Written by Alex Wilson.
|This paper is one of 11 policy responses set out in a new EPRS study which looks first at 15 risks facing the European Union, in the changed context of a world coming out of the coronavirus crisis, but one in which a war has been launched just outside the Union’s borders. The study then looks in greater detail at 11 policy responses the EU could take to address the risks outlined and to strengthen the Union’s resilience to them. It continues a series launched in spring 2020, which sought to identify means to strengthen the European Union’s long-term resilience in the context of recovery from the coronavirus crisis. Read the full study here.|
The issue in short: The challenge and the existing gaps
Defined by the International Energy Agency as ‘reliable, affordable access to all fuels and energy sources’, energy security is vital to the EU’s economy. However, lacking sufficient energy reserves of its own, the EU is critically dependent on imports. In 2020, these covered well over half (57 %) of the EU’s energy needs – a figure which rises to 97 % for oil and 84 % for natural gas.
Heavy reliance on imports creates vulnerabilities. Past risks were highlighted by the 1973 crisis, when an embargo led by Arab oil producers caused oil prices to quadruple, resulting in high inflation, a deep recession and episodes of social unrest. In 2009, Russian gas producer Gazprom halted supplies through Ukraine, leaving several EU countries including Bulgaria and Romania with a severe shortfall for nearly two weeks in the depths of winter. Questions about the reliability of Europe’s main gas supplier were raised again in 2021, when Gazprom’s refusal to supply more than the contractual minimum left European reserves depleted and exacerbated a ‘gas crunch‘, in which surging prices caused hardship to consumers and put dozens of energy companies out of business. Russia’s invasion of Ukraine in February 2022 threatens to further disrupt gas supplies to Europe. The war prompted Germany to suspend certification of the Nord Stream 2 pipeline, and obliged the EU as a whole to find ways to drastically reduce their reliance on energy imports from Russia. The European Commission has proposed a reduction of two-thirds in EU energy imports from Russia by the end of 2022. Reflecting these risks, the European Parliament/Normandy Region’s Normandy Index identifies energy insecurity as Europe’s main external vulnerability.
In the longer run, a major benefit of the transition to renewable sources, together with enhanced energy efficiency measures, is that Europe should become less dependent on imported fossil fuels. Nevertheless, short- and medium-term trends are rather less favourable. In view of the need to cut carbon emissions, most EU countries are phasing out coal use in power production, while post-Fukushima safety concerns have accelerated the end of nuclear power in several Member States. Nevertheless, there is a considerable way to go in terms of developing and commercialising energy storage technologies that can accommodate the variable nature of renewable energy production (in particularly solar and wind power). This means the EU will continue to rely on gas for heating and to a lesser extent for electricity production in the coming years. The transport sector in Europe is also far from decarbonised and heavily reliant on oil based products. Gas imports have in fact been rising as the EU’s own production dries up, with the main EU producing country (The Netherlands) intent on ending its gas production in 2022. Russia has become the EU’s main energy supplier in recent years, responsible for around 45% of gas and coal imports, and around 25% of oil imports. It is likely to remain Europe’s dominant supplier in the gas sector for some time, given that Norway and Algeria (the EU’s second and third largest suppliers) do not have the capacity to replace it, and it remains unclear how much gas the EU can expect to receive from gas fields in Azerbaijan. This means future supply diversification will rely heavily on Liquefied Natural Gas (LNG). LNG offers a key advantage over pipeline supplies because it can be more flexibly shipped in from a wider range of producer countries, including strategic allies such as the USA, without the need for pipelines. However, LNG is generally more expensive than pipeline gas, especially at times of high global demand, while its production and transport system makes it more polluting. Furthermore, access to LNG requires Member States to build dedicated import terminals and integrate these into their gas networks, as well as those of neighbouring countries.https://youtu.be/gyi_GEjPH-w
Since the invasion of Ukraine in 2022, energy dependence on Russia has been highlighted as a major geopolitical risk for Europe, which also helps to finance Russian aggression, something that the EU needs to address collectively and as a matter of priority. Over the past 15 years, the EU has made some progress in terms of diversifying gas supplies and better integrating national gas markets (e.g. through enhanced interconnection capacity), so that supply disruptions can be addressed through burden sharing, reverse flows and other tools. This progress is underpinned by EU legislation on security of gas supply, intergovernmental agreements in the energy sector, and the third gas package. Reform of the third gas package and security of gas supply regulation lie at the heart of the hydrogen and decarbonised gas markets package, proposed by the Commission in December 2021, whose primary aim is to help gas markets deliver on the clean energy transition.
