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02/12/2016

Barriers to infrastructure investment blocking Energy Union

Europe's East

Barriers to infrastructure investment blocking Energy Union

EIB President Werner Hoyer said it was urgent to tackle barriers to investment.

[Committee of the Regions / Tim De Backer/ Flickr]

Energy Union, the flagship initiative to wean the EU off its dependence on Russian gas, faces regulatory, financial and political obstacles that can delay or prevent funding for vital infrastructure, the EU Task Force on Investment has warned.

The Force is jointly led by the European Commission and the European Investment Bank (EIB) and includes representatives of all EU member states. It was set up at the request of national finance ministers, who were given the Force’s report at their meeting in Brussels today (9 December).

The report identified about 2,000 projects across the EU, worth €1.3 trillion of potential investments, from a list submitted by member states. They include infrastructure in transport, the digital economy, environment and social infrastructure, as well as energy.

€500 billion worth of projects could be started over the next three years, many in public-private partnerships, the EU Task Force said. Public funding would come from sources, including from the newly-created European Fund for Strategic Investments (EFSI).

The EFSI, managed by the EIB, is a €21 billion fund of risk guarantees designed to attract private investment back to the EU and kick start its becalmed economy.  The European Commission has said that the guarantees will draw a 15 fold increase in private capital, raising a total of €315 billion.

Energy Union                                                    

Energy security has been a priority of policymakers since a 2009 gas dispute between Russia and the Ukraine disrupted supplies to the Union.  During 2014, the continuing crisis in the Ukraine threatened EU gas supplies again, until a 30 October deal between Russian and the Ukraine secured winter supplies.

National regulation, budget constraints, consumer unwillingness to pay increased prices, or accept certain infrastructure projects, and a lack of finance, could prevent investment in infrastructure such as interconnections and grids, the report said.

Better interconnections throughout the EU, and allowing countries to trade energy with each other more easily, are vital to bolster the EU’s resilience to Russia using gas as a political weapon.

National network companies have traditionally only been given weak incentives to overcome the complications of different regulatory regimes in other EU countries, the report said.

According to the report, nearly €119 billion is needed to implement all 248 energy transmission Projects of Common Interest (PCI) needed by 2020.

PCIs are energy infrastructure projects that benefit from faster procedures and improved regulatory treatment. To qualify, they must benefit at least two member states, help market integration, boost competition and energy security, and reduce CO2 emissions.

72 PCIs, costing €50 billion, are “mature”, and will be implemented until the end of 2017. Twenty of these mature projects have been identified as urgent to ensure the EU’s security of supply, the report said.

Despite the PCIs being agreed by member states, “some areas remain isolated” from the European energy market.

Urgent measures are needed to hit the minimum target of 10% of electricity interconnections, agreed as part of the EU’s 2030 Climate and Energy package in October, and to implement the PCIs.

EU leaders detailed several areas, including the Iberian Peninsula and the Baltic regions, as “energy islands” that needed special attention.

“In principle, it is the market which is expected to deliver the bulk of this energy infrastructure investment […] in practice a range of barriers may delay, or even prevent investment in this sector,” the report said.  It also pushed up the cost of finance.

Renewables

Diversifying the EU’s energy supply is also an important component of the Energy Union. Member states and the private sector are expected to invest €48 billion annually to meet 2020 renewable targets.

The perceived high risk of some projects also deters private investors, especially because mature renewables have not been effectively integrated into the wider internal electricity market and public support schemes for renewables in countries such as Spain have been withdrawn.

Government budget constraints, and a lack of consumer appetite to shoulder price increases, have also stymied renewables investment. Many utility companies are contracting their balance sheets, and there is a lack of long-term finance for larger and smaller developers of renewables, the report said.

There is also not a long track record of investment by institutional investors such as pension funds in renewable infrastructure in the EU.

Public opposition to projects can delay or prevent projects or raise cost, for example by insisting power cables be buried instead of using cheaper overhead lines, the report said.

Read>>EU dependent on Russian gas for ‘foreseeable future’, warns IEA

Solutions

Many of the problems facing energy infrastructure are mirrored across other sectors.

Priority had to be given to removing those barriers through better regulation, the Task Force said. Member states also needed to continue reforms to improve the business climate to stimulate investment.

The Force called for a “transparent pipeline of investment projects”. Based on a UK initiative, the pipeline would address the lack of credible information about such initiatives, which is a “major barrier”” to investment.

EU governments should also commit to developing long-term investment plans, which could be published online. To complement this, the EU should set up a service to advise project promoters, investors, and public authorities.  

The Force said pipeline would restore investor confidence, and encourage private sector investment to complement nation and EU funding, including from the newly created European Fund for Strategic Investments (EFSI).

Officials stressed that Jean-Claude Juncker’s investment plan would not be the only source of public capital. The EIB, EU, and member states have separate sources as well, they said.

Private investors will ultimately choose what projects they want to back, most likely in public-private partnerships, from a “dynamic” list, which will regularly be updated.  None of the projects on the list have been chosen for funding or are entitled to preferential treatment, officials said.

Commission Vice-President Jyrki Katainen, responsible for investment, said, “There has been a severe disconnect between the available investment and credible projects on the ground. We are now taking a big step to restore investor confidence.”

The report will be presented to EU leaders at the European Council on 18 December. 

Positions

Bankwatch’s Markus Trilling said, “Scary is the first word that came to my mind as I looked at the list of projects proposed by the various member states to be financed from Juncker’s billions. There is a huge amount of coal being proposed by the various countries, including Poland, Croatia and Romania, and this is in full contradiction not only to EU goals but also to Juncker’s rhetoric on sustainability.”

 

Background

Russia’s gas export monopoly Gazprom sells its gas to EU clients under secretive bilateral deals. An illustration on how Gazprom uses the price of gas as a political weapon was provided in the context of the unfolding Ukraine crisis.

Ukraine was paying Gazprom a price of $400 per thousand cubic metres (tcm)under an agreement signed under former Prime Minister Yulia Tymoshenko, back in 2009.

Moscow dropped the price to $268.50 after then-President Viktor Yanukovich turned his back on a trade and association agreement with the European Union last year, but reinstated the original price after he was ousted in February.

The EU Energy Union is part of the political response to the threat to EU gas supplies.  The majority of Russian gas imports to the EU, about 30% of its annual needs, goes through Ukraine. In 2009, Russia turned off the taps, causing shortages in the EU.

Timeline

  • 18 December: European Council meeting

Further Reading