In the previous issue, I noted that Germany's measures against the energy crisis were convoluted and that there was a risk that the confusion would be exacerbated by the sharpening of each party's arguments in connection with the federal state elections. Germany needs to mitigate the damage in the short term and change the way it invests in the energy technologies and infrastructure in the long term. In the issue in September, I indicated that full use of domestic power sources and the price mechanism were being explored for short-term damage mitigation with all what Germany had. In this issue, I was going to touch on renewable energy investment, but I would like to change my plans and touch on the price mechanism a little more. Extension of Nuclear Power Plant's lifetime and Use of Lignite

　As many of you are probably aware, Germany has decided to extend the life of three nuclear power plants in operation until April 2023, as well as to extend the life of some lignite power plants that were scheduled for closure this year. The government has approved the development of new open pit mining sites for this purpose. Although the risk of a widespread blackout is low when looking only at the domestic electricity demand in Germany and the generation capacity they are holding, the decision was made to strengthen the temporary use of these facilities due to the uncertain situation regarding the restart of nuclear power plants in France and the high uncertainty and risk of a sharp rise in gas prices in the run-up to the winter. 　As a result, the supply-demand balance for electricity this winter is expected to be somewhat released, and electricity prices will be pushed down somewhat as well. Several research institutes have assessed that the extension of nuclear power plant's lifetime could reduce prices by 4-12%. On the other hand, the effect of curbing gas consumption in Germany is estimated to be limited to 1% even though the optimistic estimation. The measures in the power sector are expected to be more effective in preventing electricity price hikes than in avoiding power shortages. Supply Shortage Countermeasures or Price Spike Countermeasures: The Expert Committee's View

For the citizens and the media, price hikes are the most pressing issue, and they seem to be getting more coverage. Although Germany's GDP kept slight growth in the third quarter of 2022 (+0.3% y-o-y and +1.1% y-o-y), Minister for Economic and Climate Protection Robert Habeck believes that a recession is inevitable in 2023. In fact, consumer price inflation in October 2022 was 10.4% y/y, 11.1% y/y in the EU CPI, and 43.0% y/y in the energy sector. It is not surprising that many are concerned about inflation. 　 The committee of independent experts on gas and heating in Germany has been discussing measures to deal with the gas and heating sectors. The final report of the committee was released on October 31, and the cabinet has already approved its contents. 　The committee of experts was convened on September 23 and consists of three representatives, 18 members, and three observers. The observers are members of the ruling party, and the committee members are drawn from academia, energy companies, industries, and trade unions. They are represented by Professor Grimm of the University of Nuremberg, Russwurm of the Federation of German Industries (BDI), and Vassiliadis of the Union of the Chemical Industry (IGBCE). 　The objectives of this expert committee are: 1. to assess the extent to which the increase in natural gas prices due to the supply disruptions of Russian natural gas will be an additional and unreasonable burden on businesses and households, especially from the fall of 2022 until the spring of 2024, 2. to evaluate federal measures to mitigate this price hikes. It will work on specific proposals for mitigation, such as lowering the burden of gas and heating payments, and it will also examine their mitigation effects and their impact on the European single market. Measures to reduce demand and increase supply will also be considered at the same time. 3. to evaluate options for mitigating price volatility at the European level, taking into account gas price formation in the global market. Specific proposals in the European region will be considered and their mitigation effects as well as other impacts will be considered. 4. to develop concrete proposals for measures for the federal government. Develop mechanisms that are clear and quickly implementable at a reasonable cost. The mechanism will provide significant burden relief, will not interfere with price incentives, and will be a clear mechanism that can be implemented quickly (legally, technically, and in time). 5. The Expert Committee members shall present the results of their work by the end of October. 　The interim report of the committee was released on October 10 and the final report on October 31. What clearly differentiates the committee's objectives from the concerns of the public is that it explicitly aimed at demand suppression measures through the price mechanism. Prof. Grimm stated in a media interview that incentives to curb gas consumption were a top priority, suggesting that the committee's goal was to absolutely avoid gas shortages. 　For this reason, both the expert committee and the German government, which convened the committee, are opposed to the caps on wholesale gas prices and/or import prices proposed by other EU member states on the grounds that such caps would stimulate demand by suppressing prices and risk causing gas supply shortages (Germany is skeptical that the gas price cap will work as expected by the proposing countries in the first place) and that higher wholesale prices are an important price mechanism. Germany's goal is to ensure both demand cut and secured supply by accepting price spikes on the global market. Proposal of the Gas Expert Committee

