Energy Union for Europe - a policy proposal by Poland

16 June 2014, Vienna

Adam Janczak

Deputy Director of the EU Economic Department Polish Ministry of Foreign Affairs

Russian gas prices in Europe

(USD/tcm) 2012 2013

- prices in 1 st half 2012 - estimates of prices in 2013

Based on unofficial data published by Russian newspaper Izvestia in Feb 2013.

Prices for the Baltic states and CIS countries were not disclosed.

Costs of lack of Energy Union

• Estimated welfare loss for the EU due to gas market inefficiency: 11-18 bln EUR/year [ACER*] 30 bln EUR/year [Booz&Co**] • Per household, split by Member States: • Conclusion: The costs are mostly borne by customers

in CEE region

Source: ACER* *ACER, Annual Report on the Results of Monitoring the Internal Electricity and Natural Gas Markets in 2012, November 2013 **Booz&Co report for DG ENER, Benefits of an Integrated European Energy Market, July 2013

Energy Union for Europe – 6 pillars

1. Priority infrastructure development 2. EU-level solidarity mechanisms 3. Strengthen the bargaining power of Member States and the EU vis-à-vis external suppliers 4. Development of indigenous energy sources in the EU 5. Diversification of energy supply to the EU - gas and oil in particular 6. Reinforcing the Energy Community

Most ambitious: 3rd pillar – EU’s bargaining power

• Increase transparency of gas trade and ensure full compliance of IGA’s and contracts with EU law: – IGA template with restricted clauses and compulsory provisions – Commission’s direct support during IGA negotiations and ex ante verification of agreements – Publishing aggregated contract data through market monitoring and reporting mechanisms (e.g. by ACER) • Demand aggregation mechanisms: – – – dedicated gas purchasing agency voluntary consortia of interested companies obligation to sell gas on regional exchanges / platforms

• • •

Proposals in the European Energy Security Strategy

Common purchasing: „The Commission will assess options for voluntary demand aggregation mechanisms that could increase the bargaining power of European buyers in compliance with EU and trade law legislation” Gas trade transparency: “The Commission and Member states should increase transparency at EU level regarding security of gas supply and explore how price information under existing reporting mechanisms (…) can be further developed”.

Review of IGA Decision: “(…) the possibility to develop standard provisions and to request the Commission’s assistance during negotiations. (…) Member States and relevant companies must inform the Commission as early as possible before concluding intergovernmental agreements having a potential impact on security of energy supplies and diversification options and seek advice from the Commission during negotiations. This requires a review of Decision No 994/2012/EU.”

Common gas purchasing – choosing the optimal design

How?

Top-down

(dedicated gas purchasing agency)

Bottom-up

(voluntary mechanisms)

When?

Permanent Ad hoc

(in case of crisis)

Where?

EU-wide Regional

Common gas purchasing – additional options to consider

• • For voluntary mechanisms: – “Free opt-in” with a „no opt-out” clause, so that the supplier cannot break the alliance with offers of separate deals • For ad hoc mechanisms: – Contracts with a purchase option excercisable in case of crisis For regional mechanisms: – diversification options key for successful joint negotiations (grouping buyers 100% dependent on one supplier won’t bring significant results )

ESA - ideas for the gas market

Euratom Supply Agency (ESA) Gas Market

The co-signature of ESA is required to conclude any supply contract, which helps to avoid contracts likely to jeopardise the security of supply and the smooth functioning of the nuclear common market.

ESA monitors the market by collecting data on prices, quantities and other contractual conditions and publishes aggregated market data reports providing a benchmark for the on-going contracts negotiations. ESA monitors and forecasts possible non-match of demand and supply on the market. In case of a non-match, ESA could take additional actions in order to balance demand and supply, e.g. by sharing the available supplies or by collective purchase (in practice, not experienced to-date). ESA ensures that supply from one external supplier does not exceed a reasonable level of dependence, so as to guarantee supply diversification and proper market functioning.

A body which would be notified of all major contracts and agreements in the gas sector could allow to track and avoid contracts detrimental to competition and security of supply, e.g. through elimination of certain contractual elements.

Data on gas prices in the EU and individual

regions/Member States could be collected and published in an aggregated form to level the information advantage on the side of a dominant gas supplier, without hampering commercial confidentiality of individual agreements/contracts. A body could be established to perform demand and supply forecasting and launch collective purchasing mechanism in crisis situations where demand and supply cannot be matched due to supply disruptions. Concentration thresholds could be introduced for gas markets at national, regional and EU level in order to avoid single supplier dominance.

Other Inspirations

•

BAFA:

BAFA (the German Federal Office of Economics and Export Control) calculates and publishes the average monthly cross-border price of natural gas imported into Germany. The German Border Price is an important benchmark in gas contract negotiations. BAFA also publishes the quantities of imported natural gas broken down by main countries of origin.

•

Caspian Development Corporation (CDC):

The CDC was a concept of a block purchasing agreement proposed by the Commission, designed to bring new gas supplies from the Caspian region. The project acknowledged the potential negative effects of collective purchasing on competition – in order to balance them, various countermeasures were proposed (e.g. gas-release program, “Chinese walls” between shareholders and CDC staff). The possibility of requesting an informal Guidance Letter from the Commission was also considered.

Conclusions

• Increased bargaining power = market transparency and demand aggregation + alternative sources (external, indigenous); • Not all ESA mechanisms have been used in practice due to the well functioning uranium market – this makes them even more justified on the malfunctioning gas market; • Russian-Chinese deal proves that negotiations between equal partners leads to optimization of gas price.

Thank you for your attention

Adam Janczak

Deputy Director of the EU Economic Department Polish Ministry of Foreign Affairs