Energy Union Requires “Big Picture” Approach
Mr. Jean-Arnold Vinois, currently Energy Union Adviser to the Jacques Delors Institute and Honorary Director of the European Commission, says one of the main lesson he drew from working 25 years in the European Commission is that when dealing with a lot of detailed aspects of a policy, you may sometimes lose sight of the big picture. And today this picture is changing very quickly. In the field of energy, changes are occurring at a very fast pace such as the way energy is produced and may be used, strong technological changes including disruptive technologies and the appearance of new actors, as well as the fast increasing awareness of climate change and of the need to change our way of life. One of the key new actor is the consumer, “and that is the result of the creation of a market where the consumer is able to choose among different energy suppliers. This is, I believe, a very new situation that opens up many new possibilities.”
First of all, he says, the consumer may sometimes become a producer of electricity for himself but also for others while all consumers will likely have soon the ability to use energy in a more efficient way. This represents a major potential to save energy and to reduce the need for new power generation facilities. The size of this potential is not assessed yet.
“Now we see the meeting of different sectors,” explains Mr. Vinois, “like energy and information technologies (IT). IT will probably be more active than the energy sector to offer different solutions to the consumers. It is a major challenge for the utilities and that is an interesting evolution that should be encouraged by regulators, as it offers huge opportunities for energy savings, through the introduction and use of new technologies in the energy system. This system is in need of more intelligence, through the creation of interfaces between all the players in order to ensure the optimal real time matching of supply and demand required in electricity.”
But, there's a bit of a schism. According to him, today what we see is on the one hand over-investment in generation facilities, although generation adequacy is not properly measured, at least at regional and European levels, and on the other hand, a lack of reactivity of the consumer, who does not know when it is the best time to consume, as he does not receive the right signals. And with the new variability in the system introduced by massive injection of wind and solar sources of electricity, there is an imperative obligation, says Mr. Vinois, to ensure cost-effectively the realtime matching of supply and demand. This can only be done with investing in more intelligence into the system, made possible by IT.
“Other things are coming faster than usually anticipated, like storage, which has become a big issue with the variability of renewable sources and whose results should come sooner than later,” he reports, offering business magnate Elon Musk's “famous battery” as an example. At the same time, “Electrification of transport, long seen as a very long term reality, seems to be taking off, and again here you see new players like Google and Apple coming into the car industry with big ambitions”. Major changes will be observed in the big energy landscape, including in power, transport and consumers’ behavior.
“With the growing awareness of the need to limit without delay the greenhouse gas emissions, we have to progress quickly to address all of these issues, by encouraging and facilitating innovation and its deployment” he adds.
With all those changes affecting many sectors, Mr. Vinois believes it's indispensable to adopt an holistic view of energy, rather than getting trapped in a “silo” of one's own interest, as usual in the energy as in other sectors.
“Everybody is logically in our world thinking for himself, only seeing his own interests, and this is particularly the case in the field of energy, where you see powerful lobbies defending nuclear or coal or renewable or oil or gas, etc. without really addressing the real issue which is to deliver energy to consumers, be it feedstock for industry, power for everybody, heating and cooling or mobility in a secure and sustainable way and at affordable costs.”
With the top priority now granted by the Commission to the Energy Union, Natural Gas Europe had the privilege of speaking to Mr. Vinois about a policy paper he recently co-authored with Jacques de Jong and Thomas Pellerin-Carlin entitled “Governing the differences in the European Energy Union”, which looks at the ways in which energy policy is formulated at various levels: European, regional multinational and national. He also offered his insights into other aspects of the European energy sector in light of the European Commission's push for an Energy Union.
Europe, in a way, seems very bipolar in its pursuit of the Energy Union. If we take the situation of say Denmark or Germany, where renewables' implementation is very high, versus Central & Eastern Europe, countries like Hungary, where it seems we're living in the “old fuel” world, how is it possible to bridge these two contrasting scenarios?
