Abstract
The article provides an overview of the risks and challenges that the EU is facing in the current geopolitical situation as Europe relies too heavily on oil and gas imports from Russia. This energy dependence is not the only threat to the security of the energy supply, but it is the biggest one and presents the toughest challenge of all. Even when the Ukraine issue has been resolved, the question of energy dependence will remain and solutions must be found as a matter of urgency. Combining our energy infrastructures and perhaps uniting our negotiating power vis-à-vis third countries could help us to reduce dependence, improve the security of supply and increase European competitiveness as a result of lower energy prices overall. The existing internal energy market directives must be implemented and new policies established as we move towards a true European energy union.
Keywords
Introduction
Concerns about energy dependence are not new in Europe. Since the founding of the European Coal and Steel Community in 1952, energy policy has been a key driver for European integration. In 1995, the European Commission issued an Energy White Paper based on the EU's ‘three pillars’ approach to its energy policy–-sustainability, competitiveness and security of supply (European Commission 1995). Since then these pillars have been maintained in all three energy packages, 1 which have aimed to achieve liberalisation and strengthen the competitiveness of the electricity and gas markets. They have also been confirmed by a large number of Council decisions. The three pillars are not only essential but also interlinked, as shown below.
The European legislation addressing the issue of the creation and development of the electricity and gas market is grouped into three different packages, which were issued in 1996–8, 2003 and 2009 respectively. The First Energy Legislation Package, adopted in the late 1990s, allowed the opening of the electricity and gas market and a gradual introduction of competition. The Second Energy Legislation Package further focused on the concepts of unbundling and third party access and defined the need for independent regulatory authorities. The Third Energy Legislation package established a new unbundling regime and more clearly defined the duties of national regulatory authorities.
First, sustainability suggests increasing reliance on still more expensive renewable sources; thus energy-intensive industries become less competitive as these additional costs lead to higher energy prices. Even investment in energy efficiency improvements can cost more in the short term and add to today's energy costs.
Second, using cheaper indigenous coal produces double the emissions when compared with imported gas, which not only interferes with the sustainability goal but also endangers the security of supply, as it encourages more gas imports, thus increasing energy dependence and leading to less energy security.
Third and finally, though we are able to see the great benefit to the environment of wind and solar power plants, their fluctuating nature demands quick-start backup power, which again can increase gas imports and/or emissions. Moreover, the physical impossibility of storing excess electricity often means that available renewable energy cannot be accepted by the transmission system.
This eternal triangle of interdependent pillars is easy to define but hard to achieve. Even after more than 60 years of putting energy independence at the heart of the EU agenda, this problem is still in the headlines and far from being solved (European Commission 2014).
It is true that today's headlines stem from the crisis in Ukraine, but the simple fact is that despite all efforts, according to the latest delivery statistics from Gazprom, 2 European dependency on Russian gas increased to a record level of over 160 billion cubic metres in 2013. It is proving very hard to replace such a huge volume from other sources. The main reason for this dependence is obviously price and availability; however, current events in Ukraine remind us that the real cost can be more than just money.
The delivery statistics published by Gazprom (2014) include Turkey and Switzerland.
This volume of Russian gas imports is shared amongst several different contracts with companies from a variety of EU member states. Many of these supply contracts are due for renewal and one cannot separate the Ukraine issue–-with mounting sanctions against Russia–-from the need to renegotiate these contracts. This aspect alone will keep the issue in the news long after peace returns to our Ukrainian neighbours.
Russian gas is the obvious issue to discuss, but all fuels that do not adequately exist in the EU present potential dependencies that we must be careful to avoid. Hardwood biomass, for example, which is such an attractive conversion for many of our large coal power plants, comes almost entirely from Canada and the US. Converting from coal to sustainable biomass is a good environmental option, but do safeguards need to be put in place to avoid another significant dependency?
