[NGW Magazine] Security of Supply, IGAs and Energy Union

This article is featured in NGW Magazine Volume 2, Issue 11

By Ana Stanic, E&A Law, London

Muddled thinking? The dividing line between European Commission law and aspirations has become blurred.

In April, a key piece of EU legislation concerning gas was revised: the decision on intergovernmental agreements (IGA decision). The end of the month also saw the Council and European Parliament reach an agreement on the amendment to another key piece of EU legislation concerning gas: the Security of Gas Supply Regulation (“Revised SOS Regulation”). Over the same period the discussions regarding Nord Stream 2 have intensified.

A lot of the discussion, especially amongst EU politicians, in respect of the above legislation and Nord Stream 2 centred on the concept of the Energy Union. Confusingly, many involved in the discussion seem to believe that Energy Union is a legal concept and a legal measuring rod for assessing projects, agreements and domestic laws and plans. So for example, gas infrastructure projects such as Nord Stream 2 are said to be “incompatible with the Energy Union”. 

But what does it mean for a project to be “incompatible with the Energy Union”? Such language may be taken to suggest that there are legal rules that define the Energy Union, but it is not even a legal concept. And furthermore, a project cannot be prevented from going ahead on the grounds that it is “incompatible with the Energy Union”. 

Nor can an agreement or a law or a national plan be legally assessed by reference to Energy Union objectives or principles. At present, it is merely a set of political objectives. In fact, there is not yet a consensus even about what the Energy Union means in political terms. 

A misunderstanding over the concept of the Energy Union held up the adoption of the amendments to the IGA Decision. In its comments on the EC’s proposal to amend the IGA Decision the European Parliament sought to have agreements between an EU states and third countries which concern oil and gas subject to assessment by the EC as to their compatibility with the “Union’s energy security objectives” and “Energy Union objectives” before they could be concluded. 

Given that the reference to “Energy Union” is not to a legal term or concept, it is encouraging from a legal perspective that Recital 9 of the amended IGA Decision makes absolutely clear that “the relevant Union energy policy objectives, solidarity between member states and Union policy positions adopted in Council or European Council conclusions…should not form part of the legal assessment undertaken by the EC of IGAs before they are concluded”.   

Accordingly Article 5 of the revised IGA Decision provides that an IGA between a member state and a third country concerning oil and gas can only be signed after the EC has assessed whether it is compatible with EU law. Up until now such IGAs were subject to such an assessment by the EC only after they were concluded.

The decision not to include the references to the Energy Union in the IGA Decision as requested by the parliament, is therefore a very positive development since it reinforces legal certainty and clarity. And legal certainty and clarity are key to ensuring investment in new energy infrastructure in the EU. 

We are now in the third round for listings of Projects of Common Interest. The next list will be drawn up by November of this year. Given low gas prices and the expected arrival of cheap LNG from the US, the stability, certainty and clarity of the EU regulatory framework is vital for the realisation of new gas infrastructure projects, be it for the construction of LNG terminals, inter-connectors or ambitious deep sea pipelines such as the East Med pipeline. 

Lack of clarity and certainty as to the nature and scope of the solidarity obligations imposed on states under the Revised SOS Regulation held up its adoption. The three key new provisions of the Revised SOS Regulation are: First, member states have to help their neighbours to ensure gas supply to households, essential services – other than educational and public administration – and district heating installations that deliver heat to households or essential services of its neighbour by prioritising the supply to such customers over the supply of consumers in its own jurisdiction that are not protected customers. 

Importantly, the final version of the Revised SOS Regulation clarifies that this obligation is one of last resort; spells out the methodology for calculating fair compensation for such supply; provides that the payment for compensation shall be prompt; and ensures that supply to certain critical gas-fired power plants in the state(s) that provide the solidarity can continue if the lack of such supply would result in severe damages in the functioning of the electricity system or would hamper the production or transportation of gas. 

Second, states are grouped in four risk groups at the regional level and are required to develop within these risk groups a common approach to security of gas supply by 1 September 2018 and thereafter every four years.  

Third, gas companies are required to notify to the EC contracts which last for more than one year and which individually or cumulatively with contracts with the same supplier or its affiliates represent at least 28% of a state’s gas demand. This provision represents a significant victory for parliament since initially the EC proposed a 40% threshold for this reporting obligation. 

Importantly, the EC’s proposal to extend the solidarity obligation of a state to cover countries signatories to the Energy Community Treaty (including Ukraine and Georgia) was rejected by the Council after the Legal Service confirmed that it was incompatible with the provisions of the Lisbon Treaty. The final version of the Regulation makes clear that the EC cannot assess action and other plans by reference to the Energy Union or its objectives. 

The attention of the gas sector will now turn to the Winter Package. Although this legislation concerns electricity the potential impact on gas is significant not least because it sets out the templates for national energy and climate change plans, contains references to the Energy Union, proposes to alter the decision making mechanism for the pan-EU energy regulation co-ordinator Acer; and seeks to introduce regional bodies which are not envisaged under the Lisbon Treaty. Moreover the EC as announced that it intends to mirror certain elements of the Electricity Market Design proposals in the package of proposals it plans to rollout to amend the Third Energy Package as it relates to the gas sector in spring next year. 

Ana Stanic, E&A Law, London