A European Energy Union

A European Energy Union

A resilient union is the only way forward for cheaper, secure and sustainable energy

By Petras Auštrevičius, Lithuanian member of European Parliament

The current state of the European Union’s energy market is highly unsatisfying and resembles an unsustainable energy archipelago assembled from 28 mostly independent energy islands, each critically exposed to common security threats such as climate change, highly unsatisfying energy prices and sometimes extreme dependency on unreliable third-country suppliers.

The EU imports more than half its energy from third-party countries, spending more than 400 billion euros per year (more than Greece’s debt), resulting in external energy dependency and uncompetitive energy prices. Moreover, as proven by the current crisis in Ukraine and previous gas interruptions in 2004 and 2006, importing energy from hostile foreign regimes, such as Vladimir Putin’s Russia, endangers member states’ national security and the EU as a whole by limiting the EU’s bargaining scale and making it compromise with an aggressor.

The establishment of an authentic Energy Union based on the European Energy Security Strategy is one of the most ambitious achievements the European Commission has set for itself during the 2014-2019 term of President Jean-Claude Juncker. In light of previous failed attempts to create a single energy market, the viability of the Energy Union and the rhetoric surrounding it have been widely debated. We will briefly analyze this most forward looking EU project.

To begin with, in today’s geopolitical context, revamping the EU energy strategy would not only enable economic gains by increasing the EU’s economic bargaining power, it would inevitably have positive implications in the foreign policy and security fields as well.

The Energy Union is part of the EC vision “Europe 2020,” which aims to deliver smart, sustainable and inclusive growth based on a competitive, low-carbon economy. It is not contested that, if EU wants to step up its economic growth, it is crucial to overcome foreign energy dependency and internal fragmentation by adopting a common European approach to energy policy and purchasing diplomacy.

To achieve those goals, the European Commission needs to tackle the market and geopolitical energy security nexus. This balance can be achieved only by member states showing enough political will and working in a common direction to reshape both internal and external dimensions of energy policy.

The internal dimension — an efficient and competitive single market

The current EU energy market still does not function in full accordance with free-market principles and suffers from overwhelming state regulation, leading to very little competition, an ineffective industrial sector and artificially high energy prices that endanger energy access. As an example, when Belgium faced a power shortage in 2014 despite an underutilized Dutch power plant operating only 8 kilometers from its border. This illustrates that fragmentation of the energy market and states’ control over energy resources pose grave challenges to the energy supply chain. A competitive internal energy market would be capable of eliminating such energy islands and market distortions.

To create a well-functioning single energy market, the first step is liberalizing energy markets by eliminating obstacles such as distortive state regulations and developing interconnections to facilitate free trade. This goes hand in hand with stronger regulatory certainty within the EU and better enforcement of already existing internal market rules, namely the Third Energy Package. Liberalizing energy flows would make the energy market much more competitive and effective and reduce artificially calculated energy prices.

Energy security, competitiveness and sustainability rest on diversifying energy supplies and moderating energy demand. Relying on one energy supplier results in lack of competition and poses a security threat. Sources and supply routes should be diversified by taking into account the credibility of suppliers by regarding political and not just economic aspects. Development of indigenous energy sources, freedom for each country to decide its own energy mix and promotion of European industry participation in energy generation, transmission, distribution and interconnections should be encouraged. Demand and supply should be planned carefully to avoid excessive infrastructure and ensure cost-optimal supply. Setting common standards for smart grids would be a significant starting point to link producers with consumers.

Having sufficient energy infrastructure is required for a well-functioning energy market. Developing regional energy links –– decentralizing energy –– throughout the EU is crucial. Energy can be produced more effectively and the system made more resilient while at the same time providing business opportunities for local medium-size enterprises. Therefore, the commission should accelerate the implementation of regional gas and electrical infrastructure projects and, where necessary, capacity markets to ensure that supply is available when it is most needed. It should also establish regional smart grids and new energy storage mechanisms capable of handling more renewables and being integrated into the internal energy market. Moreover, the commission should promote the principle of cross-border solidarity and establish administrative and communication channels so states can provide assistance to each other during energy shocks.

There are significant efforts already underway to start the integration of competitive electricity and gas markets. Excellent examples are the new gas interconnections between Central and Eastern European states and the Baltic region’s electrical infrastructure links, Nordbalt and Lit Pol, which will complete the Baltic Interconnection Plan. In addition, despite gas dependency, positive measures are being implemented to counter politically motivated gas supply cuts, namely, in liquefied natural gas (LNG). Opening LNG terminals in Lithuania in 2014 and Poland in 2015, two countries very dependent on gas imported from Gazprom, and countries such as Croatia in 2020, shows that a range of new countermeasures and new import options, such as from Israel or the United States, are emerging.

In addition to energy security and independence, energy efficiency and sustainability are part of the EU’s 2030 targets. The EU is aiming to improve energy efficiency by at least 27 percent and reduce greenhouse gas emissions at least 40 percent from 1990 levels by 2030. To achieve this, economic growth needs to be uncoupled from high energy consumption. Improving energy efficiency can significantly reduce energy consumption and result in sustainable economic gains. According to the commission, the EU’s gas imports can be reduced 2.6 percent for every 1 percent in additional energy savings. Member states and cities should make better use of available EU funds and invest in renovating buildings, modernizing heating systems and facilitating cleaner public transportation. Improving vehicle performance is another means of improving energy efficiency.

