Energy Sovereignty. The Price of Independence

Munich, 29 June 2022 - Sanctions against Russian gas will result in painful cuts in consumption for many people in Germany.

According to a study by global management consultancy Oliver Wyman, ‘Energy Sovereignty: The Price of Independence - Energiesouveränität: Der Preis Der Unabhängigkeit’ (available in German), gas and electricity prices will rise by 80-130% if imports are curbed in the short term. Lower-income households would be particularly hard hit.

According to the study, a four-person household would have to pay 190 euros per month more for energy if supplies from Russia to Germany are to be sharply reduced by the end of 2023. A two-person household would have to increase spending by up to 90 euros a month. This means an annual cost increase of up to 2,900 euros for gas and 800 euros for electricity. As a result, saving rates and consumer spending are projected to drop, and vacations will be reduced or stopped altogether.

The German government has been urged to compensate for the losses. Energy-intensive industries such as steel and chemicals also need support, with jobs and businesses at risk. At the same time, policymakers must provide strong incentives for greater energy efficiency and accelerated expansion of renewable energy, liquefied natural gas (LNG), and hydrogen infrastructure.

“Policymakers need to act consistently and provide incentives and financial support to cushion the consequences of independence from Russian gas. Accordingly, a comprehensive and accelerated transformation in the direction of renewables and hydrogen is necessary,” said Dominik Weh, partner and co-head of Oliver Wyman’s Public Sector & Policy practice in Europe. He also expects inflation to continue rising.

In the event of a Russian supply freeze, there is also the threat of a significant supply gap. In this scenario, Germany would have to cut gas consumption by around 25% in addition to the higher prices for electricity and gas.

Renewable energies reduce price pressure

According to the study, a supply shortfall can only be avoided in a scenario in which fossil fuel purchases from Russia are gradually curtailed by 2035. Gas supplies from other countries and imports of LNG could then fill the resulting gaps. The extent of the increase in energy costs in individual cases depends on whether consumers and companies use renewable energy.

“Increases in electricity costs can be reduced by expanding renewables such as wind and photovoltaics, while individual households can respond by installing photovoltaic systems and battery storage in particular," said Joerg Stäglich, partner in Oliver Wyman’s Energy and Natural Resources practice. "Building owners can counteract high heating costs by increasing the use of electricity-powered heat pumps, investing in energy efficiency, and adjusting their consumption patterns. Consumers who have a decentralized energy supply and generate their own electricity, for example, are much better able to cope with the departure from Russian gas. People will increasingly realise that they have to change their behaviour and make a contribution so that energy independence succeeds."

The federal government could create more incentives for renewable energy generation among households and companies, as well as for the expansion of energy efficiency. Targeted subsidies for wind energy, photovoltaic systems, micro-CHP (combined heat and power) systems, heat pumps, and battery storage can accelerate the process.

Price increases also hit industry and energy suppliers

Sectors such as the steel or chemical industries, which require gas in production, are also massively affected by rising energy prices. They would have to be supported by apportionments.

"Many jobs are otherwise at risk and there is a threat of site closures or relocations abroad," said Weh. Russian gas accounted for 55% of total gas imports to Germany at the end of February 2022 and could be reduced to between 24-26% by the end of 2022. "Replacing fossil fuels with renewable energy also provides greater resilience to potential future political conflict and could be a driver for political change in non-democratic states," Weh added.

Energy suppliers also face tougher times in the event of swift sanctions. The industry faces further consolidation, the study authors predict. Already in 2021, there were 39 insolvencies in Germany because electricity suppliers could not cope with the increased costs given their long-term supply obligations. "The pressure on utilities will continue to increase as energy prices rise," Stäglich said. However, companies could counteract this with increased digitization by optimizing their energy procurement and counteracting price jumps with focused risk management. But the accelerated energy transition also offers opportunities, he added: "Utilities can distinguish themselves among their customers with innovative energy efficiency solutions." 

About the study

Oliver Wyman examined the consequences of a reduction in gas imports from Russia on energy costs and the energy mix in Germany. Two short-term and two long-term scenarios were analysed for this purpose: A "supply shock" due to sanctions by Germany and Russia, respectively, and two long-term scenarios of a gradual transformation of the energy mix toward renewables. The respective impacts on energy costs were determined for five archetypical consumption units - two- and four-person households, bakeries, supermarkets, medium-sized mechanical engineering companies - which were additionally classified according to three consumption profiles (from gas-intensive to sustainable). The analysis was carried out using a methodology based on the merit order model to determine electricity prices and incorporating publicly available information on commodity prices, energy consumption, household expenditure and electricity generation capacity.

About Oliver Wyman

Oliver Wyman is a global leader in management consulting. With offices in more than 70 cities across 30 countries, Oliver Wyman combines deep industry knowledge with specialized expertise in strategy, operations, risk management, and organization transformation. The firm has more than 5,500 professionals around the world who work with clients to optimize their business, improve their operations and risk profile, and accelerate their organizational performance to seize the most attractive opportunities. Oliver Wyman is a business of Marsh McLennan [NYSE: MMC]. For more information, visit www.oliverwyman.com. Follow Oliver Wyman on Twitter @OliverWyman.