EU: Energy union in making?

It seems that a much deeper integration of the EU energy policy could be on the table. Read few comments.

Questions:

1. Polish PM Donald Tusk even writes in his article : Europe should confront Russia’s monopolistic position with a single European body charged with buying its gas. But could you realistically envision this kind of scenario or the obstacles are too big and would it be really beneficial?

2. What can Russia do to challenge a deeper integration of the EU energy policy, would it be beneficial for Russia to spoil it?

Answers:

Jonas GrätzResearcher, Global Security Team, Center for Security Studies

1. The idea about creating a single buying agency for gas is not new, but has gained political traction due to the current crisis. It aims to address a basic weakness in the EU’s energy policy: the lack of coordination when it comes to dealing with Russian energy, which allows the Kremlin to use its gas export monopoly very effectively. The situation today is somewhat worse than in the past as there are no strong European energy companies anymore that could take the lead in negotiating with Gazprom. This relates to a basic dilemma of the EU’s energy policy: a functioning energy market requires strong antitrust laws and many small companies. At the same time, a functioning market needs gas, and this has to be secured at the transnational level, where competitors are very large. You thus need both small and big players, which is impossible. Additionally, EU energy companies have been weakened by member state policies such as the “Energiewende” in Germany. Meanwhile, many other countries, such as China, are using big energy companies to shield the domestic market and to build international competitiveness. Not so the EU. Hence, the EU today is in an unfortunate situation towards Russia, but also towards other energy producers, and Tusk’s proposal wants to remedy this situation. But the proposal is difficult to achieve also because public agencies do not necessarily possess the knowledge needed. It would also entail distributional costs, as smaller countries would benefit more than larger countries. An easier approach would perhaps be to consciously strengthen EU energy companies by allowing and encouraging cross-national mergers and keeping a golden share at the EU level to influence corporate policy. The existing and evolving spot markets would then equalize energy prices across the EU anyway. Such an approach would possibly need derogations from antitrust policy. But something definitely needs to be done.

2. Of course, it is always advantageous as a big player to face many small players, as it enables you to use “divide and rule” tactics. Hence, Russia will be opposed to further integration on the EU level. Putin even strives to make the EU as a whole a thing of the past. Hence, as before, Russia will try to use carrots (cheaper energy prices, opportunities for exports to Russia) and sticks (threats to cancel existing contracts) in order to play off different member states against each other.

Iana DreyerTrade and Energy Policy Analyst

1. There is no need for a single gas buying consortium. But it is vital to remove the stranglehold of Gazprom on individual member states’s gas markets, and this should be one in a coordinated way from the Baltics to the Balkans. In this region Gazprom controls trading companies, has stakes in national gas companies etc. It is vital that the ongoing antitrust case against Gazprom move forward and bring results. There must be a big push to end once and for all the isolation of the Baltics and Bulgaria on the gas markets. Bulgaria should very quickly tap into TAP. In that sense Tusk’s proposals to raise EU funding for projects makes sense. The reality is that as a whole the EU is not doing too bad in terms of energy security. The problem is the vulnerability of CEE/SEE.

2. Gazprom keeps holding its dominant position in countries that are late in applying EU gas directives, that are vulnerable to corruption. It is clear that the EU Commission has a role to play in all this an in particular in watching how gas supply contracts are negotiated. Gazprom will do all it can to spoil energy market integration, but it is mainly to the member states, with the support of the EU Commission to create competitive market conditions and not give in to pressure. Where markets function better, as in the West, Gazprom has less direct sway over gas market trends, and adapts to situations.

Aleksandra Gawlikowska-FykHead of Energy Project, Polish Institute of International Affairs

1. Paradoxically it might be the most interesting novelty in the whole six-point plan. But it all depends on details. If this is embedded in the current market structure and arrangements, for example, we can imagine that such agency buys not all gas consumed in the EU but rather let’s say – strategic portion (reserves) and then sells it on the energy exchange, than it may be beneficial. No matter what the final proposal is, it will face obstacles, as many companies find it beneficial to cooperate with Gazprom as usually.

2. Prime Minister Donald Tusk refers to Russia’s monopolistic position, which allows Gazprom to retain the division of gas markets in Europe and benefit from insufficient diversification. Among others – when the market is split, Gazprom is capable of introducing price discrimination. Hence Russia is criticizing and slowing down the EU attempts to limit Gazprom anticompetitive behavior, for instance regarding third energy package and competition law. Regarding the energy union, Russia will oppose any measures to amend or renegotiate existing gas contracts.

Agata Loskot-StrachotaEnergy Policy Research Fellow, Centre for Eastern Studies 

1. I am pretty convinced that better coordination & unification of EU energy policy would be a key asset in EU energy relations with Russia (as well as with any other partner). Single, integrated and effective internal energy market would increase security of supply especially in CEE region. And we are in the process of integration and unification but it lasts long and faces many challanges, which we in CEE also observe quite well. At the same time most in EU admit that when it comes to gas trade EU and Russia remain codependant with EU being biggest market and source of revenues form Russian gas sales. And it seems also evident that common EU gas policy towards Russia would be the most effective one in case of both any short term crisis (as present Ukrainian one) or longer term challanges. I am not sure what institutionalisation of this coordinated, common EU gas policy is feasible presently – in current market conditions & taking into account all obstacles, different actors & interests & policy targets. I am pretty convinced though that an energy crisis might be a trigger for enhanced cooperation and/or creation of new policy directions and measures. The example here might be the 70. oil crisises which resulted in creation of strategic oil reserves and IEA and in EU – in increased demand for Russian (then Soviet) gas. In EU, in much smaller scale, 2009 crisis had also resulted in some policy changes (SoS regulation).

2. It seems that building common , effective EU energy policy isn’t in Russian interest, at least presently. Russia has always prefered bilateral energy relations with EU members states, winning ones interests against the others and so preventing both coordination or enhanced solidarity. It will most probably continue this way. One sign of that was letter of president Putin on gas challanges related to Ukrainian gas problems – it was addressed to 18 European leaders but not to EU / EC. We may observe it as well in the case of South Stream gas pipeline project where Russia is continuing bilateral relations with specific member states despite EC’s reservations.

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