The Polish Prime Minister Donald Tusk proposes to counter the EU’s dependency on Russian gas by forming an “energy union” – a “single European body charged with buying its gas”. According to Energy Post’s editor-in-chief Karel Beckman, this implies that we should fight the Russians by imitating the Russian command-and-control system. Apparently Mr Tusk has not understood what the EU – or EU energy policy – is about.
Politicians tend be great opportunists. Let’s say it goes with the job. But opportunism can be carried too far.
The Ukraine crisis has led to plenty of odd policy recommendations, but the plea by Polish Prime Minister Donald Tusk in the Financial Times (21 April 2014) for a “united” European energy policy takes the cake. If it came from some random Wall Street Journal op-ed writer we could safely ignore it. But this was written by an important EU leader and presumably meant to be taken seriously.
For those who have not read the piece, let’s first hear what Mr Tusk has to say. He writes that “excessive dependence on Russian energy makes Europe weak”, which is “basic economics. A dominant supplier has the power to raise prices and reduce supply.”
The way to “correct this market distortion”, writes Tusk, “is simple. Europe should confront Russia’s monopolistic position with a single European body charged with buying its gas.”
After the EU has established this Super-Monopoly, says Tusk, “Europe should undertake the lengthier task of breaking up the Russian gas monopoly and restoring free market competition.”
How would this work? Tusk proposes that the EU set up a singly agency for the entire EU, an “energy union”, on the analogy of Euratom, which should buy and distribute natural gas for the whole of the EU. This “energy union” would be founded on the five principles.
“First, Europe should develop a mechanism for jointly negotiating energy contracts with Russia. It would be created in stages. Initially, bilateral agreements would be stripped of any secret and market-distorting clauses; then, a template contract would be created for all new gas contracts; finally, the European Commission would be required to take a role in all new negotiations.”
“Second, mechanisms guaranteeing solidarity among member states should be strengthened in case energy supplies are again cut off, as they were in the cold winter of 2009 when Russia’s previous dispute with Ukraine stopped gas flowing to a number of EU nations. Europe must be safe in the knowledge that its gas supply is assured, its storage facilities are sufficient and its gas networks are uninterrupted.”
Who does Mr Tusk suggest would run his “Energy Union”? Mr Oettinger?
“Third, the EU should support the building of adequate energy infrastructure. Today, at least 10 EU member states depend on a single supplier – Gazprom – for more than half of their consumption. Some are wholly dependent on Russia’s state-controlled gas giant. In countries where the security of supply is weakest, storage capacity and gas links should be built with the help of the EU. Such projects should enjoy the highest permitted level of co-financing from Brussels – 75 per cent.”
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Paul Hunt says
Hi, Karel,
Excellent article. I think what it highlights is that Mr. Tusk is just another member of this unholy coalition of ‘stakeholders’ which wants to keep gas prices in the EU much higher that then need be or should be. It includes the renewable energy subsidy junkies, green fantasists, those who benefit politically or economically from the emission-adjusted price of gas being higher than that of competing fuels and technologies and all of the participants in the gas supply chain who capture economic rents. However, some of the big verticallly integrated players who used to profit so handsomely from cosy deals with the external suppliers (generally with the support of their national governments) which are now going sour are beginning to plough their own furrow – e.g., the Magritte Group. Change is coming, but one shouldn’t underestimate the determination of those who benefit from the current arrangements to resist.
There are two key challenges or problems that most be met or resolved. The first is the failing system of energy regulation which has been adopted and adapted from the seriously flawed British model throughout the EU. Regulators should seek to strike a balance between the interests of investors and the collective interests of final consumers. The latter are not represented effectively in the current process and, as a result, the vast majority of EU citizens are being gouged as both consumers and taxpayers. Secondly, there is an urgent requirement for a genuinely competitive market in gas pipeline capacity similar to that which operates in the US. The current system which is based on Entry-Exit and proscribes point-to-point capacity transactions is a paradise for monopolists, profit-gougers and subsidy junkies. It deters investment and restricts trade and competition in gas.
It wouldn’t require structural reforms or new primary legislation to make these changes. The established national regulatory bodies all have the powers to change their internal regulatory processes and Entry-Exit is mandated in a regulation – not by primary legislation.
SirBenfro says
At least two other ways to interpret Tusk’s bombast:
1) It’s not about Russia – it’s about Germany. Poland has not forgiven Germany for keeping Nordstream all to itself. It wants to get revenge by depriving Germany of the ability to deal bilaterally with Russia.
2) It’s about giving his mate Jerzy Buzek a leg-up in his campaign to succeed Oettinger as Energy Commissioner. If he can sell the “European Energy Union”, he can sell Buzek as the man to drive it, since in 2010 (a few weeks before Nordstream opened, coincidentally) Buzek and Jacques Delors launched the very similar sounding “European Energy Community”.
Pali44 says
I think there is a different interpretation also.
Gazprom is selling the Russian gas for very different prices for the different countries. The price is always depend on the Russian government (Gazprom is a governmental company) political intention.
In case of an open discussion about prices (not accepting Gazprom demand for secrecy) is way to avoid high differences (nowadays USD 100/tcbm) between the EU countries.
May be my mind is wrong, the basic cause for established the predecessor of EU (Steel and Coal Unio) was the same cause.
Giacomo says
It sounds to me that Mr. Tusk’s proposal would give the EU the authority to negotiate energy trade agreements with other countries, replacing the existing practice of bilateral deals between member states and third party countries. In other words, it would be a first step towards finally establishing a common European energy policy. If this understanding is correct, I cannot but welcome Mr. Tusk’s proposal, and hope that other states pick up the challenge of improving it.
Michael Knowles CEng says
I totally agree with Paull Hunt’s comments especially – “The first is the failing system of energy regulation which has been adopted and adapted from the seriously flawed British model throughout the EU. Regulators should seek to strike a balance between the interests of investors and the collective interests of final consumers.” The only thing the UK Regulator OFGEM appears capable of trying to do is to make energy users bills a bit easier to understand.. They do not seem to have a grip on the renewables market and indeed by law do not have to report on the Renewables Obligation (RO) in an up to date way. They publish the RO accounts a year in arrears so the subsidies that we are paying are known only for the accounting year 2012/13 and show the RO is costing the consumer nearly £2billion a year for the next 25 years and rising until 2017 when it is phased out in favour of the new Electrricity Market Reform feed in tariffs under contracts for differences that are for 15 years but set higher than RO levels to compensate generators/developers – e.g., Offshore wind emr cfd is £155/MWh reducing to £140/MWh in 2017 compared with the current RO level of about £135/MWh ref (2) IMechE response to DECC consultation on RO banding levels for 2013 to 2017 http://www.imeche.org/docs/default-source/public-affairs/3236-consultation-ro-banding-response-form.doc?sfvrsn=0 19 January 2012