European energy policy: political and economic implications

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At the end of November 2022, the EU-27 member states reached some vital politico-economic decisions on critical energy-related issues. These decisions are not only important for resolving EU-wide current energy crisis; now the states must move forward to implement as swiftly as possible tough decisions, which include also some “market correction mechanisms”. Soon the Council will formally adopt urgently needed biding legislative package.  

At the end of November, Commissioner for Energy K. Simson presented Commission’s new proposal for a so-called “market correction mechanism” to limit excessive gas price spikes at an extraordinary energy council. The EU member states (on behalf of the energy ministers) agreed on two basic emergency measures proposed earlier by the Commission to tackle the ongoing energy crisis: a) on enhancing solidarity through better coordination of gas purchases and exchanges of gas across borders (the Commission proposal from this October), and b) on acceleration of permitting procedures for renewable energy projects (a proposal from this November).

EU energy policy: main directions
The EU’s energy policy is a multi-faced decision-making substance: it covers a broad range of topics, generally, aimed at accelerating and facilitating the transition in the states from fossil fuels towards clean energy technologies; it shall be done in a socially responsible way. For too long the EU policy has been formulated along threefold objectives: achieving more secure, sustainable and affordable energy system in the EU.
Recently, with the European Green Deal, the Commission’s main energy objective was focused on achieving carbon-neutrality by 2050; this longer-term ambition (adopted by the Commission during 2020-21) include some new directions, i.e. offshore renewable energy, renovation wave, energy system integration, as well as hydrogen and methane.
For example new targets for 2030 include: a) to raise the share of renewable energy to 40% of total EU energy consumption (up from 32%). b) improved energy efficiency by 36% (final energy consumption) and reducing primary energy consumption by 39% relative to the 2007 projections of consumption levels, as well as energy efficiency measures (increase by 9 percent up from 32.5%, made in 2020).

However, traditional political directions in the EU energy issues are the following:
= Secure energy supplies. The EU has to become less dependent on imported energy – by making more efficient use of our domestic energy while diversifying sources and supplies.
= Energy efficiency. EU rules on buildings, industry, consumer products and transport are helping the EU to meet its energy-efficiency targets and move to a low-carbon society.
= Nuclear energy. EU action helps ensure nuclear reactors are safe and secure, radioactive waste is well managed and nuclear materials are used only for legitimate purposes.
= Energy technology and innovation. The EU supports deployment of low-carbon technologies such as photovoltaic, wind power, carbon capture and storage (CCS), and energy storage technologies.
= Single energy market. The EU wants fewer technical and regulatory barriers so that energy can flow across national borders and energy providers can compete throughout the EU.
= Renewable energy. The EU coordinates work to reach national targets in line with the renewable energy directive. It also promotes alternative energy use in transport.
= Oil, gas and coal. EU rules aim to keep fossil fuel markets fair and to protect the environment, including when new technologies such as shale gas extraction are being used.
= Energy infrastructure. The Trans-European Networks (TEN-E) strategy focuses on extending and upgrading Europe’s infrastructure and creating networks that cross national borders.

Recent political agreements on crucial energy issues
The EU adopted five political decisions which involve the following issues:
= First, making joint purchases of gas a reality; the EU adopted a process for the member states to allow to pool regional demand through the EU Energy Platform and buy 13.5billion cubic meters of gas together next year; that is in time to re-fill the states’ storage.
= Second, to give ACER the task of developing a new EU LNG benchmark by the end of March next year. The current most popular benchmark, TTF, no longer reflects the situation on the EU gas market and a complementary instrument is needed.
= Third, the EU will develop circuit breakers for intra-day derivatives trading, to avoid excessive volatility and ease liquidity stress for energy utilities.
= Fourth, the general idea is to reinforce the EU energy solidarity; i.e. to make sure that in the event of an emergency the EU member state will not be left alone.
= And fifth, the EU will accelerate the permitting procedures for technologies that can make a difference already for this winter, e.g. installing solar PVs and heat pumps, etc. The EU is also establishing the principle that renewable energy projects are in overriding public interest.

