EU energy security

GAS SYSTEM
The European Commission (EC) has released its package of energy security measures designed to prepare the EU for global energy transition to cleaner forms of energy and to ensure resilience against possible energy supply interruptions. Energy security is a key component of the Energy Union strategy, a key political priority of the Juncker Commission.

The package sets out a wide-range of measures which include moderating energy demand, increasing energy production in Europe, including renewables, further developing a well-functioning and fully-integrated internal energy market, as well as diversification of energy sources, suppliers and routes. Further, the proposals aim to bring more transparency to the European energy market and create more solidarity between the Member-States. The package was also presented in light of the new global agreement on climate change, adopted in December 2015 in Paris. The Paris agreement sent a strong signal to states, businesses and policy-makers placing clean energy on an irreversible pathway and setting the scene for a global energy transition.

Security of gas supply regulation
Aptly named SoS. It is recognised that gas will play a role in the transition to a low-carbon economy and remains important in the EU energy mix. However, the increasing dependence on imports requires the EU to strengthen the resilience of its markets when confronted by gas supply disruptions. In order to address this, the EC proposes a shift from national approaches to regional approaches when designing security of supply measures. Further, the proposal introduces a solidarity principle among Member-States to ensure continuity of supply to essential services.Member-States are expected to prepare risk assessments, preventive action plans and emergency plans at regional level and update them every four years.

Intergovernmental agreements (IGAs)
The EU wants to ensure that intergovernmental agreements signed by its Member-States with third-countries and relevant to EU gas security are more transparent and fully comply with EU law. To that end it introduces a ‘before-the-event’ compatibility check by the Commission. Such an assessment makes it possible to check compliance with competition rules and internal energy market legislation before the agreements are negotiated, signed and sealed. Member-States will have to take full account of the Commission’s opinion ahead of signing the agreements. This is one of the most controversial components of the package. But this regulation will not apply to commercial contracts.

Liquefied natural gas (LNG) and storage
Europe is the biggest importer of natural gas in the world. Europe’s overall LNG import capacity is significant – currently it is enough to meet around 43% of total current gas demand – but actual LNG imports are limited to about 40bcm, about 10% of EU’s gas demand. However, significant regional disparities regarding access to LNG remain. The Commission sets an LNG strategy that will improve access of all Member-States to LNG as an alternative source of gas. The central elements of this strategy are building the strategic infrastructure to complete the internal energy market and identifying the necessary projects to end single-source dependency of some of the Member-States. The problem though is pricing. In the EU piped gas is cheaper than LNG imports, limiting LNG market penetration. Gazprom seems to be well placed to confront this competition, thanks to low production costs and export overcapacity. As a result, LNG may provide more of a strategic and supportive role in cases of spikes in demand.

Heating and cooling
The heating and cooling of buildings and industry consumes half of the EU’s energy. Further, it is 75%-powered by fossil fuels. The proposed Heating and Cooling Strategy focuses on use of clean energy in buildings and industry. It also stresses that increased energy efficiency and use of renewables will have an impact on energy security. Looking into this sector more strategically is crucial as the EU wants to reduce dependence on external fossil fuel imports. EU Commissioner Miguel Arias Canete said EC’s proposals have been built around three principles: solidarity, flexibility and diversification.Through these, the EU intends to lead the global transition to low-carbon energy.

Benefits and challenges
In general, EC’s proposals should be viewed positively by industry, particularly by companies operating in regions with political instability and regulatory uncertainty, as the measures encourage regional integration of energy systems and aim to provide access to wider energy markets. The SoS regulation also ensures gas supplies to essential services in case of a severe crisis.
However, Member-States and National Regulatory Authorities may not like interference from the EC in developing and controlling their energy policies and industries. At present, energy in the EU is regulated at national level. As a result, discussions on IGAs are expected to be fiercely debated, especially in light of Nord Stream 2 expansion.

In the new energy security package the EU recognises the impact of geopolitics on the economics of energy and energy business. But the danger is that this becomes exclusively focused on ‘stopping Russian gas’. An article in Natural Gas Europe asked: “When is a gas pipeline not a gas pipeline? When it is a Russian export project.” Then it is the subject of heated debates and legal argument within the EU about what exactly Russia is trying to do and on what grounds it could best be stopped.

Nord Stream 2 could bring to Europe five times more gas than the Southern Gas Corridor each year, cheaper and with less transit risk. Nord Stream 1 has worked fine so far. But a great deal of effort is expended to stop it. Commissioner Maros Sefcovic denies that the whole thing is based on the ‘Gazprom issue’. He said: “Our primary response to the security of supply concern is diversification”.

For the package to succeed, more attention should be devoted to demand to ensure correct and timely investment signals to industry, which are key to the strategy’s success.In addition, investments driven by strategic rather than commercial needs will rely on the help of EU funding instruments. But in such cases, future policy action will have to strike a fine balance between the overcapacity needed to ensure resilience and the risk of costly stranded assets.

Overall, the package represents a positive step towards the EU’s energy security and a strong, resilient and flexible gas system in Europe. But too many geopolitical influences and lack of clarity raise the possibility of either wrong investments resulting in stranded assets or no investments at all, leading to future vulnerability.
As far as the East Med is concerned, the EC’s focus on diversification of supplies favours the developmentof liquid gas hubs in the Mediterranean – but, given the time required to set-up such hubs, this has to be seen as a longer-term target. In addition, the EC intends to engage closely with future gas suppliers such as Egypt, Israel, Lebanon and Cyprus. But a sobering thought is that the EC does not trade gas. This is left to companies who will enter into gas sales agreements only when profitable and risk is manageable.

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