The European Commission is heading for a full-on confrontation with Member States with a new set of proposals on gas security of supply: a fresh attempt by Brussels to impose a truly European policy. According to leaked drafts obtained by Energy Post, the Commission will demand more oversight on gas deals with foreign countries and suppliers, and look to replace national gas policies with regional ones. There will also be a first-ever LNG and gas storage strategy for Europe. The battle for the Energy Union has started.
The first real test of the European Energy Union is coming up. On 10 or 24 February – final date to be confirmed – the European Commission will issue its “winter package” on energy security. This will include two important legislative proposals: one of them will revise the EU’s 2012 decision that created an information exchange mechanism for intergovernmental agreements (IGAs) on energy with non-EU countries (e.g. Russia), and the other will revise a 2010 EU regulation on gas security of supply. Leaked drafts of both proposals show that the Commission intends to challenge nationalist thinking head on.
Breaking EU law with impunity
“Experience shows that assessment by Member States is not sufficient and satisfactory to ensure compliance of IGAs with EU law,” concludes the Commission in its draft revision of the 2012 IGA decision. IGAs are legally binding agreements between one or more EU Member States and one or more third countries that have an impact on the internal energy market or security of supply.
The purpose of IGAs has typically been to provide legal certainty for the construction of import and export infrastructure, to facilitate the purchase of oil and gas, or to establish a more general framework for energy cooperation. IGAs are usually bilateral agreements that form the basis for more detailed commercial contracts. The 2012 EU decision mandated information sharing on IGAs relating to all energy commodities except nuclear (which has its own procedure under the Euratom Treaty) to check that they conform to EU liberalisation and competition law.
Around one-third of the Intergovernmental Gas Agreements has been judged of concern by the European Commission. It has written to the relevant Member States to invite them to amend or end them. Not one of them has done so.
Since the 2012 decision, Member States have notified 124 IGAs to the Commission. Around 60% of these covered general energy cooperation (e.g. with Korea, India and China) and raised no concerns. The other 40% were more specific agreements relating to the development of energy infrastructure, such as new oil and gas pipelines. Six underpinned the doomed South Stream project alone, for example. These six, plus 11 others, gave the Commission cause for worry, it says in a draft report on the IGA decision that is to accompany its legislative proposal.
“Around one-third of the notified IGAs related to energy supplies or energy infrastructure has been judged of concern,” it says in the report. The Commission sent letters to the nine Member States concerned in 2013, it continues, inviting them to amend or terminate the IGAs in question. To date, none of them have done so (although some of the IGAs have since run their course). It turns out that under public international law a Member State cannot amend or end its IGA early without the consent of the other party. This “considerably limits” its enforcement powers, the Commission concludes.
Brussels to screen international deals
The essence of the Commission’s proposed revision to the IGA decision is that it takes a look at IGAs before, not after, they become legally binding and flags up potential problems in advance. After that, “Member States shall take utmost account of the European Commission’s opinion”. This does not exactly amount to a Commission veto, but it was enough for the Commission to be sent packing by Member States when it first proposed this back in 2011. The eventual “ex-post” rather than “ex-ante” checking procedure was “the result of tough inter-institutional negotiations”, the Commission admits today. Not a single Member State has taken up the Commission’s offer of a voluntary ex-ante assessment.
But the context has changed, the Commission says. Security of supply is top of the agenda after the crisis in Ukraine and instability in North Africa and the Middle East. South Stream is dead. The concept of a European Energy Union is very much alive. And it is now clear for the first time just how many IGAs are breaking EU law.
In future, both the Commission and national authorities would be able to ask gas companies for “additional information” about commercial contracts
IGAs are not about to become old news, the Commission adds. Only one IGA has been signed after 2012, but some of the 15-30 year IGAs dating back years ago will be coming up for renewal (no less than three within the next year, it notes). Plus, new IGAs are anticipated as the EU looks to further diversify gas routes and suppliers. Overall, EU gas imports are expected to stay stable, if not rise, over the next 20 years. And just as they did in the past, big infrastructure projects will continue to rely on the public support that IGAs underpin.
“The IGA decision stands at the crossroads of the external dimension and of the internal market,” the Commission says. “Fundamental political decisions on energy should not be taken exclusively at national level.” To play it safe, it wants Member States to notify all “non-binding instruments” such as energy-related Memoranda of Understanding, ministerial declarations and joint codes of conduct to the Commission in future too. These may be non-binding, but they can also give rise to political pressure and non-compliant contracts.
Cracking commercial contracts
Commercial contracts are explicitly excluded from the 2012 IGA decision – and there is no proposal to bring them in – because they fall under the remit of the 2010 EU regulation on security of gas supply. Consistent with its proposals on IGAs, the Commission wants more transparency on gas supply contracts between European companies and third country suppliers “to the extent that such contracts may have impact on the security of supply in the EU”. Nord Stream 2 is a good example.
