for the winter season.

First, a 1-billion-dollar-per-year deal was struck between Uniper and Australia’s Woodside. This has become Germany’s biggest ever corporate rescue. RWE and Abu Dhabi National Oil Company reached the second agreement. It covers 137,000 cubic meters in December, and additional shipments unspecified in 2023.

Uniper and RWE both stated that they were able to secure additional supplies through their LNG portfolios, but did not provide further information. EnBW stated that supply contracts are still being worked on and was actively looking for market opportunities.

Habeck’s hectic schedule and that of Chancellor Olaf Scholz highlight the difficulty in getting long-term major deals to help Germany get away from high spot prices. To search for more volumes, they have traveled the world, making stops in Canada, Qatar and Norway.

Giovanni Sgaravatti (Bruegel research analyst) stated that “I believe Germany has done whatever it can.” “In order to enter the LNG market Germany needed to begin from scratch. This is not an easy task.”


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