Whereas EU legislation has in the past focused on market functioning and diversification of supply, the more recent emphasis has been to transform energy markets in a way that aligns with the EU’s ambitious climate goals. Rather less emphasis has been placed on the price of energy paid by consumers, with the assumption being that lower energy prices would naturally flow from sustainable, functioning and integrated energy markets. Yet as described in Chapter 3, energy prices in the EU rose sharply in 2021 due in large part to the economic recovery from the Covid-19 crisis, and have shot up even further in 2022 because of the Russian invasion of Ukraine. This has led to broader price inflation and a cost of living crisis. While guaranteeing physical energy supplies remains the highest priority, there are growing concerns about how energy is priced in the EU and the mechanisms in place to ensure that consumers (especially vulnerable ones) can afford their energy supplies. The risks otherwise are of growing energy poverty and negative impact on economic growth, as energy use accounts for a high and growing share of consumer spending.
Existing policy responses
The Security of Gas Supply (SoGS) regulation constitutes the main EU framework for ensuring that Member States plan and cooperate closely on security of supply and can support neighbouring countries in the event of a supply disruption. Potential policy responses under the SoGS regulation, which was revised in 2017, include closer regional cooperation over managing energy supplies in a crisis, physical diversion of supplies to help neighbouring countries, and prioritisation of essential services and supplies to households across the EU. Gas security in Europe is further enhanced by measures to ensure the EU has a role in scrutinising intergovernmental agreements and some commercial contracts in the energy field with third countries, and ensuring that EU law also applies to pipelines with third countries. While gas is the biggest concern in terms of security of supply, the EU also has legislation to ensure all Member States develop minimum oil reserves, and takes measures to guarantee security of electricity supply in the event of an unexpected disruption.
Growing national concerns around the rise of energy prices in 2021, discussed extensively in the European Council and in meetings of energy and finance ministers, led to the European Commission adopting a toolbox (October 2021) of targeted interventions that Member States could take to counter these price rises in a way that did not undermine the single market in energy. These include temporary reductions in energy taxes, social payments to vulnerable consumers, and actions to prevent disconnections such as a temporary deferral of payments. Furthermore, the Commission proposed a revision of the SoGS regulation that included greater coordination of gas storage at EU level and voluntary joint purchasing of strategic gas stocks. These suggestions were included as part of the hydrogen and decarbonised gas markets package in December 2021.
The Russian invasion of Ukraine in 2022 has pushed the issue of energy dependency to the fore, with a growing realisation that the EU can no longer rely on Russia as its main energy supplier, and should take concrete actions to curb its energy imports immediately. The Commission proposed a joint European action, entitled REPowerEU (8 March 2022), designed to reduce fossil fuel imports from Russia by 2/3 in 2022, with the goal of making Europe independent from Russian fossil fuels well before 2030. Permitted actions include a relaxation of state aid rules for businesses affected by high energy prices, the possibility of windfall taxes on energy companies that have benefited from the price crisis, and the diversification of gas supplies through greater LNG import capacity and the delivery of alternative pipeline routes. The informal meeting of the European Council on 10-11 March 2022 issued the Versailles Declaration that seeks progress in reducing EU energy dependency on Russia in particular. On 23 March 2022, the Commission proposed an expedited and targeted revision of the SoGS regulation that would require all Member States to fill their gas storage levels to at least 80 % of capacity by 1 November 2022 (rising to 90% in subsequent winters), introduce solidarity mechanisms between Member States when it comes to accessing stored gas, and require certification of all gas storage operators, including those owned by third countries (e.g. Russia). The overarching aim is to ensure that Europe can cope with any potential interruption of Russian gas supplies over the next winter. According to a 2022 report from the Agency for the Cooperation of Energy Regulators (ACER), actual gas in storage in the EU-27 was only around 20 % of annual consumption (as at 1 October 2021), with filling-in levels of only 72 % and particularly low storage levels in sites owned by Gazprom. The ACER report lends support to the idea of urgent EU action on gas storage.