“Fundamental political decisions on energy should not be taken exclusively at national level”
The big change proposed in the draft revision to the 2010 regulation is that in future both the Commission and national authorities would be able to request “additional information, including contractual information” in non-emergency situations to help assess gas security of supply. This information would come on top of what companies are anyway required to communicate (e.g. minimum daily, monthly and yearly volumes). The Commission argues that it could not properly assess a decrease in gas supply from Russia in the winter of 2014-15 because of a lack of information. External risks are not properly factored into security of supply policies because governments only have access to “some, limited commercial information out of emergency situations”.
In future, gas companies would have to notify all “security of supply relevant contracts” to the Commission and national authorities. These are contracts for more than one year that put more than 40% of the gas consumption in a Member State in the hands of a single third country supplier or its affiliates. The Commission and national authorities may also demand to scrutinise contracts that do not meet the 40% threshold, if they deem it necessary to assess security of supply.
Regional not national thinking
Despite, or perhaps because of the sensitivity around commercial contracts, the Commission picks “the regional challenge” as the biggest hurdle to implementing a new gas security of supply regulation. The thinking in Europe today is still “almost purely national”, the Commission says. “The necessity of EU action is based on the evidence that national approaches not only lead to sub-optimal measures, they can also make the impact of a crisis more acute.” Electricity export limitations imposed by Bulgaria in February 2012 had a knock-on effect on the electricity and gas sectors in Greece, for example.
The Commission wants all interconnection points to be equipped with permanent reverse flow capacity
At the heart of draft proposals to revise the 2010 gas security of supply regulation is a call for mandatory regional, not national, risk assessments, preventive action plans and emergency plans. These would follow a pre-set template, be peer-reviewed and require Commission approval. The regional risk assessments would be done on the basis of an EU-wide simulation with common standards and a specific scenario.
Other innovations foreseen by the Commission include more oversight of how Member States look after so-called “protected” customers and of non-market based measures to improve security of supply. A new solidarity principle would ensure that supply to non-protected customers cannot continue in a Member State if the supply to households, essential social services and their district heating is not satisfied in a Member State to which its transmission network is connected.
In addition, the Commission wants all interconnection points to be equipped with permanent reverse flow capacity (with some scope for exemptions), invites Member States and gas companies to “explore potential benefits” of collective gas purchasing to address supply shortages, and suggests how the revised 2010 regulation will affect the Energy Community.
LNG and storage strategy
A first-ever LNG and gas storage strategy for Europe is also due out on 10 or 24 February. This will cater to “the prospect of a dramatic (50%) expansion in global supply over the next few years and the expected lower LNG prices”, the Commission says in a leaked draft of the strategy. It spies a major opportunity for Europe and foresees action on three fronts: one, getting the right physical infrastructure in place so that all Member States can access LNG, two, making sure the internal energy market provides the right price to attract LNG and investments to where needed, and three, working with international partners to promote liquid global markets.
Once priority energy infrastructure projects are completed, single source dependency would end and all Member States would gain access to LNG, either via terminals or indirectly
Large-scale re-gasification capacity in the EU in 2015 was 195 bcm, the Commissions says. Another 23 bcm were under construction and another 146 bcm await a final investment decision. Existing terminals were only used at around 20% capacity (vs. 32% globally).
Nevertheless, the number one priority for EU policymakers is to accelerate a final investment decision on key gas infrastructure projects, so-called Projects of Common Interest (PCIs). The Commission adopted a revised list of these priority projects with its first State of the Energy Union report last year. “Modelling shows that once these key PCIs are implemented, single source dependency would end and all Member States would gain access to LNG, either via terminals or indirectly via interconnectors and/or access to liquid hubs,” the Commission says in its draft strategy. It cites six projects in Central East South Europe, another six in the Baltic region, and two in South West Europe. Together, they represent a potential investment need of some €5 billion.
The Commission is also looking to do more to open up gas markets in Central, South Western and South Eastern Europe. And it wants the EU to better exploit the gas storage capacity it has, which has grown “strongly” over the last ten years. The Commission asks Member States to include storage in regional energy security plans and pledges to remove barriers to it as a tool for supply flexibility.
The point of the “winter package” is to ensure that European citizens have access to secure, affordable energy. The legislative proposals promote compliance with EU law and transparency to this end. If the EU is serious about an Energy Union, then political decisions on energy cannot be made in national vacuums. There will be shift in decision-making from the national to the regional and European level. This is the Commission’s first attempt to put this fact into practice. How the winter package fares will be a lesson for all the other energy and climate proposals still to come in 2016, the “year of delivery” for the Energy Union.