Europe Macro – January 10, 2022

| January 10th, 2022

Today is all about inflation. ECB’s Schnabel made key comments regarding greenflation, which we support using the oil industry as an example. In the UK, we’re seeing that producer prices are about to push up consumer prices as companies start to aggressively hike prices. Additionally, we cover often overlooked risks that come with sky-high energy prices in Europe.

1.  INFLATION

1.1 ECB executive warns green energy push will drive inflation higher – FT

Policies to tackle climate change are likely to keep energy prices higher for longer and may force the European Central Bank to withdraw its stimulus more quickly than planned, one of its senior executives has warned.

Isabel Schnabel, the ECB executive responsible for market operations, said the planned transition away from fossil fuels to a greener low-carbon economy “poses measurable upside risks to our baseline projection of inflation over the medium term”.

After the economy rebounded from the impact of the coronavirus pandemic, a sharp surge in energy prices drove inflation to 5 per cent in December, a record high for the eurozone. But the ECB has forecast energy prices will fade and has committed to maintain its ultra-loose monetary policy for at least another year.

However, the inflationary impact of the green energy transition could force the central bank to reconsider this position, Schnabel said, speaking via video link to the annual meeting of the American Finance Association on Saturday.

“There are instances in which central banks will need to break with the prevailing consensus that monetary policy should look through rising energy prices so as to secure price stability over the medium term,” Schnabel said.

Energy prices in the 19 countries that share the euro rose 26 per cent in December from a year earlier, close to a record high set the previous month. Natural gas prices hit record highs in the region last year, driving wholesale electricity prices to €196 per megawatt hour in November — nearly quadruple average pre-pandemic levels — the ECB executive said.

“While in the past energy prices often fell as quickly as they rose, the need to step up the fight against climate change may imply that fossil fuel prices will now not only have to stay elevated, but even have to keep rising if we are to meet the goals of the Paris climate agreement,” Schnabel said.

The German economics professor, who joined the ECB board two years ago, has emerged as the most vocal critic among its top executives of its vast bond-buying programme, which has acquired a €4.7tn portfolio of assets since it started seven years ago.

[…] Schnabel outlined “two scenarios where monetary policy would need to change course”. One is if persistently elevated energy prices caused consumers to expect continued high levels of inflation and created a 1970s style wage-price spiral. But she said “so far” wages and union demands “remain comparatively moderate”.

The second scenario is if policies to tackle climate change, such as a carbon tax and measures to compensate poorer households for higher energy costs, turn out to increase inflationary pressures — as recent studies suggest is already happening — she said.

Comment: This is one of the most important articles as a key ECB member (Schnabel) is confirming a very dangerous macro trend: greenflation. The green energy transition is causing structural and long-term energy inflation, which is making it impossible for the ECB to get inflation back to 2%. Prior to 2021 that wasn’t an issue as economic growth was moderate and oil production was high enough to sustain demand. Now this is changing as becoming carbon neutral is impossible without cuts in oil and gas production. Hence supply and been under pressure in a time when energy demand is coming back. 

Or as The Telegraph’s Jeremy Warner puts it:

“Just the opportunity to drill on British soil or waters would these days be a fine thing. Climate change goals have taken the place of oppressive levels of tax as the main deterrent. Both BP and Shell have been steadily disengaging from the North Sea for years.

Shell recently doubled down on the withdrawal by scrapping plans to invest in Cambo, a proposed oil field off the Shetland Islands, citing an insufficiently strong commercial case. Yet as one of the prospects targeted by climate change campaigners in the run up to Cop26, it is hard to resist the suspicion that Shell decided simply that the potential returns were not worth the political heat.”

According to OPEC, oil and gas will still account for more than 50% of global energy demand in 2040(!). Including coal, this number rises by almost 22%. 

Moreover, and with regard to the comments on companies’ unwillingness to invest in higher drilling volumes, global oil discoveries hit a multi-decade low in 2021.

