Shaping the European Energy Solidarity: If not now, then when?

Introduction

2022 is testing Europe’s resilience with several cascading crises. The aftermath of COVID-19 lockdowns and the return of war to the continent have shaken Europe to its core. These challenges have also brought major shockson the energy market. Supply disruptions and skyrocketing energy prices are forcing Europe to find the best solutions and instruments to address these difficulties. One of these instruments is the newly established EU Energy Platform – a voluntary coordination mechanism set up at the European Union level for the common purchase of gas, LNG, and hydrogen.

Will this new institutional set-up effectively pave the way for Europe’s exit from Russia’s energy supply? Is this a short-term emergency tool or could it be regarded as one of the building blocks of Europe’s energy-security strategy? Will this new proposed strategy of pooling demand and having a single EU-wide mandate for negotiations work better than having each Member State coordinating its own contracts? Can we interpret this new mechanism as a sign of a truly united Europe, a trigger for a real European solidarity?

The foundation that led to the establishment of the EU Energy Platform (hereinafter the Platform) are joint purchase agreements. These are nothing new. This approach has been proposed before by several high-level politicians. The first time was in May 2009, when President Nicolas Sarkozy expressed France’s will to set up a central gas-purchasing body to strengthen its negotiating hand with suppliers: “I will not back down on the need to have a real energy policy,” Sarkozy said in a speech in southern France, setting out his policies ahead of the 2009 European elections. “I want to introduce the idea of a central gas-buying body, so that Europe has a really strong negotiating position towards its suppliers”. At that time, the announcement was made in the context of disruptions to Russian gas supplies over the previous three years, following disputes between Moscow and its key energy transit countries: Georgia and Ukraine. It was a bold political statement. However, no concrete policy actions were taken to implement this tool into practice.

The next attempt took place in April 2014, when the then-Prime Minister of Poland, Donald Tusk, proposed an instrument for jointly buying gas, as part of the EU Energy Union framework. To improve the collective negotiating power of the gas-importing companies in the Member States that are heavily dependent on Gazprom as the main gas supplier, he considered the creation of a mandatory system for jointly purchasing gas in the EU. By contrast, the European Commission announced in its Communication on the Energy Union of 25 February 2015 that it wanted to examine “options for voluntary demand aggregation mechanisms for collective purchasing of gas during a crisis and where Member States are dependent on a single supplier,” subject to the requirement that these are “fully compliant with World Trade Organization (WTO) and EU competition rules.” The Commission’s suggestion was politically endorsed by the European Council in its conclusions on the Energy Union on 19 March 2015. Member States have specifically endorsed the voluntary option of this mechanism as a compromise, because several national governments were not keen on promoting mandatory joint purchases due to the different national policy views: “At that time, this strategy failed not only because of a different perception of Russia, but also because we have been very far from the energy transition. Politically it was fine, but in essence, no one would use this tool really to achieve any energy policy goals. Now with this major political decision, combined with the energy-security concerns, this tool might be more relevant than ever”, highlighted Prof. Andris Piebalgs, former European Commissioner for Development (2010-2014) and for Energy (2004-2009).

Fast forward a few years and in December 2021, the European Commission once again proposed the option of a voluntary joint purchase of gas reserves. This announcement came amidst record-high energy prices and, ultimately, Russia’s invasion of Ukraine on 24 February 2022 has impelled the EU heads of government to speed up their efforts to decrease Europe’s dependency on Russian gas. As a result, the political endorsement for the joint gas purchase agreements took place during the EU Council summit at the end of March this year. And here we are, once again finding ourselves back to the relatively old idea of showing solidarity and pooling forces together to jointly buy energy. But will Europe succeed this time?

The reference to the Platform was made in the REPowerEU Communication “Joint European Action for more affordable, secure and sustainable energy”, followed by a formal political endorsement by the EU’s heads of state or government at the European Council on 25 March 2022. Shortly after this, the Platform was formally established on 7 April 2022, at a first meeting with EU countries. The Platform is intended to aggregate EU gas demand, help use gas infrastructure like LNG terminals efficiently and transparently and facilitate outreach to supply partners. When it comes to the operational perspective, the Commission will steer the work of the Platform through the following regional task forces:

1. The South-East Europe regional task force - launched on 5 May 2022 at a ministerial meeting in Sofia, Bulgaria, in coordination with neighbours in the South-East of Europe. In June, the Commission endorsed an action plan to guide the next steps of diversification and security of supply in the South-East Europe region after the disruption of gas supplies by Russia. It foresees joint efforts of the region and the European Commission on three key pillars: gas needs of the region, including the potential to reduce demand through electricity; infrastructure opportunities and addressing outstanding issues; and gas-supply options.

