RESUMEN EJECUTIVO DE LA EVALUACIÓN EX POST EXTERNA DEL PROYECTO DE COOPERACIÓN TRIANGULAR ENTRE ALEMANIA, COSTA RICA

In order to avoid a direct translation of high oil prices into high energy prices, it is necessary to decouple oil and gas prices as gas prices are a significant influence on energy prices in the electricity and heating sector. As a consequence, viable and accessible alternatives to oil-indexed gas contracts are required. Ideally, these alternatives should rely on a market-based price signal for natural gas and reflect the actual situation of natural gas supply and demand. Generally, more mature and competitive markets give suppliers and consumers the opportunity to develop a broader range of pricing models more appropriate to individual needs. This is also underlined in a recent discussion from the Institut français des relations internationals (Kanai 2011). It should be noted that the access to gas markets gives power generators more flexibility, not necessarily to make more profit, but to avoid generation during loss-making periods, i.e. when the power price is below their short-term generation costs.

5.1.1. The role of infrastructure in enabling wholesale markets

While in most North-Western EU Member States gas markets have already been established and are well-functioning, market liquidity is still relatively low with the exception of the NBP hub in the UK. Sufficient market liquidity is, however, an important precondition to have a well-functioning marked-based pricing mechanism. Market liquidity can be improved by increasing interconnectivity between different regional gas hubs and by removing market entry barriers for new players in order to diversify gas supply. It should be noted that low interconnectivity is not only a matter of limited physical transmission capacities but can also be a contractual issue as unused cross-border transmission capacity is not always released into the market in a timely manner. Regulators will need to address this issue.

Compared to the Member States in the North-West of the EU, the situation is very different in the remaining EU Member States, where gas hubs are practically non-existent and interconnectivity between different states is very limited. This is illustrated in Figure 92:

there is no interconnection at all between Sweden and Finland, Finland and Estonia, Lithuania and Poland, Poland and Slovakia, Slovakia and Hungary, and Austria and the Czech Republic. As a result, Finland and the Baltic states are completely isolated from other EU countries and are therefore limited to largely relying on just one supplier. Also, there are no bidirectional flows between Estonia and Latvia, Poland and the Czech Republic, Austria and Slovenia, Austria and Hungary, Italy and Slovenia, Hungary and Romania, Romania and Bulgaria, and Bulgaria and Greece. Here, the first step would be to better interconnect these systems by building and increasing transmission capacities to neighbouring Member States. Financial support could be granted by the Connecting Europe Facility (see section 5.4.2). In addition, access to additional gas supplies is necessary. In (COM/2008/781), the European Commission proposed the Southern Gas Corridor initiative to access gas supplies from Middle Eastern and Caspian regions. The Trans Adriatic Pipeline (TAP) is a Southern Corridor project and is expected to transport gas from the Shah Deniz II gas field in Azerbaijan to Italy via Albania and Greece,¹²³ starting in 2018. The project was chosen by Shah Deniz Consortium over the competing Nabucco West project, which proposed a different route crossing Bulgaria, Romania, Hungary, and arriving in Austria near the Slovakian border.

123 The route between Azerbaijan and Greece is covered by the Trans-Anatolian gas pipeline (TANAP).

The selection of TAP over Nabucco West represents a clear setback in diversifying gas supplies for these countries, as TAP allows Gazprom to maintain its predominant position in this region. But such a state of play in Central and Eastern Europe is not only due to the limited interconnection but is also linked to competition issues. To foster the development of gas hubs in this part of Europe, domestic markets need to be open to competition. DG Competition has recently launched a case against the predominant supplier in these markets, i.e. Gazprom (cf. textbox on the Gazprom case).

Another pipeline project, the North-South gas corridor, plans to connect the LNG Terminal in Świnoujście in Poland with the proposed Adria LNG terminal in Croatia. Running through central Poland, the Czech Republic, Slovakia and Hungary the North-South gas corridor will allow these countries to access new gas supplies. Since pipeline projects need a long planning time, enduring political support is crucial for the realisation of such projects.

Figure 92: Interconnections, reverse flows in the EU-27 gas system.

