December 9, 2016
BRUSSELS INSIDER by Sonja van Renssen
This week: 2 important updates from the EU capital…
- Gas sector unhappy with EU’s latest energy proposals
- PLUS: Brussels to get more control over gas contracts
December 9, 2016
Gas sector unhappy with EU’s latest energy proposals
The European gas industry has little to rejoice over in the European Commission’s “winter package” of new energy legislation unveiled last week. “It’s not good. We’re not happy,” a representative from a European utility that burns gas told Energy Post. Members of the oil and gas sector echoed this sentiment in conversations with Energy Post.
Last week’s package was not about gas. The Commission’s “gas package” was published back in February and it focused on security of supply. The new package focuses on energy efficiency, renewables and power market design. Yet there are two initiatives in last week’s proposals that could help the gas industry and another three that definitely won’t.
Let’s start with the “good”news. First the Commission’s plan to scrap priority dispatch for renewable energy projects could help gas displace biomass in power generation, said Johan Leuraers, who works on Governmental and Regulatory Affairs at Statoil, at a gas R&D conference in Trondheim, Norway, on Monday. That would be good for air quality, he added.
Second, oil and gas companies including Statoil and ENI welcomed the proposal for a CO2 emission performance standard (EPS) for capacity mechanisms. They say that in the absence of a serious carbon price, this can finally give them an edge over coal.
The EU carbon price dropped to below €4 a tonne this week over political uncertainty in the Eurozone (after the Italian referendum) and the potential cancellation of a key vote on EU Emission Trading Scheme (ETS) reform in the European Parliament; that vote has now been provisionally postponed from 8 to 15 December.
In its “winter package”, the Commission proposes that “new” power plants would only be able to participate in capacity mechanisms if they emit less than 550gCO2/kWh. “New” is defined as a final investment decision after the entry into force of the revised regulation.
Existing plants would be exempt from the 550gCO2/kWh standard for five years after the same date. The standard is the same as that used by the European Investment Bank (EIB) in its lending criteria.
In practice, the new electricity market regulation will probably not enter force until 2020. Commission Vice-President for the Energy Union Maroš Šefčovič said at a press conference on Thursday that the goal is to finalise the whole winter package with Member States and MEPs by the end of the current Commission’s mandate in 2019.
This explains Greenpeace’s criticism last week that “at least 95% of coal power plants would be eligible to receive capacity payments until 2026”. Brian Ricketts, Secretary General at Eurocoal, representing the European coal sector, confirmed to Energy Post that coal cannot meet the 550gCO2/kWh standard without carbon capture and storage (CCS). Co-firing with biomass is not an option, he added, because the Commission also proposes that biomass burned in coal-fired power plants cannot count towards Member States’ renewables targets.
“Instead of a 550gCO2/kWh emission performance standard, the Commission may as well propose to outlaw coal,” he says. The average EU coal plant operates at 38% efficiency and emits 881gCO2/kWh. A state-of-the art coal plant emits 743gCO2/kWh.
Those who applaud the 550gCO2/kWh standard also caution that “you cannot make your living out of capacity markets,” in the words of Leuraers. ENI was leading the charge for an emission performance standard (EPS) for the entire energy market. That battle now moves to the European Parliament and Council of Ministers.
One oil and gas representative told Energy Post that the sector will at least try to reduce the five year delay for the 550gCO2/kWh to affect existing plants. They are likely to find MEPs sympathetic to this cause as a means of accelerating the decarbonisation of the power sector.
But even in the gas industry not everyone is pleased about the 550gCO2/kWh standard. Early analysis suggests that it could affect “a large chunk” of combined cycle gas turbines (CCGT) as well as coal plants, warns the representative from a gas- (and coal-) burning utility. She predicts “huge issues” around energy security. Ricketts points out that coal still supplied 26% of electricity in 2014, about the same as nuclear.
Others in the industry oppose the standard because it goes against the idea of the EU Emission Trading Scheme (ETS) as the EU’s flagship – and most cost-effective – decarbonisation tool.
What the gas industry as a whole does agree on however, is that the winter package’s 30% energy efficiency target for Europe, the push for renewables in heating and cooling and the lowered Primary Energy Factor (used to evaluate the energy efficiency of different energy carriers e.g. electricity vs. gas in heating) are bad news.
The 30% energy efficiency target will reduce gross EU inland consumption of gas by 10% in 2030 (down from 351 mtoe to 316 mtoe) compared to the 27% target on the table previously, reported Platts on Monday. The figures are found in part I of the Commission’s impact assessment accompanying its proposal for a new EU energy efficiency directive (see p. 40 here.)
The higher energy efficiency target affects gas more than any other power source: demand for oil would go down by just 2%, nuclear 1% and renewables 3%, while demand for solid fuels would actually increase by 4%.
On renewables in heating and cooling, the Commission says Member States “shall endeavour to increase the share of renewable energy supplied for heating and cooling by at least one percentage point every year”. Whilst the gas industry may complain, it’s worth pointing out that this has been considerably weakened from earlier drafts of the new renewables directive, which said Member States “shall” require heating and cooling suppliers to deliver the 1% annual increase.
Finally, in proposing to reduce the Primary Energy Factor (PEF) from 2.5 to 2.0 for electricity-using products, the Commission takes away some of the efficiency edge which gas products previously enjoyed. In what amounts to a win for electricity-driven devices (think heat pumps for example) it now assumes that power generation in the EU is delivered at 50% not 40% efficiency.
The gas industry can of course still keep its fingers crossed for a cold winter.
Brussels to get more control over gas contracts
The gas industry’s worries about demand for gas as a consequence of the European Commission’s “winter package” (see article above), come just as it can point to progress on security of supply.
