Securing gas supply for good

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Domestic gas production in North West Europe is declining. EU countries face three options: cutting back on consumption, develop their shale gas resources or increasing imports. Given that the reform of the EU’s emission trading system (ETS) will lead to a coal-to-gas switching in the electricity sector, natural gas will continue to play an important role in European energy demand. Additionally, renewable energies will show strong growth but, despite their centrality in switching to a green energy market, will still need to be complemented by gas. In 2016, Europe imported 53.5% of its energy needs. Therefore the EU is working to develop a new foreign policy which will further secure gas supply in the future.

Background

About one quarter of all the energy used in the EU is natural gas, and many EU countries import nearly all their energy supplies, such as the United Kingdom (45.5%), France (46.1%), Germany (61.4%), Spain (72.9%) and Italy (75.9%) . Some of these countries are also heavily reliant on a single source or a single transport route for the majority of their gas . Yet, in 2017 17% of the global population lacks access to electricity. Energy poverty in Europe is still a relevant issue, as it affects nearly 11% of the EU population. Due to rising energy prices, low income and poor energy efficient homes, particularly prevalent in Central Eastern and Southern Europe (notably and Greece), around 54 million people in Europe cannot afford to adequately heat their homes at an affordable cost. The EU countries need to be prepared in order to manage gas supply disruptions if a crisis occurs both concerning infrastructure and geopolitical tensions. For the time being, Russia remains Europe’s largest gas supplier, followed by Saudi Arabia and Norway. The high level of mutual dependence involving the two sides may be the key for a future settlement: the European Union relies on Gazprom (the only producer and exporter of liquefied gas (LNG) in Russia) for about a third of its natural gas supply, and Russia earns significant revenue from selling gas to Europe.

Areas of conflict

The challenges that the European Union and its Member States have to face in securing gas supply concern mainly infrastructure and geopolitical tensions. On one side, infrastructure failure can cause disruptions along gas transport routes and, on the other, supplies can be endangered by political disputes.

Infrastructure

• Energy efficiency

energy efficient design in gas transmission system is in need of improvement, as 5% of energy is deployed for its transportation.

• Standards

Member States have different standards for daily operations and technical construction of gas pipelines. For this reason project execution and time delivery of projects can be problematic. The European Parliament believes that a higher degree of standardization will ease the integration and transmission among countries. In fact, the parts of the interconnected transmission system within national borders are owned and operated by national entities. The pipeline capacity is allocated on a national basis even if more than 60% of the EU’s gas supply crosses more than one national border.

• Economical issues

The recovery of the investments in transmission pipelines is mainly based on long term agreements. Therefore private investors unlikely will ensure sufficient capacity for gas supply, limiting its diversification. The investors in the pipeline transmission capacity inside the EU are primarily state-owned Transmission System Operators (TSOs), who have natural monopolies as they build, own and operate pipeline infrastructure.

Geopolitical tensions

Europe’s gas suppliers are poorly diversified. However, this implies various risks concerning security of imports. Already in 2009 Russia cut gas exports via Ukraine towards Europe of 60%. Today the European Parliament believes that the framework ensuring fair and non-discriminating access to natural gas networks and a free flow over national borders that has gradually been established by the European Commission, through the creation of a European Energy Union and gas network codes, is in need of improvement. Specific problems arise in the case of cross-border pipeline projects involving different regulatory framework. There is no clear mechanism for the resolution of potential conflicts and the rights and obligations of stakeholders can differ according to the Member State. Additionally the nature of the gas market may be incompatible between two countries connected by a pipeline, and therefore the integration of different legal regimes may increase the transaction costs of constructing and operating a pipeline. Cooperation between Member States and ensuring regulatory coherence are necessary to secure Europe’s gas supply. Alongside the aforementioned issues, Member States have different interests concerning gas supply. Poland believes that the Nord Stream 2 project is not consistent with the objectives of the Energy Union, as it does not give access to new sources of gas, but strengthens the position of Russia as the largest natural gas supplier in the European market. While Germany is more focused on the liberalisation of the energy market, opening the market for electricity rapidly, boosting competition in energy supply firms and product prices, Poland is trying to secure its energy supply while slowly shifting towards more sustainable energy sources. In fact, coal dominates the power sector of Poland, where it is still the largest source of greenhouse gas emissions as well as a major employer.

