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The European energy dilemma

Hydrocarbon Engineering,

Why have policymakers not acted immediately to invest in granting access to alternative sources of natural gas, beyond Russia?

The Brookings Institute has highlight that, in Poland for example, this could have been done by spending several dozen million euros on increased interconnector and reverse flow capacity with Germany, or alternatively constructing a pipeline to Denmark. Both of these options would have offered Poland stocks more resilient to supply shocks, and less dependent on Russia.

As another example, the Baltic States have barely made an effort to address their energy security considerations, and prefer to construct their own LNG terminal, which given the modest size of their respective markets, does not make commercial sense and thus complicates these efforts. Brookings emphasises that this behaviour does not correspond with that of nations that feel under threat.

Energy policy in the EU

The 2007 Lisbon Treaty refers to European energy policy, and states that it aims to ensure the functioning of energy markets, ensuring security of supply, promoting energy efficiency and renewable energy, and promoting the interconnection of energy networks. However, this ‘shall not affect a member state’s right to determine the conditions for exploiting its energy resources, its choice between different energy resources, and the general structure of supply’. Hence, European member states have the final say with regards to ensuring their energy supplies.

Furthermore, with regard to energy networks, European institutions lack the mandate and the financial means to solve bottlenecks. It was only in late 2011 that the European Commission received a structural mandate to co-invest in energy networks. Even then, the available budget under the Connecting Europe Facility – 5.85 billion euros in the period until 2020 – does not match the estimated required investments to integrate European networks fully, which are estimated to be approximately 200 billion euros.

Politicians from all member states have been anxious to ensure that part of the available budget is invested in their respective countries, in fear of having to explain that taxpayers contributions have been invested elsewhere in the EU. As a result of this dispersed division of financial means, the available money is sufficient to carry out feasibility studies, but barely to construct additional physical infrastructure. Numerous studies have shown this structural deficit, yet the Commission continues to report that the internal market will be completed in 2014, as scheduled.

According to Brookings, the crisis in Ukraine, and the fear of supply disruption, has made it painfully clear that Europe is nowhere near an integrated and resilient market. It is interesting to see how current policymakers respond to these observations: They decided to first make a more detailed assessment of the problems and ensured that it would be published long after the May 2014 election. In other words, the issue was left to the newly elected members of the European parliament and the European Commission, which are commencing their activities in the fall of 2014.

Increasing integration

Brookings has suggested the following ways forward:

  • Necessary investments in interconnectors, reverse flow facilities and extra storage capacity are required in eastern and southern Europe. Politicians from European member states should stop lobbying for their pet projects at home that would like some EU funding, and instead explain to their constituents why this targeted investment is, in the end, better for all European citizens.
  • Eastern Europe needs structural reforms. Several member states still have regulated prices, are entirely dominated by integrated incumbent energy companies and do not invest adequately in infrastructure to make their markets more attractive for competition. According to Brookings, a good start would be to implement all existing EU legislation. In order to make sure that his actually happens, the Agency for the Cooperation of Energy Regulators requires a larger mandate to check the implementation, better streamline regulations between member states and, if required, impose heft measures on those member states that do not comply.
  • Policymakers should be continuously on the lookout for superfluous subsidies and waste of public funds. The LNG regasification project in Poland provides an excellent example, according to Brookings. Contracted LNG from Qatar will be significantly more expensive than pipeline gas in Poland, and since the Polish authorities do not want to raise domestic gas prices, the net effect of this policy decision is that the Polish regulator will have to regulate the prices of the LNG. The Polish taxpayer will have to pay a premium price for ‘security’.

Brookings holds that once markets have been developed, integrated and opened up for competition, vulnerability to supply shocks will decrease substantially, and in case of a disruption, alternative suppliers can increase supplies and ship their produce freely throughout the EU. The key is to develop a harness against market abuse by any dominant player in the form of sufficient competition, liquidity and access to alternative supplies. Attempts to ‘move away’ from Russian natural gas entirely are futile, as prices dictate that the cheapest available reserves always find a place in the market. However, managing disruptions to this supply is possible and can be achieved through European collaboration.

Adapted from a press release by Emma McAleavey.

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