The EU internal market for gas will remain incomplete as long as long as many Member States continue to persist in following national policies, writes Tim Boersma, dissertation candidate at the University of Groningen and soon-to-be fellow at the Brookings Institution’s Energy Security Initiative in Washington, DC. According to Boersma, much better policy coordination is needed if Europe is not to miss out on the substantial benefits of an integrated gas market and many countries in Central and Eastern Europe are not to remain exclusively dependent on a single source. But examining the readiness in member states’ capitals to cooperate with European institutions, it seems that the issue is not high on the political agenda, notes Boersma. Perhaps it would help if Russia cut off supplies again?
Photo: Future Shape
We all remember the price dispute between Russia and Ukraine in 2006, which resulted in the abrupt cut-off of natural gas supplies to the European Union. The move left thousands of citizens in Eastern Europe in the bitter cold for several weeks, and spurred lengthy debates about energy security and the reliability of Europe’s most important external suppliers. In the end in 2010 the European Commission came to the only reasonable conclusion: an (undesirable) interruption of supplies would not have been so problematic if the European internal market for natural gas had been functioning properly, because there would have been plenty of substitute natural gas available.
It is therefore disappointing to observe that today the internal gas market is still not functioning properly. Its planned “completion” in 2014 is unlikely to occur and may, at the current pace of progress, not happen at all in the foreseeable future. The reasons are well known: a structural lack of investments in infrastructure and a failure to implement legislation and better coordinate regulation. In large parts of Europe all too often there is no effective cross-border cooperation.
The US has been one of the largest producers of natural gas in the world for decades and the EU has always been dependent on external suppliers
Existing mechanisms to attract investments in natural gas infrastructure are insufficient: European Commission estimates suggest that in the period up to 2020 €70 billion of investments are needed and that these will not take place under business as usual conditions. There are options to incentivize these investments, such as a regulatory focus on security of supply instead of merely efficiency, or the allowance of more generous and stable rates of return for investors. Instead, European national regulatory authorities generally focus on efficiency (making it not attractive enough to invest in infrastructure), and regulatory regimes are changed quite often, creating an unstable investment climate. As a result, in large parts of the EU interconnection facilities are not being built, leaving several member states vulnerable to potential supply disruptions.
Just as problematic is that there is little coordination between the member states. Most countries have opted to have their own regulatory regimes, creating a patchwork of regulations. In 2010, the Agency for the Cooperation of Energy Regulators was established to improve EU-wide coordination, but to date the agency lacks formal powers and financial means to make a difference. Thus, the internal market for gas is only reasonably well integrated in the northwest, while the larger part of the EU is lagging.
The European Commission has gone to great lengths to obtain a larger mandate to help (co)finance energy infrastructure projects, a desire heavily opposed by member states in northwestern Europe that have developed and integrated their national gas markets reasonably well. In April 2013 a substantially watered-down regulation on guidelines for trans-European energy infrastructure was adopted by the member states, providing the European Commission for the first time in history with a structural role in the Union’s energy infrastructure. However, this mandate only applies to specific cases, and it is forcing the European Commission to draw up lists of ‘projects of common interest’. Moreover, the ultimately agreed budget for these investments (under the Connecting Europe Facility) comprises not more than €5.1 billion (for both electricity and gas infrastructure) for the period up to 2020 and thus seems to qualify as a drop in the ocean.
In November 2012 the European Commission published an update on the internal energy market, with distressing results. It concluded that there are persistent inefficiencies and risks for proper market functioning. At the time of this writing, infringement procedures are pending against fourteen member states, and there may be more to come. Existing instruments for European institutions to enforce implementation of existing legislation are exceedingly time-consuming, and many questions remain unanswered about the effectiveness of current practices such as naming and shaming and giving penalties.
All in all, a completion of the internal market in the nearby future does not seem realistic. Jeff Makholm has even predicted that the EU gas market may be in for several decades of “institutional development” before it will function properly. In his analysis of the historical development of the US gas market – which regularly features in studies on the European gas system – he observes that it has taken the US several decades to become what is now often perceived as the only well-integrated gas market in the world. Even though the EU has made substantial progress, it may therefore also not be surprising that it has substantial institutional work left to be done.
However, it is worth noting that the US and EU markets differ substantially, one of the differences being that the US has been one of the largest producers of natural gas in the world for decades and the EU has always been dependent on external suppliers. As noted, a supply cut-off can be dealt with effectively in an integrated market where natural gas can flow freely.
Therefore, the EU urgently needs to get its act together and complete the internal energy market on short notice. The benefits of cross-border cooperation on energy policy are substantial, and would create more efficiency throughout the energy system and give Europe a stronger bargaining position towards external suppliers.
Unfortunately, there is currently not much reason to expect that this is going to happen. As the US economist Oliver Williamson notes, major adjustments of “the rules of the game” occur over decades or even centuries, with the occasional exception of a sharp break of established procedures following for instance on a crisis or perceived threat. Therefore, ironically, the best thing that could happen in order to accelerate Europe’s internal energy market completion may be an unprecedented supply disruption that affects citizens all across Europe and not just those in the east of the continent.
Tim Boersma (firstname.lastname@example.org) is a dissertation candidate at the University of Groningen, faculty of Arts, chair group International Relations and World Politics. On 23rd September, he defends his dissertation: ‘Dealing With Energy Security in Europe – A comparison of gas market policies in the European Union and the United States’. Subsequently, he joins The Brookings Institution’s Energy Security Initiative in Washington, DC.
 Without interconnections, in particular member states that depend on a single source for their natural gas supplies are vulnerable to supply disruptions. For an article on single-source dependency in Europe, see for instance: Le Coq, C., Paltseva, E., 2012. Assessing gas transit risks: Russia vs. the EU. Energy Policy, 42, 642 – 650.
 Makholm, J.D., 2012. The Political Economy of Pipelines – A Century of Comparative Institutional Development. The University of Chicago Press. Chicago, IL.
 See for instance Ascari, S., 2011. An American Model For the EU Gas Market? European University Institute working paper, RSCAS 2011/39. Robert Schuman Center for Advanced Studies, Florence School of Regulation. Or Vasquez, M., Hallack, M., Glachant, J.-M., 2012. Building Gas Markets: US versus EU, Market versus Market Model. European University Institute working paper, RSCAS 2012/10. Robert Schuman Center for Advanced Studies, Florence School of Regulation.
 Williamson, O.E., 2000. The New Institutional Economics: Taking Stock, Looking Ahead. Journal of Economic Literature, 38, 595 – 613.