Towards a Single, Competitive Gas Market

Is a single, competitive European gas market achievable? The answer could only be “yes,” even if the target was far off in the distance, according to Klaus-Dieter Borchardt, Director B, DG Energy – European Commission, who enumerated the numerous challenges that prospect was up against at the European Gas Conference 2014.

The first challenge he named was Europe's dependency upon gas imports, something which would increase from 60 to 80% by 2035. He said the continent had three supply sources: Norway, Russia, and Algeria (LNG to a lesser extent because of prices).

Mr. Borchardt stated, “One of our main intentions is to diversify the sources of the supply of gas because of this increase in dependency. So the first step has been taken over the last year with the opening of the Southern Gas Corridor, where we hope that by 2019 we will get a considerable amount of gas coming from the Caspian Sea through TANAP (Trans Anatolian Pipeline) and TAP (Trans Adriatic Pipeline).”

Natural gas, he said, remained a geopolitical issue, offering Ukraine, a transit country, as a case in point. He added that the transmission system required modernization and improvements.

He made mention of LNG developments in the Baltic states, specifically Lithuania, where an LNG terminal was under construction. “As a Project of Common Interest we are looking for Baltic regional LNG, either to be placed in Estonia or Finland, with a Baltic connector.”

Central & Eastern Europe, he said, was very vulnerable in terms of gas supply and very high prices. The US shale gas revolution had also influenced the game.

One challenge offered by Mr. Borchardt was the very tight grip that EU member states had on decisions regarding energy, not only that they reserved the right to decide on their individual energy mix but also showed interest in the workings of the internal energy market.

“This of course has first and foremost to do with security of supply,” he explained, “because for them when we are talking about energy, it is for them first and foremost security of supply, and understandable, at least from politicians' perspective.”

He noted that a number of member states' national gas companies were within the reach of national politics, which made life difficult for the European Commission, resulting in clashes of interest: the internal energy market versus local political interests.

His diagram indicated the number of gas traders at virtual trading points in various European countries – it showed big contrasts, with some countries having over 50 trading points. Increasing such numbers, he said, required a smooth, regional approach.

Mr. Borchardt's next slide, he said, reflected the theory that gas was the “fuel of opportunity.”

“In practice, today, it's suffering,” he said. “I think everyone agrees that gas is the least CO2 emitting fossil fuel and it's a flexible fuel – it has, as such, all the preconditions for being well placed on the market, but what we see is the contrary: gas is pushed more and more out of the merit curve due to low ETS prices and also low coal prices; we see that gas-fired power generation is suffering.”

The latest Commission proposal, he reported, had been adopted along with the 2013 Climate & Energy Policy Framework, in which the Commission had put forward to the European Parliament and the Council a proposal for improving the ETS system.

The first of two measures he described was the creation of a market stability reserve. “If there's a surplus of allowances on the market, this measure allows to take them into the reserve and if there's a shortage of allowances they can be re delivered to the market from the reserve,” he explained, adding that such occurrences would not be triggered by political decisions but by built-in thresholds.

The second measure was the increase of the linear reduction factor from 1.7 to 2.2, a corrective measure linked to greenhouse gas reduction level fixed by the Commission at 40% by 2030.

Mr. Borchardt showed the magic triangle of EU energy policy: internal market/competition, security of supply, sustainability.

“Each objective in and of itself is a challenge,” he said. “For us, a well functioning internal energy market is key for all the three objectives.”

He admitted that completing an internal energy market was not an easy task, but it required special consideration for the natural gas markets: it was a network industry, for one.

He explained: “We still have monopolies of the grids and we have a low number of upstream suppliers. This is a clear contrast when you look to the shale gas structure in the United States – it's exactly the opposite.” Also, there was no global market as there was for oil and coal.

Moreover, he said that gas markets were “not very sexy” during times of economic crisis.

“We think that the market is the most effective tool to get things right at the right price, therefore we believe that because of what Europe has to offer – the biggest import gas market, being a reliable partner and having a clear regulatory framework, although under development, we can offer predictability and even certainty.

“So, we have something to offer and believe we should continue to work on a market-based solution also for the gas sector,” said Mr. Borchardt, who said that functioning markets could contribute effectively to bringing down prices. He offered some examples.

Referring to the 2012 wholesale gas price, he explained that where markets were functioning there was a clear downward trend. Meanwhile, the northwestern Europe hub prices had diverged from contract prices that were high and long-term and causing large losses to many utility portfolios.

Another slide depicted that oil-indexed contacts were going down while gas-to-gas competition was going up. “These developments on the market are properly reflected here.”

To create a functioning internal gas market, Mr. Borchardt said it was necessary to create the conditions: a lot of investment, better rules for cross-border trade and transport, and external suppliers needed to be pushed towards more competition on the European market, and mechanisms needed to be created by which price signals are transmitted efficiently across Europe.

“Price signals are really a key if we want to set the right investment incentives and also get the right prices on the markets,” he added.

“Our vision here is not the vision of creating one single, internal energy market for 28 member states; our vision is more to connect liquid hubs, which does not mean that we are cementing the markets for a number of reasons,” he explained, adding that zones were connected via harmonized operational and market rules. “Wholesalers and retailers shall compete across the different zones and at the end of the day we expect that in this system consumers will benefit from the competitive dynamics that such a model will trigger.

“The high degree of liquidity will also contribute to the security of supply in Europe,” said Mr. Borchardt, who said this required clear and detailed rules, like the network codes which were being implemented; rules were also being devised for trading, he added.

Isolated markets, he said, required interconnectors or LNG terminals to diversify supply. Bi-directional flows could also contribute to ending isolation. Projects of common interest and the availability of direct EU financing – EUR 5.8 billion – was there to spend.