The commission should create corresponding administrative mechanisms capable of monitoring and reporting implementation of its Efficiency Directive and facilitating implementation of EU energy efficiency legislation. Furthermore, facilitating the transition to renewables and smart infrastructure should favor market-based instruments, as this is the only way to achieve the most cost-effective results.

However, rapid private investment and pooling of EU resources is extremely important to efficiently balance sustainable energy. An investment in the energy market of at least of 1 trillion euros, needed to ensure full recovery from the economic crisis and a successful transition to renewable energy, is currently obstructed by regulatory problems. To draw more private investment, the EU should first address the problem of regulatory uncertainty. Strengthening EU governance mechanisms is crucial. This should encompass a regulatory framework with rules for competition and subsidy regimes, which if well organized and implemented, would increase competitiveness and transparency. The ENTSO-E information system, which provides information on the European energy sector, is a positive development. Such data centralization will make energy strategy planning much easier and more transparent, which means easier information access to investors and more competitive prices for consumers.

Moreover, EU states should take advantage of available financial resources via instruments such as the European Regional Development Fund, Horizon 2020, and of access to the investment schemes of the European Bank for Reconstruction and Development and the European Investment Bank.

Finally, to increase energy efficiency and optimize energy network infrastructure, Europe has to work at developing new energy technologies. A sustainable, low-carbon economy will produce the benefits of cheap, efficient energy and environmental preservation. Environmental harm caused by rapid economic growth based on polluting practices cannot be eliminated by attempting to repair the damage later; it can only be eliminated by energy advancements and sustainable growth practices. This is well illustrated by market-based instruments such as the Emission Trading System.

Other measures to increase efficiency and empower consumers could include better energy efficiency and energy performance labeling.

The external dimension — a univocal EU position and political will

In recent years, member state governments and the commission have routinely stressed that EU energy policy has moved beyond the internal dimension; external energy policy has become a EU Common Foreign and Security Policy priority. An excellent example of this is the South Stream project, initiated by Russia but then canceled due to EU interference.

Indeed, the EU has stepped up external energy cooperation efforts by signing energy partnership agreements with such countries as Kazakhstan and starting energy dialogues with African and OPEC countries and developing Black Sea and Caspian Sea initiatives. However, a truly coherent qualitative approach — moving from a market-governance approach to a geopolitical external energy negotiations approach — is still missing and there is a need to develop a univocal European negotiation position vis-à-vis third countries, including key Western producer states that are still resisting.

While very important, short-term measures such as gas storage, development of reverse gas flow infrastructure and new terminals for LNG are not enough, especially for those extremely vulnerable member states that are dependent on a single external energy supplier. We must continue looking for long-term energy diversification solutions––meaning energy suppliers, sources and energy infrastructure. The EU is currently working to bring gas to Europe from Azerbaijan via the Southern Gas Corridor, which will be opened in a few years. It is also developing a Mediterranean gas hub and supply infrastructure with Norway.

However, establishing a univocal position and acting collectively in energy and climate diplomacy fields enables member states to negotiate as a single block and expand their competitiveness through reciprocity outside the EU. Currently, the EU is disadvantaged since third-party supplier states tend to use dual-pricing practices for domestic and exported resources. Also, there is no globally binding agreement that would force countries outside the EU to produce energy complying with EU environmental standards. This creates a “race to the bottom” in which other non-EU states try to produce power as cheaply as possible at the expense of environmental standards, safety and social requirements to maintain a competitive advantage. Only by finding measures to tackle these two issues — reciprocity outside the EU and social and environmental compliance — can the EU broaden the playing field regarding third-country producers.

Moreover, EU members differ in their vulnerability levels, and some are more resilient than others to supply shocks. However, the EU is based on the overarching principle of solidarity, and any state jeopardizing the security of other member states weakens and endangers the security and the economy of the EU as a whole. It is important to eliminate undue obstacles to competitive behavior that limit both market entry and exit. To achieve this, the EU first needs to engage the political issues in some member states that cause those states to impinge on common EU energy interests. Additionally, for coherent energy diplomacy, the commission should create monitoring and reporting mechanisms for intergovernmental agreements to reduce the possibility of noncompliance with EU legislation.

Secure external energy relationships and adequate administrative mechanisms should be developed as a crucial part of the Energy Union, complementing internal cohesion and improving pan-European security from outside threats.

When assessing the power balance among member states, the energy dimension is too often overlooked. In this interdependent world where instability in one region inevitably has implications elsewhere, the EU needs to achieve energy independence and security objectives to improve resilience.

In spite of prevailing criticisms and doubts, there is a strong conviction that the Energy Union is a feasible project as long as there is sufficient political will among member states and the strategy is implemented gradually and consistently. In the long run, an Energy Union based on the three pillars of security, competitiveness and sustainability would make Europe much stronger from security and economic perspectives. Therefore, we must accelerate our efforts and remove obstacles to developing a genuine Energy Union based on regional energy networks and complemented by secure external energy relationships and a common bargaining strategy with third countries.  o