Energy companies rather buy back their own shares and hike dividends instead of investing in production growth. Or as Jeremy Warner puts it – using the United Kingdom as an example: 

“The fact is that for now the world is still overwhelmingly dependent on hydrocarbons for its energy needs. We are going to need the gas and oil these companies produce for a long time to come. Drive the industry offshore if you must, but by reducing Britain to an investment desert, it only makes us even more dependent on outside forces that care little or nothing about the demands of climate change.”

Add to this that most of OPEC is unable to increase production according to HFI Research:

“By our estimate, the only countries that are capable of increasing production in 2022 are Saudi, UAE, and Kuwait. While we think they have the combined capability to increase production by ~2 million b/d, this would imply that most of their spare capacity is to be depleted. And in the case of IEA’s assumption, it is using an excel drag in assuming a linear increase in OPEC+ production without taking into account overcompliance by members who are incapable of increasing production.”

The ongoing supply/demand imbalance is causing Brent oil to trade well above $80 despite the surge in COVID cases and (partial) lockdowns in European and Asian countries. 

And, adding to that, European “big oil” is now becoming “small oil” as Ron Bousso and Sabrina Valle write for Reuters. European majors are not investing in production growth due to environmental rules and pressure from politicians. Hence, in a time when oil supply has to grow, the European majors are expected to reduce production by roughly 1 million barrels of oil per day until 2030. 

So, to go back to Isabel Schnabel’s comments, this is a problem that goes well-beyond the ECB. It is a problem that will cause energy inflation to remain high for years to come. And it’s not just oil. It includes measures to make housing more sustainable, reduce meat consumption, slowly eliminate plastics, and many more measures.

The ECB is already seeing high inflation in the EU. It knows that real rates have fallen off a cliff, and it knows that quickly raising rates and ending QE could start a sovereign debt crisis in the EU as countries like Italy are dependent on cheap financing.

It’s an incredibly tricky situation. The fact that Isabel Schnabel is now publicly communicating it is a big step away from “inflation is transitory”. 

1.2 Energy crisis: Inflation could hit 7% without bill cap – The Times

Inflation could rise to about 7 per cent if ministers fail to cap an increase in energy bills due in April, internal government estimates suggest, risking a multibillion-pound hole in public finances.

Ofgem, the energy regulator, is reviewing the existing price cap, which is due to be revised next month after record breaking wholesale prices.

The cap, governing most retail energy bills, is likely to rise by more than 50 per cent on present estimates, raising the average cost of gas and electricity for a household from £1,277 a year to about £2,000.

Government projections are understood to suggest that such a rise could help push inflation up a further two percentage points in April from its level of 5.1 per cent in November. As well as exacerbating the cost-of-living crisis such a rise would pile pressure on public finances with further potential rises in interest rates.

Rishi Sunak has previously suggested that a sustained 1 per cent increase in rates could add £25 billion to the cost of servicing government debt. The internal government figures are similar to a projection by Goldman Sachs, the financial services company, which suggested that rising fuel bills would contribute to inflation reaching 6.8 per cent, its highest level in 30 years.

The chancellor and Boris Johnson are to discuss the energy crisis early next week because of growing concerns about the impact of the price cap.

Kwasi Kwarteng, the business secretary, has been in discussions with energy suppliers about possible measures to reduce the rises. These include an industry-wide “structural fund” that would allow companies to borrow money to keep bills lower and repay the money by not reducing bills as quickly when wholesale energy prices fall.

Comment: The UK could see 7% inflation without a price cap. That is likely true and results in a major issue: how to cap prices, and will it be successful? Capping prices is possible, the problem is that it can cause suppliers to go bankrupt. After all, natural gas prices do not care about UK price caps, they move independently. So, capping prices will shift the risk to suppliers. If suppliers are being supported with government money, the problem is only temporarily “solved”. Moreover, if prices remain high – which could very well be the case – who guarantees that support can be repaid? 

