Review of Environment, Energy and Economics - Re3 Building Tomorrow's Europe. The Role of an "EU Energy Union"
 

 

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Nov
13
2014
 
Building Tomorrow's Europe. The Role of an "EU Energy Union"
by Simone Tagliapietra
Energy - Articles
 

Energy has been at the core of the EU integration since its inception. However, following the path of a shooting star, the key role of energy gradually declined over time, to the level of being basically left out from the Treaties, at least up to Lisbon. The EU has struggled to circumnavigate this “energy-gap” of the Treaties by legislating on energy-related issues by making use of its shared competences in the areas of internal market and environment. However, this effort has resulted in a very fragmented EU energy policy, also characterized by the absence of a major element: security of energy supply. After the 2014 Ukraine crisis a new momentum has emerged in the EU about the urgent need of creating a truly European energy policy, with both the new President of the EU Council and the new EU Commission calling for the creation of a EU Energy Union. This paper argues that the EU should seize this historical opportunity to fill the main long-lasting gap of its energy policy: security of energy supply. To this end, the paper proposes a set of new actions that might be undertaken in this field, also outlying that the most feasible option to the development of a new EU Energy Union seems to be the formation -through a scheme of differentiated integration- of a smaller coalition of Member States committed to quickly advance the integration of their energy policies under the principle that only by acting together the EU will be able to meet the growing energy challenges of the future.

Keywords: EU Energy Policy, EU Energy Security, EU Energy Union

JEL classification: Q40, Q42, Q48

Suggested citation: Tagliapietra, Simone, Building Tomorrow's Europe. The Role of an "EU Energy Union" (November 13, 2014). Review of Environment, Energy and Economics (Re3), http://dx.doi.org/10.7711/feemre3.2014.11.002

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Energy: from epicentre to perimeter of the EU construction?
Energy has been placed at the core of the European construction since its very beginning. In fact, with the European Coal and Steel Community (ECSC) created by the Treaty of Paris in 1951 and the European Atomic Energy Agency (Euratom) created by the Treaty of Rome in 1957, Europe’s Founding Fathers had foreseen that energy might have represented a major instrument to build cooperation and solidarity among European states.

The rationale behind the two initiatives was similar: to provide a common policy with a precise set of rules and instruments based on exclusive supranational powers conferred to a central institution: the High Authority in the case of the ECSC and the Supply Agency in the case of Euratom.

These two institutions, together with the European Economic Community (also created by the Treaty of Rome in 1957), have represented the foundations of what later became the European Union (EU) as we know it today.

However, after this initial momentum the role of energy in the European construction gradually weakened. In fact, none of the successive Treaties (e.g. the Single European Act of 1986, the Treaty of Maastricht of 1992, the Treaty of Amsterdam of 1997 and the Treaty of Nice of 2001) provided to the EU the competences necessary to deal with energy issues in a comprehensive and effective way.

Only the Treaty of Maastricht briefly mentioned the issue, by inserting energy at the very end of its list of twenty action areas. [Note 1] A mention that was also extremely feeble and vague.

The Treaty of Lisbon of 2007 has not completely changed this situation. The Treaty recognizes (for the first time) energy as one of the EU’s shared competences and allocates to the issue a dedicated Energy Title (XXI), represented by Article 194 TFUE. [Note 2] However, the Article represents a precarious equilibrium between two drivers: national sovereignty over natural resources and energy mix on the one hand and shared EU competence for the rest on the other hand. 

This Article, as well as the overall historical evolution of energy in the EU Treaties, exemplifies the reluctance of EU Member States to give up to the EU their sovereignty over energy policy. This trend is mainly due to the fact that Member States generally consider energy as an own strategic realm, comparable to the one of foreign policy. Furthermore, another major element seems to prevent Member States from ceding their sovereignty on energy: the divergent interests of Member States themselves due to their different energy mixes and their consequently different security of supply priorities.

In sum, as Andoura, Hancher and Van Der Woude (2010) appropriately outline, «however paradoxical it may appear, energy seems to be the only sector where the Communities, in their almost 60 years of legal development, have been moving from a high degree of integration down to a lower level, never being able to regain the common vision and courage of their founding years». [Note 3]

Filling the Treaties’ energy gap: the EU legislative struggle and its focus on the internal (energy) market
Considering the lack of specific provisions concerning the energy field in the Treaties, the Community struggled to develop a European energy policy by making use of the general provisions of the Treaties themselves. The recourse to these general provisions has allowed the Community to carry out a consistent legislation on energy-related issues, resulted in a consistent body of over five hundreds legislative acts and documents such as Directives, Communications, Decisions, Regulations, Guidelines, Working Documents, Memorandums, Green Papers and White Papers.

