How much could households save under Germany's new gas price cap?
Germany is bringing in new energy relief measures, including a gas price 'brake'. Here's what it could mean for your budget.
Germany has agreed on an energy price cap as part of a huge €200 billion package to help households and businesses with rising costs.
A gas price brake or cap - or Gaspreisbremse - will come into force as part of this package. A total of 25,000 larger businesses, as well as almost 2,000 hospitals and schools will benefit from the cap from January 1st next year, according to the plan agreed between the federal government and state leaders.
Households and smaller businesses may have to wait until March 1st for the price brake to come into force. But politicians said they would try to apply the relief retroactively from February.
READ ALSO: Germany plans to cap energy prices from 2023
Why is it coming into force?
Heating with gas has become exceptionally expensive as wholesale prices for natural gas rise.
The problem began because of supply and demand issues in the Covid pandemic.
The situation worsened dramatically due to Russia's invasion of Ukraine in February this year, with Russia cutting back its supplies of gas to Germany, meaning suppliers had to buy gas from elsewhere at extortionate prices.
Meanwhile, numerous countries - including Germany - have this year been reducing their energy dependence on Russia and looking for new suppliers.
All of this has resulted in unprecedented price hikes for customers.
Just under half of all households in Germany use gas for heating, with gas customers largely concentrated in urban areas.
"The source for these consequences and great challenges is (Russian President Vladimir) Putin's war," German Chancellor Olaf Scholz said earlier this week.
The support package is Germany's response "so that citizens do not have to fear their bills", added Scholz.
How will the gas price cap work?
The government will set a maximum fixed price that energy suppliers can charge their customers.
The current plans call for the price to be about 12 cents per kilowatt hour of gas usage. For new customers, the price at the beginning of November averaged 21 cents per kilowatt-hour.
But the capped price does not apply to the entire consumption that gas customers use in Germany. The plan is for gas to cost a maximum of 12 cents per kilowatt hour for 80 percent and will be based on the previous year's consumption. Anyone who consumes more than the basic quota will then pay the more expensive market price.
So, for an estimated annual consumption of 5000 kilowatt hours, the price cap only applies to 4000 kilowatt hours. It's been designed like this because the government wants households to save on gas as much as possible.
If the affected gas households reduce consumption, the monthly savings for households with old gas contracts will be fairly minimal, but it will make a big difference to those having to take out newer contracts.
How much could people save?
For a single household with a previous year's forecast usage of 5000 kilowatt hours, there are a few options.
If the person's consumption drops to 4000 kilowatt hours, they will pay on average €480 per year or €40 per month throughout the gas price brake period, German news site Focus estimates.
Without a gas price brake, the household with the same usage and contract would have to pay €624 (€52 a month). If the person has a new gas contract, however, the cost could be about €836 (around €70 per month).
If the consumption remains unchanged at 5,000 kilowatt hours, the monthly payment would be about €53 (old contracts) or €57.42 (new contract).
What about a two-person household?
The savings are similarly high for an average two-person household. If a couple used about 10,000 kilowatt hours of gas in the previous year, consumption would have to drop to 8000 kilowatt hours for the household to take full advantage of the gas price brake and not have to spend more money on gas.
With the cap in place, the household pays €960 at 8000 kilowatt hours - or €80 a month.
Without a gas price cap, a two-person household with an older contract would pay about €1248 per year - and with new contract that could even amount to €1672.
When will the gas price cap come into effect?
The gas price brake is to be introduced on March 1st, 2023, and will apply until April 2024. But it could actually apply from February.
"A retroactive effect to February 1st, 2023, is being sought," the federal and state governments said in their resolution paper.
The cap will be implemented along with other regulations such as a skimming of so-called windfall profits at electricity producers, Scholz said.
The government also plans to pay the December gas bill for customers. But that leaves the current month of November and the month of January - often the coldest of the year - where people could struggle.