Reform of the Energy Security Act: New Options for Action to Secure Energy Supply in the Event of Crisis

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[co-author: Tina Schantz, LL.M]

Few issues are currently occupying German industry and the energy sector as much as the Ukraine crisis and its consequences for the critical infrastructure in Germany. Against this background and in order to secure energy supplies and manage crises on the energy markets, the German federal government is to be given additional scope for action.

To this end, the German Bundestag passed a comprehensive reform of the German Energy Security Act on Thursday, 12 May 2022.

The Energy Security Act, dating back to the time of the first oil crisis in the 1970s, already then contained extensive powers for the executive branch to enact measures in the event of an energy crisis. It will now be supplemented by extensive additional authorizations to broaden the scope for action in the event that the current situation on the energy markets should worsen. In particular, operators of critical infrastructure can in future be placed under trusteeship or, as a last resort, even be expropriated. In addition, gas trading and supply companies along the entire supply chain will be given a statutory right to adjust prices in order to prevent cascading effects in the event of a shortfall in gas imports. Further changes concern to the European solidarity mechanism as well as safeguarding the operation of German gas storage facilities.

The reform may also impact business partners of companies that operate critical energy infrastructure in Germany.

Background of the legislative Reform

The Energy Security Act (Energiesicherungsgesetz, "EnSiG") was passed in 1973 in response to the first oil crisis. In the event of a disruption or threat to the energy supply, it empowers the German government to enact certain ordinances to ensure that vital energy needs are met. This includes in particular regulations on the production, distribution and use of energies and energy sources of all kinds. In addition, the supply and use of energy may be restricted in terms of time, place or quantity. This explicitly encompasses the adoption of maximum prices for energies as well as speed limits and driving bans for motor vehicles – the EnSiG also provided the legal basis for the "car-free Sundays" in Germany in November and December 1973. The previous version of the EnSiG has been in force essentially unchanged since 1975.

In recent weeks, Russia's illegal war of aggression against Ukraine has led to what are probably the most significant distortions on the global energy markets since the oil crises of 1973 and 1979/80. Germany's high dependence on energy supplies from Russia, especially natural gas, has further exacerbated the already tight supply situation. At the same time, it has become apparent that the existing legal framework is not sufficient to address the challenges of the current crisis. The EnSiG has so far not explicitly allowed for individual measures against certain market players or operators of critical infrastructure, such as LNG plants or gas storage facilities. The order for trusteeship over Gazprom Germania GmbH enacted by the German government was instead based on a provision of the Foreign Trade and Payments Act (Außenwirtschaftsgesetz).

The reform of the EnSiG now passed by the Bundestag clarifies and supplements existing regulatory powers and creates additional options for action. At the same time, new provisions are created for the implementation of European regulations on the security of gas supply and solidarity in the event of a crisis, in particular Regulation (EU) No. 2017/1938. The reform is still subject to the approval of the German Bundesrat (the upper house of the German parliament, in which the sixteen German Länder are represented), which is, however, expected in the near future.

Extensive New Regulations and Options for Action

The bill passed by the Bundestag creates a number of new powers and regulations. The focus here is on reforming the Energy Security Act:

  • Rules are created to implement the European solidarity mechanism under Article 13 of Regulation (EU) No. 2017/1938 (Draft Section 2a EnSiG). It is expressly clarified that the German government may use the instruments of the EnSiG to fulfill Germany's obligation to supply gas to other EU member states. Conversely, the Act provides that Germany may procure gas from other EU member states under the solidarity mechanism.

  • The establishment of a digital platform for natural gas (Draft Section 2b EnSiG) is intended to improve the data basis on the use of natural gas in order to better identify reduction potential and to order shutdowns in the event of a crisis. By amending the Gas Assurance Ordinance (Gassicherungsverordnung), gas traders, infrastructure operators as well as major consumers are to be obliged to register on the platform yet to be created, and to store certain information (e.g. company data, gas volumes and prices).