First, against expectations, EU energy ministers meeting in Brussels on Monday unblocked negotiations on a new gas security of supply regulation. Second, on Wednesday night, Member States and MEPs reached a provisional deal on a sister proposal for greater scrutiny by the Commission of intergovernmental agreements (IGAs) underpinning bilateral gas – and oil – deals with non-EU states such as Russia.
With this, Brussels effectively moves along its February “gas package” to make way for the new winter package. The gas package is a tester of appetite for unity à la Energy Union.
The deal on IGAs came at the third of three “trialogues” – three-way negotiation sessions with the Commission, MEPs and Member States – organised by the Slovak EU presidency this autumn.
IGAs are legally-binding agreements between EU and non-EU countries that typically underpin new oil and gas pipelines or fuel purchases. Historically, Member States have rejected any Commission involvement in these. But with energy security high on the agenda, evidence that gas IGAs in particular often break EU competition law (e.g. the six IGAs that underpinned South Stream) and an Energy Union to promote, the Commission once again suggested to get involved.
The European Parliament, led by Polish right of centre MEP Zdzislaw Krasnodebski, was all for it. Member States however, tried to limit Brussels’ influence anew. The result is “the best we could get within the political reality” a Parliament source close to the negotiations told Energy Post
There are four main outcomes:
- Gas and oil IGAs will be scrutinised by the Commission ex ante i.e. before they enter into force. (Member States wanted it limited just to gas; Commission and Parliament wanted it to apply to all energy IGAs. As part of the deal, the Commission will revisit electricity IGAs at the law’s next review in 2020.)
- Non-binding agreements such as Memoranda of Understanding only have to be submitted to the Commission on a voluntary basis and ex post i.e. after they have been signed. (Parliament wanted these too to be checked ex ante; Commission proposed a mandatory ex post notification.)
- Hybrid agreements between a country and a company are outside the scope of the deal. (Parliament wanted them in, but amongst Member States only Poland agreed. The Commission will issue a statement alongside the new law calling for them to be monitored.)
- The Commission may request to participate in IGA negotiations; this request needs to be approved by Member States. (Parliament wanted the Commission to take part; Member States wanted it to have to be invited. The Commission itself had legal advice that negotiating external contracts is strictly a Member State competence.)
Nuclear was outside the scope of the new law from the start, since it is governed separately by procedures under the Euratom Treaty.
In sum, the deal opens the door to a greater role for the Commission in ensuring that Member States sign IGAs that are compatible with EU law and benefit European energy security. A Parliament source told Energy Post that it was important to wrap up the file before the winter package “swamps” MEPs. Moreover, for the incoming Maltese EU Presidency, which will take charge from January to June 2017, gas is not a priority.
In terms of real impact on security of supply however, at least one commentator, Severin Fischer, a Senior Researcher at the Centre for Security Studies (CSS) in Zürich, Switzerland, cautioned that “very few Member States still use IGAs”. There are no IGAs underpinning the new Nord Stream 2 project, for example.
The second legislative half of the Commission’s February gas package was a proposal to revise a 2010 EU regulation on gas security of supply. This deals with commercial gas contracts. The Parliament, led by another Polish MEP, Jerzy Buzek, centre-right Chair of the Energy and Industry Committee, reached a common position back in October. But Member States have struggled to follow suit.
With Monday’s political guidance from ministers however, they are now expected to finalise their position for early next year, after which trialogues with the Parliament and Commission can start.
“We should finish first of all the gas package,” said Buzek at a press conference in Brussels on Thursday in response to a question over how the Parliament will prioritise work on the new winter package.
From the start, there have been three divisive issues that were finally resolved as follows on Monday:
- Regional approach – Member States want a “risk-based” approach that brings countries together on the basis of a common transnational gas supply risk e.g. a supply cut from Russia. The groups would be defined on the back of an assessment from ENTSO-G, the European body of gas network operators. Member states would prepare national preventive action and emergency plans, but with regional “chapters”.
This is more bottom-up and less political than the idea of establishing “core regions”, for example bringing together Germany and Poland, proposed by the Commission. The Parliament supported the Commission, but introduced the concept of “emergency supply corridors” as a route towards more flexibility. Member States recognise this concept.
- Information exchange – Long-term gas contracts that provide 40% or more of the annual natural gas consumption in a Member State would have to be notified to national authorities. If the authority has doubts about the impact on security of supply, it must notify the Commission. In addition, national authorities and the Commission can request “security of supply relevant information” even if the 40% threshold is not met, but this cannot cover prices.
The 40% threshold is critical and dates back to the Commission’s proposal. With it, Nord Stream 2 “would probably be hit”, says Fischer. What is important to the Parliament however, said a source there, is that the Commission and not just national authorities have first-hand access to contracts. The Parliament also wants “consumption” changed to “imports”, to cater for Member States that re-export gas.
- Solidarity – Member States agree that solidarity is a “last resort mechanism after all emergency measures have been exhausted”. They want to stick to general principles rather than spelling out the rules for compensation in the new regulation however.
MEPs want a strong solidarity mechanism with greater powers for the Commission to step in.
Monday’s unblocking was enabled by at least two significant political compromises: Poland gave in on regional cooperation and Germany gave in on commercial contracts. The biggest challenge facing the gas security of supply regulation now will be a fight for MEPs’ and Member States’ time. Sources in Parliament and Council say that the two institutions are not very close together in their positions.
Fischer sees a softening of the energy security rhetoric that initially propelled the Energy Union forward, such as the call from Poland for a joint gas purchasing platform. “We’re back to where we were before we started the [latest] security of supply discussion – small amendments to the functioning market.” In his mind, it is the development of the gas market that has done and will continue to do most for security of supply.