EU Energy Policy Blog

In July 2009 the European commission published a proposal for a Regulation on the security of gas supply, due to replace the Directive 2004/67 on the same topic. The proposal has been discussed at the Council under the Swedish Presidency and the negotiation continues under the Spanish Presidency; a political agreement is expected in May 2010.

The objective of this Regulation is clear: that all member states address gas security seriously so that, when the next supply crisis hits, no country within the Union is at risk of significant economic losses, or worse.

The Commission’s goal is legitimate. However, there are some problems in the text, in particular the mechanism through which member states will be required to devise and implement gas security policies.

In the Commission’s proposal there are two largely conflicting approaches to achieving this (even in the latest versions of the text reflecting the negotiation so far):

- The first one consists of defining security of supply “standards” that, once applied by all member states, would guarantee a minimum level of security of supply across the EU.

- The second approach consists of asking member states to perform “risk assessments” of their gas systems, based in part on the supply standards they have to comply with. Those assessments would be part of “preventive action plans” that the Commission would then review.

How those two approaches would interact in practice is unclear. Requiring member states to perform risk assessments while at the same time asking them to comply with security of supply standards seems illogical.

The purpose of mandating gas security assessments is to reveal what degree of security a country enjoys and discover the cost of buying more insurance. On the basis of such an assessment the government can decide on a sensible minimum level of supply security for the country, and how to achieve it.

On the contrary, devising a set of “standards” that all member states should comply with amounts to mandating a uniform minimum level of security; it makes national security assessments redundant.

To make the Regulation simpler, more coherent and easier to negotiate on at the Council a clear choice should be made between these two approaches: top-down (standards) or bottom-up (security assessments).

The negotiation at the Council so far has shown three clear trends:

- The determination of the member states to weaken the standards. Arguably, we are already not far from a version where everybody complies with the standards ex ante.

- The recognition that the risk assessment process and the national action plans are amongst the most valuable features of the Regulation.

- The recognition that there should be more regional co-operation on gas security policy.

The first of these three trends illustrates what the negotiation over the Directive 2004/67 had already shown, namely: that the standards approach, however appealing at first glance, faces serious hurdles in an EU negotiation. Mandating an arbitrary minimum level of security contradicts the member states’ legitimate claim to define how much insurance they should buy and how and when to buy it.

On this background, the second and third trends create an opportunity to make a clear choice in favour of a bottom-up approach based on security assessments, national action plans and regional co-operation.

In my view, the Regulation should set up a bottom-up policy process associating member states, the Commission and independent experts working on a regional basis. My proposal builds upon what is already present in the latest versions of the proposal under the headings “risk assessments” and “regional co-operation”.

The policy process would serve the following purposes:

- Reveal the gas security situation in all member states;

- Increase and share knowledge among member states about gas security policies and measures, including their cost;

- Incentivise national governments to make gas security policy choices that are economically sensible and politically responsible.

To that effect, the Regulation should:

1. Mandate in-depth national gas security assessment reports. The reports should include:

- An evaluation of the level of security enjoyed by the country, that is the ability of each member states’ energy system to meet final contracted energy demand in the face of gas supply disruptions of various severity, length and probability. This supposes a detailed appraisal of the policies in place, on top of an analysis of the risks of supply disruptions.

- An evaluation of the cost of improving gas security through various policy
options.

The Regulation could propose some guiding standards to frame the gas security assessment reports. Referring to ‘one-in-X years’ peak demand periods is clearly sensible. Referring to the loss of the major inflow into the gas system also makes sense. Generally speaking, member states should be advised to evaluate under what circumstances they would have to start interrupting gas customers involuntarily, and how likely those situations are.

2. Create regional gas security groups. The national assessment reports would be carried out in the context of regional gas security groups. It would ensure a degree of methodological consistency in the assessments among countries that have somewhat similar gas supply set-ups and face similar risks (especially reliance on the same transit routes). They would also ensure a level of mutual support and be conducive to increased regional co-operation. Beyond the production of the national assessment reports, the regional groups would act as permanent platforms for member states to share knowledge and learn about gas security and associated issues. Regional groups would receive the support of third-party experts from international organisations, universities and consultancies. The Commission would participate as an observer.

3. Mandate national gas security action plans to be attached to the assessment reports. In the action plans governments would explain whether they are satisfied with the level of security they enjoy and, if not, how they intend to increase security of supply and over what timeframe. The national action plans would include an evaluation of the cost of the proposed measures and how they could be financed. The national action plans may include measures carried out in partnership with other member states and include joint proposals on how to share the cost.

4. Mandate a review of the assessments and action plans, carried out by teams of independent experts under the responsibility of the Commission. Based on these independent reviews the Commission would send written comments and suggestions to the national governments. These could include, where relevant, advice on subsidies or preferential loans that could be requested from European institutions in order to implement a more ambitious gas security policy than the one proposed in the national action plan.

5. Mandate that all the assessment reports, the action plans, the reviewers’ reports and the Commission’s comments and suggestions be made publicly available on the Commission’s and national governments’ websites. This is very important if the governments are to be held responsible for their gas security choices by national politicians and opinion leaders.

6. Mandate a regular update of the assessment reports and review process, for example every five years.

Some fear that such a bottom-up policy process would not be capable of forcing member states, especially those with a serious gas security problem, to address the issue in an ambitious enough manner. This is a real concern indeed. I would make the following three observations though:

- Firstly, there are less than a handful of member states that have serious gas security problems;

- Secondly, there is a great deal of interest and goodwill across Europe, including in the most insecure countries, to address this issue seriously, provided it is done is a sensible manner;

- Finally, one has to keep in mind what the alternative is: a Regulation imposing security of supply standards so benign that all member states comply with them ex ante. Arguably the current version of the text is already not very far away from this.

If the EU wants to avoid producing a piece of legislation that looks more sophisticated than 2004/67 but is actually just as empty, the best hope is to put in place an innovative policy process that on the one hand allows member states to make economically sensible choices, and on the other hand holds them politically accountable for their gas security policies – or lack thereof.

Pierre Noël, University of Cambridge (EPRG) and European Council on Foreign Relations (ECFR)

P.S. For a more comprehensive view on the problems of the Regulation see my recent note here.

This entry was posted on Thursday, March 4th, 2010 at 10:04 am and is filed under Gas, Security of Supply. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.