Alongside these concerns about energy dependency, Member States are increasingly alarmed at the consequences of high energy prices (also an element of security of supply, according to the IEA definition), and some now strongly object to the marginal pricing model used for the EU electricity market, which sets the energy price according to the most expensive source used in energy consumption. In normal times, marginal pricing can be a transparent tool that is useful for incentivising renewable sources, especially those like solar and wind power with low operating costs. Yet in times of great market disruption, marginal pricing can mean that electricity users have had to pay high energy bills based on the cost of gas rather than the most common source for energy generation (e.g. nuclear energy in France). This has prompted several Member States to demand a more thorough overhaul of EU energy market rules, including a new system of setting energy prices that places a lower financial burden on consumers. In the European Council meeting of 24-25 March 2022, Member States agreed to fill in gas storage sites and phase out Russian oil, gas and coal imports as soon as possible, and work together on the voluntary common purchase of gas, LNG and hydrogen. Member States also agreed on the need for new measures to combat the rapid increase in energy prices, inter alia by calling on the Commission ‘to submit proposals that effectively address the problem of excessive electricity prices’.
National level initiatives
EU Member States have undertaken a number of actions to help their consumers, especially vulnerable ones, cope with a period of exceptionally high energy prices. This includes reductions in energy taxes, imposing price caps on energy bills, and making financial support available for more vulnerable consumers. The Bruegel think-tank has mapped out the various national policies that Member States are taking to address energy price rises. The war in Ukraine has prompted Member States to go much further and look for ways to sharply and rapidly reduce their dependence on fossil fuel imports from Russia. Some Member States such as France and Belgium have decided to prolong the life of nuclear reactors that are currently scheduled for closure, although Germany has taken a different approach and intends to continue with closing nuclear power plants but invest more heavily in renewables. Poland is accelerating its strategy to reduce dependence on Russian energy imports, ending its gas supply contract with Russia by the end of 2022 and replacing this with gas imports via its dedicated LNG terminal. Poland could also end its supply contract for Russian oil in 2023, and make more use of its indigenous coal resources to replace natural gas in the short term. Switching to coal is an option for other countries with coal reserves or coal fired power stations, even if the highly polluting effects of coal mean that its use needs to be completely phased out in the medium term. For its part Germany has suspended certification of the NS2 pipelines, and has authorised the development of new LNG import terminals, as important steps towards reducing its dependence on gas supplied from Russia. The big and ongoing question is whether the EU as a whole will cease all energy imports from Russia, and thus follow the line taken by the USA and the UK, as well as the Baltic States inside the EU.
EU action with external partners/international organisations
The EU’s 2016 Global Strategy makes it a priority to ‘strengthen relations with reliable energy-producing and transit countries’. The Commission will adopt a new EU strategy on external energy relations in May 2022, which should take into account REPowerEU and the broader European response to the war in Ukraine. Two important multilateral frameworks for EU external energy relations are the International Energy Agency, which the EU participates in directly through the Agency’s Governing Board, and the Energy Charter Treaty (ECT), that governs commercial relations between energy producing and consuming countries. Whereas the IEA is a valuable forum for energy dialogue and research, its membership is limited to OECD countries that are mostly net energy consumers. The IEA has an important role in monitoring emergency oil stocks and releasing these to guarantee security of supply, but it does not have comparable powers to ensure security of gas supply. The ECT represents both net energy producing and consuming countries, but its membership is geographically limited and many major energy suppliers (e.g. Russia, Norway, Australia) and net consumers (China and most Asian countries) are not parties. The EU is seeking to reform the ECT in a way that would make it more compatible with the green energy transition and more effective in addressing problems relating to increasingly globalised energy markets.
Since 2006, the EU has been part of an Energy Community with neighbouring countries (currently, the six western Balkan countries that are not EU Member States together with Ukraine, Georgia and Moldova), several of which are important transit countries for EU gas supplies from Russia and Azerbaijan, and face similar challenges to the EU in terms of dependence on Russian imports. Energy Community members have adopted key European energy laws, such as the second and third legislative packages on gas and electricity markets, helping them to become more energy secure and integrate at least partially with the EU’s internal energy market. However, there is still a long way to go: as of 2021, member countries had implemented just over half of the laws included in their Energy Community commitments.