2. The Central Eastern regional task force - initiated in June 2022 at a ministerial meeting in Prague. The task force brings together nine EU countries – Austria, Croatia, Czechia, Germany, Hungary, Italy, Poland, Slovenia and Slovakia – also including Ukraine and Moldova. It will be co-chaired by Czechia, which also took over the Council of the EU Presidency in July 2022. According to Lenka Kovačovská, Advisor to the Czech Deputy Minister of Industry and Trade, the scope of the Platform and its regional task forces is evolving over time. At the beginning, there was also a discussion about demand reductions being implemented in the Action Plans for the regional levels, but with the new legislation on the obligatory gas savings it is logical that this may not be addressed any more by the regional Task Force. However, the added value of this proposed structure could be seen in tackling the infrastructure bottlenecks. This is especially valid for the CEE region, which is dominantly landlocked with infrastructure bottlenecks, prohibiting the free flow of gas into other regions. Therefore, the infrastructure part is crucial to the structure of the Platform, and a strong governance framework is much needed to address these issues that have been identified already by this regional task force. Furthermore, there must be a governing framework on how to effectively manage the existing capacities reserved under fixed contracts by major shippers that are not using it. In this sense, the task force has been discussing a Pan-European framework on how those reserved yet unused gas capacities should be implemented. This is also an outcome of the current discussions that the task force already channelled to the European Commission. When it comes to the gas purchases themselves, so far, there is relatively lower commercial interest compared to political one according to Ms Kovačovská. Nevertheless, this lower commercial interest that we see at the moment is due to the continued lack of clarifications on double supplies and competition issues.

Other regional task forces with more details in terms of the workflow will follow, including: the North-West, the South-West and the Baltics regional task forces. When it comes to the future development of this regional approach, striking the right balance will be key. It is natural that some regional task forces will have a lower activity level than others. Some regions will experience more challenges than others, owing to the different economic and energy metrics. Furthermore, every single region will have different issues to address. This will evolve naturally because the topology of the European gas network is very diverse. The only question mark in this sense would be the price that will have to be paid by the others. For the CEE region, for example, the inclusion of Germany and Italy into the above-mentioned task force is extremely useful, even if these countries do not necessarily identify with this region. Without these two major players, no effective solution can be found. In every group, you will have a Member State which will have to give more than receive; at least this is how it the situation looks for the moment. For the stability of the EU, it might even play a positive role, as for now.

In essence, when looking at the proposed structure of this new mechanism, it is evident that there will be a gradual process to establish the Platform: initially it will act as a “door opener”, meaning that the Platform will conclude memoranda of understanding with third countries to open the door for EU companies to step in and conclude commercial contracts. As a next step, according to the Commission's vision in its REPowerEU plan, it will present a voluntary joint purchasing mechanism, which will negotiate and contract gas supply for consumers in participating EU countries. At least this is the current thinking around the implementation of this proposed mechanism. Eventually, this vision aims to represent the way in which Europe’s Member States can use their collective political and economic weight to ensure affordable and secure energy imports.

Current challenges

Considering the structure of the Platform mentioned above, there are several major challenges that need to be clarified to set up a properly functioning mechanism:   

• Legal constraints: there are two aspects that have to be clarified in this sense. First, there are still many contracts for significant volume of Russian gas concluded by individual Member States that stretch into the early 2030s. If those contracts will continue to be fulfilled until the end of their term, then this is a direct contrast with the REPowerEU provisions, which aim to end Europe's dependence on Russian fossil fuels by 2027. This is especially valid for industrial players who are still bound by valid contracts. Unless they have clarity that those contracts already signed will not be fulfilled in the end, they are not really eager to commit to any other new contract for gas purchases, because they would have to face the risk of having overlapping agreements. Second, should companies be interested in  joint gas purchases, there is a need for much more legal clarity on how the joint gas purchases will work. At the end of the day, companies sign contracts, not governments, and if the joint venture will eventually be implemented, these legal requirements have to be addressed.

