Rising energy and food prices are pushing Europe into recession. Due to the early phase-out of nuclear power, the refusal to allow fracking in the country, and past over-reliance on Russia, Germany looks set to suffer more than most other countries. To limit the damage, the German government is now rushing to provide a massive support package that provides generous relief to households and businesses to help pay exorbitant energy bills while maintaining the incentive to reduce gas and electricity consumption in response to high market prices.

Germany will cap the price of natural gas for consumers and households at €120 per MWh, which is 80% of their normal consumption. Above this level, consumers will pay a high purchase price for any additional use of gas, and the same applies to small businesses. The measure should come into force in March 2023. We estimate that the average consumer will end up paying for gas starting in March 2023 and then roughly what they paid in October 2022.

In the past, natural gas prices have typically fluctuated within a relatively narrow range. However, since the summer of 2021, they have skyrocketed in Europe as Russia began cutting off supplies in what, in hindsight, looks like a deliberate attempt to make Europe vulnerable to blackmail while Putin was plotting a vicious war against Ukraine. Will the situation get worse? We estimate how much consumers are likely to pay for natural gas starting in March 2023 as the average of marginal price (80%) and forward prices (20%). Under the measure, consumers will not face much more pressure than they do today on their heating bills starting in March. A separate subsidy can do much the same for electricity bills. However, consumers will still have to brace for some additional burden, since the increase in electricity tariffs for companies is still absorbed by the entire production chain. However, we estimate that consumer confidence in Germany could pick up again in early 2023.

* Messrs. Holger Schmieding, Callum Pickering and Salomon Fiedler are economists at Berenberg Bank.