EU and energy dependency: what can change

EU and energy dependency: what can change

Valerio Zanovello | Fellow at Atlantic Council
The development of the energy sector in Europe depends on several factors, in particular, relations with gas exporters and infrastructure growth to facilitate connections. With certain assumptions the future scenario could radically evolve

One of the major critical points of the European energy market is its dependence on imports. Analyzing the Eurostat data, it is possible to notice that in 2014 the energy dependency rate amounts to 62.4% for the EU-28 zone. This indicator becomes even more significant if the South European countries, such as Italy, Spain and Greece, are analyzed where the rate settles between 71% and 77% up to 97% in Malta. Focusing attention on the natural gas market, the Eurostat data shows that in 2014 the rate of natural gas production amounted to 15.2% of total energy production, a significant decrease compared to previous years. In fact, analyzing the ten-year trend (from 2004 to 2014) a decline in production by 42.9% can be observed.  During this ten year period, the only positive trend is the one regarding renewable energy which, thanks to abundant mid/long term investments, has made Europe the best area for sustainable development in the entire world. However, the problem of energy dependency becomes more relevant when gas importations come from few players. Through analyzing more Eurostat data, it is possible to notice that the three major countries which export gas to Europe are Russia, with 37.5% of the total amount, Norway, with 31.6% and Algeria, with 12.3%.

Relations with exporting countries

Currently, the relationship between European Union and Norway is excellent and the country is perfectly integrated in the EU system. This is possible thanks to several agreements signed in years past, such as the SEE, which allows Norway to participate in the common European market without being a member of the European Union, and the Schengen Agreement, which set rules aimed at encouraging the free movement of citizens within the 26 member states. Regarding Algeria, in 2002 an Association Agreement was signed with the aim of promoting trade and expansion of harmonious economic and social relations between the parties and establish conditions for the gradual liberalization of trade in goods, services and capital. In 2012 Algeria and the EU launched consultations on an Action Plan that will set out anticipated actions and priorities over a five-year timeframe. It will serve to support co-operation and further exploit the potential of the Association Agreement. In addition to this, the EU strongly supports the process of the accession of Algeria to the WTO. Instead, the relationship between the EU and Russia is fickle. In the past, the link between the two countries has always been tense, especially after the crisis in Ukraine, in which the EU decided to take serious legal actions against Russia. Nevertheless, the relationship between the EU and Russia is advantageous for both parties, since the European community strongly depends on Russian gas while Russia sees the EU market as one of the best main outlets for his economy. Even so, international relations are generally stable and commercial trades are consolidated, the EU countries have always negotiated from a disadvantageous position compared the counterparty, since in case of interruption of the flow of gas, the European nations do not have any other options.

The importance of infrastructure to develop the EU energy sector

To overcome this problem and to create a more competitive energy market, the European Commission has drawn up a list of 195 key energy infrastructure projects, known as Projects of Common Interest (PCI). PCIs may benefit from accelerated planning and permit approval; it would designate a single national authority for obtaining permits, improve regulatory conditions, lower administrative costs, increase public participation and raise visibility to investors and access to financial support. To become a PCI, a project must have a significant impact on the energy markets and market integration of at least two EU countries, boost competition in energy markets and boost the EU’s energy security by diversifying sources. Of particular importance to the problem of energy dependence is the construction of five differnt pipelines. The first one is TAP, Trans Atlantic Pipeline; it aims to facilitate exploitation of the Shah Deniz’s field in Azerbaijan and it will cross Albany, Greece and Italy, for a total length of 878 km and a capacity of 10 BCm/y by 2019. The second project is the one regarding GASLI (Gas Pipeline Connecting Algeria to Italy). GASLI is a pipeline project between Algeria and Italy; the project can be divided into three sections: an offshore pipeline section between Algeria and South Sardinia (length 288 km, capacity 258 GWh/d, with a compression station in Algeria), an onshore pipeline between South Sardinia and North Sardinia (length 285 km, capcity 258 GWh/d), and an offshore pipeline between South Sardinia and Tuscany (length 288 km, capacity 258 GWh/d). The third investment is the one that connects Malta to the European gas network. The project is made up of two phases: the first phase is a gas pipeline interconnection between Gela to Malta including terminal stations with an approx. length of 155 km and an annual capacity of 2 BCm/y and daily capacity of 49 GWh/day. Following the completion of the first phase, a second phase can be planned allowing for bi-directional flow of gas through the pipeline interconnection by installing a floating LNG storage and re-Gasification Unit located approximately 12 Km offshore. This project has the longest term; the realization of the first phase is planned by 2026 and the second one by 2031. The fourth project is the reverse flow interconnection between Italy and Switzerland at Passo Gries. It will be finished in 2018 and points towards Germany and France via Switzerland with new onshore pipelines of approximately 80 Km and with a daily capacity of 421 GWh/day as overall reserve flow capacity increment. The Power of the compressor station is 95 MW. The last related implementation is the gas pipeline from Greece to Italy, currently known as ''Poseidon Pipeline''. The pipeline will connect the Italian and Greek gas networks, from the compressor station in Thespratia (EL) to the receiving terminal in Otranto (IT), crossing the Ionian Sea. With a capacity of 329 GWh/D, it will be finished by 2020.

Future perspectives

Thanks to these developments, the future environment could change radically. By receiving gas supplies from various sources, especially from the Middle-East and North Africa, it could destabilize the bargaining power of Algeria and Russia, changing the international balances. Furthermore, the creation of new infrastructure will bring new social and environmental investments, as well as a general improvement and a revival of the countries affected by the projects. The European Union countries that will benefit the most in from these particular investments will be Albania, Greece and Italy. Regarding Albany, actually, it will be possible to create a national energy market that permits greater integration with other European countries. Whereas in Greece, all forms of investment will not be funded by the Greek government, but will be financed completely through external funds; this means the implementation will only bring benefits to the public sector. Italy will be the country that will experience the largest return on investment; it will became the heart of the European energy market, since it is planned that around 10 billion cubic meters per year will enter in the national borders and then will be distributed throughout Europe. Furthermore, the European Union in recent years is implementing additional projects in the renewable energy sector. From 2004 to 2014, the renewable energy sector in Europe has grown by 73.1%; moreover, the European Union has implemented a target that by 2020, 27% of total energy consumption must come from renewable resources.  The implementation of new gas pipelines and infrastructure, combined with productivity growth in clean energy, will change the energy market of the coming years; it will be a more green-friendly and competitive environment. As bargaining power is evened between the parties, the general level of welfare will improve.