Assessing the risks and challenges
Whilst it is very easy to point to the Ukraine crisis as the reason for the current focus on this matter, it is not the only serious aspect of the issue of energy dependency, which has so far resisted half a century of efforts to overcome it. It is often correctly said that Europe needs a functioning single energy market–-yet the market we have is neither functioning nor single. For example, consider the slow implementation, or no implementation at all in some member states, of the Third Energy Package. The required unbundling of the generation, transmission and distribution of energy has been a requirement of all three energy packages, but for some it simply has not happened. Partly in consequence of this shortfall, not all industrial and domestic consumers have access to different energy providers. As a result, energy prices remain high, which makes cheaper imported gas even more attractive to some. In addition, the inability of the EU to encourage the building of gas pipelines to other suppliers is a most significant factor. The South Stream pipeline project, in which Bulgaria, Serbia, Hungary, Greece, Slovenia, Austria and Croatia are involved, was designed to diversify the routes of gas supply to the EU. It has been shelved for the moment because of the incompatibility of the project with the Third Energy Package, mainly because the ownership unbundling rule, non-discriminatory access for third parties to the pipeline and tariff structure need addressing. The Nabucco project was in development for almost 10 years before its cancellation due to a lack of investment. The aim of the project was to import high volumes of Azeri gas via Turkey, Bulgaria, Romania and Hungary to Austria in an attempt to reduce existing dependencies. The successor of Nabucco, the ongoing Trans-Adriatic Pipeline project envisages the transportation of natural gas from the Caspian Sea (Azerbaijan) via Greece, Albania and the Adriatic Sea to Italy and on to Western Europe. Progress has been slow, just when acceleration is needed: as a consequence, the EU, especially Central and Eastern Europe, will continue to rely on Russian natural gas in the near future.
There is a great temptation for politicians and journalists to blame every current problem on the global economic recession from which we are slowly recovering. Though not always true, it is quite clear that this seven-year crisis has considerably affected the EU's investment in domestic energy projects while, at the same time, the purchasing power of those economies less affected by the crisis, such as India and China, has increased. This has disadvantaged EU companies in the energy supply business, as well as in energy-intensive industries such as aluminium, paper, chemical, glass and pharmaceutical production. Clearly the recession, combined with high energy prices in the EU, has encouraged our essential high-employment industries to migrate elsewhere, thus exacerbating the impact of the crisis and reducing the EU's ability to become energy self-sufficient. Significantly, a large proportion of our oil refinery businesses have migrated to countries outside the EU (International Energy Agency 2013). The increasing energy demand in Asia and the Middle East is seeing a continued build-up of refining capacity there, while in many EU countries declining demand is intensifying commercial pressure to reduce capacity. Linked to these aspects, we have seen Brazil grow as an exporter of oil and biofuels, which has reduced the impact of the recession there, thus adding another pressure to our global competitiveness, which, again, is attracting us to gas from Russia.
It is also time to analyse the true economic impact of the EU measures aimed at environmental responsibility. Environmental protection is at the heart of EU policy and its world-leading efforts should be applauded–-but there is no doubt that our high energy costs owe much to this highly responsible set of policies and regulations. Despite the special measures to protect against carbon leakage, putting a price on carbon through the Emission Trading Scheme might be seen as an additional burden on our industries that our global competitors do not share. Industry in the US enjoys energy prices that are about half of those across the EU. They have also seen emissions reductions comparable with ours, despite having no tax on CO2 emissions. Combating climate change and improving energy sustainability are long-term priorities that must be defended but need to be considered alongside the need for European energy independence. All policies and legislation must be impact assessed as our industries recover from the economic recession and become competitive in global markets. Energy-intensive industries also tend to be employment intensive. Across the EU, unemployment is at an unacceptably high level, particularly amongst young people. Real jobs come from wealth creation which, in turn, comes from economic growth. The right level and balance of policies must be found for the benefit of all. Dependency issues must be considered alongside environmental needs and our global competitiveness.
Hopefully, the Ukraine crisis will come to a peaceful end soon, but the political scars and economic implications will last for years to come. The EU urgently needs to deal with these ongoing implications and study the underlying causes in order to be less vulnerable to the impact of international troubles in the future. With the coming winter, energy demands of all kinds will increase. Some communities and industries will suffer blackouts and hardship if the gas supply is significantly reduced. Such supply shortages always push up prices and the poorest in our community will be hit the hardest. In my own country of Bulgaria, I fear for the people for whom there is no affordable alternative.
A common energy policy for the benefit of all
Finding solutions to improve the security of our supply and to address our energy policy is not an easy task as many factors must be taken into consideration and many sectors must be reorganised. Geopolitical and political uncertainty increase the feeling that we have to stay united in order to respond to potential gas shortages, energy crises and electricity disruptions.
European energy union
There is no doubt today that the EU should define common foreign policy and energy priorities in order to establish a true European energy union supported by a major revision of the Energy White Paper. It will certainly be difficult for some member states to concede parts of their sovereignty in this area but, without this, the EU cannot put itself in a strong position to negotiate EU-wide gas prices. Equally, in times of political instability, the EU must have the power to react with a single voice, both strongly and firmly, to reduce potential threats to the security of the energy supply. A good way ahead in this respect would be a requirement that all new energy contracts with third countries have to be coordinated by the EU. This change will not happen overnight, but it is essential in order to avoid contradictions with the Third Energy Package. A good example is the South Stream project–-all EU member states participating in the project gave the Commission the power to negotiate contract conditions with Gazprom in order to ensure compliance with the requirements of the Third Energy Package. This is why the setting up of the European energy union should remain high on the EU agenda for the next five years. New Commission President Juncker gave a clear signal in this direction by appointing a vice-president for this crucial project.