Given the tense state of relations with Moscow, the EU is now actively seeking to reduce its reliance on energy supplies from Russia. Germany has already taken an important step in this direction by not approving the Nord Stream 2 pipeline for operation (see in focus). The EU has nevertheless maintained bilateral energy dialogues with several other supplier and transit countries, such as Algeria, Turkey and Azerbaijan. The EU has significant energy cooperation with Ukraine; in 2019 it mediated a five-year gas transit agreement between Kyiv and Moscow, while Ukraine is a leading member of the Energy Community and has become more closely aligned with the EU energy acquis. In 2021, Germany committed to establish a Green Fund in support of the Ukrainian energy sector, with at least US$1 billion of investments, as part of an agreement with the US. This could be a useful template for future EU support for the Ukrainian energy sector.
Obstacles to implementation
There is no legal obstacle to strengthening energy security at EU level – this is a specific EU competence under Article 194 TFEU, which provides an explicit legal basis for EU energy policies. Yet competence over the structure of energy supply, the choice of energy sources (‘energy mix’), and the conditions for exploiting energy resources, all reside with the Member States (also according to Article 194 TFEU). Member States are therefore primarily responsible for ensuring security of supply within their territory. The focus of EU action – such as the SoGS regulation – is to ensure that Member States do not penalise neighbouring countries when they take legitimate measures to guarantee their own energy supplies, and come to their support if supplies are interrupted.
The extent to which EU energy systems are coordinated is also a matter of political will. Member States remain free not only to decide which energy sources to use (or prohibit), but also how to organise their infrastructure and secure their own (usually bilateral) contracts with supply countries. While the EU now has a scrutiny role over intergovernmental agreements and some commercial contracts in the energy field, and has developed the right to apply single market rules to pipelines with third countries, this remains far from the pooling of energy sovereignty that may now be necessary at EU level. Given the secular decline in EU fossil energy production, Member States have sometimes sought to jostle for preferential relations and contractual terms with supply countries, leading to policy choices that are not consistent with Europe’s long term interest and which has so far prevented the EU from effectively speaking with one voice in external energy relations.
Past disputes between Member States over the Nord Stream 2 pipelines highlight the extent to which Member States’ decisions on energy infrastructure could become politicised and negatively impact EU security of supply. The Russian invasion of Ukraine in 2022 brought into relief the close interdependency and common challenges faced by Member States in the energy field, as well as the common need to reduce dependency on energy imports from countries that constitute a geopolitical threat to Europe. Perhaps the Ukraine crisis will deliver the political will that is necessary for Member States to coordinate more closely on their energy mixes and supply infrastructure, take strategic decisions in close consultation with their neighbours, and map a path out of energy dependency that is compatible with the transition to climate neutrality by 2050. This will necessarily include the promotion of renewable energy sources and energy efficiency measures that can sharply curb imports of fossil fuels and promote cleaner alternatives. It is now even more evident that for the EU and its Member States, climate action and energy security are two sides of the same coin, and concerted actions to support one will in the longer run reinforce the other.
Policy proposals by experts and stakeholders
The think tank Bruegel has set out scenarios for how Europe could prepare for a winter without Russian gas supplies. Bruegel argues that even limited Russian gas imports bolster Gazprom and thus support the Putin regime. No Russian imports is a possible scenario that could be realised by maximising alternative pipeline supplies, LNG imports and storage capacity, although even this along would be insufficient to fully replace Russian gas supplies. Diversification of supply would therefore need to be accompanied by a sharp decrease in energy demand, which can be achieved by greater energy efficiency, lower heating, and prioritising certain types of energy demand above others. Similarly, Bruegel argues that cutting off Russian coal and oil imports would lead to a temporary adjustment that is painful but would ultimately be better than continued dependence.