This intense activity, although far from being a common policy as the one pursued by the ECSC and Euratom Treaties, has allowed the EU to advance the development of its energy policy, albeit in a very fragmented way. This development has been very slow, particularly because the Community has been forced to progress very cautiously in order to avoid the risk of being accused of lacking legitimacy from Member States.

On the basis of the general provisions of the Treaties, the Community has made use of its shared competences in the areas of internal market and environment to legislate on energy related issues, ultimately imposing its authority in the sector even without any specific competence. This “encirclement strategy” was particularly made possible by the Single European Act of 1986 that, in order to facilitate the achievement of the internal market, increased the number of cases in which the Council could decide by a qualified majority instead of unanimity. [Note 4]

Since the 1990s the Community adopted a series of Directives aimed at liberalizing the European electricity and gas markets, with the final aim to open-up national markets to competition and to create a truly integrated internal European energy market in the framework of the European single market integration process. The underlying idea behind this effort has been that the completion of the internal European energy market would increase competitiveness and improve service quality, guarantee fair prices for consumers, improve interconnection and thus also bolster security of energy supply.

The leap forward of EU energy policy since 2005 and the rising importance of the energy-climate nexus
During the British presidency of the EU in 2005, Prime Minister Tony Blair pushed the European energy policy issue to the top of the EU’s agenda. The European Commission reacted to this political momentum by publishing in March 2006 a Green Paper on developing a common and coherent European energy policy entitled “A European Strategy for Sustainable, Competitive and Secure Energy”. [Note 5]  As the title suggests, the paper delineated a European energy policy structured on three key pillars, which continue to remain fundamental also today.

The Green Paper received the praise of the European Council of March 2006 and the Commission rapidly followed-up by issuing the so-called “Energy and Climate Package”, a set of measures aimed at establishing a new European energy policy focused on specific targets related to greenhouse gas reduction, renewable energies and energy efficiency: the well-known “20-20-20” energy policy targets. [Note 6]

The rapid evolution of the European energy policy since 2005 has been rather unprecedented in comparison with the previous decades. In this short period of time, the EU Member States agreed for the first time on the need for a common action towards the increasingly challenging energy and climate issues. This agreement paved the way for an innovative and ambitious approach to the European energy policy, which ultimately resulted in the adoption of the “20-20-20” energy policy targets and in the adoption of the Third Internal Energy Market Package.

However, the results just mentioned also reflect the long-lasting limits of the European energy policy. In fact, they outline how the European energy policy basically remains focused on the development of the internal energy market, with the only addition of measures adopted in the context of the European climate policy. This is of course due to the fact that, as previously illustrated, on the basis of the Treaties’ energy gap the only way for the Community to legislate on energy related issues has been to make use of its shared competences in the areas of internal market and environment.

Due to the controversial structure of Article 194 TFUE previously illustrated, the Treaty of Lisbon has not substantially altered this picture. In fact, since the introduction of the Treaty the EU has not made any significant additional achievement on energy policy.

The risk of this situation is the advancement of an incomplete European energy policy, focused exclusively on the development of the internal energy market and on the progress towards a low-carbon economy, excluding the third element of the European energy policy’s “sustainability - competitiveness - security” paradigm: security of energy supply.

Security of energy supply: the missing element of the EU energy policy
Security of energy supply has been for a long time a sort of unexplored area at the EU level. Only with the already mentioned Green Paper “A European Strategy for Sustainable, Competitive and Secure Energy” [Note 7]  of 2006 the Commission placed security of energy supply among the three founding pillars of the EU energy policy.

After this first step, the Commission reacted to the Russian-Ukrainian-European gas crises of 2006 and 2009 by delivering the “Second Strategic Energy Review - An EU Energy Security and Solidarity Action Plan” [Note 8]  in 2008 and “The EU Energy Policy: Engaging with Partners beyond Our Borders” [Note 9]  in 2011: two documents outlying an interesting, but unfortunately irrealistic, energy security strategy for Europe.

In 2014 the Commission reacted to the Ukraine crisis by delivering the “European Energy Security Strategy”, [Note 10]  a document that (re)proposes a series of measures, mainly already outlined in 2008 and 2011, to tackle the EU’s security of energy supply challenges.