That's the difficulty of allowing for national choice of energy mix, as presently written in the Treaty on the Functioning of the European Union. It means that if Poland wants to continue to generate electricity with coal in the name of security of supply, because it is a domestic resource, they have a point. If France wants to continue with nuclear, it is their right as was also the right of Germany to phase out quickly its nuclear reactors.
If you look at the broad picture today, everyone sees that the main priority is clearly energy efficiency, where, for instance, Eastern European countries have really a lot to do to reduce their dependency on coal and gas: their buildings are very often energy inefficient and district heating is often not only costly but also leading to huge losses of heating through the system, while consumers have not any incentive to reduce their consumption. The potential is probably saving energy consumption by 20-30%.
The costs of renewable sources for power generation have been reduced significantly, partly due to their heavy subsidization, leading to economies of scale and improvement of the technologies. The cost of solar panels, for example, has been reduced by something like 80% in the last 5 years. This has made renewables much more affordable for countries which were less wealthy than Germany or Denmark to deploy such technologies, and the market is probably ready to deliver good renewable solutions to these countries which can now afford them, because they are almost at par with other fuels like gas or coal. That's the good news.
It's very important that all these countries are able to establish medium and long term plans which include all these aspects. How will they improve the efficiency of buildings? How will they manage diversification of sources of power to power plants, including centralized and decentralized generation of electricity with solar panels or onshore wind, etc.? I very much hope that we will see such plans to flourish in the next months because we are speaking of important and long term investments which require the confidence of the potential investors to enter into them. The new governance proposed by the Commission to the Member States on 18 November 2015, together with the State of the Energy Union, is going in this direction.
It is also having the big picture in mind that you should consider the gas issue for Eastern European countries where there is often the dominance or the exclusivity of a single supplier, who may be tempted to abuse its market position. That's where the EU has to implement in practice the diversification of sources of energy and supply as well as routes which have also to be fully flexible. The combination of pipelines, LNG terminals and storages has to be intelligent too. The example of Poland here is telling: it has a new LNG terminal, it enjoys reverse flow from Germany on the Yamal pipeline coming from Russia through Belarus, enabling it also to import gas from Norway and Western European countries. Hungary will soon be able to get gas from other sources through new North South routes, linking Poland to Slovakia and then Slovakia to Hungary, an interconnector to be soon commissioned. Ensuring the free flow of gas across the whole Union is the best guarantee for security of supply. A well functioning gas market is essential to achieve.
That's what the Energy Union means also: to enable the diversification of each member state. This is valid for gas where each Member State should be able to rely on three sources of supply, e.g. Russian, Norwegian, LNG and possibly domestic production. Interconnections are key to achieve such diversification and the network development plans should be based on this need of diversification.
In the field of electricity, the same objective of diversification should be pursued between thermal units and renewable as well as nuclear where existing. Combining the strengths of all Member States in order to mitigate their weaknesses should be the key objective of the future market design announced by the Commission. This should also lead to invest in renewable where this source is the most cost effective.
I am optimistic by nature, but also by experience and see that things are moving much faster than one can imagine. This is clearly the case in energy where the last ten years have been very hectic in comparison with the fifty previous years where very little happened, because of the opposition of Member States and their State owned energy monopolies keen to protect their national “markets”.
At present, member states have the ability to decide how they fulfill their emissions targets, for example, as well as what sources of energy they use. Your document suggests there be a bit more monitoring as to what is actually going on in these countries.
According to the treaty, the member states keep their sovereignty – that means exclusive national competence, regarding first, the choice of the energy mix; second, the decision to exploit natural resources; and third, energy taxation. These areas are absolutely key. In other words, you cannot have an effective European policy without knowing what each member state is willing to do, particularly in terms of energy mix
Germany's nuclear phase out in 2011 made this apparent to everyone. It was decided unilaterally by the country according to this principle of free choice of the energy mix, but it created major consequences for many of Germany's neighbours which have been caught by surprise. So I think that the European spirit means that there is a need to discuss openly and in advance legitimate national decisions, which may have serious consequences for others. And the more interdependent the Member States are through interconnections and market coupling and the more concertation is needed.