• Operation and implementation: at this point, there is strong ambiguity when it comes to the implementation of the joint ventures. How to balance the regional task forces and what would be the added value of these compared to the existing supermajors on the EU market? Would they be a part of it? What would be the role of competition in this case? Will these joint ventures be organised by the existing supermajors and would we then see a kind of relief from the competition rules? If this is the case, then we might have really complex negotiations in the future, because it would be quite challenging to determine on which type of activities they would make profits. In this case, the expression of a strong political will is not enough. This an exercise for both political and commercial actors.  

• Bringing everyone on board: in the case of Latvia, there is this public perception of needing to build its own LNG terminal, even if there is enough capacity in the closest regions of Lithuania, Estonia or Finland. There is always this suspicion that these neighbours will try to deal with their own emergencies first, before helping any other country. And this is where one of the dangerous aspects is, because this perception could be strengthened by one action, as for example in the case of Hungary when it declared that it would impose a state of emergency and stop delivering energy to other countries. “You are in the common market; you cannot take all the flows for yourself just because you are sitting closer to the pipeline. But if this pipeline was closed, you would be shouting wild to get solidarity. To prevent this political division and reduce this suspicion to a reasonable scale, this is where the Platform is needed,” highlighted Prof. Piebalgs.

• Comparison with the COVID-19 vaccines procurement is not helpful: on the one hand, political explanation, spreading messages of encouragement and underpinning the need for solidarity in the public space is badly needed. This is where the Platform could serve as a tool for expressing broader political solidarity when you have to cut off your own customers to provide gas to other countries. On the other hand, the energy market is a much more complex structure, as well as the process of buying and securing your energy supply. In this sense, policy makers must not rely too much on this past experience of the common purchases of the vaccines. The current energy-market landscape does not offer too much optimism for this simplistic approach.  

When looking at the evolution of this proposal, we could think that the Platform has been foreseen as a sort of emergency tool that was supposed to deliver in times of crisis. However, experts argue that if it was to be an emergency tool, it would have to have been fully functional for a few months now. Certainly at the beginning, it was perceived or drafted as an emergency tool. Yet, as there were major uncertainties about the legal provisions, organisational aspects, etc., many companies and Member States started to address the issues on their own. When it comes to joint gas purchases, the role is now more for the medium to long-term prospects to aggregate future demand – especially in the context of uncertainty of the quantity of gas available on the market in the future. “The number-one priority from my perspective should be energy security. Securing all supplies wherever you can at the most reasonable cost from reliable suppliers,” underlined Ben Cahill, Senior Fellow, Energy Security and Climate Change Program at the Center for Strategic and International Studies (CSIS). Nevertheless, in the future, the Platform could potentially play an important role in hydrogen purchases, once the market for it is established. Hydrogen is very new, and a proper market for it does not really exist yet. However, the EU’s thinking on this is that it will eventually follow the same rules as the gas model, which means that it will develop as a regional trade. And that is how hydrogen is most likely to expand. Considering that one part of the EU’s hydrogen strategy refers to the import of hydrogen from outside Europe, this is probably where the Platform could contribute. The Platform could prove useful for monitoring the infrastructure development within Europe, i.e. removal of technical or commercial contractual bottlenecks, collecting the data on potential demand for it, etc.. Nevertheless, this does not mean that it will be the only tool to provide a reliable energy supply in the future. “The future prospects will depend on how the EU will be implementing its renewable-energy targets and energy-efficiency programmes. Without major advancements in renewable energy, there will be no real change, and this will negatively impact our energy security,” stressed Prof. Piebalgs.

When it comes to energy security, “in the short-term, Europe will definitely learn from its reliance on Russian energy supply. The question is how long will it remember for?” highlighted Ms Kovačovská. The real danger for Europe is that it might fall again into the trap of finding the cheapest option. Energy security has its price, and total dependence on Russian gas was to a certain extent caused by the fact that gas was the cheapest option. And there was demand for cheap gas, especially when you factor in the competitiveness of industries and affordable prices for customers. The future architecture of energy security has to be built by factoring in the aspects that go beyond price.

