Q&A: What does Germany's decision to put Nord Stream 2 on hold mean?
Content
1. What's the significance of the decision to suspend the approval process? Is Nord Stream 2 dead?
2. Does the German government reassess its position on natural gas with the decision?
3. What does the decision mean for supply security in Germany and Europe?
4. Can stopping Nord Stream 2 have legal repercussions for the German government?
5. What does the decision mean for the prospects of a German LNG import terminal?
6. What are the reactions from German and European Stakeholders?
1. What's the significance of the decision to suspend the approval process? Is Nord Stream 2 dead?
After years of emphasising that the contentious pipeline is a purely economic project, chancellor Olaf Scholz’s decision marks the first time the German government has taken open action against it. Until now, the government remained in favour of the pipeline, even though this upset European neighbours and partners across the world.
However, the decision does not necessarily mark the end of Nord Stream 2, which was completed in September 2021. For now, the government made use of a regulatory tool to halt the certification: it withdrew a report by the former government which had said the pipeline would not endanger German and European supply security. This assessment is essential for the certification and will now be re-evaluated by the economy and climate ministry.
Re-assessing whether Nord Stream 2 endangers supply security “does not mean [it] is sanctioned by this step or that it can never come,” said economy minister Robert Habeck.
Asked about what Russia would have to do to ensure the continuation of the project, Scholz told public broadcaster ARD that “we‘re a long way from that now”. He said that no one could make a prediction about whether the pipeline would ever start operations. “In any case, we are now in a situation where nobody should bet on it.”
2. Does the German government reassess its position on natural gas with the decision?
Germany wants to be climate neutral by 2045 and ideally phase-out the use of coal for power production by 2030. Most gas is used for heating and industrial processes, where consumption is set to decrease due to more efficiency and the switch to climate-friendly operations. In addition, natural gas – as a less CO2 intensive fuel than coal – can be used in flexible power stations that are necessary to accompany the intermittent electricity generation from renewable sources. The German government’s plan for decarbonising its economy includes the use of gas as a bridging technology before the flexible power plants can be run with (green) hydrogen instead. Fossil gas would therefore be largely phased out by 2045.
There are no signs this plan has changed in light of the gas price hikes this winter, the Russian aggression against Ukraine, and suspension of the approval procedure for Nord Stream 2. After announcing that Nord Stream 2 approval would be put under review, economy and climate ministerHabeck (Green Party) said that his ministry would bring forward an energy transition monitoring report planned for 2026 to this summer. It will analyse and model the development of renewables deployment and the grid infrastructure expansion as well as the potential for an earlier coal exit in 2030. The government wants to determine how many flexible, hydrogen-ready gas power plants Germany will need and where.
German industry and the energy associations support this approach. Industry association BDI says that the dependence on imports is not a valid argument against new gas plants. “Germany is and will remain an importing country for energy, even if the energy sources will be CO2-neutral in the long term,” BDI president Siegfried Russwurm said in January 2022.
While the German government sticks to its plan to achieve climate neutrality via the use of natural gas, it has also made clear that it will – after the current crisis – diversify the sourcing of the fossil fuel.
3. What does the decision mean for supply security in Germany and Europe?
Germany and many other European countries rely on Russian supplies to cover a high share of their energy needs. About half of Germany’s, and more than 40 percent of the EU’s, natural gas imports currently come from Russia and the country is also the main external supplier of coal and oil products to Europe. However, as Nord Stream 2 has not yet begun operation, stopping the pipeline’s completion alone would not mean any changes to current supply capacities.
But an intensifying conflict between Russia and Ukraine could still have a severe impact on supply. While Russian energy deliveries to Western Europe have remained stable even during the height of the Cold War, German government members such as finance minister Christian Lindner have voiced worries that things could be different this time, if Russia is ready to let go of an important source of income to pursue its geopolitical ambitions. Moreover, as a large share of gas deliveries to Europe currently flows through pipelines in Ukraine, these could come to a sudden halt, either if Moscow turns off the tap or if infrastructure is seized or damaged on the ground.
Habeck has reassured that supply security for gas would not be compromised by the conflict at least this winter as the country has made “provisions” to cushion a drop in Russian deliveries. However, he also warned that the already high energy prices could rise further as a result. Economic research institute ifo said a hot conflict between Russia and Ukraine would lead to price shocks at least in the short-run. Finance minister Lindner said this would be the time Germany seriously has to consider building its own liquefied natural gas (LNG) terminal, which so far has not come into existence due to investors not seeing a viable business case as long as cheap Russian gas is available.