Additionally, and according to the Financial Times, Labour, the Liberal Democrats and some Tory MPs want Sunak to levy a tax on the profits of North Sea operators to alleviate soaring domestic energy bills, arguing the sector can easily withstand the hit. While it could generate close to GBP 20 billion, it would make the relationship between governments and the oil and gas industry even worse, which will not result in long-term production growth. 

It’s a situation that can only be solved using long-term measures that rebalance supply and demand in the industry (see the first article in this segment for more info). Unfortunately, the opposite is happening as Germany is shutting down its nuclear plants.

“Soaring gas prices are pushing up bills for households and businesses around Europe while there is also a struggle to keep a lid on carbon emissions. Both Germany and neighbouring Poland are still burning vast amounts of coal to keep the lights on.

“It’s absurd,” says Michael Liebreich, energy expert and chairman of Liebreich Associates, of Germany’s nuclear shutdown. “I think it’s an epic, epic mistake. I’ve called it a climate crime.””

Meanwhile, its energy needs are set to double until 2045 (from 2020 levels). So, just like the UK, Germany is seeing the risks of sustained inflation rates at above-average levels:

“Soaring energy bills amid global constraints on gas supply have helped push inflation in Germany to hit 5.3pc in December, the highest rate since June 1992. Experts expect power costs in Germany to remain high in 2022.”

What this creates is a situation that, for example, Rishi Sunak wants to avoid. It hurts consumers, makes regulating energy prices next to impossible, and it makes the case for more aggressive BoE rate hikes, which increases borrowing costs for the government and households. All of this is inflationary and none of it can be solved by capping energy costs for consumers. It’s kicking the can down the road. 

1.3 Firms grapple with the pain of rocketing inflation – The Times

Daniel Walton rattled off a list of rising prices — from steel, to polyester, to packaging. “There isn’t a material cost that hasn’t increased,” said Walton, who set up his Olpro tent business 11 years ago. He then cited the punitive increases in the cost of importing goods from Asia, after the price of hiring a shipping container rose from $2,000 before the pandemic to $13,000 (£9,600).

As a result of these huge increases, Walton, 45, will put up the price of his products by up to 20 per cent next month.

The Worcestershire-based businessman, who employs 20 people, is not alone in feeling battered by rising costs. Last week, Greggs, the bakery chain, increased the price of its sausage rolls by between 5p and 10p, while one of the most respected retailers in Britain, Lord (Simon) Wolfson, predicted that clothing prices in the Next chain he runs would rise by up to 6 per cent in the autumn.

This appeared to be reflected in a study by the Bank of England last week that found businesses were expecting to increase prices by 5 per cent this year, while lobby group the British Chambers of Commerce reported that its survey of more than 5,000 businesses had found that inflation was now top of the list of their worries.

For businesses, inflation makes it difficult to plan, squeezes profit margins and reduces their incentive to invest in machinery and staff. “We weren’t anticipating the large increase in inflation we’ve seen [as lockdowns ended],” said Peter Levell, associate director at the Institute for Fiscal Studies. “The economy had to switch back on, which led to supply frictions, which pushed up prices.”

Comment: The only thing that is set to change in 2022 (compared to 2021) is that the inflation rate is seeing downward pressure due to a tough comparison to 2021 in the second half of this year. Other than that, there is not a lot pointing at lower price pressure. Supply chain issues are persistent, and producers are not able anymore to shoulder rising input costs:

“Some businesses, though, show signs of no longer being able to keep absorbing higher costs. Like Walton at Olpro, Brennan Jacomb, founder of conservatory business Green Space UK, warned that he would have to put up prices next month. His suppliers are demanding more for aluminium and PVC. One is increasing prices by 14 per cent and adding a 15 per cent surcharge, while another is rising prices by 18 per cent for PVC and 32 per cent for aluminium. “It’s right across the industry — it’s not just one supplier,” said Jacomb, 46, who has bases in Ringwood in Hampshire and Rugby in Warwickshire.”

As the graph below shows, the spread between UK producer prices and consumer prices has risen to more than 4.0%. This is twice as high compared to 2018 (before global economic growth started slowing) and it supports the Times article.

