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European Institute of Romania Debate: Energy security of the EU. Romania's participation in the Energy Union
The European Institute of Romania (EIR) organized on 15 February 2017 a debate on Energy security of the EU. Romania's participation in the Energy Union.
The debate was occasioned by the presentation of the research results of the study The energy diplomacy of the European Union and the potential of developing new infrastructure projects. Romania`s participation in the Energy Union, conducted within the project Strategy and Policy Studies (SPOS) 2016, coordinated by the EIR.
The event was attended by representatives of the Romanian Government, members of the research team, experts in European affairs, economy, energy policy and security, environment, and representatives of academic and research institutions, media etc.
There is a summary of this study:
The EU is currently facing two important challenges in the energy sector: to respond adequately to the perils of climate change and to ensure security of supply for all European customers. The latter is the core of the Energy Union and it is the most important driver, since 2014 across the EU, for new infrastructure development projects in the energy sector.
Among Member States, the most active ones in pushing for the acceleration of the energy market integration and the successful creation of the Energy Union are the countries in Central and Eastern Europe, namely the countries that have been the most affected by the implications of the consecutive gas crises of 2006, 2009 and the 2014 Crimea crisis. In particular, Lithuania has pushed for the development of a regional gas market for the Baltic states and Finland: in this pursuit, it has achieved total independence from the Russian monopoly in both gas and electricity, and contributed essentially to other countries' energy security, diversifying energy routes and sources. Moreover, the country acted as a regional champion, accelerating the investments and the market development in the neigbouring countries and it also seeks to build a regional gas exchange that will be completely functional by 2020, when the whole region should be fully interconnected physically through infrastructure. Unlike countries that insist on their own energy policies as a sovereignty prerogative, Lithuania has proved that it can have it all, by simply making the best use of EU's opportunities: credibility and visibility in the EU, energy security, solidarity with its neighbours, and European funds. Lithuania is given as an example of European leadership and solidarity in the recent energy crisis. Romania, in its own right, can achieve the same. It will need, however, the same instruments that Lithuania used: political will and courage; human resources with commitment and skills in negotiations at regional and EU level, and preparation of projects, but also in research; commitment to pursue a consistent energy policy over several electoral cycles.
The European Union, in return, needs support from the Member States and from their political leadership to face the current crisis, after BREXIT and the rise of nationalist parties which emerged in the Western Europe Member States. The development of the Energy Union requires a gradual shift in power from organizations and institutions that work now at a national level (national transport operators for gas and electricity, national energy regulators, national energy ministries and parliaments that devise national energy policies) to a pan-European vision. This is very difficult to achieve. The current energy policy of the European Union, apart from the successful Baltic example, is a continuous compromise between the narrow national interests and a truly European market for energy. Such compromises between national and European interests, as well as those between interests of various national stakeholders, are not always possible. Even worse, they often lead to lots of inefficiencies: for investments in energy production or energy-intensive industries vs energy-efficient consumers; for support of household consumers vs market liberalization; for the proliferation of emission-free renewable energy vs protection of incumbent fossil-fuelled energy production industry and so on. The worst part is that various national policies that support different stakeholders through subsidies and other forms of state aid, are often going against European competition principles, distorting prices and their informative role, which further hinders the development of infrastructure and efficient capacities of producing energy. In a few words, there is a conflict between "more or less Europe" in the energy policy just as there is in any other EU policy; we strongly argue that the most successful model is that of promoting the national priorities inside the EU and contributing to the development of the Energy Union.
At the same time, the European Union is facing unprecedented challenges in the energy sector and it is now critical to act with a single voice. Latest developments include: an ever-changing international landscape of gas and oil extraction, with the recent drop in oil prices and with the United States planning to export liquefied natural gas (LNG); the preparation of actual measures to implement the climate change commitments decided upon in Paris last year, which include both EU-wide commitments and engagements at national level; the limited competition in the new Member States concerning gas sources and routes and the Crimea crisis. New technological developments and research for renewable sources of energy, electricity storage capacities, electric vehicles, new generation nuclear reactors need a proper, competitive, transparent, predictable legal and regulatory framework, as well as funds from private and public sources which need to be coordinated at European level for optimal use.
To respond to such challenges, administrative interventions in the energy policies need to be limited to a minimum in the Member States, coordinated at European level through directives and regulations, and implemented and monitored at national levels through a coordinated regulatory approach. Investments in infrastructure need a proper prioritization at European level as well, since several projects proposed by national institutions are competing or suboptimal: this is particularly true for gas interconnectors and pipelines which are competing for the same quantities of gas. While regional initiatives such as CESEC have been set up to ensure such coordination for the development of interconnectors, pipelines and gas storage capacities in the most vulnerable part of Europe, there is a need for pan-European thinking of the energy policy, as the Western countries would also have to contribute financially for the energy security of the East.
