From national silos to an integrated market, Europe’s gas network has come a long way writes Alex Barnes.
Alex Barnes is Government Relations Advisor at Nord Stream 2 AG.
Ten years ago, when I was working for BG Group, it was incredibly hard to export North Sea gas to continental Europe. The problem wasn’t the connection to the continent – it was shipping gas to customers once you got there. Plenty of physical capacity existed but if you weren’t an incumbent, accessing it was all but impossible. Gas trading in continental Europe was non-existent in most countries. A European Commission enquiry had highlighted the many failings of gas competition in Europe.
Since then the picture has changed beyond recognition, thanks to the Third Energy Package. European gas consumers have never had as much choice or security of supply as they have now. Access to pipeline capacity is no longer a problem. EU rules ensure that capacity is allocated via open access auctions. Where capacity is booked but not being used, it is made available to the market so that nobody can block access to competitors. Gas flows are ensured on a non-discriminatory basis.
As a result, competition on the EU’s gas market has taken off. Analysis by ACER, the EU energy regulator, shows that there is growing price convergence across Europe. Today, a power station in France and a factory in the Czech Republic pay the same wholesale market price for gas. Suppliers have to ensure that their prices are competitive with traded hub prices if they want to sell their gas. Otherwise they risk losing sales.
Diversity and fair competition are key to keep the gas flowing at all times
European buyers now have a greater ability to choose gas from multiple sources. The EU is now such a large and liquid gas market that it is seen as an attractive destination for liquefied natural gas (LNG) cargoes, which follow the money to get the best price. If European consumers are willing to pay the same price as other regions for LNG, cargoes come to Europe.
This dynamic exerts competitive pressure on pipeline suppliers, to the benefit of European consumers. Existing and planned LNG import capacity is sufficient to meet more than half of Europe’s gas demand. Europe is fortunate that, unlike many other import dependent regions, it has the choice between pipeline supplies or LNG. It can play one off against the other, provided the regulatory framework maintains a fair and level playing field.
Security of supply has also improved dramatically. Since 2010 EU law requires all Member States to have enough capacity to cope with disruption to their single biggest source of supply, and that all pipelines between Member States need to be capable to send gas in both directions. To help Member States meet these requirements, the EU has provided support to new interconnectors between countries.
This means EU countries are now in a much better position to cope with disruption of supplies than in the past, as confirmed by analysis by ENTSOG, which represents EU pipeline companies. Competing suppliers find it easier than ever before to access European markets, which in turn puts pressure on incumbent suppliers. Ukraine, for example, has bought most of its gas imports from EU wholesale markets since 2015/2016. This would have been unthinkable ten years ago. It illustrates how gas markets have evolved.
Market share no longer important
This evolution means that market share is no longer an adequate proxy to determine vulnerability. Because consumers now have the opportunity to switch easily between different suppliers they are not exposed even if they buy significant quantities of gas from one supplier. Let me demonstrate this with the following example: Even if 100% of my breakfasts include a cup of coffee made with beans from Nicaragua, nobody would argue I am dependent on the producer of that coffee – because I could easily switch to a different brand of coffee. It is entirely up to me. The point here is not to argue that natural gas is just as easily replaceable as coffee, it is not. But in both cases, the consumption volumes do not matter because alternative, competing options are available and accessible.
Because today we have a functioning internal gas market, thanks to the Third Energy Package, it is misleading to say that any Member State is unduly dependent on any external supplier because it imports most of its gas from them. This is true for all Member States, including those in Central Eastern Europe. It is also true for Germany, which is unique in Europe in that it is both a major consumer of gas in its own right but also a major transit country for Norwegian and Russian gas to other countries.
Germany is in the superb position to choose between Russian or Norwegian pipeline gas or LNG, thanks to good pipeline connections to terminals in neighbouring countries. Another example is Poland, which has made giant leaps in that regard and has been buying gas from Western wholesale markets for a while.
Achieving a functioning internal gas market was hard work – let us not endanger it needlessly
The European gas market has changed substantially. A clear understanding of this market evolution, however, is often lacking as the debate about the significance and impact of Nord Stream 2 has demonstrated numerous times.
The rush by some policymakers to amend the Gas Directive – to extend internal gas market rules to import pipelines that lie outside the internal market – is all too often driven by an outdated view of the gas market or outright political motivation. A proper impact assessment and stakeholder consultation, as stipulated in the EU’s own Better Regulation standards, would have undoubtedly made clear there is no need for such a proposal and that it conflicts with other international laws. It is therefore no wonder that an overwhelming majority of Europe’s energy industries publicly criticised the Gas Directive amendment, which needlessly endangers all the success we have seen over the past decade.
It has been one year since President Juncker announced the proposed amendment without any prior stakeholder consultation. Considering the continued and well justified opposition in the Council and the energy industry it may be time now to go back to the drawing board once more.