Policy recommendations

• Connecting the political rhetoric with commercial reality: governments must handle the crisis with the most appropriate means, while at the same time continuing the policy path towards climate neutrality. Achieving this balance is not easy, especially when heavy industries in Europe still rely on fossil fuels and are currently facing major challenges. For example, about 50% of EU aluminium and zinc production capacity “has already been forced offline due to the power crisis”, while European buyers (understandably due to the geopolitical consequences) remain a bit reluctant to sign long-term contracts for gas, which make them less competitive on the global market. This commercial factor must also be factored in when deciding to sign the next contracts.

• Incorporating geopolitical risks into the governance framework: provisions on obligatory diversification of energy supply must be implemented on both levels: commercial and national/European regulatory frameworks. The strategic importance of diversifying the energy supply has not been previously acknowledged. Furthermore, national governments have to remember that trade with fully like-minded democratic states in the global energy market is unrealistic, as the quantities that they can offer in this respect are not enough to cover the needs of Europe’s heavy industries. Inevitably, some commodities happen to be in the countries that have political models that differ from the EU one. That is why it is crucial for governments now to consider the inclusion of these provisions into their energy strategies to drive the security agenda.

• Do not lose sight of energy security: the energy-price crisis is currently in the spotlight, and there are emergencies that have to be addressed. Naturally, it is critical to tackle these with the most appropriate instruments to bring relief to consumers and industries. However, the energy-security vision must also be anchored in the proposed solutions.

Solidarity has become a keyword during the COVID-19 pandemic, initially in a call to people at local, national, and global levels to work together through maintaining social distancing to slow the spread of the virus. Today, though, Europe finds itself in the same situation: the solidarity principle is actively invoked by the political establishment of the EU to jointly coordinate the efforts across the continent to solve the energy crisis. Essentially, this firm appeal has led to the establishment of the EU Energy Platform. However, the Platform itself will only remain a tool to coordinate common efforts. Eventually, solidarity will be based on the political will and the extent to which it will be successful in bringing commercial companies on board. At the same time, solidarity will be heavily tested as we get closer to winter and energy prices are expected to remain high due to uncertainty in the market. For policy makers, it will be increasingly difficult to continue to convince citizens and other stakeholders to remain united and confront this crisis together. “Ultimately, you have as much solidarity as Member States believe it is politically palatable within their own countries, within their own constituencies, and they will not do any more than that”, underlined Dr Katja Yafimava, Senior Research Fellow at the Oxford Institute for Energy Studies. Nevertheless, let us remember once again that, in the end, we all find ourselves in the same European boat. Just recently, after the Extraordinary Energy Council that took place on 30 September 2022, the governments of Germany and France advocated for stronger support for the joint European purchasing power in their joint paper. The projection of solidarity between the Member States is crucial to facing this ongoing crisis, which ultimately creates the perfect foundation for shaping proper European energy solidarity and implement the political vision that started more than ten years ago. If not now, then when?

Solidarity has become a keyword during the COVID-19 pandemic, initially in a call to people at local, national, and global levels to work together through maintaining social distancing to slow the spread of the virus. Today, though, Europe finds itself in the same situation: the solidarity principle is actively invoked by the political establishment of the EU to jointly coordinate the efforts across the continent to solve the energy crisis. Essentially, this firm appeal has led to the establishment of the EU Energy Platform. However, the Platform itself will only remain a tool to coordinate common efforts. Eventually, solidarity will be based on the political will and the extent to which it will be successful in bringing commercial companies on board. At the same time, solidarity will be heavily tested as we get closer to winter and energy prices are expected to remain high due to uncertainty in the market. For policy makers, it will be increasingly difficult to continue to convince citizens and other stakeholders to remain united and confront this crisis together. “Ultimately, you have as much solidarity as Member States believe it is politically palatable within their own countries, within their own constituencies, and they will not do any more than that”, underlined Dr Katja Yafimava, Senior Research Fellow at the Oxford Institute for Energy Studies. Nevertheless, let us remember once again that, in the end, we all find ourselves in the same European boat. Just recently, after the Extraordinary Energy Council that took place on 30 September 2022, the governments of Germany and France advocated for stronger support for the joint European purchasing power in their joint paper. The projection of solidarity between the Member States is crucial to facing this ongoing crisis, which ultimately creates the perfect foundation for shaping proper European energy solidarity and implement the political vision that started more than ten years ago. If not now, then when?