We therefore propose accelerating a trend that is already visible in the past two decades in the European energy sector: a specialization of energy regulators; a gradual shift of powers from the national energy regulators to a European regulator; and, possibly, in the future, a "merger" of national gas transmission operators and electricity transmission operators in pan-European companies with the national governments as shareholders. It is also critical to limit distortions at the national level such as administrative interventions or state aid for the protection of various stakeholders’ interests. This can be done by setting up a broad legal and regulatory framework only at EU level. National regulators and transmission operators might have narrow national interests such as to create artificial energy border crossing bottlenecks in order to collect higher tariffs; or special facilities for domestic energy consumers in the detriment of energy exports in case of an energy crisis in a neighbouring countries. Hence, the need for a European policy to ensure solidarity and energy access for all European citizens and companies in times of distress, becomes more salient in present times.
As a further matter, a large part of the European energy policy and a common approach to the energy supplies coming from outside the EU does not necessarily need a collective, centralized control of import contracts, which would also be quite incompatible with the principles of a commercial, competitive EU-wide energy market. The most viable approach and the trend in the European energy policy is to ensure interconnections and liquid markets, which in theory would render the EU equal bargaining power with large companies from outside, such as Gazprom. We will explain in the study why an interconnected market with fully competitive contracting powers would, in effect, act as a single buyer with strong bargaining power, because a large supplier such as Gazprom would not be able to discriminate among consumers and markets. The only areas in which strong intervention is needed from the EU institutions are: financing of large infrastructure such as pipelines in the Southern Corridor or interconnectors or gas storage facilities, which have public service benefits of energy security justifying public funding; transfer of broad regulatory powers to a European regulator, to ensure harmonization not only for cross-border energy transactions, but in a single market with no borders; setting up pan-European transport operators; and ensuring local regulators monitor local operations of the markets. This would mainly follow the same approach as in the European monetary policy of the Eurozone, with the roles of the ECB and national banks.
Considering that neighbouring countries which are not members of the EU are however critical for routes and sources of energy, such as the Balkans, Ukraine, Moldova, the EU must also help the integration of energy markets and policies across the Energy Community as part of the Energy Union. In this respect, Romania can also take on a leadership role, by helping interconnect Moldova with the European gas and electricity markets. This is essential on several levels. Firstly, it would ensure a market for Romanian energy producers (renewable electricity generators in Dobrogea, gas from the Black Sea). Secondly, it would significantly enhance the energy security and the national security of Moldova, which is completely dependent, as a consequence of the Russian abuse of power in the energy sector and monopoly, being also influenced by the corruption networks. The energy deals are the only ones financing to support the Trans-Dniester separatist regime, as this region is designed to be a no man's land where various schemes are developed to breach EU's sanctions and embargos on Russia (according to media investigations1). The solution to all these major issues is the full implementation of the European rules for the energy market, namely the Third Energy Package, for which Moldova would however need external support from international partners, such as EU, IMF, World Bank and Romania.
In this overall landscape of the Energy Union, Romania has several lines of action and its interests are strongly aligned with those of the European Union. First, Romania can benefit greatly, as it has done since 2012, from fully implementing the Third Energy Package, market liberalization, improved governance of the energy sector. The new energy law (123/2012), the increased independence of the energy regulator, and the price convergence for electricity and gas to real market levels have improved energy efficiency and allocation of resources and reduced the corruption in the energy sector (notably, the "smart guys" in electricity and "cheap gas companies" in the gas sector).
Second, Romania can become a regional player and gain significant financial resources from using the opportunities of a transit country for major gas networks. The Romanian gas transmission operator Transgaz has successfully obtained funding from the European Commission for a first step in developing the pipeline Bulgaria-Romania-Hungary-Austria (BRUA) that would ensure the transit of gas from the future Southern Corridor to Central Europe. The next phases of infrastructure reinforcements would ensure a better management of the domestic transport system, pressures comparable with the neighbouring country which would allow exports of gas and the access of gas from the Black Sea to the central European hubs (Baumgarten).
Third, Romania can also contribute substantially to the energy security of Ukraine and the Republic of Moldova. Other projects with good prospects to obtain grants include interconnections with Moldova and Ukraine, which would allow increasing the energy security of both countries and better functioning energy markets in the Eastern members of the Energy Community. Transgaz and the electricity transport operator Transelectrica are also considering investing in the infrastructure development in Moldova as shareholders in independent transport operators, as long as there is institutional support and proper market development to ensure the return of investments. Such infrastructure investments would be also in the benefit of energy producers in Romania, particularly renewables in Dobrogea region, nuclear power and gas, all of which are currently facing a demand crisis following the changing patterns of energy consumption in Romania.
It is encouraging that Romania has already achieved support for its energy interconnection projects (negotiations for BRUA within CESEC, interconnectors with Moldova and Ukraine) and this is due to the efforts of Romania's energy diplomacy in Brussels.