However, the effectiveness of this legislative activity remains extremely limited. In fact, the theoretic common approach on security of energy supply proposed by the EU continues to collide with the reluctance of Member States of ceding part of their sovereignty to the EU over an issue -energy security- considered as highly strategic for their respective national interests.

In this context, it appears that only a new, strong political momentum could significantly change the situation, boosting the development of a truly European security of energy supply strategy. This is unlikely to occur in a situation of general stability, when a business-as-usual approach tends to characterize the EU (energy, but not only) policy making.

On the contrary, this might well occur in a situation of urgency determined by a sudden change in the external environment, as the perception of external threats might ultimately lead the EU Member States to strengthen their union.

In the case of energy, a situation of emergency has arisen at the EU level in the aftermath of the 2014 Ukraine crisis. In fact, the profound political rift materialized between the EU and the Russian Federation over Ukraine has led to an unprecedented reconsideration of the EU-Russia energy partnership at the EU level. In this new, challenging, situation many European leaders have called for the rapid development of a common EU strategy on security of energy supply. [Note 11]

On the basis of an explicit request of the EU Council, the Commission adopted in May 2014 the already mentioned “European Energy Security Strategy”. [Note 12]  However, this time the reaction of the EU has not been limited to this, rather traditional, outcome. In fact, the new President of the Commission Jean-Claude Juncker announced in early September 2014 his intention to insert in his team a new post for Vice President for Energy Union (in addition to the Commissioner for energy and climate): a move that represents a major upgrading for energy in the EU institutional structure. [Note 13]

This move was favored also by the fact that EU leaders elected Polish Prime Minister Donald Tusk on 30 August, 2014 to be the next President of the EU Council. President Tusk expressed several times during the Ukraine crisis the need for a truly European energy policy, ultimately calling for the establishment of a European energy union. [Note 14]

If this unprecedented high-level political momentum towards a real “Europeanization” of energy policy will be effectively followed-up in the near future, the EU should primarily seize this historical opportunity to fill the major long-lasting gap of its energy policy: security of energy supply.

Such a development would not only be beneficial for the EU energy sector, but also for the overall role of the EU in the neighbourhood and beyond.

Towards a European Energy Union: the need to focus on a security of energy supply strategy
On the basis of the historical trends previously discussed, it is possible to expect a further action of the EU on the development of the internal energy market and on achievement of climate goals, including renewable energy and energy efficiency targets.

However, notwithstanding the vital importance of these issues, the consistency of the new path towards the European Energy Union will be finally measured by the effective achievements on the security of energy supply front (and most notably on gas). Let’s try to figure out which new actions might, eventually, be undertaken in parallel to the ones already proposed by the Commission’s “European Energy Security Strategy” reviews of 2008, 2011 and 2014 to really make the difference in this field.

  1. To adopt a realistic and inclusive approach
    The fundamental prerequisite to any effective European security of energy supply strategy is realism. As far as energy security is concerned, over the last years the EU has sometimes gave the impression of following unfeasible targets, losing credibility among stakeholders both within and beyond its borders.

    The Southern Gas Corridor is an emblematic example of this trend. Since many years the EU has promoted an overly optimistic vision on the opportunity of bringing major volumes of Caspian and Middle Eastern gas to Europe via Turkey. This grandeur paved the way for the failure of the large-scale Nabucco project and, on the consequently, for the rise of a smaller-scale pipeline project, TANAP, substantially far from the initial concept of the Corridor itself. [Note 15]

    A more realistic approach might be sustained by a more inclusive attitude towards key stakeholders both internally and externally. Including private companies and investors in the formulation of a European security of energy supply strategy seems to be a fundamental element to guarantee the effectiveness of the strategy itself.
  2. To develop solid partnerships with strategic third countries
    A new European security of energy supply strategy will be more effective if based on a solid relationship between the EU and the most strategic third countries involved in the game.

    Also in this case the evolution of the Southern Gas Corridor could provide a good example to explain the point. After years of strong cooperation between the EU and Turkey on the Southern Gas Corridor, the failure of Nabucco and the emergence of the TANAP project ultimately outlined a divergence in the way the two players perceived not only the Corridor but also their energy relations. The EU has not made significant efforts to re-launch this partnership, putting at risk the potential future developments of this strategic Corridor. In fact, with the recently discovered gas reserves of the Kurdistan Region of Iraq and Israel, the Corridor could well gain a new momentum. However, after the failure of Nabucco the support of Turkey should not be taken for granted by the EU, as the country might prefer to secure its own energy supply on a bilateral basis with gas producing countries. A solid partnership with Turkey would thus be essential for the European security of gas supply, particularly considering that Turkey is basically the only country through which the EU could diversify its gas supplies via pipeline. [Note 16]  
  3. To effectively promote interconnections between Member States
    Security of energy supply is characterized by two, mutually depended, dimensions: external and internal. As far as the internal dimension is concerned, it is of course important to reduce the dependency on external energy suppliers by promoting energy efficiency, renewable energy and the development of local energy resources. Furthermore, in this field a key element is represented by the development of key interconnections between Member States, in order to allow a physical solidarity within the EU. This action should be particularly applied to electricity and gas infrastructure.