Single energy market
We should no longer tolerate the non-completion of the single EU energy market. It is essential for promoting more efficient, competitive and interconnected energy markets and supplier choice for consumers. Member states can retain their choice of energy mix but must work together and inform each other of their respective capacities, thus ensuring that they are able to compensate for each other's lack of production in times of difficulty. An example is the closing of nuclear power plants in some member states–-a replacement energy capacity needs to be provided. We should do our best to create a truly working energy market where the security of supply is guaranteed by all member states rather than by an external supplier. This will also lead to cheaper energy prices as a result of the openness and functioning of this market. What is more, it will provide consumers with the freedom to choose their gas or electricity supplier.
Only through heavy investment in interconnectors can we convert 28 transmission grids into a single one. This is true for gas as well as electricity, and the fact is we do not have enough inter-member state connections to make the grid systems or the markets work together. Countries on the edge of the EU, such as Lithuania, Latvia, Estonia, Malta and Bulgaria, suffer the most.
We need to prioritise the construction of interconnectors where they are most needed. It seems that the last chance for a long gas pipeline project is the Trans-Adriatic Pipeline, which will bring natural gas from the Caspian Sea region. This must surely be encouraged and even partly financed by the EU.
Indigenous energy resources
A thorough re-examination of untapped gas resources within the EU, namely in the Black Sea Region and Cyprus, must be carried out, along with a cost and feasibility study, to assess the extent to which these domestic energy resources could be exploited. The first indications are that the total gross low-risk deep fuel potential is enough to cover the supply of natural gas to South-Eastern Europe for several decades. The EU needs to consider the exploration of potential shale gas fields as that too could help us to overcome Europe's dependence. Moreover, streamlined environmental impact assessment guidelines from the European Commission must be established.
Despite the growth of Liquefied Natural Gas (LNG) worldwide and its key role in the EU markets, it is still not available to EU consumers because of the high transportation costs and lack of LNG terminals (European Parliament 2014). The EU should develop a policy to incentivise investment in LNG terminals, pipelines and reverse gas interconnectors so that all member states can benefit from this energy source at an affordable price, not just those who are situated closest to the existing LNG terminals. The US is marching ahead with this massive potential fuel supply and we should encourage the necessary investments so that shale gas from the US becomes available for EU consumers.
Furthermore, energy efficiency measures and policies targeting efficiency in buildings must be strongly encouraged and subsidised to mitigate the impact of energy prices on household budgets. Such measures might deliver benefits that extend well beyond improvements in competitiveness. In addition, we should encourage changes in our consumers’ habits by building a new energy efficiency culture.
For quite some time coal will remain the main fuel source for electricity production. A policy must be developed to ensure the best use of existing coal-fired power plants, encouraging investment in carbon capture and storage technologies, and more efficient and environmentally sensitive solutions.
Renewables need to become more affordable through the better use of research and subsidy regimes as they are a sustainable and viable alternative to gas dependency. Moreover, the EU Research and Innovation programme–-Horizon 2020–-is offering nearly €80 billion of funding over the next seven years (2014-2020) (European Commission 2011). It is therefore vital that this huge amount should be used to encourage innovation in the above-mentioned areas, involving both the private and public sectors.
New partners
We need to foster an EU-level global approach to establishing and enhancing partnerships for the supply of fuels. The Middle East is the only large source of low-cost oil; state companies and their host governments control some 80 % of the world's proven-plus-probable oil reserves. Expanding our potential partner base and looking for new suppliers might reduce our dependency as the EU will have increased flexibility to switch to other sources.
Conclusion
As the Commission has correctly observed in one of its communications to the European Council and the European Parliament, ‘the point of departure for a European energy policy is threefold: combating climate change, limiting the EU's internal vulnerability to imported hydrocarbons, and promoting growth and jobs, thereby providing secure and affordable energy to consumers’ (European Commission 2007).
Making progress in any of these areas requires a joint effort from national governments, an innovative and sustained effort from the Commission and the Parliament, and support from our industrial and technological players. Combining our infrastructures and uniting in our negotiations with third countries might help us to reduce dependence, improve the security of the energy supply and increase the competitiveness of our economy. This will ensure that Europe as whole is able to keep up with the rapid pace of the globalised world–-regardless of political turmoil.
Footnotes