Nord stream 2

Nord Stream 2 is a twin pipeline laid over a distance of 1,200 kilometres underneath the Baltic Sea due for launch in 2019. The gas pipeline is set to begin supplying gas from the Russian Federation to Germany. This project has been conceived to advance and promote the reliability and security of gas supply to the European transmission network. Nord Stream 2 builds upon the technical excellence and environmental safety standards achieved with the Nord stream pipeline, which began transporting natural gas through the Baltic Sea in 2011. The successful construction of the first Nord Stream pipeline has shown that this project is a sustainable solution to meet the demand for natural gas in the EU, as it did not cause any significant environmental impacts. Nord Stream 2 AG, the project company established for planning, construction and subsequent operation of the Nord Stream 2 Pipeline is owned by Gazprom. Nord Stream 2 AG signed financing agreements for the Nord Stream 2 pipeline project with ENGIE, OMV, Shell, Uniper and Wintershall. The combined experience of these energy companies is thought to ensure the best corporate governance for this project. Both Gazprom and Germany stated that Nord Stream 2 would improve the reliability of gas delivery while facilitating the development of the European gas market. However, the construction of the new gas transmission pipeline has attracted controversy. The main elements of this agreement lies in the fact that Nord Stream 2 will bypass Poland, the Baltic countries, Belarus and Ukraine, key routes for gas flows towards Europe. These countries would further lose their transit rights and have no way of influencing negotiations with Russia. Nord Stream 2 has faced opposition from some European politicians because of the deadlock over Ukraine. Already in June 2014 Russia had decided to stop supplying Ukraine with gas, risking to cut off supplies for European customers as well. However, Germany said it would only agree to the deal if Russia does not stop gas flows to Ukraine and eastern Europe when the transit contract comes to an end in 2019. Yet, despite its oppositions, the project will be decided on not by the EU as a whole, but by the permitting authorities of the five countries whose waters would be crossed by the pipeline: Russia, Finland, Sweden, Denmark and Germany. For the time being, Finland, Sweden and Denmark do not want to block the realisation of the project.

Key Questions

• How to reach a diversified supply of gas?
• How to reach further gas supply independence?

Existing measures

Energy as a shared competence

Energy is a shared competences of the EU, therefore both the EU and Members States are able to legislate and adopt legally binding acts. EU countries exercise their own competence where the EU does not exercise, or has decided not to exercise, its own competence. The energy policy of the EU has three main objectives: security of supply, competitiveness and sustainability.

Energy Union

The Commission's second Strategic Energy Review (2008) and the Commission's Green paper "Towards a secure, sustainable and competitive European energy network" (2008) have not been enough to provide an efficient framework for investments and European integration in gas networks. For this purpose the European Commission has launched a European Energy Union in 2014 to ensure secure, affordable and climate-friendly energy for EU citizens and businesses. The Energy Union is meant to assure the free flow of energy across borders, the employment of new technologies and renewed infrastructure, building on the 2030 Energy and Climate Framework and the Energy Security Strategy. The 2030 Energy and Climate Framework works on competitiveness and security of the energy system, such as price differences with major trading partners, diversification of supply, and interconnection capacity between EU countries. The Energy Security Strategy sets out short-term and long-term measures aimed at increasing energy efficiency and production, building missing infrastructure, achieving cohesion and transparency amongst Member States on external energy policies, and strengthening the solidarity mechanism between the EU countries.

Security of Gas Supply Regulation

On 27 April 2017 an agreement on a new Security of Gas Supply Regulation was reached. The Commission proposed an update of the Security of Gas Supply Regulation of 2010 in order to help prevent potential gas shortages and respond to them if they happen. The new rules ensure a regionally coordinated and common approach to security of supply measures among EU Member States. This will put the EU in a better position to prepare for and manage gas shortages if a crisis occurs. The main improvements are:

• Introduction of a solidarity principle: in the event of a severe gas crisis, neighbouring Member States will help out to ensure gas supply to households and essential social services.
• Closer regional cooperation: regional groups facilitate the joint assessment of common security of supply risks and the development of an agreement on joint preventive and emergency measures.
• Greater transparency: Natural gas companies will have to notify long-term contracts that are relevant for security of supply (28 % of the annual gas consumption in the Member State).

Third Energy Package

Currently the European Commission, together with other stakeholders, is discussing the main challenges in implementing network codes and guidelines concerning gas networks. The main aim is to provide an integrated European energy market. Member States have agreed to harmonise the rules under which markets and system operations are governed via network codes and guidelines now part of the Third Energy Package. The third package enhances the functioning of the internal energy market and resolve structural problems. It covers five main areas:

• unbundling energy suppliers from network operators
• strengthening the independence of regulators
• establishment of the Agency for the Cooperation of Energy Regulators (ACER)
• cross-border cooperation between transmission system operators and the creation of European Networks for Transmission System Operators
• increased transparency in retail markets (the market for the sale of goods or services to consumers rather than producers or intermediaries) to benefit consumers

Stakeholders

• EU institutions (Parliament, Council of Ministers, Commission)
• Member States (who own and operate on different parts of cross-border pipelines and act as investors)
• Third countries who act as gas suppliers for Europe (notably Russia and Saudi Arabia)
• European Network of Transmission System Operators for Gas (ENTSOG)
• Agency for the Cooperation of Energy Regulations (ACER)