Economic policy think tank Bruegel said the risk of a severe supply crisis is small in the short-run as increased LNG imports, relatively mild winter temperatures in Europe and Russia keeping its delivery promises so far prevented a full supply crunch. But the risk increases if the conflict and accompanying sanctions drag on until next winter. A straightforward response would be to reduce the amount of gas needed, rather than looking for new suppliers, the think tank concluded: “Whatever happens, the most efficient solution requires demand-side adjustments to reduce dependency on gas.” Without it, a stop of Russian gas imports might result in “some EU countries having to take emergency measures” already before the end of this winter, which could include shutting down non-critical industries or rationing heating supply to businesses and households.
4. Can stopping Nord Stream 2 have legal repercussions for the German government?
If German authorities put a final stop to the use of the completed pipeline, the Nord Stream 2 company will likely resort to legal action. The German government could be faced with a compensation claim brought forward by the Nord Stream 2 AG operator.
In January, Habeck said that if during the approval procedure authorities denied the certification of the pipeline according to German and European rules, “no compensation will be due”.
But the Nord Stream 2 AG has filed legal complaints before, for example against the European Union subjecting the project to new rules on pipelines connecting the EU with third countries. In August 2021, it failed at a court in Düsseldorf where it had demanded that Germany removes the pipeline from the scope of the EU Gas Directive.
As a Swiss subsidiary of Gazprom, the company also has access to legal remedies under the Energy Charter Treaty (ECT) which is intended to protect energy related investments from changing government policies. Such arbitration proceedings, dealt with by ad hoc appointed judges, are often decided in favour of energy companies or result in large settlement sums. The ECT is under sustained criticism because it also allows fossil fuel companies to launch proceedings against governments which decide to phase-out fossil energies. Before the court, the legitimate expectations of the plaintiff, for example positive signals given to Nord Stream 2 by receiving construction permits for the pipeline, are important arguments; while a changing political situation, even if caused by a crisis like the one in Ukraine, does not count as a valid argument, legal expert Gabriel Lentner told Tagesspiegel Background.
This explains why the German government is sticking to formalities when suspending the approval procedure of the pipeline. The economy and climate ministry withdrew its “security of supply report” for the pipeline, without which it is not possible for the Federal Network Agency (BNetzA) to certify the project. The report assesses whether granting the certification would jeopardise the security of electricity or gas supply of Germany and the European Union.
The ministry stressed that the supply security assessment (completed by the previous government in its very last weeks in office) is “based on an analysis of factual and legal fundamentals and can or must be adjusted in the event of a change in significant factual fundamentals” (Section 4b (3) EnWG). Both Russia’s aggression in Ukraine and patchy gas deliveries from Russia this winter are counting as such a change in “factual fundamentals”, minister Habeck indicated. How vulnerable the report will be to future legal action depends a lot on its actual wording and reasoning on how Nord Stream 2 endangers Germany’s supply security, legal experts told Die Welt. After the German government’s assessment, the European Commission also gets a say.
5. What does the decision mean for the prospects of a German LNG import terminal?
The energy crisis in general, as well as the decision to halt Nord Stream 2 certification, have put a renewed focus on the question of whether Germany needs its own import terminal for liquefied natural gas. For years, it appeared there was no economic case for direct LNG imports to Germany, since the country is well-connected to receive natural gas through pipelines from other countries. Critics have also argued that LNG imports are more expensive than gas delivered directly via pipeline.
The current high gas prices and calls for a more diversified supply may now change the situation. However, the construction of Germany’s first LNG terminal so far remains uncertain. One project – Uniper's Wilhelmshaven facility – was dropped due to lacking interest in the LNG sector in terms of booking large, long-term capacities for LNG regasification in Germany. Another project – German LNG Terminal in Brunsbüttel – continues to face delays.
Plans for a domestic terminal are now receiving renewed support from politicians such as finance minister Lindner from the pro-business FDP. “I’m very much in favour of Germany building LNG terminals, and have been for years,” he told the Financial Times. “If we get LNG terminals built then that would be a positive outcome of this situation.”
Habeck told Handelsblatt LNG terminals are “an additional bypass” and help increase supply security. “And we need terminals for hydrogen imports anyway. We can then also use parts of the infrastructure. The situation this winter has been tight, we have to draw a political consequence from this.”
Ultimately, the business case has to be there, which depends on many factors, including gas prices and possible state support. “Should there be a desire for German LNG terminals for economic policy reasons, then these costs would have to be partially subsidised,” said Kerstin Andreae of energy industry association BDEW.
6. What are the reactions from German and European Stakeholders?
Many German politicians, business associations, and environmental NGOs have welcomed the government's decisions to halt the contentious gas pipeline Nord Stream 2 following Russian aggression towards Ukraine. Against the backdrop of Europe’s ongoing energy crisis, the decision intensified calls for a diversification of Germany’s energy supply and speed up the move to renewables to lower dependence on Russian fossil fuel imports. Clean Energy Wire has published an article which collects key reactions.