It is also worth mentioning that while factory gate prices are high in the UK, euro area, and US, only the UK saw higher prices in December. 

Moreover, the BoE’s official estimates are that inflation will reach 6% in spring of 2022. The bank expects inflation to remain above-average in 2022 followed by normalisation in 2023. 

For now, however, supply chains remain an issue, energy prices (crude oil and benchmark natural gas prices in Europe) are unlikely to fall, and producer price inflation is slowly but steadily pushing up consumer prices. In the second half, inflation will be pressured by tough comparisons vs. 2021, but other than that, there is no reason to believe that it will be business as usual soon. 

As Nicholas Glinsman noted in this week’s outlook, inflation went from “demand pull” to “cost push” because of the pandemic. It will be very hard to fix this. 

1.4 Building costs rise to a 50-year high – Frankfurter Allgemeine

In November of last year, the price of new housing in Germany rose more sharply than at any time since 1970. Prices for new construction of conventionally manufactured residential buildings increased by 14.4 per cent compared to the same month of the previous year, as the Federal Statistical Office announced in Wiesbaden on Monday. According to the data, the last time a stronger increase was recorded was in August 1970, with 17.0 per cent compared to the same month of the previous year.

The high demand for building materials such as wood, steel and insulating materials on the world markets has been fuelling prices for some time. Carpentry and timber construction work became more expensive than average in November, with prices rising by 38.9 per cent due to the increased demand for construction timber at home and abroad.

This was compounded by the withdrawal of the temporary reduction in VAT. Since January 2021, the regular rates apply again, so goods and services tended to become more expensive year-on-year. Without the VAT effect, construction prices would have risen by 11.6 percent in November 2021, according to the statisticians.

Comment: German construction inflation is red-hot. Construction price growth has hit a 50-year high as a result of temporary VAT surges, labour shortages, and ongoing supply chain issues. In this case, Germany is also dealing with slow new orders. Last week, IHS Markit reported that the German December construction remained below the 50 threshold – indicating contraction.

IHS comments suggested that December inflation data is expected to remain high, while some factors that push up inflation have eased:

“Cost pressures faced by German building companies remained strong in December, but even on this front there were some reasons for encouragement as the rate of input price inflation dropped to a nine-month low amid signs of supply bottlenecks slowly easing.”

Unfortunately, and according to the above-mentioned Frankfurter Allgemeine article, inflation in construction is not expected to normalise soon. Supply chain issues are persistent, which is resulting in lasting material inflation. The same goes for labour, which has a structural problem in Germany. Additionally, but not specifically mentioned here, greenflation will continue to be an issue as homebuilders need to become climate neutral over the next 2-3 decades.

“According to Hans Peter Wollseifer, president of the skilled trades, an easing on the price front is not to be expected soon. “Private customers are waiting longer for tradesmen and are paying significantly more,” Wollseifer said recently. “Building will become more expensive in the future, not only because wages are rising, but because the prices for materials are rising. Because it is already becoming apparent that prices – even if material bottlenecks ease – will not fully return to pre-crisis levels.””

1.5 Norway to further raise household electricity subsidy – Reuters

Norway’s minority government plans to further increase its subsidy for household electricity bills amid a spike in winter season power prices, the energy ministry said.

A rise in the cost of electricity to record highs, part of a Europe-wide surge, has put pressure on the centre-left government to find ways to cushion the blow. The coalition of the Labour Party and the Centre Party first introduced a subsidy in December, but opposition critics had said that scheme was insufficient.

The cost of the plan will now rise to an estimated 8.9 billion Norwegian crowns ($1.01 billion), the energy ministry said in a statement published on Saturday, from around 6 billion seen last month. The Socialist Left party, on which the coalition relies for winning majorities in parliament, separately said it would back the revised plan.

The government will pay 80% of the portion of power bills above prices of 0.70 crowns per kilowatt hour (KWh), up from 55% in the plan deviced last month. The overall cap on consumption covered by the scheme remained at 5,000 KWh per month.