　The centerpiece of the proposal is to ease the burden on gas and heat consumers. Since no cap on wholesale prices means that price increases will be passed on to retail prices, the proposal is a subsidy to ease the burden to an appropriate extent. 　The subsidy will be provided to each consumer in two stages. First, the government will pay their gas bills in December. Then, starting in March 2011, the government will provide a portion of the gas consumption. 　The method of paying for gas in Japan and Germany is different, so it is better to explain from there.

In Germany, households and small consumers usually sign a gas supply contract with a fixed price for one or more years. In Germany, the fuel adjustment system (fuel surcharge) is not applied from the viewpoint of consumer protection. The gas surcharge system was temporarily considered for introduction in Germany, but due to various circumstances, the introduction of the system was ultimately delayed just prior to the introduction of the system. It should be clear from this that price changes without a contract review during the contract period would be extremely difficult in Germany. 　The meter reading of gas consumption is typically done once a year. Therefore, monthly gas payments are based on the total gas consumption of the previous year, and it is rare for the assumed gas consumption to change during the year. Therefore Monthly gas bill = estimated monthly gas consumption based on the previous year's gas consumption X fixed annual gas price The estimated monthly gas consumption is often simply divided by 12. Then, after the last month of the annual contract, the difference between the actual annual gas consumption and the assumed gas consumption is settled. If it is more than expected, an additional payment is made, and if it is less, a refund is given (the same payment method applies to electricity for many households). 　Based on this, the government's payment to cover the December gas bill would be equal to one month's gas bill at the time of contract (renewal), i.e., based on the retail gas price and the assumed monthly consumption before the gas price hike. Therefore, the actual gas consumption in December is not taken into account. Consumers also do not know their gas consumption for the month of December, and even if they exceptionally increase their gas consumption in December, for example, it will not be included in the December bill, but in the total annual increase when the total annual gas consumption is finally settled. In other words, using more heating because it is free in December does not benefit the consumer, but only increases the burden at the time of annual settlement. Therefore, even if the government bears the cost of gas in December, this is hardly an incentive to increase gas consumption. On the contrary, if they conserve gas in December as well as in other months, they will receive more cash for it. 　Next, the second tier of subsidies is the “gas price brake,” which will be in effect from March 2011 through April 2012. Unlike the price cap, the price brake is a program that subsidizes consumers a certain amount of money. It does not set any restrictions on retail or wholesale prices, but rather pays a subsidy based on the difference between the price set by the government and that the consumers pay according to the contract with the gas supplier for the certain amount. 　The government will pay the portion of the gas price brake for households and small businesses up to 80% of the assumed monthly consumption based on September 2022, at a unit price of 12 cents per kWh of gas or more. 　To take a concrete example, let us assume that a 100m2 house consumes 12,000 kWh of gas per year for heating and hot water. The monthly consumption would then be 1000 kWh. In this case, up to 800 kWh, the portion above 12 cents would be subsidized. Assuming that the cost of gas is 20 cents or 25 cents, the subsidy amount and the amount paid by the household would be as follows, respectively. Case of assumed monthly gas consumption of 1000 kWh (September 2022) In the case of 20 cents Subsidy amount 800x(0.2-0.12) = 800x0.08 = 64 Original payment amount 1000x0.2=200 Amount to be paid by the household 200-64=136 In the case of 25 cents Subsidized amount 800x(0.25-0.12)=800x0.13=104 Original payment 1000x0.25=250 Amount paid by the household 250-104=146 　The key here is that the amount of subsidized gas consumption is determined by the assumed amount as of September 2022 and has nothing to do with actual consumption. 　For example, consider the case where consumption is higher than in September 2022, lower, or extremely conservative.

