Explained: Why Germany Has Decided To Tax All Gas Consumers

According to a proposed legislation reform, Germany has created a mechanism to tax all gas consumers in order to assist suppliers struggling with skyrocketing gas import prices, as cited by Reuters.

Germany enacted a legislation in late May to allow the government to guarantee energy supplies in the case of a market collapse brought on by Russia's invasion of Ukraine and the reduction of Russian gas exports, which the country strongly depends on.

Reuters

The additional clause, which the parliament will consider on July 8, aims to assist German distributors who have had to deal with dramatically higher prices as Russian exports have decreased as a result of Western sanctions over the conflict in Ukraine while adhering to regulations meant to protect consumer price guarantees.

Due to concerns about consumer cost of living crises and inflation, the government has refrained from enabling merchants to pass along prices across the supply chain. This week, Uniper suffered the first significant casualty. The firm, which was the largest German client of Russian supplier Gazprom, requested government assistance on Thursday as a result of significant losses.

About the amendment

The country's energy security law allows for price transfers after a state declares a gas emergency, but the terms needed to be adjusted because the law was hastily drafted in reaction to unprecedented events. Hence the amendment was required. Now, how will it be managed further?

Reuters

The suggestion from last Friday indicated that Trading Hub Europe might be hired to oversee such a plan. The government has hired the gas zone operator, who currently provides invoicing and balancing services to transportation firms, to purchase LNG and pipeline gas for storage.

Options have been explored, a Trading Hub Europe representative confirmed, but added that more information cannot be released until political processes are complete, as cited by Reuters.

In order to avoid the need for customers to come to the courts in an effort to get businesses to uphold prewar price commitments, choosing Trading Hub Europe, which has experience with auctioning and surcharging procedures, could be a legally safe option.

However, the legislators now need to specify who can make a claim, how much they can make a claim for, and what mechanism could be utilised to pass costs on to consumers.

Effect of Russia- Ukraine conflict

Due to the Russia-Ukraine conflict, Russia is taking adverse steps to russell a few feathers of the Ukraine backing NATO countries which includes Germany. According to a senior energy official, German consumers may see gas prices triple in the coming months as a result of Russia's curtailment of exports to Europe, as cited by Guardian.

Reuters

According to Klaus M¨šller, president of Germany's federal network agency, Moscow cut the flow of gas via the Nord Stream 1 pipeline by 40% in June, claiming technical justifications that Berlin rejects as a hoax. This prompted a four- to six-fold increase in market pricing.

M¨šller added that although such "enormous leaps in price" were unlikely to be totally passed on to consumers, Germans needed to prepare for sharply higher prices. The public broadcaster ARD reported that he said "a doubling or triple is possible."

He also added that Germany could go for just over two months without Russian gas supplies, however, to prepare for the supply crunch, Germany needed to save gas and rapidly diversify its suppliers,

When can we expect a price trigger in Berlin?

The government's emergency gas plan entered stage two of three this month, but it still anticipates providers to continue to endure price rises that led to the Uniper crisis.

The change, which will be approved on July 8, incorporates the Trading Hub Europe model while also preserving the possibility of invoking a general provision that would permit greater prices to be transmitted straight to consumers. Europe is anticipating this month's planned maintenance on the Nord Stream 1 pipeline, which transports Russian gas from Germany to that country.

Reuters

After the scheduled maintenance on July 11¨C21, if Russia does not reopen the pipeline, this might result in a gas emergency and possibly force unforeseen declarations or state rationing. Berlin might wish to delay taking any action under the revised energy security law until after July 21 in order to avoid cutting demand and prices. It might even take longer given that social measures to assist the most vulnerable consumers in paying high bills won't be implemented until the autumn.