Comment: Energy prices have become unsustainable in Europe. Norway is one of the latest examples of a government that is ramping up financial support to protect the purchasing power of its population (and its popularity in the polls). Needless to say, Norway is not the only country with (temporary) financial countermeasures. Support is happening all over Europe. Thanks to The Times, we now have an handy overview:

[…] France – Last September, the French government unveiled a one-off €100 (£83) payment to nearly 6 million poorer households that receive energy vouchers to help them pay their bills.

Later that month, Jean Castex, the prime minister, put a block on the regulated price of gas — effectively a cap — that will prevent increases pencilled in for February from coming into force. The cap was due to be removed in April but as gas prices continued to rise, the French government decided the “tariff shield” would remain in place for the whole of this year. Castex also extended the one-off energy voucher scheme to everyone earning below €2,000 a month — around 38 million people — at a cost of nearly €4 billion.

[…] Germany – State intervention was initially rejected in Germany, a country where 41.5 million households buy their energy in a highly competitive market. Germany’s energy market was liberalised in 1998, but is still dominated by four main players — including RWE and E.ON.

However, that position changed last October, when the government announced plans to reduce green levies — a proposal that has also gained some traction in the UK. Germany’s renewable energy surcharge is taken from consumers and handed to companies building wind and solar farms to aid the transition from fossil fuels to green sources of energy. From the start of the month, it dropped from 6.5 cents per kilowatt hour to 3.7 cents. The government said it would help to fund the cut with €3.3 billion in revenue from carbon taxes.

[…] Spain had just slashed taxes and imposed a temporary windfall tax on energy companies that profited from the surge in wholesale gas prices. The Spanish government hopes to collect €2.6 billion by the end of March, when the six-month windfall tax ends, from this crackdown on “excess profits”. Spain has also introduced a series of tax cuts on electricity bills until May to help consumers cope with high prices.

The pattern here is obvious. Countries either pay customers directly or lower taxes. So far, measures do not go beyond easy solutions that temporarily increase the deficit. If this crisis takes long, governments will need to find ways to recoup these tax losses, which will be a tough task in case inflation (in general) is not temporary.

2.  SUPPLY CHAINS

2.1 With arrival of Intel, Europe to gain advanced chips – Euractiv

This article was published on December 22, 2021. Nonetheless, it is an important piece of news as we combine it with a just-released interview with the General Manager of Intel Germany, Christin Eisenschmidt.

Europe will soon produce a strategically vital component in the modern global economy as US semiconductor giant Intel chooses the site for a new cutting-edge chip factory. Recent problems in global supply chains have highlighted the fundamental importance of semiconductors, which are used in a growing number of products including cars, TVs and smartphones.

Keen demand and the closure of semiconductor plants, particularly in Asia, due to pandemic disruptions led to a global chip shortage and forced car manufacturers such as Ford, Nissan and Volkswagen to scale back production. The European Union wants to become less reliant on fragile global supply chains destabilised by the pandemic and has identified semiconductors as being of strategic importance for the 27-nation bloc.

Intel will select early next year a location for its European factories – which will make semiconductor components so fine that they are measured in nanometres. Chief executive Pat Gelsinger said Intel plans to set up two production units each employing 1,500 workers and costing €10 billion.

Six more factories could be built in the future, raising the potential investment to €80 billion.

Germany appears to be the favourite to host the Intel site. The region around the eastern city of Dresden already hosts big names in the chip industry such as Bosch, Global Foundries and Infineon.

Dresden “seems to tick all the boxes”, said Jean-Christophe Eloy, president of research company Yole Developpment, which specialises in the semiconductor market.The surrounding Saxony region – which has earned itself the nickname “Silicon Saxony” – has a significant workforce and real estate potential given its proximity to Germany’s border with Poland and the Czech Republic, Eloy added.

Frank Boesenberg, managing director of the Silicon Saxony association, which represents local semiconductor interests, confirmed discussions were underway to host Intel’s project.