    Just take the example of the European gas market. In addition to the Southern Gas Corridor, the only way for the EU to diversify its gas supply portfolio is represented by new liquefied natural gas (LNG) imports. Today about 60 percent of the EU’ LNG capacity is located on its southern shores, among Spain, France, Italy, Portugal and Greece. [Note 17]  The paradox is that the role of these terminals in the current EU gas security of supply architecture is far below its potential, considering -for instance- the lack of major interconnections between Spain and the rest of Europe, or Italy and the rest of Europe.

    The development of proper interconnections should thus be strongly promoted by the EU. A first step in this direction might be represented by the realization of reverse-flow systems in the current infrastructure.

    For instance, to date along the gas transmission route connecting the UK and Italy, only the UK-Interconnector pipeline and the network in Belgium can currently flow gas in both directions, as the TENP and TransitGas systems in Germany and Switzerland, as well as the Italian network, to date can move physical flows only from North to South only. Applying a reverse-flow system in this infrastructure allowing South to North gas flows would enable Southern suppliers -such as the perspective Southern Gas Corridor suppliers- to compete with Northern suppliers (mainly Russia and Norway) in the wider European gas market in a context of diversification of gas supply portfolios both at the micro (large wholesalers and operators) and macro (countries) levels.
  4. To set-up new financial schemes to support the development of strategic energy infrastructure
    Trans-European energy networks, such as electricity or gas interconnectors, are meant to serve several European countries at one fell swoop and for this reason it is not possible to expect a single country to embark alone in the financing of such kind of projects. This is the reason why an action of the EU in this field is needed not just in terms of coordination and supervision, but most notably in terms of (co-)financing.

    In July 2014 President Junker called for a EUR 300 billion public-private investment programme to revive the European economy, on the basis of existing budget resources, the European Investment Bank and the private sector. [Note 18]  Part of these resources might be used to co-finance strategic energy infrastructure projects within the EU, such as the ones previously mentioned, with the ultimate aim of consolidating the internal dimension of security of energy supply.

    For instance, the EU could make use of part of these financial resources to act as a catalyst in order to attract institutional investors (such as pension funds, insurance companies, mutual funds and sovereign wealth funds) into the financing of European energy infrastructure projects by providing special lending, guarantees and equity investments able to lowering the risk profiles of the projects.

    The launch of a new and solid project bond initiative, designed to enable the issuance by project companies, generally public private partnerships (PPPs), of long-term well-rated bonds instead of relying only on bank lending, might also be considered in this framework.  In fact, the participation of the European Commission and the European Investment Bank might mitigate some of the risk associated with a project bond issued to finance a specific project. Member States, infrastructure managers or companies might therefore be able to access a competitive source of finance and consequently improve the cost of financing such projects. Such an initiative might thus act as a catalyst to re-open the debt capital market, currently largely unexploited for infrastructure investments following the financial crisis, as a significant source of financing in the European energy infrastructure sector. [Note 19]  

Creating the European Energy Union, following the examples of the Economic and Monetary Union and the Banking Union
At this point, the crucial question is: how can the EU promote such actions, considering the limits imposed by the Treaty of Lisbon over the energy mix and the structure of energy supply?

As stated before, it’s basically all about the political willingness of Member States to do so. An ancient English proverb says that If there is a will, there is a way, and this is exactly the case. Of course, due to divergences of interests among Member States in the energy field, it is difficult today to expect a unanimous consensus of all Member States on a new European security of energy supply strategy or, generally speaking, on a truly effective European Energy Union. For this reason the amendment of the Energy Title of the Treaty of Lisbon is an option that cannot be even taken into consideration.

The only way forward seems to be represented by the formation of a smaller coalition of Member States, committed to the principle of giving-up part of their sovereignty in the field of energy to the EU in order to better achieve common goals.

