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8. NATURAL GAS

Residential gas demand has decreased from peak levels in the early 2000s, when it accounted for over a third of total gas consumption. However, it increased significantly in recent years with 23% growth from 2014 to 2017. The gas is mainly used for heating purposes, and consumption varies with temperature variations. Residential gas demand generally peaks in the winter months and can be up to three times higher than summer demand. Meanwhile, commercial gas demand has been fluctuating within the range of 11 bcm to 13 bcm over the past decade.

The third-largest gas consumer is power and heat generation. Gas used in power generation decreased by 31% from 2010 to 2014 as it struggled to compete against new renewables and cheap coal power. This trend has shifted in recent years as gas consumption in the heat and power sector increased by 37% from 2014 to 2017, especially in light of closures of nuclear power plants. In 2018, gas power plants generated 85 terawatt-hours (TWh) of electricity, which accounted for 13% of total power generation.

Looking ahead, the closure of all nuclear generation by the end of the 2022 and the planned phase-out of coal-fired generation over the next two decades is expected to increase the call on gas-fired generation to meet power sector load needs (though efficiency measures might offset some of the demand growth, as will growth in renewables). The government anticipates that gas consumption in electricity will grow over the coming years, while gas consumption in the heating sector will fall, overall resulting in net growth in gas demand as well as imports.

Institutions

At the federal level, under the Energy Industry Act (EnWG) from 2005, Germany’s electricity and gas markets are regulated by the Federal Network Agency (Bundesnetzagentur). The primary responsibility of the agency is to ensure fair and effective competition in the supply of gas (and electricity), including by establishing non-discriminatory third-party access to networks and monitoring prices (Bundesnetzagentur, 2019). In particular, the Bundesnetzagentur oversees network operators whose network reaches over 100 000 customers (directly and indirectly) or crosses state borders. All networks not covered by the Bundesnetzagentur fall under the regulatory jurisdiction of the states (Länder). In collaboration with the Bundesnetzagentur, the Länder and the Bundeskartellamt oversee competition in the gas and electricity sectors, based on authority under the Act Against Restraints of Competition. The agencies issue a monitoring report on the gas sector (along with the electricity sector) each year.

The Federal Ministry for Economic Affairs and Energy (BMWi) is also the lead agency with respect to natural gas security and has the authority to intervene in situations where standard market-based measures are insufficient. It is responsible for the co-ordination and implementation of emergency response measures at the national and European Union (EU) levels. Additionally, once the emergency level is declared, the Bundesnetzagentur becomes the federal load distributor. This means the Bundesnetzagentur has to ensure the distribution of gas for covering the vital needs of energy consumption. All responsibilities and measures to this end are outlined in the National Emergency Plan for Gas, which is published by the BMWi.

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Interruptible contracts are made only with industrial customers that have the capability of fuel switching. Around 10-20% of gas sold to industrial customers is conducted as interruptible contracts.

Prices

Germany’s wholesale gas prices are set on its two gas hubs: NCG and Gaspool. Both track relatively closely to prices on Europe’s largest gas hub, the Title Transfer Facility (TTF). Wholesale prices are generally marginally higher than TTF prices, but lower than gas prices in Central and Eastern European hubs. Germany’s natural gas import prices (border price) over the period January-June 2019 averaged EUR 4.90 per terajoule (BAFA, 2019).

At the retail level, Germany’s industry gas price is slightly below the median among International Energy Agency (IEA) member countries, while the residential price is exactly at the median level. Compared with neighbouring countries, Germany’s prices are relatively low (Figure 8.5). The German industry prices have followed the same development as in the Netherlands. Household prices have remained at a lower level in Germany while increasing in neighbouring countries in the past few years. Natural gas prices are not regulated in Germany.

Figure 8.5 Natural gas prices in selected IEA member countries, 2000-18

Germany’s gas price is below most neighbouring countries for both industry and households.

Notes: MWh = megawatt-hours. Data not available for Germany 2001 and industry for Austria 2000-11 and the Netherlands 2004-06.

Source: IEA (2019c), Energy Prices and Taxes Third Quarter 2019, www.iea.org/statistics/.

