IN FOCUS: Commission Unveils the Energy Security Package
On 16 February, Vice-President Šefčovič and Commissioner Arias Cañete, top energy chiefs in Europe, announced a “winter package” of reforms including a Security of Gas Supply Regulation; a proposed decision on intergovernmental agreements (IGAs); the LNG and Gas Storage Strategy and a Heating and Cooling Strategy.
By and large, the proposed Security of Gas Supply Regulation seeks to improve security of gas supply through a cross-border approach. It includes a solidarity principle among Member States to ensure that supply can be reoriented as a priority, including across borders, to “protected customers” in case of a severe crisis. Further, the proposed decision on intergovernmental agreements (IGAs) will allow the Commission to assess intergovernmental gas agreements ex ante, i.e. before they are signed to ensure that they comply with EU legislation and do not negatively impact other Member States. The Commission will assess commercial contracts that last more than one year and that supply 40 percent or more of a country’s market. The LNG and Gas Storage Strategy aims to diversify the EU’s gas supply and improve access to storage by focusing on developing the LNG market as an alternative gas.
As a sector that consumes half of the EU’s energy and is powered by 27 percent of fossil fuels, the Heating and Cooling Strategy aims to reduce energy waste by saving energy in the heating and cooling of buildings and industry. It will seek to achieve this by promoting the use of EU funds (especially for smart technologies) on the one hand, and by reviewing current EU legislation to ensure heating and cooling is properly taken into account in current EU legislation (i.e. Energy Efficiency Directive, Energy Performance of Buildings Directive (EPBD), Renewable Energy Directive and the new electricity Market Design). Specifically, the EPBD will allow old household equipment to be replaced while the new electricity market design will provide the flexibility and demand response needed to integrate renewable energy into the energy mix more significantly.
Although the package has received broad support from energy industry players, some sticking points still remain open. Especially important will be seeing what role gas will come to play in heating and cooling. The Heating and Cooling Strategy is just an EU coordination tool and it remains to be seen how Member States will put it into practice. Another question is how the European Parliament and the Council will amend the four proposals in the forthcoming months. The Green party, in particular, has already expressed their disagreement with the Commission’s proposals, especially since they believe the Commission is basing its strategy on a huge over-estimation of demand for gas. In doing so, they believe, the Commission is able to quietly push through projects that, officially, it takes a critical line on, such as the Nord Stream II Pipeline. Forthcoming negotiations on the package in the Parliament and Council are expected to be lengthy, with both institutions likely to change much of the substance within the proposals.
European Commission Press Release: Commission proposes new rules on gas and a heating and cooling strategy
Criticisms to Nord Stream II Surge on Both Sides of the Atlantic
The Nord Stream II project continues to be heavily debated, not just in Europe but also in the USA. The project, which aims to transport an additional 55 billion cubic metres of gas per year from Russia to Germany under the Baltic Sea, will bypass gas transit through Ukraine. Russia’s Gazprom would take ownership of 50% and the rest will be shared equally between BASF, E.On, Engie, OMV and Shell (each 10%). If the project becomes a reality, Ukraine could lose approximately €2 billion per year from gas transit fees. At the same time, critics highlight that rather than diversifying gas imports, it just reroutes the same gas through different territory. The Commission has been clear that it backs continued transit through Ukraine and is not in favour of Nord Stream II. The commission’s experts are currently assessing whether or not there is a legal mandate to block its construction because of possible legal infringements with the 3rd Energy Package. The US attitude is that the construction would send a bad signal to Ukraine, would heighten the EU’s dependence on Russia, and would be redundant, in light of the EU’s LNG strategy. The US, of course, is set to ship large parts of its LNG to Europe after demand – and prices - have fallen in Asia. Some say this situation is temporary and the EU cannot bank on American LNG in the medium-term and thus another pipeline is needed. While observers continue to argue about Nord Stream II’s potential merits or lack thereof, Gazprom signed a MoU with partners on 24 February announcing a new project, Poseidon, which would build a pipeline under the Black Sea, delivering Russian natural gas to Greece by transit through an unnamed third country (most likely Bulgaria) and continue to Italy. The project is essentially a revival of an old project and would foster Italy’s role as a regional gas hub. In addition, it might appease the Italians on Nord Stream II.
EU Observer: Why Europe should fight Nord Stream II
EurActiv: Gazprom revives ‘Poseidon’ Adriatic link
Iran Launches First Oil Shipments to Europe in More Than Three Years
15 February marked a landmark for European-Iranian relations: for the first time in more than three years a tanker, containing 2 million barrels of oil, was shipped from Iran to Europe, and was quickly followed by more. With the 16 January lifting of economic sanctions the Iranian market is again open to international trade and investment and experts predict an estimated 500,000 barrels per day to be shipped. Exceptionally bad timing, say some observers: the market is already oversupplied, and this increased supply will depress prices further. Certainly stock markets in Dubai and Saudi Arabia reacted immediately, going into tailspin. Not so fast, say others: the country needs some 200 billion euros in investment first to develop. The Iranian government, meanwhile, is hard at work to make the most of the opening: it has set out a strategy to regain European market share and attract investment, by lowering its prices to refineries along the Mediterranean Sea.
