Documents considered by the Committee on 5 November 2014 - European Scrutiny Committee Contents


6 Resilience of the European gas system to supply disruption in 2014-15

Committee's assessment Politically important
Committee's decisionDocument cleared from scrutiny, but relevant to the debate recommended on European Energy Security Strategy
Document detailsResilience of the European gas system to disruption of supplies in 2014-15
Legal base
DepartmentEnergy and Climate Change
Document numbers(36421), 14414/14 + ADDs 1-6, COM(14) 654

Summary and Committee's conclusions

6.1 A number of earlier Communications and other documents from the Commission have highlighted the need for a sustainable, competitive and secure energy supply, and it has taken the view that the disruption of gas supplies in 2006 and 2009 reinforced the need for a common European energy policy. It therefore put forward in May 2014 a Communication setting out a European Energy Security Strategy, based on eight pillars, the first of which contained measures to overcome major disruption during the 2014-15 winter, and included national "stress tests" to assess the resilience of the European gas system to cooperate with such disruption.

6.2 This approach was endorsed by the European Council on 23 June 2014, and the Commission has accordingly now brought forward this Communication, setting out the results of the analysis it has undertaken, aimed at assessing Member States' resilience to, and ability to cope with, a potential serious disruption of gas supplies this winter in the light of the developing situation in Ukraine and the risk of a disruption in gas supplies from the East. Assuming average winter conditions, it involved simulations, based on (a) the disruption of gas to Europe via the Ukrainian transit route for one-month and six-month periods, and (b) the disruption of all Russian gas flows to Europe, also for one month and six months.

6.3 As such, it provides for the first time a complete picture of the resilience of the European gas sector, and it also examines ways in which the serious impact of disruption might be partially alleviated by specific national and regional measures, particularly in the short term, but also with a view to strengthening EU resilience in the medium and long term. It concludes by listing 17 specific recommendations.

6.4 The Government has welcomed the Communication and its main conclusions, including in particular the emphasis on the use of market measures wherever possible. Although there are a number of areas which it will wish to consider carefully with the Commission as the proposals are developed further, it observes that the specific recommendations are targeted primarily at Member States importing Russian gas, and are unlikely to be problematical for the UK, which has diverse sources.

6.5 Although this Communication deals with a subject of some interest, not least in view of the context within which it has arisen, the approach it advocates is acceptable to the UK, and its practical impact is likely to be felt most keenly in those other Member States which import gas from Russia. For that reason, we are content to clear it, but we regard it as relevant to the debate which we have recommended on the proposed European Energy Security Strategy. However, we also note that we made that recommendation as long ago as 2 July 2014, and we urge the Government to make the necessary arrangements for the debate to be held without further delay.

Full details of the document: Commission Communication on the short term resilience of the European gas system — Preparedness for a possible disruption of supplies from the East during the fall and winter of 2014-15: (36421), 14414/41 + ADDs 1-6, COM(14) 654.

Background

6.6 The need for a sustainable, competitive and secure supply has long been a critical element of EU energy policy, and has been the subject of a number of earlier Communications and other documents from the Commission. However, the Commission took the view that the disruptions of gas supplies which hit some Member States in 2006 and 2009 reinforced the need for a common European energy policy, and for Member States to reduce dependence on a single supplier. It therefore put forward in May 2014 a Communication[29] setting out a European Energy Security Strategy, based on eight pillars containing actions to be taken in the short, medium and longer term. The first of these contained measures to increase capacity to overcome major disruption during the 2014-15 winter, and included national "stress tests" to assess the resilience of the European gas system to cope with such disruption.

The current document

6.7 The stress tests proposal was endorsed by the European Council on 23 June 2014, and the Commission has accordingly now brought forward this Communication, setting out the results of the analysis it has undertaken, aimed at assessing Member States' resilience to, and ability to cope with, a potential serious disruption of gas supplies this winter in the light of the developing situation in Ukraine and the risk of a disruption in gas supplies from the East.

6.8 The exercise was carried out by all Member States as well as the parties to the wider Energy Community Treaty,[30] and, assuming average winter conditions, involved simulations of two main scenarios:

·  disruption of gas to Europe via the Ukrainian transit route for one-month and six-month periods; and

·  disruption of all Russian gas flows to Europe, also for one month and six months.

6.9 As such, it provides for the first time a complete picture of the resilience of the European gas sector, and it also examines ways in which the serious impact of disruption might be partially alleviated by specific national and regional measures, particularly in the short term, but also with a view to strengthening EU resilience in the medium and long term. It concludes by listing 17 specific recommendations (see Annex A).