This kind of differentiated integration, permitted by the Treaty of Lisbon, has already been used -albeit in different forms- to create the Economic and Monetary Union, the Fiscal Compact, the Banking Union and other justice and home affairs, and has proved to be a good catalyst for advancing the European integration by allowing some Member States to move forward immediately in a specific field and, at the same time, by ensuring to all other Member States the opportunity to join the initiative in any moment.

Such a differentiated integration can be carried out in various ways, such as enhanced cooperation under the EU Treaty, intergovernmental coordination with or without the use of EU structures, and cooperation outside the EU based on international law. [Note 20]

It is guaranteed that the Brussels bureaucratic machinery would easily find out the best institutional setting for a new European Energy Union. What is really needed now is a team of far-sighted European political leaders, willing to put together their energy (security) policies with the profound conviction that only by acting together the EU will be able to meet the growing energy challenges of the future. 

Notes

[Note 1]  Article 3, Treaty on European Union (TEU), OJ 1992/C 191.
 
[Note 2]  Consolidated versions of the Treaty on European Union (TEU) and the Treaty on the Functioning of the European Union (TFEU), OJ 2008/C 115.

[Note 3]  Sami Andoura, Leigh Hancher and Marc Van Der Woude (2010), Towards a European Energy Community: a Policy Proposal, Notre Europe, Brussels, p. 14.

[Note 4]  Due to this new provision, it was no longer necessary unanimity for the measures aimed at the domestic market, with the exception of the tax provisions and those relating to the free movement of persons.

[Note 5]  A European Strategy for Sustainable, Competitive and Secure Energy, Green Paper of the Commission, COM(2006) 105 final.

[Note 6]  By 2020: reducing by 20% the emissions of greenhouse gases, increasing by 20% the energy efficiency in the EU, reaching 20% of renewable energy sources in total energy consumption in the EU.

[Note 7]  Op. cit., note 5.

[Note 8]  Second Strategic Energy Review - An EU Energy Security and Solidarity Action Plan, Communication from the Commission to the European Parliament and the Council, COM(2008) 781.

[Note 9]  The EU Energy Policy: Engaging with Partners beyond Our Borders, Communication from the Commission to the European Parliament, the Council, the European Economic and Social Committee and the Committee on the Regions, COM(2011) 539 final.

[Note 10]  European Energy Security Strategy, Communication from the Commission to the European Parliament, the Council, the European Economic and Social Committee and the Committee on the Regions, COM(2014) 330 final.

[Note 11]  European Council, Conclusions, EUCO 7/1/14 REV1, 29/21 March 2014.

[Note 12]  Op. cit., note 10.

[Note 13]  EurActiv, The Junker team revealed, September 4, 2014.

[Note 14]  Donald Tusk, A united Europe can end Russia’s energy stronghold, Financial Times, April 21, 2014.

[Note 15]  See: Simone Tagliapietra (2014), Turkey as a Regional Natural Gas Hub: Myth or Reality? An Analysis of the Regional Gas Market Outlook, beyond the Mainstream Rhetoric, Nota di Lavoro 2014.002, Fondazione Eni Enrico Mattei, Milano.

[Note 16]  See: Simone Tagliapietra (2014), The EU-Turkey Energy Relations After the 2014 Ukraine Crisis. Enhancing The Partnership in a Rapidly Changing Environment, Nota di Lavoro 2014.075, Fondazione Eni Enrico Mattei, Milano.

[Note 17]  EU LNG annual nominal capacity by country (as of 2014): Spain 60.3 bcm/year; UK 52.3 bcm/year; France 23.75 bcm/year; Italy 14.7 bcm/year; Netherlands 12 bcm/year; Portugal 7.9 bcm/year; Belgium 9 bcm/year; Greece 5.3 bcm/year. Data source: Gas Infrastructure Europe (GIE).

[Note 18]  EurActiv, EU's Juncker calls for 300 bn euro investment programme, July 15, 2014.

[Note 19]  See: Simone Tagliapietra (2013), Financing the European Energy Infrastructure of the Future. New Horizons Between the Connecting Europe Facility and the Europe 2020 Project Bond Initiative, in Review of International Environment, Energy and Economics, Fondazione Eni Enrico Mattei, September 27, 2013.

[Note 20]  See: Nicolai von Ondarza (2013), Strengthening the Core or Splitting Europe? Prospects and Pitfalls of a Strategy of Differentiated Integration, RP 2, Stiftung Wissenschaft und Politik, Berlin.



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Simone Tagliapietra, Junior researcher, Fondazione Eni Enrico Mattei
   
 
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