Case of actual monthly gas consumption of 1200 kWh and unit price of 20 cents per kWh (1000 kWh in September 2022) Subsidy amount 800x(0.2-0.12) = 800x0.08 = 64 Original payment 1200x0.2=240 Amount paid by household 240-64=176 Case of actual monthly gas consumption of 800 kWh and unit price of 20 cents per kWh (1000 kWh in September 2010) Subsidy amount 800x(0.2-0.12)=800x0.08=64 Original payment 800x0.2=160 Amount paid by household 160-64=96 In case of extreme savings Case of actual monthly gas consumption of 300 kWh and unit price of 20 cents per kWh (1000 kWh in September 2010) Subsidy amount 800x(0.2-0.12)=800x0.08=64 Original payment 300x0.2=60 Amount paid by the household 60-64=-4 i.e., a bonus of 4 euros per month for one year 　Thus, the gas price brake is characterized by a switch from burden relief to a household bonus at a certain stage when savings are promoted. Since actual consumption is not reflected in the subsidy amount, the more you save, the more you gain. On the other hand, if the household consumes more gas than in the previous year, the burden will increase dramatically. The subsidy is set at 80% because households are expected to save 20%. 　The mechanism is roughly the same for large gas consumers, with a subsidy to cover the price above 7 cents for up to 70% of actual gas consumption in 2022. However, large consumers are required to maintain 90% of their employment for a period of one year after the subsidy period, especially from the perspective of maintaining employment. The fact that industry receives 70% of the subsidy means that they are required to save 30% of gas consumption. Incidentally, the 12 cents for households and 7 cents for large consumers are each 2-3 times higher than the price of gas in previous years, so both households and businesses will have to bear an increased burden compared to past years. At the same time, this does not affect wholesale or retail prices, so market prices will reflect actual supply and demand conditions, falling when there is room for gas supply and soaring when there is not. In Germany, gas consumption already decreased during the gas price hiking, and it is clear that the price mechanism is functioning, so reforms that would undermine this function are not realistic. Moreover, maintaining the price mechanism is important for Europe and Germany to continue importing gas from outside the EU (even if only from Russia, a unilateral price cap set by the buyer would be unacceptable in general trade), and Germany, which does not want imports to be disrupted, wants to avoid political intervention in market prices. Other German thinking, as seen in the final report of the Committee of Experts

　The final report of the expert panel emphasizes the following points, in addition to the measures against price hikes and maintaining incentives to save the gas through price signals (parentheses are added by the author). — Prepare for the next winter (next winter will be more severe than this winter, given the gas situation). — Accelerate the transition (not only to achieve climate neutrality, but also to prepare for a “new normal” in which fossil fuel prices will not return to their previous levels, as the energy transition, including accelerating the expansion of renewable energy, strengthening DR, and launching a hydrogen market, is of paramount importance to overcome the crisis). — Stabilize price levels and the economy (maintain supply chains and mitigate inflation at the same time. Support should be focused on households and businesses facing existential dangers.) — Consider Europe (maintain compatibility with European crisis packages, encourage joint procurement of gas) — Suggest the measures to be integrated at the European level (different measures are taken in different countries, and coordination through dialogue with European countries should be sought prior to implementation). 　The Expert Committee has repeatedly emphasized that energy crisis measures must contribute to achieving carbon neutrality in Europe and Germany in the long term. In other words, maintaining or strengthening incentives to save energy and invest in energy-saving measures is the cornerstone of these measures. 　Burden mitigation measures must not be the prolongation of conventional lifestyles or business strategies that are unsustainable from a climate policy perspective, and are designed to provide greater support to companies that implement measures that are compatible with the “new normal”. Companies that do not take such measures will be asked to bear the cost of soaring fossil fuel prices themselves. 　A similar electricity price brake will be introduced for electricity, but I personally doubt that it will work for electricity. However, I will discuss this in my next column when I have a chance.