  • The Federal Government will be empowered to place companies operating critical infrastructure in the energy sector under trust administration. Trust administration can be ordered in particular if there is a risk that a company will no longer adequately fulfill its duties to ensure security of supply. In particular, the voting rights of shareholders can be temporarily suspended or transferred to an agency of the Federal Government, instructions can be issued to the management and its administrative and disposal powers can be restricted (Draft Section 17 EnSiG). The order may be enacted for a maximum term of six months, but may be extended, even several times, for a further six months in each case, provided that the prerequisites for trust management continue to be met. As a last resort, the expropriation of shares in such companies will also be possible (Draft sections 18 et seq. EnSiG). Expropriation is to be compensated, but only to those who can invoke the fundamental property right of the Basic Law (Sec. 21 (1) EnSiG-E). The Bundestag is to be involved in the enactment of legal ordinances relating to the expropriation procedure, but not in individual expropriation acts (Section 23 EnSiG-E).

  • A new provision will allow for price adjustments in the event that the so-called 'alert level' or 'emergency level' are declared in accordance with the Gas Emergency Plan of the Federal Ministry of Economics and Climate Protection – as a further escalation to the 'early warning level' already in force at present – and that the Federal Network Agency has observed a significant reduction in total gas import volumes to Germany. This is to address cases where gas supplies to Germany are cancelled or drastically curtailed and importers and other players along the supply chain have to make expensive substitute purchases in order to meet their supply obligations. In such a case, all affected energy supply companies along the supply chain will be entitled to adjust their gas prices vis à-vis their customers to an appropriate level (Draft Section 24 EnSiG). This provision is intended to prevent importers from becoming financially distressed, which could have cascading effects on the entire market. In Parliament, the regulation was further clarified to the effect that the price adjustment may not exceed the additional costs of the replacement procurement. In addition, customers have a right to review and, if necessary, adjust the contractual price to an "appropriate level" every two months. If the gas shortage ceases to exist, the price must be reduced to such a level without delay.

In addition to the Energy Security Act, the Energy Industry Act ("EnWG") will also be amended in three points:

  • The Federal Network Agency ("BNetzA") will be authorized to prohibit the use of so-called critical components in the energy sector (Draft Section 11 (1g) EnWG). This refers to IT products that are used in critical infrastructures in the energy sector and whose disruption or failure can lead to impairments in supply security and to threats to public safety.

  • The BNetzA will be empowered to regulate the rights and obligations of LNG system operators (Draft Section 26 EnWG) by way of determinations or approvals. This includes, in particular, the conditions under which an operator must grant third parties access to its LNG facility.

  • The temporary or permanent decommissioning and shutdown of gas storage facilities will in future be subject to notification and approval (Draft Section 35h EnWG). If the operator of a gas storage facility intends to decommission it, it will have to give twelve months' advance notice and provide appropriate justification. If approval is refused in order to avoid negative effects on the security of supply in Germany or the European Union, the operator will continue to be obligated to operate the facility. If the operator cannot ensure continued operation, the BNetzA is authorized to take appropriate measures.

Conclusion

The reform of the EnSiG endows the German government with extensive powers of intervention should the the situation on the energy markets tighten further. Of particular importance in this respect is the ordering of state trusteeship or even expropriation of operators of critical energy infrastructure when there is an imminentdanger that the company concerned will no longer be able to fulfill its public service tasks in the energy sector. This includes cases in which domestic subsidiaries are "abandoned" by foreign parent companies (as in the case of Gazprom Germania GmbH); however, the measures are not limited to such cases. Rather, the new powers of intervention exist irrespective of the domicile of the company concerned or its shareholders and are aimed solely at ensuring the security of energy supply in Germany.

Trust administration or expropriation can also be advantageous for business partners of the companies concerned. The maintenance of business operations by the German state prevents an insolvency of the company and ensures the fulfillment of contractual obligations towards third parties. At the same time, any foreign shareholders are at least temporarily deprived of influence over their German companies and their assets. Business partners are thus not forced by their own sanction obligations to immediately terminate their business relationship with the German companies concerned. When the trusteeship expires, however, the shareholders regain full control over the companies concerned, so that for instance the effect of certain sanctions could be revived.

The situation is different in the case of expropriation: the companies concerned are temporarily acquired by the German state. This may entail consequences for existing contractual relationships, for example with regard to change of control clauses and associated termination rights. However, the law expressly provides that companies whose shares are expropriated are ultimately to be re-privatized.

It is worthwhile to closely monitor the planned changes in the context of contract management already now.

[View source.]

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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