Germany's New Gas Storage Law - How Will It Work?

A bill to guarantee minimum gas storage levels in Germany, whose underground facilities account for a quarter of the EU bloc's total capacity, will kick in from May 1 after parliamentary approval.

The law, which is meant to lessen the exposure of Europe's biggest economy to the size and speed of gas flows out of Russia for the next three years, sets out minimum capacity requirements to create a buffer before the next heating season that starts in October.

Germany's action comes ahead of planned EU moves to improve member states' energy supply security following major prices rises, exacerbated by the Russia-Ukraine conflict. 

Here's how Germany's law will work in practice, and its legal implications and possible hiccups:

WHAT IS PLANNED?

The once fully liberalised gas sector, under state monitoring, must now ensure that underground caverns are 80% full by Oct. 1, when the winter season starts, 90% full by Nov. 1, and 40% full on Feb. 1.

Storage levels fell to 24% in early March after a slowdown in injections from, among others, Astora, part of Gazprom Germania (GAZP.MM), a Russian holding company for gas infrastructure and trading that has since been moved into German state trusteeship. read more

That decline was counterintuitive, given that prices were high.

In recent weeks, filling gathered pace to reach 32%, seven points more than a year ago, as record prices attracted more liquefied natural gas (LNG) supplies to Europe and discouraged consumption.

The Economy Ministry, the national energy regulator and gas zone operator THE will use long-term buying options (LTOs), originally intended to help balance pipeline pressure, to purchase gas.

LTOs boosted storage levels in December, January and February. THE has been tasked with initiating more special tenders and, if needed, can buy gas and storage space itself. 

Storage facility owners and operators, such as Uniper Energy Storage (UN01.DE), RWE Gas Storage West (RWEG.DE), and Storengy Deutschland (ENGIE.PA), will now be open to outside supervision, having previously operated with full autonomy.

Injections and withdrawals, previously dictated chiefly by operators' clients - big utilities' trade floors, independent traders, industry buyers and local utilities - will now also be ordered by public sector bodies from outside the market.

Economy Minister Robert Habeck has authorised THE to buy LNG worth 1.5 billion euros ($1.62 billion) to top up pipeline gas supplies from countries such as Norway and the Netherlands.

The storage measures will be accompanied by close monitoring of the market and a layered emergency plan if supplies fall sharply or stop. read more

If storage operators notice that users don't intend to replenish inventories, they have to notify the authorities and make space for THE to order their filling.

Operators will be paid historically low-cost averages for the provision of space, the law specifies.

While building up inventories for security purposes is desirable, hoarding for the purpose of price speculation is meant to be avoided, and filling will be guaranteed via a set of directives, prohibitions and fines.

The expropriation of critical gas infrastructure and assets, a subject that sources say has arisen in recent discussions on energy security, does not form part of the law.

Berlin-based storage operators group INES said the set of rules will cause "financial, legal and operative risks", and calls the law strict and far-reaching.

Utility association BDEW said it could have focused on individual operators showing irregular behaviour rather than implementing sweeping change across the board.

"The Gas Storage Act reverses the market-based approach and, for reasons of supply security, allows massive intervention possibilities," said Gabriele Haas, a specialist on energy at law firm Dentons.

"Current contracts broadly remain in place, but there are some obligations to adapt them to the new regime."

Uniper said in a statement that the bill's implementation needed clarifying quickly to safeguard investments and to ascertain how the burden of the new regulation is to be shared appropriately between market participants and the public sector.

INES says that infrastructure operators assuming market roles such as buying and distributing commodities can change the set-up of a liberalised market to a degree where contract values become curbed and participation is deterred.

Also, success in filling storage caverns is not guaranteed.

"We'll have to see if the volumes come," said a source close to the sector. "They don't grow just because there is a tender."

($1 = 0.9258 euros)