Together with the agreed rules on storage (already in spring-2022) and the demand reduction targets adopted in July, this package of decisions provides a comprehensive response to the challenges on the European gas market. Some positive signs of these measures have already been seen: e.g. with gas prices falling from the summers’ peak to less than half of that price. However, there is one piece still missing – a tool to address price spikes that do not reflect the reality of the market. The Commission proposed the main principles for such a Market Correction Mechanism in mid-October 2022; following the request by a majority of EU member states. Commission’s list of legal proposals also included, e.g. a ceiling on the month-ahead TTF price in case it exceeds €275 per megawatt hour, to be activated when there is a significant difference with global LNG price.
The intention to introduce the “market correction mechanism” is to intervene when the TTF gas price is no longer reflecting the market fundamentals. With this in mind, the Commission introduced the second condition, which is crucial to ensure a continued supply of LNG cargos to replace the lost pipeline volumes of Russian gas.
Designing this “correction proposal” has been a balancing act: on one hand, the states need an effective measure to cap the gas price when it’s necessary. Excessive prices can cause severe hardship both to our citizens and serious damage to EU’s industry and businesses; that has been a clear and fully justified message from many EU states. Ongoing discussion showed that despite different states’ views, finding a broadly supported solution was possible.
On the other hand, the “correction mechanism” comes with risks, a number of EU states have rightly pointed out; it was therefore necessary to install some safeguards to avoid unintended negative consequences.
Important as well as that this “mechanism” can be suspended by the Commission at any moment when security of supply is reached and/or other risks are eliminated; in addition, the level of the ceiling and the duration of the intervention have been set cautiously in order to minimise the risks.

Filling gas storage in 2023
At the end of November, the Commission established intermediate gas storage filling targets that the EU states should meet in 2023 in order to reach the 90% gas storage target by the next November. Foreseen under the Gas Storage Regulation (agreed in June 2022), this “implementing regulation” defines the intermediate targets for the four quarters, i.e. in February, May, July and September 2023 for those member states with underground storage on their territory and connected to their market area. These trajectories are aimed at enabling the member states to fulfill the 90% storage target 1 November 2023.
These targets are based on the proposals made by the EU states in their storage plans, submitted this September, the filling rates of the preceding five years and the Commission’s assessment of the general security of supply situation.
The draft figures were also assessed by the Gas Coordination Group, which acts as an adviser to the Commission, and by the Gas Storage Committee. Subject to a margin of five percentage points, these binding targets are the minimum thresholds that need to be respected by the EU states to ensure a certain level of security of supply and the refilling of storage facilities for the winter 2023-24.
Otherwise, the Commission can take effective measures to avoid security of gas supply problems resulting from unfilled storage facilities.

Resolving controversies
Finally, the EU is planning to introduce a cap on Russian seaborne crude oil from the beginning of this December: it comes against a backdrop of continued disagreements over the precise level at which the cap should be set, as well as wider debates on ensuring energy supply among the EU states. The need to diversify away from Russian fossil fuels has prompted the EU and its member states to pursue major partnerships with the likes of Qatar, the United Arab Emirates, Algeria, Azerbaijan, as well as the US and Norway. It has also led the EU to explore introducing a “price cap” on European wholesale natural gas transactions.
Besides, the European Council on Foreign Relations, ECFR has sought to track the diversification efforts of each EU member state through an ‘Energy Deals Tracker’.
Headline findings from ECFR’s research of the bloc’s shifting energy profiles include:
– Hungary is now the only EU member state to rely on Russian-sourced supply, according to ECFR’s research. However, there are some other member states that face particularly acute troubles in diversifying away from Moscow.
– Europeans are increasingly looking to the Middle East and Africa in their attempts to diversify supply. Partnerships with producers in Qatar, the United Arab Emirates, Algeria, Libya, and Egypt, as well as Angola, the Democratic Republic of the Congo, and Namibia, are evidenced widely within the bloc. On “Energy Deal Tracker” in:
– There is a growing realisation that the EU member states should avoid competing with one another. This realisation has led recently to a political agreement by the EU energy ministers to aggregate the EU-wide demand for the equivalent of 15 percent of the member states’ needs in filling gas storages. Another attempt was to seek, on a voluntary basis, joint purchases of gas; the states also agreed to transparency and information exchange about the new deals that they are making with gas producers and suppliers outside the EU.
– Only around half of the agreements signed by EU countries and institutions this year have an explicit clean energy focus despite an ambition in the EU’s RePowerEU strategy to double-down on clean sources. With ambiguous language emerging from COP27 on the acceptability of “low emissions fuels”, the EU needs to accelerate its commitment to a quicker transition away from gas to reinforce existing global ambition on “clean fuel”.



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