Comment (Handelsblatt): […] Because there has been a constant migration of production capacities to Asia since the 1990s. There are many reasons for this, not all of which have to do with the pandemic – for example, the increased costs for the production of semiconductors and the comparatively low wage level in Asia. In addition, there are considerable government subsidies there.

In September 2021, EU Commission President Ursula von der Leyen presented the “EU Chips Act”. Among other things, the draft law is intended to summarise national strategies of the member states as a framework. According to EU Internal Market Commissioner Thierry Breton, the Chips Act is to be based on three pillars: Research & Development, expansion of European production capacities, and international cooperation and partnerships.

From the point of view of the semiconductor industry, the draft is a success. After all, the production of chips is ultimately not only about satisfying demand, but also about geostrategic interests. Chips are now at the heart of almost all products, from industry to transport and communications to private households.

[…] According to the European Center for Digital Competitiveness (ECDC), there is another factor: How governments shape the digital transformation of their economies will “significantly determine how competitive and prosperous their countries will be in the coming decades”. According to an ECDC study, Germany has slipped to second to last place in Europe in terms of its digital competitiveness.

Due to its importance as the strongest economy in the European Union, Germany must urgently and increasingly focus on digital sovereignty in order to be able to give more support to the ambitious plans of the EU Commission. The coalition agreement of the new federal government certainly gives cause for hope – as does the approach of the Ministry of Economics, which has already selected a large number of projects in the field of microelectronics to be funded as part of a European project.

[…] According to a study by the consulting firm Kearney, state-of-the-art chips already account for a good 20 per cent of total EU chip demand – in total, EU-based companies recently paid 44 billion euros a year to purchase such chips. So we are talking about a huge market, especially since the share of advanced semiconductors is expected to grow to more than 40 per cent by 2030 and the total demand for chips is expected to almost double.

The EU has set itself the goal of manufacturing one-fifth of global chip production in its 27 member countries by 2030. Compared to today, this would be a doubling. According to the German Electrical and Electronic Manufacturers’ Association (ZVEI), in order to actually realise this mass production target, it is necessary to expand the funding instruments in the association. This involves initiatives that are important for semiconductor projects, such as the Important Project of Common European Interest or Horizon Europe.

However, according to the Central Association, there must also be financial support for companies that want to expand their semiconductor production capacities and build new plants. Otherwise, it will be difficult to reach the target set by the EU Commission. The lack of support in this area so far is a serious gap in the European strategy. It must be closed so that member states can actually benefit from short, stable supply chains and thus greater independence.

2.2 Uniper’s €10bn credit call signals strains on Europe’s energy sector – Financial Times

German utility Uniper’s admission that it had been forced to seek €10bn in new credit lines was a stark reminder that the threat posed by Europe’s energy crisis is not limited to consumers. The dash for cash last week by one of Europe’s largest energy companies comes as unprecedented rises in natural gas and power prices prompt a sudden swelling of it liabilities on futures contracts.

With state-backed lender KfW providing €2bn of the mammoth financing alongside €8bn from Uniper’s Finnish owner Fortum, bankers now fear a scramble for credit among the region’s smaller companies as private-sector banks back away.

“The moves have been so extreme that even the normal, most cautious day-to-day business of locking in the spread requires you to raise so much money just to hold the position to delivery,” said Lueder Schumacher, analyst at Société Générale.

“I’d be surprised if everybody in the market who needs access to credit lines will actually get it.”

[…] Regarded by analysts as one of the sector’s more conservative companies, Uniper sells most of its power production years before delivery.

Once it agrees an electricity price with one of its industrial customers or municipal utilities, Uniper hedges its variable production costs and then instructs its traders to lock in a spread, or margin, via a forward power sale on futures markets, such as Germany’s EEX. The company does broadly the same with gas, using exchanges such as ICE Futures Europe.

These forward sales are subject to a variation margin, a cash deposit that protects the buyer from the risk of default by the seller. The amount of cash collateral deposited fluctuates with the underlying commodity prices.