6.10 In the process, the Commission facilitated two regional focus groups of the most vulnerable EU Member States where the impact of disruptions was likely to be the most serious — the South East region (Bulgaria, Croatia, Greece, Hungary, and Romania) and the Baltic States (Estonia, Latvia, Lithuania and Finland) — as well as a focus group for the Energy Community Treaty partners. Norway was also consulted (as a key supplier), as were Turkey, Switzerland, the International Energy Agency (IEA) for a study on global liquefied natural gas (LNG), the European Network of Transmission System Operators for Gas (ENTSO-G) which modelled the impact of supply disruptions on the EU-wide gas system (including a cold spell sub-scenario for two weeks in February to cover the effect of peak demand on an already strained system), a number of other European industry associations, and the G7[31] group of nations.

6.11 The Communication is accompanied by a number of annexes and staff working documents, which deal respectively with the particular actions which the most vulnerable states (listed above) should take; the findings of the Baltic States and Finland focus group; the findings of the Energy Community partner countries; the responses of the non-EU G7 and other key third country partners; the implementation of Regulation (EU) No. 994/2010 (the 'Security of Gas Supply Regulation'), which was put in place following the 2009 crisis; and the findings of the South-East focus group

6.12 Three key messages underpin the Communication and working documents:

·  It is imperative that the market should be allowed to function as long as possible before intervention, because this will enable price signals to attract new deliveries of gas — and particularly LNG — to, and within, the EU to those countries with the highest need, provided the necessary infrastructure exists. At the same time, the Commission observes that a price increase is not a supply crisis, and nor is it a justification for intervening in the market under the pretext of security of supply.

·  Member States need to work together, and put in place measures to achieve greater co-operation at regional and European level. Also, whilst all Member States presented national measures to address a possible supply disruption in their stress tests, the Commission says that the sequencing of those measures is particularly important, in order to ensure that no neighbouring state suffers disproportionately as a result.

·  All efforts should be made to complete missing infrastructures as quickly as possible, particularly those which could be fully operational during the course of this winter.

6.13 However, the Commission recognises that not all markets are fully functioning, particularly those in the South-east and Baltic areas, and its analysis also shows that the vast majority of stress reports by Member States tended to be nationally, rather than regionally, orientated, with little consideration having been given, except in one or two cases, to how some 'co-operative' solidarity measures and (relative) burden sharing arrangements in one Member State could potentially help alleviate the threat of serious disruption in another. At the same time, the Communication stresses that any such arrangements should not be viewed as a "free-rider" solution, and that it is important for cost allocations between Member States to be agreed in advance of any emergency to compensate a 'donor' Member State.

6.14 The Commission says that vulnerable Member States should take all possible measures to reduce their demand, including putting in place fuel switching arrangements, which would come into play in the event of a serious supply disruption. It also refers to the possibility of LNG augmenting supplies where appropriate, and to gas-electricity fuel exchange arrangements of the kind being considered by Greece and Bulgaria (with Lithuania and Estonia having also made an agreement ensuring supplies to their respective protected consumers).

6.15 However, it points out that the modelling carried out by ENTSO-G suggests that, even after some supply-fuel mix changes, "missing" EU gas volumes as a result of disruption of Russian gas supplies could be of the order of 5-9 billion cubic metres, which, in the absence of co-operation between Member States, could lead to shortfalls of at least 40% (and possibly up to 100%) towards the end of the six-month period in Bulgaria, Romania, Serbia, Macedonia and Bosnia and Herzegovina if transit flows via Ukraine ceased. Similarly, in the event of a total Russian disruption, Lithuania, Estonia and Finland would suffer significantly, as would Hungary and Poland, albeit to a lesser degree. However, if available supplies were to be shared — for example, with open access to storage in Latvia helping out Lithuania and Estonia, and Greece sharing its LNG cargoes to act as a buffer for Bulgaria — the effects of severe disruption could be dampened.

6.16 The Communication also observes that filling storages beyond usual levels (as has happened this year, including in the UK) has enhanced resilience, and suggests that measures to ensure that rates of withdrawal from storage take into account the possibility of an enduring winter period, could be important in managing a crisis. It notes that several Member States have implemented preventive measures to ensure security of supply in the form of supply related storage obligations and strategic storage, whilst one Member State has reduced transmission charge tariffs to make storage more attractive. However, the Commission stresses that activities aimed at facilitating storage should not be at the expense of cross-border access.

6.17 The Communication analyses the point at which Member States envisage the introduction of non-market measures in the event of a prolonged supply disruption. It notes that, in a 'co-operative scenario', the Czech Republic and Germany (which are likely to be affected to a smaller degree in a cold spell), apparently foresee introducing such measures pre-emptively at a very early stage to ensure supply to their protected customers. Greece and Croatia would also move early to non-market measures, whilst Hungary, Bulgaria and Romania foresee using market based measures for as long as possible (essentially in line with obligations in the Security of Gas Supply Regulation). The Communication also shows the point at which non market measures would kick in the defined scenarios for all twenty-eight Member States, with the UK, Portugal, Netherlands, Luxembourg, Ireland, France, Spain and Belgium all being able to withstand a disruption using market measures throughout the six-month period, and Austria, Italy, Denmark and Sweden having to introduce non market measures only in February. However, other Member States envisage kicking in much earlier with non-market measures.