The first lesson to draw from that experience is the need for each member state to define clearly its energy strategy, not for the next 4 years but in the medium- to long-term. Only eight member states out of 28 have a kind of energy strategy beyond 2020 for themselves, meaning that 20 member states have no real vision and may take any kind of decision at anytime.
Belgium is a case in point, where they decide one day to stop nuclear and another day to prolong it. This is the worst type of approach, because you don't give any kind of signal for investors on what to do. In the end, you find yourself in deep trouble, which is the case of Belgium where we've been talking about risks of blackout for over a year. At least it forced Belgium to establish a detailed load shedding plan which was heavily discussed at political level and which has alerted the whole population about the risks of such lack of strategy.
The Commission has well understood the consequences of the absence of such energy strategy and that's why in its recent paper on the state of the Energy Union, it suggested a new governance in the field of energy, requiring each member state to clearly define its national policies relating to the five dimensions of the Energy Union: decarbonization, internal market, energy efficiency, research and security of supply.
This step should have been taken earlier, but the next step is to ensure the sharing of the national strategies among all the Member States in order to identify the common denominators and what can be done together. That's really been lacking in the last 5 years, with bad consequences upon development of national support schemes for renewables, and national schemes for subsidies to all kinds of generation in the name of strategic reserves, security of supply, etc. A regular peer review of these national strategies under the aegis of the Commission would be useful to ensure the visibility and their relevance in the context of the Energy Union.
Understanding the national policies, their constraints and potential is the precondition of any meaningful cooperation between Member States. That is where regional cooperation is a very useful intermediate step, between the national and the European framework.
The purpose of our paper, released in October, is to show the importance of this regional cooperation, with some examples existing for a while and some just being implemented in 2015. Such cooperation may have first to improve the understanding between neighboring member states but it may also be a kind of laboratory for new, common solutions. Examples may be generation adequacy being assessed at a regional level; joint support schemes for renewables; or deep cooperation between or even common transmission system operators.
There is a huge potential for such cooperation, and maybe the most mature and ambitious is the “Pentalateral Forum”, which is composed of Germany, France and the Benelux countries, with a recent extension to Switzerland and Austria. Another example is also the Baltic Energy Market Interconnection Plan, which has delivered a lot of very good results in electricity and gas in the last 6-7 years, the most visible being to remove the isolation of the three Baltic states. In July 2015, there is a new cooperation, the Central East South Europe Gas Connectivity (CESEC), which is aiming at identifying very quickly the most important infrastructures to develop in the region in order to integrate the gas markets of the countries concerned.
It's a process. I think all this can only be done step-by-step. Europe is about inventing the future, like in migration policy and the euro currency; it's clearly the same for energy, because the member states are used to decide alone while they still consider themselves responsible for security of supply. There is a major discrepancy between such national responsibility and the development of an integrated internal market where the interdependency of the member states is now such that it would be fully justified to create a European framework for security of supply. In other words, you need to move the parameters of security of supply from the national to the European level, because of this interdependency meaning that not any one member state today may be fully master of its own security of supply. And, if Member States persist to ensure their security of supply at national level, independently from the interconnections with their neighbours, it will be a very costly policy for all consumers A 2013 study for the Commission has shown that the lack of integration of the gas and electricity markets costs between 50 and 80 billions Euros per year.
We have reached the point where the players and member states accept doing more together. It is not the moment to go backward.
Each Member State has to take its share of responsibility by doing what is needed and should not just rely on the solidarity of its neighbours. Solidarity does not mean free riding. That is why they must also work together to improve the situation and make the optimal use of resources and infrastructure which are available.