Wall Street Journal: Iran Launches First Oil Shipments to Europe in Three Years
Bloomberg: Iran Sends First Oil Shipment to Europe since Sanctions End
The Telegraph: Iran sanctions: Middle East stock crash wipes £27bn off markets as Tehran enters oil war
COP21: EU Leads on Implementation of Paris Agreement
The COP21 Climate Agreement reached in Paris in December 2015 will be opened for countries to sign on 22 April 2016. Only after 55 countries accounting for at least 55% of global emissions have ratified it will it become effective. EU leaders are set to lead on the implementation process, like they were at the forefront of international efforts towards a global climate deal to begin with. Unlike many other regions in the world, the EU already has comprehensive legislation in place to reduce emissions from all sectors of the EU economy, as well as financing earmarked for climate action. Further, on 15 February, the Council of Foreign Ministers agreed to an action plan for climate diplomacy which aims to establish the fight against climate change as a strategic priority in all political dialogues. EU environment ministers also met on 12 February to discuss a set of 70 concrete initiatives to combat climate change under the auspices of the Lima-Paris Action Plan (LPAA). The aim is to get businesses and civil society organisation together with policy makers at all levels to work together on the implementation of the Paris deal.
EU Council: Council conclusions on European climate diplomacy after COP21
Reuters: U.S. will sign Paris Agreement and stick to it - Stern
Energy Efficiency Label Divides Policymakers
As part of its summer package, on 15 July 2015 the Commission proposed a revision of the energy labelling directive, a central element of which was the return to a single A to G label scale. The Commission argued that the current labelling system is confusing for consumers. This is because energy efficiency has improved significantly since the label was first introduced in 1995, leading most modern products to be considered in the highest efficiency class. During the MEP debate in the ITRE Committee on the issue, many members, with the notable exception of the ITRE rapporteur Dario Tamburrano (EFDD), disagreed with the Commission. They also did not agree with the Commission’s proposal that the top two classes (A and B) of new energy labels, which will run from A to G, should be empty to leave room for future technical progress. The Committee asked for more flexibility on the matter, saying that the decision of how many classes should be empty should depend on the distribution of products on the market in terms of their efficiency and not only on expected technological development. Retailers, who have overall welcomed the review of the energy efficiency labelling, expressed concerns with the time for transition. On the one hand, long transition periods may confuse consumers, but manufacturers also need time to update their labels, which will incur costs. The ITRE Committee is expected to vote this file on 24 May 2016. The date for a plenary vote on the Report Energy Efficiency Label has still not been set.
European Parliament: Procedure File: Framework for energy efficiency labelling
Brexit: The Energy Perspective
Contribution from Douglas Miller, consultant, London, APCO Worldwide
The British energy sector has been through a challenging couple of years.
Take the oil and gas industry for instance. As a result of plummeting oil prices, many of the North Sea oil fields have had to be shut down or have seen production dramatically curtailed. Investment into new projects has dried up. Jobs have been lost and rigs stand empty.
Wholesale energy costs, although far lower today than in recent years, have not translated into lower energy bills for consumers. Energy suppliers have been criticized by energy watchdogs and consumer groups alike for not passing on cost savings.
There have also been concerns around the decommissioning rate of older power stations and the narrowing supply margin (the difference between supply and demand). It is therefore surprising that Energy UK, which represents the ‘big six’ energy providers, says it now backs phasing out coal-fired stations, after years of defending use of fossil fuels.
Indeed, just last week the Industrial Communities Alliance (ICA), a group representing 60 local authorities across Britain has warned that recent closures of large power stations have left the country at risk of power cuts next winter.
This supply crunch, or nervousness about it, has not been helped by the fact that with wholesale prices so low it is very hard to justify the cost of building of expensive new power plants and capacity. There has also been mass criticism of the strike price deal at Hinkley Point, the new nuclear power station.
The UK energy sector currently relies on a combination of home produced energy and imports. The imports come largely through North Sea interconnectors, with supply contracts established with EU companies. The main point of interest will be whether these contracts will be easy to renew, if Britain does leave the EU. The infrastructure will remain but some commentators have thrown doubt over whether the UK could increase imports as easily if it was in the EU.
Although the UK has lessened its import dependence in recent quarters, and can rely on LNG imports from Algeria and the USA, all three of its gas interconnectors are linked to EU countries: Republic of Ireland, Belgium and the Netherlands. This could cause issues if there were a sudden increase in demand or a supply crunch.
Finally, a potential Brexit raises another question about the development of shale gas in the UK. The benefits of onshore shale production, as witnessed in the US, is that production costs are far lower than offshore drilling. Shale gas is also a lot more flexible, with many US companies mothballing their production until prices return above break even.
The UK may well put in place a renewed drive with increased on shore shale gas production, in an attempt to increase the amount of home produced fuel and lowering the dependency on imports. If the supply margin does remain tight then this production could help the energy industry in times of future crises.
The energy industry is still evaluating what will come should Britain decide to leave the EU. However, given that the referendum is towards the end of June, there is not much time to react before winter starts to develop in October. The industry should be planning for all eventualities long before polling day. That means now.
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