Europe's energy-related sanctions on Russia over its invasion of Ukraine need to take into account the repercussions for society and the economy, executives at German utility E.ON SE said March 16, resisting calls to pull out of a key Russian gas pipeline.

Germany will move away from Russian gas in the long term, but cutting gas supplies now would lead to untenable consequences for households and industry, E.ON CEO Leonhard Birnbaum said during a media briefing to announce the company's 2021 results.

The utility owns a 15.5% stake in the Nord Stream 1 gas pipeline, which transports gas from Russia into Germany. While pressure is mounting on companies to divest any links to Russia in light of the country's invasion of Ukraine, E.ON remains committed to the investment, which has a book value of €1.2 billion.

"We need to keep import paths open," Birnbaum said. "We will not exit from our stake in Nord Stream 1."

Given EU sanctions and the geopolitical environment, there would not be a buyer for the asset at the moment, the CEO said, while an exit would require transferring E.ON's stake to PJSC Gazprom, the Russian state-backed majority owner of the pipeline.

"What sort of punishment would that be?" Birnbaum said, adding that E.ON will continue to exert its influence in the organization.

Demand curtailment in the industry will be inevitable next winter should Russian gas flows be cut completely, the CEO said. For industrial users in particular, a prolonged shutdown could be devastating and weaken Germany's industrial base, Birnbaum said.

Beyond Nord Stream 1, E.ON has limited links to Russian gas supplies but said it is too early to say what the impact of the war in Ukraine will be for the business. The company expects an adjusted EBITDA range between €7.6 billion and €7.8 billion in 2022. In 2021, the company increased group adjusted EBITDA by €1 billion to €7.9 billion, supported mainly by its retail segment.

Solar plans 'in shambles' without China

Russia's invasion of Ukraine "changed the rules in Europe," Birnbaum said, praising the approach of the German government, which stopped short of cutting gas imports.

"Who would have thought that a Green [Party] energy minister would go on the search for gas and coal imports to fill reserves?" the CEO said about Robert Habeck, Germany's minister for economic affairs and climate action.

Extended run times for coal-fired power stations, as well as the construction of new LNG import terminals, are also part of the government's strategy to reduce reliance on Russia. However, the new Nord Stream 2 gas pipeline has been put on ice indefinitely.

Meanwhile, citizen movements in Germany and elsewhere in Europe have already been encouraging people to turn their heating off or down to help reduce consumption of Russian gas, for instance under the Twitter hashtag #freezeforpeace.

"I don't support 'freezing for peace.' It sounds as if you could solve the problems with just a jumper," Birnbaum said. While turning down home heating will help cut energy bills, the demand curtailment measures that would absorb any gas shortfalls should first be made by industry. "The households would be the last to be cut off," the CEO said.

Instead, the installation of rooftop solar systems has become even more interesting for households as gas and power prices surge, Birnbaum said. Asked on a call with analysts how well-placed the company's solar supply chain is to accelerate the deployment, Birnbaum said a speedy rollout is possible thanks to partners in China.

"As long as we don't see any supply chain disruption in China we are well-positioned on our [solar] plans," the CEO said. Should there be problems in the Chinese exports, however, the plans would be "in shambles," Birnbaum said.

The geographic concentration and reliance of Europe's energy system remains high, and there are concerns that the pivot away from Russian gas means one dependency is swapped for another.

The U.S. government already banned imports from the manufacturing hub Xinjiang in China over reports of human rights violations and forced labor, which China denies. As a result, solar developers there are facing shortages of equipment.

The EU also wants to introduce a ban on products made with forced labor, but details on its mechanics are not yet clear. In addition, EU lawmakers recently announced enhanced reporting requirements for importers, which will force large European importers to scrutinize working conditions in their supply chains.

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