Many of the existing “Projects of Common Interest” in the gas sector struggle to make economic sense and might end up as stranded assets. This waste of public resources must stop, writes Danila Bochkarev.
Danila Bochkarev is a senior fellow at the EastWest Institute. The opinions expressed in this article solely reflect the views of the author, not of his organisation.
On 23 November 2016, the European Commission released a communication on strengthening Europe’s energy networks focused on the network interconnections. According to the EC, an “interconnected European grid will help deliver the ultimate goals of the Energy Union to ensure affordable, secure and sustainable energy to all Europeans”.
Private investment and the EU financial aid has already helped to improve the interconnectivity between the gas sectors of ‘old’ and ‘new’ member states, increase the confidence in the market mechanisms and reduce the price divergence between the West and the East.
Many countries previously dependent on the single supplier of supply have currently access to alternative sources of energy. For example, Poland can now obtain more than 90% of its gas imports from non-Russian sources. The Commission Communication also stressed the fact that the gas grid has become “more resilient and nearly all member states… already have access to two sources of gas.”
The improved interconnectivity has also led to price alignment between the West and the East of the Union. For example, in the first half of 2014, the gap between the average wholesale price between the Dutch hub TTF (€21.58/MWh), the most liquid hub on the European Continent, and the Czech Republic (€27.81/MWh) was still quite significant – over €6/MWh.
In the third quarter of 2017, wholesale prices at the TTF (€16.14/MWh) and the Czech Republic (€16.16/MWh) converged. In 2016, Poland’s wholesale gas prices fell by 31% compared to 2014, to €15.4/MWh – compared to an EU average of €15.0/MWh, while Polish household gas prices fell by 13.4% from 2013 to 2016, faster than the EU average (10.0% decrease).
These advances in the interconnectivity and price alignment led to a creation of a ‘single gas space’ in Europe with the market forces already working for the benefit of consumers. In the gas market, “market rules are more or less working, we have a functioning gas market,” confirmed Klaus-Dieter Borchardt, a director at European Commission, in an interview released on 22 January 2018 by the Florence School of Regulation.
The creation of the single market would not have been possible without the regulatory framework and a financial aid from the European Union. The EU policy on energy interconnections is implemented via the Regulation on trans-European energy networks (TEN-E).
The projects of common interests (PCIs) – key infrastructure projects, linking the energy systems of EU countries and contributing to the EU climate and energy policy objectives – are financially supported through the Connecting Europe Facility (CEF) mechanism.
According to its mid-term results report, released in September 2017, the CEF has already allocated more than €1.6 billion for the energy infrastructure projects, with additional 3.1 billion euro to spend. Brussels has been particularly generous with financial assistance in the Central and Eastern Europe (CEE).
The CEE countries are the largest recipients of the energy-related funding from the Connecting Europe Facility – top three countries are Poland (€271.7 million), Romania (€180.8 million) and Estonia (€166.4 million).
Since a significant part of the infrastructure projects is paid with the taxpayers’ money, the question of efficiency, economic utility and the social net present value (NPV) should be considered as well.
In its’ second annual report on the progress of PCIs in electricity and gas published in July 2016, the European Agency for the Cooperation of Energy Regulators (ACER) noted significant delays in implementing the PCIs and “unrealistically high” infrastructure cost.
ACER’s PCI report published in July 2017 recognised some positive developments while pointing out significant delays in implementing these infrastructure projects. Furthermore, the assessment of the benefits of the gas PCIs “faced serious difficulties and the Agency lacked comprehensive monetized benefits data reported for gas projects”.
The current list of gas sector PCIs contains 53 projects, spread out over 24 EU and 7 non-EU countries, clustered into several priority interconnection projects (such as the Baltic Energy Market Interconnection Plan, the Southern Gas Corridor, etc.)
The original list was significantly longer, and analysis of the projects missing from the 2017 PCI list says a lot about the state of infrastructure development in the EU.
First, the good news: 22 gas projects from the first and second lists “will have been completed by early 2018” (EC Q&A on the PCIs in energy and the electricity interconnection target) and thus taken of the list (PCI 8.8 “Upgrade of entry points Lwowek and Wloclawek of Yamal–Europe pipeline in Poland”), other PCIs were dropped in favor of projects fulfilling the same function (for example, PCI 6.20.1.
Construction of new storage facility on the territory of Bulgaria, replaced by the PCI 6.20.2 extension of an existing Chiren gas storage). Some projects disappeared from the list with a discernible or publicly stated reason, likely the commercial interest disappeared as the growth in demand in many EU market did not expand as much as developers had hoped for 10 years ago.
The fact that the reasons for changes in the list sometimes come as a surprise to observers and trigger political discussions – for instance, at the European Parliament’s ITRE Committee meeting on 23 January 2018 – point to the fact that a transparent mechanism to compare and assess the economics of different projects is yet to be established.
An issue paper “Projects of Common Interest and gas producers pricing strategy” prepared by Hungary’s Regional Centre for Energy Policy Research (REKK), the German Institute for Economic Research (DIW Berlin) and the Norwegian University of Science and Technology (NTNU) as a part of the SET-Nav – a policy and research project co-funded by the EU Horizon 2020 program – assessed PCIs against the EU’s decarbonisation goals and produced cost-benefit analysis.
The studied showed that many projects – such as Poland-Slovakia interconnector, Stork II pipeline between the Czech Republic and Poland, Romania-Bulgaria interconnector show a negative social NPV both on the national and EU level even with the CEF funding.
Some projects – like the Krk LNG terminal – are profitable with the CEF assistance but struggle to prove their financial viability as a purely commercial project. Basically, many of the existing PCIs struggle to make economic sense, may see only low utilisation and might end up as stranded assets.
The issue of PCIs was at the heart of discussion at the ITRE Committee of the European Parliament on 23 January. In that context, both supporters and opponents of the natural gas cannot really disagree with Xabier Ziluaga (MEP, European United Left/Nordic Green Left).
Ziluaga mentioned that “there are no guarantees that the gas projects don’t end up costing more than originally proposed. These are additional costs which are passed on to energy and electricity tariffs for our companies, for our citizens … it could exacerbate energy poverty too.”
Promotion of an energy infrastructure should be therefore based on careful assessment of its economic underpinning and the positive effect it might bring. Financing an infrastructure project according to (often volatile) political consideration just to please some national egos is a waste of public resources and simply does not make sense.