Germany applies taxes and levies on household consumers of gas at around 15%, higher than the European average of 10%. Similarly, compared with a European average of 10% for industrial consumers, German taxation levels are about 18%.

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TSOs submitted their draft gas NDP for 2018-28 to the Bundesnetzagentur in April 2018, under which they propose 41 expansion measures through 2028, at an investment cost of EUR 7 billion. In total, the TSOs proposed the addition of 1 390 km of pipelines and an increase in the capacity of compressor stations by 499 megawatts (MW). The bulk of the increase compared with the 2016-26 NDP is due to the planned European Gas Pipeline Link (EUGAL), which will transport gas from the planned Nord Stream 2 import pipeline from Russia to other places within Germany, to the Czech Republic, and likely down to Austria. As such, it will run from the Baltic Sea to the German-Czech border. In addition, the latest NDP includes plans to connect a planned new LNG import terminal at Brunsbüttel to the gas grid (see below on LNG).

Several parts of Germany’s gas grid are served solely by low-calorific natural gas (L-gas), which can be fed only with indigenous gas or gas imports from the Netherlands. As both domestic and Dutch gas supplies fall further in coming years, Germany will need to rely exclusively on high-calorific gas (H-gas), which makes up the rest of its supply, including from Norway, Denmark and Russia. Given that H-gas cannot be shipped on L-gas networks (or used in the boilers of many end users, which will require adaptation), TSOs and DSOs in 2015 began a process to fully convert the gas grid to H-gas by 2030. In 2015, there were 969 L-gas interconnection points that needed to be converted, compared with 922 in 2017. The states at least partially impacted are Bremen, Hesse, Lower Saxony, North RhineWestphalia, Rhineland-Palatinate and Saxony-Anhalt (BMWi, 2019a). The TSOs expect that by 2023, more than 2.5 million gas appliances will have been adapted to H-gas.

Storage

Germany has suitable geological conditions for gas storage facilities. At the end of 2017, Germany had 49 operational gas storage facilities, of which 17 were pore storage and 21 were salt caverns. Based on these facilities, the maximum working gas storage capacity in the country is 24.3 bcm, which could cover 47 days of Germany’s 20-year peak demand metric (see emergency response section below). Among EU countries, Germany has the largest natural gas storage capacity, and the fourth-largest in the world.

Table 8.1 Natural gas storage capacity in select countries

Source: BMWi (2019a), “Gas”, www.bmwi.de/Redaktion/EN/Textsammlungen/Energy/gas.html.

Operators of gas storage facilities are required to offer access to other companies on appropriate and non-discriminatory technical and commercial terms. Additional rules on access to storage facilities are governed by EU Regulation 715/2009 related to transparency, as well as voluntary practices under the European Guidelines on Good Practice for Storage System Operators.

LNG

At present, Germany does not have its own LNG regasification terminals. However, the country is looking at options to diversify its gas import sources through LNG. Germany currently has access to LNG, despite not having an LNG terminal, through its regional

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The commitment to natural gas as a transport fuel was reaffirmed in the 2018 coalition treaty, which extended tax breaks for natural gas beyond 2018 (VDA, 2019). From July 2018, German subsidies for purchases of natural gas vehicles amount to EUR 8 000 for compressed natural gas (CNG) and EUR 12 000 for LNG (up to EUR 500 000 for a given manufacturer) (NGV Global News, 2018).

Still, the use of natural gas in transportation is currently limited, making up less than 1% of total transport fuels consumption. On the other hand, oil-derived fuels still account for over 94% of transport fuels. Moreover, the government’s core focus for decarbonising the transport sector has shifted more to electric vehicles (EVs) and, longer-term, to hydrogen technologies. German automakers are also more focused on EVs, though some also have smaller lines of CNG passenger cars.

The German government is also exploring options to expand the role of LNG in trucking for freight transport, an integral component of Germany’s road transport sector. In October 2018, the Bundestag voted to exempt natural gas trucks from highway tolls for two years from 1 January 2019 (NGV Global News, 2018). Still, a sizeable buildout of fuelling infrastructure will need to support uptake of LNG trucks in larger volumes, at the same time that many manufacturers are shifting attention to electric drivetrains for larger vehicles and trucks as well (though battery weight remains a considerable hurdle for longdistance trucking).

