European Commission: Open and Connected Gas Market

In his talk at the European Gas Conference in Vienna, Austria, Philip Lowe, Director-General for Energy, European Commission, said because energy sources of power and heat were relatively limited by single sources of supply in Europe, there had been an ongoing goal to create an ongoing, competitive, interconnected, integrated market for energy, particularly in natural gas.

He recalled the natural gas crises in 2006 and 2009, but said the Continent had made investments in interconnection and reverse flow, but also in the regulation that secured supplies. Lowe noted the "substantial network" of natural gas delivery in Europe, commenting that suppliers could be proud of that.

"An open and connected market in Europe is naturally setting the conditions for opening up suppliers to provide the most competitive sources of energy, and the conditions which are really secure," he said. "And it opens up the possibility for new entrants to come in without fear of being repressed by incumbents."

The creation of a true dynamic of competition across Europe, however, he said was still something that remained a goal to be achieved.

Lowe explained: "We have not finished the job, we got call from our prime ministers and heads of state in 2011 to try to get the main elements of regulation and infrastructure in place, so that by the end of 2014 this has become more or less a reality.

He reported that the EC was playing close attention to situations in the Baltics and Southeastern Europe, where there were several national economies that were 90-100% dependent on one source of fossil fuel.

"That is something that has characterized and been a recurring theme of European energy policy and still is a major theme in the light of global developments, which favor the competitive situation of other economies rather than European ones."

Since 2008-09, he said that all 27 EU member states had said climate change needed to be taken seriously. "We took it seriously by setting up targets to diversify sources of supply towards low carbon technologies.

"Nuclear can play a role in that, but I don't have to tell you that public acceptability on the source of energy is a major dimension to energy-mix decisions, which, at a national level, are basically the constraints put on market decisions by public acceptance. That's true of onshore wind in the UK, true of nuclear in Austria, or in Germany.

There were even constraints on new technologies like carbon capture and storage, which some contended could be the secret towards transformation to a low carbon economy.

"Sorry, the public doesn't accept it. There is not a single demonstration CCS project of any scale going on in Europe today," Mr. Lowe stated.

On the one hand, Europe saw an ongoing need to be open and competitive; on the other hand, there was the concern that it should re intervene into markets to promote low carbon generation. "That is definitely a serious challenge for Europe, which, perhaps in 2008 was easier to adopt in a period of strong economic activity, where the climate change objective dominated and the competitiveness and security of supply objectives looked slightly of second order," he recalled.

Now it was key, he said, that Europe have competitive and affordable energy on a secure basis to see whether it could stick to its strategy of moving towards a low carbon economy.

He continued, "Technology enables things to happen, like shale gas has done in the States, but in the end markets determine the situation, so it should be no surprise to find, short term, coal driving the electricity price in Europe given the effects on price of the shale revolution in the US and diversion of coal towards Europe. Does that mean we should blink and say our objectives for a low carbon economy were wrong?" he queried.

He noted that the consensus on climate change was even greater now than it was in 2008, but that there were strong concerns that Europe needed a consolidated strategy which profiled how it could remain competitive in energy markets.

According to Mr. Lowe, it was necessary to to build up the 2020 targets and look forward to the next decade which would provide a clear direction for policy, taking into account both competitiveness and climate change objectives.

Many things had been achieved concerning infrastructure in Europe, he said.

"We have got a market which is functioning, where reverse flow is increasingly the norm. We need to develop more infrastructure connections north and south quite clearly, and in southeastern Europe. We need to build on the progress made to diversify sources of supply, and we should be aware of the opportunities which have already been exploited through the role LNG plays in the market," he said, adding that LNG accounted for around 20% of gas imports and questioned whether US LNG could have an effect upon Europe. Oil indexation, he noted, had fallen to about 50% last year, and because of the sustained demand for gas in Asia it was unlikely to result in a huge change for Europe, perhaps just more flexibility on the part of pipeline suppliers.

Mr. Lowe said he loved discussing the riddle within the natural gas industry: "Are we a transition fuel, destination fuel or a 'default' fuel?"

"Are we a default fuel because virtually every nuclear decision takes long time to get off ground. CCS is encountering difficulty in going forward, coal looks very good in the short term, but what about framework of environmental regulations surrounding it? Yes, there are one or two coal-fired power stations being built, but do they make the difference?"

According to Mr. Lowe, there were question marks after every one of those solutions.

"What fills the gap with those question marks?" he asked, suggesting the 'Golden Age" for gas.

He showed gross inland consumption, that natural gas demand was sustained until 2030 but dropped beyond that according to the modeling of present public policy. Lowe commented: "If Europe does stick to low carbon economy targets and we do nothing, this is what will happen."

In terms of global gas demand, he noted that everywhere else natural gas demand would increase significantly.

"According to the IEA, gas is replacing coal in the mix in the US, but there's another factor: fuel efficiency standards in Europe have been progressively adopted in the States, making for substantial contribution to CO2 reduction in addition to the substitution of gas for oil," he added.

Mr. Lowe stated the need for flexibility on price and contractual terms as well as long term natural gas contracts, but for part of the market to be liquid, if gas were to be necessary in the short and medium term.

He commented, "The fate of gas depends on its price." Still, he conceded the sometimes rather restrictive conditions, like take or pay contracts.

Innovation, he said, would be key, emphasizing the alternative uses of gas.

"Yes, maybe in the short term for power generation coal has got the edge but we can expect globally that that temporary situation will return to increasing use of gas. The effective functioning of the market for gas or any energy seems to be even more important to maintain competitiveness and security of supply for Europe.

"It will help also to attract and consolidate the position of new entrants, which is vital. And innovation seems to be a big word which we need to to put at the center of what we do in Europe, rather than look at the situation from a defensive point of view."

He reported that in a month's time the EC would produce a paper, which he hoped would provide a re direction of the energy strategies of national governments and Europe as a whole.