The International Energy Agency argues that Europe can cut its dependence on Russian gas (currently at 155bcm per year) by around a third (50 bcm) within a year, according to its 10-point plan. The IEA proposes not signing any more contracts for Russian gas and doing everything possible to diversify supply routes. This must be accompanied by ramping up renewable energy production and energy efficiency actions. Minimum gas storage obligations would need to be introduced and a windfall profits taxed introduced on energy producers, consistent with the REPowerEU action proposed by the European Commission. Alongside these measures, the IEA proposes a thermostat reduction of 1C in heating that would reduce energy consumption alone by 10bcm within a year. The IEA has proposed a similar 10-point plan to end dependence on Russian oil globally, and has consistently argued for the importance of energy efficiency in curbing consumption and reducing dependence on fossil fuel imports, thus enhancing energy security.
The International Renewable Energy Agency has set out the global measures, necessary to deliver on the goals of the Paris Climate Change Agreement, in particular the ambition to limit global warming to 1.5C by 2050. This would involve a drastic reduction in fossil fuel consumption (and their imports) by means of ramping up renewable energy production and energy efficiency measures.
Ember, E3G, RAP and Bellona have produced a joint analysis, which concludes that the EU can end its dependence on Russian gas by 2025, without stalling the phase-out of coal and without having to build any new gas infrastructure. These environmental think-tanks instead suggest fully implementing the EU’s Fit for 55 plan, removing existing barriers to domestic wind and solar growth, and incentivising demand-side responses to promote energy efficiency and renewables.
Position of the European Parliament
In its December 2015 resolution on the EU’s Energy Union, the Parliament highlights the risks of over-dependence on Russia, an unreliable supplier which uses energy as a political weapon. It notes the importance of energy for the sovereignty of EU and Eastern Partnership countries. Third country suppliers must follow EU energy law. In energy relations with third countries, EU countries should negotiate with one voice, and consider mechanisms for collective gas purchasing. The EU needs a more coherent approach to external energy security, not least through coordination between the EU High Representative and the relevant Commissioners.
The September 2021 recommendation on EU-Russia political relations criticises the Nord Stream 2 pipeline as divisive, incompatible with the greenhouse gas emissions goals of the European Green Deal, and unnecessary given spare capacity in existing pipelines. It therefore calls for an immediate halt to the pipeline and a European strategy to end dependence on commodity imports from Russia.
The March 2022 resolution on the Russian aggression against Ukraine calls for imports of oil, gas and coal from Russia to be restricted, and for the Nord Stream 2 pipeline to be abandoned. Diversifying energy sources should be a priority, expanding LNG terminals and supply routes, unbundling gas storage, and increasing energy efficiency and the speed of the clean energy transition. Energy prices should be carefully monitored and appropriate measures taken to mitigate any negative economic and social impacts that emerge, while all cooperation with Russia in the nuclear field should cease.
The April 2022 resolution on Ukraine calls for an immediate full embargo on Russian imports of oil, coal, nuclear fuel, and gas, and for both Nord Stream 1 and 2 pipelines to be completely abandoned, accompanied by a plan to continue ensuring the EU’s security of energy supply in the short-term. The Parliament’s resolution also calls for common strategic energy reserves and energy purchasing mechanisms to be established at EU level, with the aim of increasing energy security while reducing external energy dependency and price volatility. The resolution also calls for work to be started on creating a gas union, based on common purchases of gas by Member States.
|In focus: Nord Stream 2|
Nord Stream 2 (NS2) illustrates the extent to which energy security has been a bone of contention between the EU and the USA, and a source of division among EU Member States. While the European Commission and the Parliament have been critical of NS2 since its conception, in 2019 Commission President Ursula von der Leyen also criticised US extra-territorial sanctions on the pipeline, due to the threat they posed to European companies carrying out legitimate business. However, the two sides are now in agreement that a Russian invasion of Ukraine requires a halt to the project. Despite initial hesitation, in February 2022 Germany put approval procedures on hold, pending further developments. In the same month, a large delivery of US LNG helped to address Europe’s shortfall: according to von der Leyen, EU countries now have enough gas to last them for the rest of the winter. Even when the war in Ukraine eventually ceases, it remains dubious whether NS2 can ever receive certification to operate. This represents a considerable cost of ‘stranded assets’ not only for Russia’s Gazprom but also for various EU energy companies and local governments that had invested their resources in the project. This emphasises the importance of not repeating similar mistakes in future.
Listen to policy podcast ‘Future Shocks 2022: Strengthening our energy security‘ on YouTube.