Germany’s role as an international transport hub and a major export-oriented economy will require additional options for ships to refuel with lower-carbon fuels, especially as more stringent international shipping regulations take effect in 2020. Natural gas has an important role to play here, too. The siting of an LNG import terminal on Germany’s coast might help advance LNG for shipping, though additional LNG infrastructure will also be needed to support a more significant buildout of the sector.

Renewable gas

The Renewable Energy Sources Act (EEG) of 2000 first introduced FiTs for renewable power, including power produced from biogas, while subsequent amendments to the act in 2004 and 2009 expanded upon the incentives. As a result, Germany has experienced a surge in biogas facilities since 2008, with around 9 500 plants active in 2019 (Budde and Newman, 2019). However, since changes to the EEG in 2014 shifted the system of payment away from FiTs to competitive auctions, there has been a significant drop in the construction of new biogas facilities, as biogas installations have not seen the dramatic cost reductions experienced by wind and solar power (Appunn, 2016). Still, the opportunities for biomethane,12 in particular, are increasing as Germany looks towards decarbonising the heat and transport sectors.

Biomethane is considered a mediumto longer-term option for transport and heat due to high production costs at present. Biomethane for these applications has been produced on a small scale; the bulk of current biogas and biomethane production is used in electricity based on the previously mentioned attractive financial incentives. In 2017, biogas and biomethane together generated approximately 32 000 gigawatt-hours (GWh)

12 While biogas contains other components beyond methane, such as CO2, and is usually consumed close to its production, biomethane is an upgraded form of biogas that can be substituted for natural gas and transported through gas grids.

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uptick in demand will increase Germany’s already-high call on imports. Moreover, at the same time that Germany’s own production of gas is small and declining, its gas imports from European sources are also set to fall in the coming years, especially from the Netherlands, where production from the Groningen field is declining and due to fully terminate by 2022 at the latest. As a result, security of natural gas supply is a top concern for the government.

Generally speaking, gas providers in Germany ensure security of supply through the following means: 1) diversification of supply sources and routes; 2) stable relationships with supplier countries; 3) long-terms supply contracts (often 20 years or longer); and 4) reliable supply infrastructure, including underground storage (BMWi, 2019a).

Revisions to the Gas Network Access Ordinance, including the reduction of gas market areas from 19 in 2006 to 2 today, boosted liquidity and improved gas supply security (see section on market structure above). In particular, the unification into one zone is expected to be positive for competition and favourable for security of supply by mitigating the market power of any one market participant.

Gas supply diversification is an important component of Germany’s energy security strategy. Though Germany has strong pipeline connectivity to several sources, Russia remains a dominant supplier. Moreover, the completion of the Nord Stream 2 pipeline could further increase Germany’s reliance on Russian gas imports (though will mitigate the risk of potential supply disruptions on transit routes).

To mitigate risks associated with dominant pipeline suppliers, Germany is advancing plans to facilitate LNG imports (see above on LNG), which can play an important role in the country’s gas security strategy. Transitioning into a gas and renewables system will lead to lower price elasticity for gas (the gas will be needed at whatever price when the wind does not blow), further reinforcing exposure to dominant pricing behaviour. Even though Russia is likely to remain the largest gas supplier to the German market, an LNG terminal could improve Germany’s negotiating leverage to secure more favourable import prices.

The federal government also supports infrastructure projects that enable gas to be supplied from the Caspian region to Europe (the Southern Gas Corridor) as a means of improving gas security through diversification (though the gas will not directly enter into Germany).

From a storage perspective, Germany’s current capacity can help ensure security of supply during extreme weather or disruption events (see section on storage above). Assuming relatively full levels of existing storage capacity, a 2015 report from the BMWi on possibilities to improve gas security and crisis prevention via regulation of storage reaffirmed the positive role that storage in Germany can play during supply disruptions (Becker Büttner Held, 2015). Nonetheless, storage facilities in Germany, as in other parts of Europe, are facing the threat of closure due to weak economics, which could create gas security risks if the number of closures ramps up.

Emergency response

There are several legal tools available to German authorities for natural gas emergency response. These include ordinances that can be used to restrict the sale, purchase or use of goods, in terms of both quantity and time, or permit them only for certain priority

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