Written by Danila Bochkarev, a Senior Fellow at EastWest Institute (Brussels) specialising in Eurasia energy and natural resources issues with a particular focus on the natural gas.
On March 28th 2017, the European Commission (EC) sent a letter to the Swedish and Danish Energy Ministers stating its’ position on Nord Stream – 2 (NS-2).
The EC confirmed the 3rd Energy Package does not apply to this trans-Baltic offshore pipeline but also expressed the view that Nord Stream 2 is not in line with the Energy Union objectives as the pipeline does not provide an access to new sources of natural gas.
The next day, Danish daily Politiken also reported that the EU offered to negotiate with Russia on behalf of the EU Members States regarding the NS – 2. The outcome of such a negotiation would be application some of the principles of the EU energy law and the Energy Union to the offshore part of the project.
What is the Energy Union and why is it so dear to the European Commission?
The Energy Union is an ‘umbrella strategy’ launched two years ago that was initially aimed at insuring Europe’s smooth transition to the low-carbon/non-carbon future. The plan was to ensure that European citizens have unrestricted access to secure, affordable and climate-friendly energy sources.
The Energy Union – at least officially – stands on three key pillars: secure and reliable energy supplies, competitive sources of energy, and affordability/sustainability of Europe’s energy supplies.
Unofficially, the Energy Union – as a pan-European umbrella strategy – becomes an important tool in a bureaucratic struggle between Brussels and the national capitals for influence on the energy regulation processes in Europe.
Currently, a number of important aspects of the national energy policies –such as the choice of the energy mix – still belong to the Member States. In this context, the importance of Commission’s attempt to obtain a mandate from the Council to negotiate an agreement with Russia on Nord Stream-2 goes beyond this project and will have implications on the future direction of the European energy policy.
For example, the Energy Union is clearly becoming a tool used to asses various energy infrastructure projects. One should however remember that this ‘umbrella strategy’ is not a compliance checklist, especially taking into account the fact that it is not - unlike the 3rd Energy Package - a legally binding document and as such is not yet a part of the acquis communautaire.
Europe already has all the necessary instruments to implement the key goals of the Energy Union. For instance, completion of a single energy market will make the criteria of reliability, competitiveness and security of supply – mentioned as the key priorities of the Energy Union - less relevant (if not outdated) even with present energy regulations.
A single gas market will increase competition and provide European citizens with a vast choice of affordable energy supplies. The European Commission confirmed that by 2017 22 out of 28 EU Member States already had full access to alternative energy supplies.
Consumers in Europe currently have a vast of choice of alternative supplies – both in the form of LNG and pipeline gas, and they appear to feel comfortable with this choice. By the end of 2016, total regasification capacity in the EU and Turkey (23 terminals in the EU-28 and 2 in Turkey) stood at 216 bcm, amounting to 40% of EU demand and 55-60% of EU gas imports.
This capacity allows (in theory) the full replacement of pipeline imports from either Norway or Algeria.
A dense net of interconnectors also contributed to a free flow of energy across borders and a secure supply in virtually every EU country. In 2015 Central and Eastern Europe's (CEE) reverse flow capacity stood at about 147 bcm/year, while a further 42 bcm/year of new interconnection capacity added within Eastern Europe and between Central and Western Europe in 2010 -2015.
Interconnectors had already changed gas flow dynamics with gas flows shifting directions from “east-west to “west-east”. For example, gas flows from Germany to the Czech Republic went up from 8.7 bcm in 2011 to 35.6 bcm in 2015, while gas flows from the Czech Republic to Slovakia increased from 2.7 bcm in 2011 to 10.9 bcm in 2015.
This increased interconnectivity has led to price alignment almost everywhere in Europe, thus increasing the affordability of natural gas for European consumers.
This connectivity also helped to spread the sense of confidence that exists in the mature markets in Western Europe to the new Member States.
Gas is therefore becoming an ‘ordinary’ source of energy which can be sourced almost everywhere, and its source of origin will no longer be a matter of concern for the energy importing countries.
In 2016 the usage of LNG re-gasification terminals went down due to the arrival of cheaper pipeline gas supplies, mostly from Russia.
According to the Gas Infrastructure Europe (GIE) data, in January – April 2016 average usage of Europe’s re-gasification capacity reached only 17 per cent, while most of the increase in Europe’s gas imports (around 30 bcm in 2016) was covered by Russia (some 20 bcm).
These figures show that EU utilities were not afraid of Gazprom and are eager to buy cheap energy from Russia as they felt confident of having a backup supply option.
New market dynamics also forced non-European suppliers to accept the new energy realities of a stagnating European gas market.
The non-EU companies realized that they are running the risk of rapidly losing their market share if they can’t effectively adapt to the new market realities. For example, Gazprom - accused by the European Commission of breaking EU antitrust rules - accepted that it must amend its market strategy and submitted relevant commitments to the Commission.
DG COMP positively assessed these commitments. "We believe that Gazprom's commitments will enable the free flow of gas in Central and Eastern Europe at competitive prices. They address our competition concerns and provide a forward looking solution in line with EU rules. In fact, they help to better integrate gas markets in the region,” said Margrethe Vestager, EU Commissioner for Competition.
Consequently, the European gas market is finally becoming depoliticized and natural gas is turning into an ‘ordinary’ commodity like oil, with import dependency becoming a secondary issue.
The case of Sweden offers a good example of what may happen with the European gas market. The share of Russian crude in Sweden’s oil consumption went up from 10 per cent in 2000 to 44 percent in 2015, and these figures are not generally perceived as a critical dependence or a security threat. Alternative oil supplies are readily available and a short transport leg makes Russian crude attractive to Swedish consumers.
The trend towards depoliticization is still fragile, but it might gain momentum if both suppliers and consumers are ready to invest in this relationship, respecting mutually accepted “rules of the game” and each other’s interests.
Policymakers for their part need to keep away from unduly influencing markets and determining the behaviour of energy companies.
As we see, EU regulations and the single market are fully sufficient to regulate supplies from third countries and address all relevant consumers’ concerns. In light of this, does Europe really need to invent new regulations?
Markets and consumers could and should decide which projects are more suitable, and no energy project should be discriminated against if its sponsors respect market rules and if it is financed by private investors.
Disclaimer: The opinions expressed in this article solely reflect the views of the author, not of his organisation.
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