In order to achieve the best results from its membership and contributions to the Energy Union, Romania must prepare a vision for its energy sector: this should not include ambitious plans to preserve generation capacities or support investments in new electricity generation, but ensure proper market development, a stable legal and regulatory framework for investors and fair, level play rules for all market participants. The Government should properly define what it wants to achieve as a public service: full employment in the coal sector? energy security? a regional leadership role? cheap energy for the Romanian households? competitiveness of the Romanian energy-intensive sectors through cheap energy supply? reduction of emissions? energy efficiency? These goals, all of which can be equally legitimate, are not always fully compatible with each other and there are obvious trade-offs. The best way to clarify this is to achieve a consensus on these goals with the stakeholders after a proper estimation of the costs and benefits of each alternative and by examining previous commitments (Kyoto protocol, EU climate change commitments, Third Energy Package etc.).
We suggest following the Lithuanian example which shows that a country can pursue its own clear interests, and become highly credible and visible in the EU, having also a regional leadership role and obtain EU financing, all by supporting and advancing the goals of the Energy Union. The trade-offs included liberalizing the energy market as per the EU rules (Third Energy Package), which might mean higher energy prices in moments of demand exceeding supply, but also alternatives for the consumers and investments in the energy market. As explained in the report, Lithuania seems to do better than the other Baltic states on its energy security, alternatives of supply and development of a regional gas market particularly because it has liberalized its energy market sooner than its other neighbours. Also, liberalized energy markets and higher or volatile energy prices can be an issue for the survival of energy-intensive industries. In the case of Romania, this has already been noticed with the reduction of the fertilizer industry following gas market liberalization, but this has also contributed significantly to Romania's gas import independence. After the closure of the largest fertilizer companies, Romania now is largely self-sufficient on gas and can withstand a supply shock caused by any disruptions of gas transit from Russia.
Romania is currently in a uniquely advantageous position to finalize its reforms in the energy sector. The economic crisis of 2008-2009 has helped restructure the energy-intensive industry faster and the economic recovery was based on higher value-added industries and services. Romania can import energy or rely on domestic suppliers, and would be able to provide its neighbours with energy in case of disruptions of gas supplies from the East. Investors have rapidly decided to develop new projects in Romania when the legal and regulatory framework seemed favourable and stable, and when Romania abandoned its plans to administratively intervene in the market (e.g. by creating one or two inefficient "energy champions" which would have excessively concentrated the market). The power exchange OPCOM is well functioning, is one of the most liquid in the region, and is also connected to Central Europe. The gas market lags behind, but valuable experiences from the development of the electricity market and institutions from a decade ago are slowly being replicated today in the development of regulations for the gas market. The gas infrastructure is obsolete and needs serious investments, but the depleted gas deposits are one of the most valuable assets for the regional gas market as they can be converted into gas storage facilities (neither Moldova nor Bulgaria has any gas storage deposits). The energy regulator ANRE, after several years of reduced capacity in 2006-2011, is slowly gaining more political independence and professional competencies. All these should be viewed also as prerequisites to enhance Romania's regional visibility in the energy sector, considering that some neighbouring countries (from the EU and from the Energy Community) are actually worse off in market conditions, fuel mixes, competition and institutions.
Romania must now focus on the remaining prerequisites in order to play a stronger role. These include, first, a real professionalization of key institutions, such as ministries (Energy, Economy); ANRE regulator; state owned companies such as transport operators Transelectrica and Transgaz, power companies Hidroelectrica, Nuclearelectrica etc, gas producer Romgaz. The main skills that should be strongly developed are negotiation skills, economics, project preparation for EU financing, but also research capacities, engineering skills, competencies comparable with peers from developed countries. Romanian decision-makers must always be prepared to react to developments: for example, the recent discussion on the approval of the Turkish Stream project should be understood not only as a risk for EU's energy security (as it enhances the dependence on Russian gas), but also a possible direct financial loss to Romania in terms of lost transit fees for the Russian gas that is currently transited through Ukraine, Republic of Moldova, Romania and Bulgaria.
Secondly, Romania should support the integration of the energy market more, including higher powers for a future energy regulator (currently ACER) and the Europeanization of the transport grids of electricity and gas. Since Romania is already considering to invest through Transgaz and Transelectrica in the infrastructure development in Moldova, it is better prepared than other Member States to diversify ownership of the national transport grids and "merge" them into companies with pan-European ownership. Though not very intuitive, by supporting a stronger role of European institutions (and weaker responsibilities and powers of national regulators and transport operators) could be in the direct benefit of Romania. Thus, if infrastructure investments are properly prioritized for EU financial support in a manner that would not depend so much on individual lobbying capacities of each Member State, the networks in Romania could attract more European financing, as Romania is in a better "physical" position for export and energy transit in the region than other countries. The idea of developing European transport operators and a regulator with a pan-European vision, if intelligently supported by the Romanian negotiators, might actually turn out to work best for Romania's own "national" interest.