For example, if Uniper agrees to sell German baseload power for €50 per megawatt hour in 2023 and the forward price rises in the meantime to €100, it will have to deposit with the exchange a variation margin of €50 — the difference between the two prices.

The Düsseldorf-based utility said in November it had sold 90 per cent of its German power for 2023 at €51 a megawatt hour, leaving it heavily exposed as the price soars far beyond that level, with German power futures for that year settling on Friday at €137.3 a megawatt hour.

Comment: Last week, we briefly highlighted the risks that the Uniper “situation” poses. However, this Financial Times touches on a very important topic: collateral. While nobody doubts that Uniper’s business is sound, we have created a situation on the European energy market that is seriously dangerous. While benchmark TTF natural gas prices have come down from recent highs, they are still at roughly 5x pre-crisis levels. New (potential) spikes could lead to higher collateral requirements, which means governments need to be ready to step in to provide liquidity for the most critical players. 

“As private sector banks have exposure limits to individual clients and sectors — and the credit facilities required by Uniper were so large — it was easier to secure the financing through Fortum and a state-backed German lender, said one person familiar with the situation.”

In this case, funding from KfW is needed to prevent (potential) future spikes. One tail risk is a Russian invasion in Ukraine. It would almost certainly cause a significant spike in natural gas prices, which requires additional collateral to maintain energy supply in Germany and beyond.

3.  GERMANY

3.1 All households in eastern Berlin reconnected to the heating network – warning remains in place – WELT

It was the number one topic in the social media on Sunday evening: Thousands were sitting in their cold flats in the east of Berlin, a power outage was to blame. Now the heat failure has apparently been resolved – the Lichtenberg district office withdrew its warning in the disaster alert Nina on Monday morning.

“The Klingenberg combined heat and power plant has started up again without any problems and thermal energy has already been supplied again since tonight,” the district office announced via the app. The disaster and civil protection officer of the Lichtenberg district, Philipp Cachée, said that most households had already been supplied with district heating again since around 3.00 am.

[…] A brief power outage at the state-owned power grid operator Stromnetz Berlin had also paralysed the Klingenberg combined heat and power plant in the Rummelsburg district in the afternoon, according to the energy supplier Vattenfall. The power plant, which is owned by the company, had to be shut down.

Around 90,000 households in eastern Berlin were therefore left without heating and hot water for hours on Sunday evening. The main focus was the Berlin-Friedrichsfelde district. According to the Lichtenberg district office, however, people in Karlshorst, Oberschöneweide and parts of Treptow-Köpenick were also affected.

Cachée stressed that, according to current knowledge, the power plant had not been damaged by the abrupt halt in operations. The Klingenberg CHP plant supplies more than 300,000 households with electricity and heat.

According to the network operator Stromnetz Berlin, the power failure in the afternoon was due to a technical malfunction in a transformer station in Berlin-Friedrichshain. There, as well as in Prenzlauer Berg and Lichtenberg, about 20,000 households were without power for a few minutes, a spokesperson said.

However, the stations Ostbahnhof, Warschauer Straße, Ostkreuz and Lichtenberg were also temporarily without light. Train traffic, however, was not affected. According to disaster control officer Cachée, four hospitals were also affected by the consequences of the power blackout for a longer period of time.

Comment: The first reactions after the outage announcements were all related to Germany’s disastrous energy transformation, which – as we frequently discussed – is indeed risking the country’s energy security.

In this case, the main concern was a chain reaction due to increasingly complex power systems according to this paper presented on the 2019 AIP Conference:

“In the large-scale interconnected power network, when the power network failure occurs, the system will redistribute the power flow, if not treated, the overload lines or transformers will be removed, which may cause a series of chain reactions, or even system collapse, resulting in power grid blackout.”

This means that it’s not just an issue in general, but especially when it comes to Germany’s push for more wind energy. Wind energy supply is volatile, which means its power grid needs to be prepared with backup power supply and modern systems that can control individual wind turbines to prevent widespread power outages. This turned out to be not a big deal, but it showed what can technically happen when things are out of control. It quickly turns into a national security issue.