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April 11, 2022

German Energy System Transformation Accelerates As Russia’s Invasion of Ukraine Continues

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GERMAN ENERGY SYSTEM TRANSFORMATION ACCELERATES AS RUSSIA’S INVASION OF UKRAINE CONTINUES

Security of Supply Threats Prompt Government Action

Russia’s invasion of Ukraine has led to a significant acceleration of changes to Germany’s energy system, including an increased focus on green hydrogen as a key to future energy security. This article provides a concise overview of the most important recent developments in Germany as we prepare to enter the third month of the conflict.

On 23 March 2022, the Russian government announced an intention to accept gas purchase payments from Germany (and other customer States it labeled “unfriendly”) in rubles only, threatening to withhold supply from those who do not do so. Affected States immediately announced that they would not comply.

On 30 March 2022, the German Federal Ministry of Economics and Climate Action (FMECA) triggered “early warning” measures under pre-existing gas supply emergency plans.

In accordance with these measures, a “crisis team” was formed to analyze and evaluate threats to Germany’s security of supply, with a view to preparing for any further measures needed to support the energy system.

On 4 April 2022 the FMECA temporarily appointed the Federal Grid Agency as fiduciary for Gazprom Germania GmbH (GG). GG is the holding company of Gazprom’s business activities in Germany and, according to the FMECA, “operates critical infrastructure in Germany and so has huge significance for the gas supply.” The decision was taken in the context of corporate reorganisation activity by GG, which the FMECA described as giving rise to an “unclear legal relationship and … violations of its reporting obligations under Germany’s Foreign Trade Regulation.”

On 6 April 2022, Robert Habeck, Germany’s Minister of Economic Affairs and Climate Action, announced a so-called “Easter Package.” At the heart of this new program of spending commitments is the proposition that increasing the role of renewables in Germany’s energy system is in the overriding public interest and serves public safety. The package, which is to be read in conjunction with an existing commitment by the Government to spend EUR 220 billion by 2026 for climate protection and the transformation of the German economy, aims to ensure that 80% of gross German electricity consumption is to come from renewable sources by 2030.

On 8 April 2022, the Government announced a EUR 100 billion financing program for at-risk energy companies faced by liquidity challenges due the need to post high security deposits for their commodity purchases. Criteria are now being developed by KfW, the state-owned bank, to grant short-term credit lines backed by a federal guarantee. Uniper, Germany’s largest energy trader, has extended an ongoing loan agreement for EUR 2 billion with KfW until 30 April 2023, and the East German energy company LEAG has received EUR 5.5 billion in financial support from KfW, in a deal said to be the largest individual aid arrangement that KfW has given since the Greek financial crisis.

In the Medium Term, More LNG is Needed to Replace Russian Gas

Following recent diplomatic discussions between the German Government and the United Arab Emirates, Qatar and other countries, German utility companies are in the process of signing additional LNG contracts. The ambition is to import up to 1 billion m3 of new LNG supply immediately, an additional 7.5 billion m3 during winter 2022/2023 and, by renting three floating LNG terminals (FSRUs), an additional 27 billion m3 by summer 2024.

Multiple new import terminals, such as the Brunsbüttel terminal with an LNG import capacity of 8 billion m3/year, are in the planning process and will be ready for supply from 2026. KfW will take a 50% stake in the import terminal in Brunsbüttel.

Notably, new import terminals and transport infrastructure should be hydrogen-ready, and German importers are increasingly interested in the opportunity to use the new form of energy. On 29 March 2022, E.ON, the largest German energy supplier with over 50 million customers, announced a memorandum of understanding with Fortescue Future Industries of Australia (FFI) to import up to five million tons of green hydrogen each year by 2030. This quantity of hydrogen matches the energy value of around a third of Germany’s Russian gas imports. FFI will produce the green hydrogen and organise its transportation to Germany, whilst E.ON will be responsible for distribution in Europe. The first imports could come as early as 2024.

Shearman & Sterling’s Global Hydrogen Industry Team, led by Dan Feldman (Partner, UAE) and Patrick Wolff (Of Counsel, Munich), are advising FFI on the partnership.

Other Germany energy companies are also looking to hydrogen as a critical component of the medium-term energy mix. Uniper has signed a cooperation agreement with the HYPORT Duqm project to export green hydrogen from Oman. As part of the collaboration, Uniper will join the project team to provide technical services and negotiate an off-take agreement for green ammonia.

Shearman & Sterling’s Global Hydrogen Industry Team, led by Dan Feldman, is advising Uniper on this transaction.

Authors and Contributors

Patrick Wolff

Of Counsel

Mergers & Acquisitions

+49 89 23888 2145

+49 89 23888 2145

+49 175 9353 098

+49 175 9353 098

Munich

Dan Feldman

Partner

Project Development & Finance

+971 2 410 8158

+971 2 410 8158

Abu Dhabi