European Union: European Commission Sets Out Its Strategy To Achieve A European Energy Union

On Feb. 25, 2015, the European Commission set out its strategy to achieve a European Energy Union with a forward looking climate change policy ("Framework Strategy"). Reforming and reorganizing Europe's energy policy into a single energy market was outlined as a top priority by Jean-Claude Juncker, President of the Commission, in his political guidelines. The project is based on the three objectives of EU energy policy:  (i) competitiveness; (ii) security of supply; and (iii) sustainability of infrastructure. The EU is the largest energy importer in the world, importing 53% of its energy, at an annual cost of around €400 billion.

Competiveness

While the EU does currently have energy rules set at the European level, in practice, it has 28 national regulatory frameworks characterised by uncoordinated national policies, market barriers and energy-isolated areas. Indeed, the Framework Strategy notes that wholesale electricity prices for European countries are 30% higher than in the U.S., while wholesale gas prices are more than twice as high as in the U.S. 10% of the residents of the EU cannot pay their energy bills and the EU is the world's largest energy importer at a cost of over €1 billion per day.

An integrated energy market, with energy flowing freely across borders, is expected to increase competition, generate market efficiency through better use of energy generation facilities across the EU and to produce cost savings for consumers. One step that has been put in play is the development of cross-border network codes requiring national infrastructure operators and regulators to offer more cross-border energy products. Increased investment in interconnectors is targeted at capacity for potential export of at least 10% of each Member State's installed generation capacity by 2020.

Security of Supply

The need for urgent reform of the EU's energy policy has been underlined by the potential for geopolitical events in Ukraine—an important gas transit country—to disrupt energy supplies. In 2013, energy supplies from Russia accounted for 39% of EU natural gas imports, Russia exported 71% of its gas to Europe; six Member States depend on Russia as single external supplier for their entire gas imports.1  Diversification of energy sources, suppliers and routes has been highlighted as a key means of improving energy security. With respect to gas, the Commission has stated that work on the Southern Gas Corridor must be intensified to enable Central Asian countries to export their gas to Europe. As a back-up in crisis situations, the Commission will also work to remove obstacles to LNG imports from the U.S. and other LNG producers. Domestically produced energy will also decrease Europe's energy import dependence. In parallel, the Commission is also planning a revision of the Security of Gas Supply Regulation, which could require companies to hold minimum levels of gas in storage.

The Framework Strategy also outlines a number of other measures to increase energy security, gas in particular.2  It highlights the need for an Energy Union that speaks with one voice on global affairs, which, in turn, is able to engage more constructively with its partners. In this context, the Commission will seek to negotiate energy specific provisions when negotiating agreements with countries important from a security of supply perspective. Foreign policy instruments will be used to establish strategic partnerships with increasingly important producing and transit countries. The EU will further develop its partnership with Norway; will consider reframing its relationship with Russia; and will upgrade the strategic partnership with Ukraine. Moreover, the Commission has taken steps to ensure that greater transparency on gas supply can be achieved through the introduction of an EU regulation putting in place an ex ante system of assessing intergovernmental agreements for compatibility with internal market rules and security of supply criteria. The Southern Gas Corridor treaties were the first to be assessed under this system.

However, the Commission is also considering more direct steps and will consider creating voluntary demand aggregation mechanisms for collective purchasing of gas during a crisis and where Member States are dependent on a single gas supplier. Member States coming together to collectively negotiate terms and conditions with a gas supplier will have increased bargaining power. Supplies through the Southern Gas Corridor (for example, from Azerbaijan and eventually Turkmenistan) have been raised in this context in EU-regional dialogues. To comply with EU competition law, the framework for the collective purchasing mechanisms envisaged by the Commission will need to ensure that cost savings are passed on to consumers and that gas suppliers—within that Member State committed to collective purchasing—will continue to compete after receiving better deals. Pursuant to the World Trade Organization rules, the collective purchasing mechanisms will also have to comply with the principles of non-discrimination and the requirement that purchases shall be made in accordance with commercial considerations.

Sustainability of Infrastructure

The Commission estimates that the transition towards a more secure and sustainable energy system will require investments of € 200 billion annually over the next decade. While the private sector will cover much of the costs, access to financing will be crucial. Some of this may be met through EU funding for priority projects and dedicated energy infrastructure funding.

Information on the Commission's Energy Union is available here.

Footnotes

1 Communication from the Commission to the European Parliament and the Council, European Energy Security Strategy, COM(2014) 330 final (Bulgaria, Slovakia, Czech Republic, Hungary, Estonia, and Lithuania).

2 Electricity is mainly produced inside the EU.

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