6.18 Finally, the Commission highlights the special responsibility to markets 'downstream' of Member States through whose territory gas flows. In particular, Germany, the Czech Republic, Austria, Slovakia, Hungary and Slovenia have important infrastructure in place which needs to be optimised in order to ensure a functioning market, and to allow gas to flow to markets where shortages could be significant.

The Government's view

6.19 In his Explanatory Memorandum of 29 October 2014, the Secretary of State for Energy and Climate Change (Mr Edward Davey) notes that the European Council on 23 October 2014 welcomed the Communication, and says that the UK welcomes the wider discussions which the Commission has had with other organisations and groups including the European industry associations, the International Energy Agency, G7 and Norway. In particular, it also welcomes the focus on the importance of Member States cooperating and allowing the market to work as long as possible, adding that non-market measures should kick in only if all market measures have been exhausted (whilst recognising that not all Member States' markets are yet fully liberalised and functioning). He adds that, where countries are particularly vulnerable to the impact of serious disruptions from the east, regional solutions should be fully exploited.

6.20 The Minister says that the Government also fully endorses the principle set out in the Security of Gas Supply Regulation, and reflected in the Communication, that measures to ensure security of supply should be clearly defined, transparent, proportionate, non-discriminatory and verifiable; should not unduly distort competition and the effective functioning of the internal market in gas; and should not endanger the security of gas supply of other Member States or of the Union as a whole. He agrees that concerted efforts need to be made, particularly in the most vulnerable states, to make best efforts to drive forward or accelerate those infrastructure projects, due to be completed over this winter, which could make all the difference in the market responding to a severe disruption: and he notes and welcomes the continuing role of the Commission in helping to realise, where appropriate, longer term projects in the most vulnerable regions (including the list of high priority projects of common interest annexed to its European Energy Security Strategy).

6.21 The Minister says that the impact on the UK of the specific short recommendations is unlikely to be problematical, given these are targeted primarily at Member States which import Russian gas,[32] whilst the UK is well supplied with gas with its diverse sources of production, LNG and pipeline connections with Norway, Netherlands and Belgium. He observes that it also has a regional arrangement with Ireland, which for gas sharing in the event of a serious disruption could also impact on the Republic and Northern Ireland.

6.22 However, he notes that three of the recommendations, particularly the reflections in the staff report on the implementation of the Security of Gas Supply Regulation, could potentially have implications for the UK market, and will thus need to be considered carefully with the Commission as it develops its proposals further. These are:

Optimal use of storage

It is suggested that special tariffs/incentives might apply to maximise storage use, with withdrawal being restricted in certain circumstances to ensure that demand is met for protected consumers. The UK market is the most liquid in the EU, and its regulatory regime, including that for storage, is seen as sufficient to attract gas even in the most unlikely of disruption scenarios. Also, there is an argument that the withholding of gas in storage for a period could have the perverse effect of triggering an emergency and/or could be construed as an 'uncooperative' measure, which could have consequences for neighbouring markets, and such measures would seem inappropriate for the UK.

Temporary lowering of Member States supply standards in relation to the Security of Gas Supply Regulation

The UK has a high proportion of protected demand, given the nature of its domestic market, but it will be necessary to continue to keep under review how the market arrangements and safety obligations, which include consideration of the integrity of the gas network in a supply emergency, dovetail with its obligations under the Regulation.

Revisiting reverse flow exemptions for major arterial interconnectors

The UK revisits the exemption on a two-yearly basis, and cost, together with other factors, will be key. If the demand is there, and market participants are willing to support these projects commercially, there are in principle no barriers, but, if the market has demonstrated that there is no such appetite, it is unclear how this might be funded, and others would have to bear the costs if there was no societal benefit to the UK.

6.23 The Minister says that the Government will be considering further all the recommendations, and working closely with other Member States if they result eventually in proposals for legislation. He notes that the Commission also intends, in the medium term, to issue a (non-binding) Recommendation to EU Member States to co-operate with Energy Community Treaty partners on third package requirements and to improve security of supply.

6.24 Finally, he says that, as the Commission develops its thinking on security of supply measures, it will be important to ensure the existing balance of competence between it and Member States is respected, and that any specific proposals are consistent with competition law and the functioning of the internal energy market. The Government will want to focus on helping the Commission to use its existing powers, such as those in the Third Package, the Security of Gas Supply Regulation and other relevant EU legislation, effectively, and in ensuring that these are enforced appropriately.

Previous Committee Reports

None.


29   (36062), 10409/14: see Fifth Report HC 219-v (2014-15), chapter 1 (2 July 2014). Back

30   Albania, Bosnia and Herzegovina, Macedonia, Serbia, Moldova, Montenegro, Ukraine and Kosovo. Back

31   United States, Canada, Japan, France, Germany, Italy, UK. Back

32   Less than 1% of Russian gas is thought to enter the UK market since there are no direct supply routes. Back


 
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