The 3rd Energy Package has put a crimp into plans for building infrastructure by Russia over the past few years and they are continuously faced with having to go back to the drawing board. Given that gas deliveries through Ukraine are allegedly going to stop in 2019, how do you see the balance between the European Commission allowing such a pipeline to be built, but also protecting open markets and diversification of supply?
When we are speaking about infrastructure, one must recognize that it is to be built for a generation, say 25 to 40 years. This infrastructure has to be commercially viable and that can only happen if it is used as much as possible. Stranded assets as well as white elephants should be avoided. The first condition for a new infrastructure is to ensure that it will help satisfy the existing and future demand. Concerning Nord Stream 2, the first question is whether the EU needs this additional pipeline or not.
Looking at the existing import capacity of the EU in terms of gas, at least 700 Billions cubic meters are currently available: 200 Bcm of LNG and about 500 Bcm of pipelines.
The total consumption today is around 420 Bcm/annum, out of which 300 Bcm is imported including 100 from the most reliable supplier, Norway. So if you take into consideration that 300 Bcm of import in the context of the 700 Bcm available you may wonder if you really need additional capacity. Personally, I think it's today more important to work on the full flexibility of the existing network to ensure that the transmission system is well connected to LNG terminals, storage facilities to ensure the flows of gas in all directions within the European Union.
I am aware that the Russian Federation says it want to finish using the Ukrainian Gas Transmission System by 2019. I do not believe that this objective will be met if you consider the long-term contracts that have been concluded between Gazprom and some European customers and the agreed delivery points so that there are a number of legal and technical constraints that don't make it easy to avoid totally the Ukrainian transit.
It's also up to the Ukrainians to understand that they're in competition with other pipelines, existing and future and they must be realistic in terms of transit fees in relation to potential competitors. So it's not the last word and I believe there's still a chance to maintain some transit through Ukraine and to question the need of an additional infrastructure that is not justified by the present and projected demand of gas in the EU.
The prospects for the demand of gas is not about a big increase; it has seen a major decrease in the last 5 years and the demand for gas will not increase tomorrow, at least not for power plants, probably not for heating, nor for industry. The main area for natural gas demand to increase would be an extensive use of LNG for shipping and maybe for heavy road transport, but it remains to be seen.
The question is also whether we need is a big additional infrastructure coming from Russia, especially when you know that NordStream1 is only used for half its capacity today and that TurkStream is also under discussion. The Southern Gas Corridor which should bring Caspian Sea Basin gas has to be completed by 2019, but for the rest we have a lot of LNG and the good news is that the price of gas is becoming more global than it has been before, so that LNG will reach Europe more than in the last 5 years. I am not unaware that Gazprom will do all it can do to eliminate the potential competition from LNG be it from USA or elsewhere by lowering the gas price, as it is doing at the moment, to make LNG uncompetitive. But this gas to gas competition is in any case good news for the consumers. And if Nord Stream 2 has finally to take place, it should be fully compliant with EU rules and it should be subject to an EU-Russia agreement to solve all legal questions including the conflict of between EU and Russian law on the offshore part.
Being retired, how different is your perspective from those trying to create and implement policy right now?
Having the nose in the steering wheel may lead you to miss the bigger issues and to concentrate on the details. Now I enjoy the luxury to watch from a distance and more objectively the evolution of the policies and changes in the society in which we live and to speak very openly with many people. I am thus able to better assess the situation of energy in Europe, having in mind the broader context of the evolution of the economy, the technologies, the society and the whole world. I am convinced that putting energy into a global perspective and adopting a holistic approach to energy is the right way to address the challenges and to prepare the future. Working for a think tank like the Jacques Delors Institute, which is a great privilege, gives me the opportunity to help those who have to define the policy and the regulatory framework. And I am fully aware of the strings attached to their daily job, that I do not envy any more.
-Drew Leifheit