There are good reasons to prepare for an import ban on Russian gas, even if the federal government and the EU are not planning such an embargo. One reason is that Russia could reduce or halt its gas exports in retaliation for sanctions. Another is to improve one’s strategic position vis-à-vis Russia. For this reason, the early warning level of the gas emergency plan was activated on March 30th.
It is unclear which further stages in the emergency plan will be reached. Level 2, the alert level, stipulates that the distribution of gas will continue to be left to the gas market.
However, if gas prices are very high, which can again drastically exceed the already high prices, political intervention is unavoidable due to the associated (social) political challenges.
One possibility would be to limit price increases through regulatory market intervention and rationing of gas. This comes at the latest at level 3, the emergency level, at which the Federal Network Agency would act as a federal load distributor and allocate the gas.
It should ensure the supply that is in the public interest, bring about a balance between the electricity and gas needs and interests of the countries and ensure the supply of the so-called privileged customer group, who enjoy special protection.
These are household customers and basic social services. But rationing also poses enormous challenges.
If allocation is inefficient, economic output could collapse by up to ten percent
In the event of a deterioration in the supply situation, who gets the gas and who doesn’t determines how the burden is shared among all parts of society.
The President of the Federal Network Agency, Klaus Müller, comments: “Unfortunately, it cannot be completely ruled out that we will have to make decisions that have terrible consequences for companies, for jobs, for value chains, for supply chains, for entire regions.”
Simulations show the potential risk of inefficient allocation: while a study estimates the cost of a gas embargo at two to three percent of gross domestic product (GDP) in the case of market-based gas distribution, for example, an allocation that favors households and services would increase industrial production collapse.
GDP would fall by an estimated 10 percent. Even if the figures should be treated with caution in view of the many imponderables, they show that errors in allocation can be very expensive.
In a shortage situation, gas-consuming companies have to consider whether they can replace gas with other energy sources, whether they can buy in (intermediate) products that are otherwise produced with gas, or even stop production altogether and resell gas that has already been purchased, or for other purposes respectively.
These decisions are influenced, among other things, by the respective business model, the restructuring potential within the company, the flexibility of the company’s customers, the existing contracts and the expected specific supply and demand situation locally and on the (world) markets.
The costs of reducing gas consumption therefore differ significantly between companies.
The regulator does not have enough information about the individual needs of companies
This is a challenge for the Federal Network Agency if it is to decide on the allocation of gas based on business models. The Federal Network Agency has set up a crisis team with 65 people and is conducting a survey of industrial gas consumption among the 2,500 largest gas consumers.
Such a survey provides important insights into the current consumption situation, but does not do justice to the individual alternative potentials in the company. The need for information goes far beyond accessible indicators. This is the well-known problem of a planned economy.
There are alternatives to a planned allocation that should also be considered. An obvious alternative is auctioning.
Auctions balance demand with the fixed, rationed supply. The companies that have the highest willingness to pay, i.e. those that derive the greatest economic benefit from the allocation, would be awarded the contract.
Those who can substitute more easily or whose products can be substituted more easily have a lower willingness to pay and would not receive a surcharge – at least as long as they do not take on a critical task for the economy and society that is not reflected in their own willingness to pay.
The proceeds from the auction could be returned to the companies for relief.
In order to protect privileged customers, i.e. households in particular, the public sector could also take part in the award as a bidder and bid on the gas for these customers instead of taking it out of the auction beforehand.
This would ensure that gas importers would not have to worry about under-allocating their gas to customers and would therefore prefer to ship gas to other countries.
Demand from privileged customers is not rigid either. Households can often turn down the gas heating at least partially at low cost. The incentives to do so increase when households can sell the gas they save.
An allocation to households based on the previous year’s consumption coupled with bonuses that a household receives if it consumes less would be conceivable.
This would insulate households against large loads while providing incentives for energy savings that households could benefit from.
This and other allocation mechanisms that invite people to save energy in a socially acceptable and effective manner are superior to simple allocation because they promote favorable savings opportunities and thus increase the supply of gas for other urgently needed purposes.
An auction makes it possible to determine the allocation of gas via prices, even in an emergency
There are other possibilities for targeted auction mechanisms. For example, analogous to mechanisms in electricity markets, companies could be obliged to limit or stop gas consumption.
Those who offer it the cheapest get the bid and the associated compensation and prepare for shutdowns accordingly.
Such contracts are not new. However, the group of addressees could be expanded – with conditions that are adapted to the rationing situation.
Such shutdown auctions can also be carried out today, for example to fill the gas storage tanks for the coming winter.
In all cases, the auction is about identifying those companies that want to purchase or reduce gas and at what price. The auctions can be nationwide, by industry, or by region, and they can include volumes and time periods.
An auction allows prices to be used as an allocation mechanism. They help politicians and regulators to distribute gas quickly and in accordance with value added, even in times of extreme shortages.
At the same time, companies and households can be shielded from the consequences of the resulting high prices at a comparatively lower burden on public budgets. How well we get out of a possible gas crisis will depend crucially on the design of the allocation mechanisms.
The authors: Peter Cramton is Professor of Economics at the University of Cologne. Since 1983 he has been researching the theory and practice of auctions. Axel Ockenfels is Professor of Economics at the University of Cologne. His focus is on market design, game theory and behavioral economics. Achim Wambach is President of the Leibniz Center for European Economic Research (ZEW) and a member of the Monopolies Commission. He researches market design and competition policy.
More: Who will have to pay in the future when energy prices rise massively