Source: Study authors based on (Koch 2013 and ENTSOG 2013)

Box 6: The Gazprom case

3) Allegation of unfair pricing (particularly "indexation" the linking of the gas price to the oil price)

While the timeline for the case and its outcome is uncertain at this point, the three allegations provide a good summary of current competition issues in Central and Eastern Europe. Contracts with resale prohibition (or destination clauses) undermine the creation of the internal energy market. These clauses are illegal, according to the EC, as they have the potential to partition the EU single market into various national sub-markets, which is not compatible with European competition law. As a consequence, these clauses were banned from supply contracts with Western European countries at the beginning of the century but they are still present in Central and Eastern Europe. Similarly, denying third parties the possibility to access the pipeline system impedes the creation of a market and the diversification of gas supplies . The allegation of unfair pricing is related to the dominance of oil-indexed gas contracts in this part of Europe combined with the fact that there is one predominant supplier in these markets, putting the affected countries in a weak negotiation position. It is questionable whether this is acceptable under EU antitrust law or it constitutes an abuse of dominance. It should be noted that oil indexation per se would pose little risk if there were a well-functioning gas market.

Given the complexity and importance of this case, a potential prohibition decision is not to be expected before the end of 2014. A further two years will probably elapse before disposal of the main issues in the EU General Court.

5.1.2. The completion of the Gas Target Model

The completion of the internal energy market by 2014 is among the top priorities of the European Commission. Its achievement will increase the share of hub-priced gas.

In its Communication “Making the internal energy market work”, the European Commission recalled that the completion of a fluid, competitive and integrated energy market is essential to achieve the transition to a low-carbon economy (EC 2012).

It is rather difficult for a single Member State to individually achieve all of the conditions listed in the Gas Target Model (see section 2.3.4). Take the criterion on sufficiently robust markets requiring a consumption level of an entry-exit zone of at least of 20 bcm per year.

In 2012, consumption exceeded 20 bcm per year in only six Member States¹²⁴ (EIA 2013).

Thus, to meet all of the criteria included in the Gas Target Model, Member States are encouraged to cooperate with neighbouring countries in order to collectively establish trading regions (i.e. interconnected regional markets).

The collaboration of the Visegrád Group in this regard is a good example; at present, none of the V4 countries can solely meet the criteria included in the model. Facing similar challenges (i.e. relatively high prices, the predominance of one gas supplier, limited connectivity between the regions etc.), Poland, the Czech Republic, Slovakia, and Hungary

124 i.e. UK, the Netherlands, Germany, France, Spain and Italy (EIA 2013).

decided to commonly implement the Gas Target Model (Ascari 2013). However, the Gas Target Model also envisages the creation of a (limited) number of national market areas by the Member States which “are able to cater for a functioning market within the country itself” (CEER 2011).

Ensuring the interconnectivity of the functioning wholesale markets is another important aspect of the Gas Target Model. An efficient and transparent allocation of the capacities on the interconnection points will be of great importance. Unused capacities should be released back to the markets. These measures should facilitate gas flows throughout the system, i.e. from one trading region/national market to another (CEER 2011).

It is important to understand that the successful implementation of the Gas Target Model is preconditioned by the transposition of the Third Energy Package into national legislation by the Member States (CEER 2011). In February 2013, 16 Member States implemented the provisions of the Third Package. Member States that failed to fully transpose the directives included in the package were: Bulgaria, Cyprus, Estonia, Finland, Ireland, Latvia, Poland, Portugal, Romania, Slovenia, and the UK (EC 2013). What is more, only 4 out of 12 of the pan-European Network Codes will be finalised by 2014, i.e. the deadline for the completion of the internal energy market. The development and the transposition of Network Codes are of particular importance for the implementation of the Gas Target Model. Once developed, these Network Codes will have to be transposed into the national legislations of the Member States and will then regulate cross-border trade of natural gas.

As stated by the Council of European Energy Regulators, the concept of the Gas Target Model should be evaluated after the implementation of the above-mentioned Network Codes. ACER will be able to participate in this assessment. According to the authors of the Gas Target Model, this evaluation might lead to a readjustment of the model (CEER 2011).

The implementation of the Gas Target Model by the Member States will facilitate the creation of hubs or virtual trading points. The existence of liquid and interconnected regional wholesale markets will encourage cross-border trade of natural gas, fostering the transition to hub-based pricing reducing the direct impact of oil prices on gas prices.

5.1.3. Policy recommendations

Therefore, in order to avoid a translation of high oil prices into high energy prices, policy should:

 Establish well-functioning gas markets by promoting the implementation of the Gas Target Model.

 Support the process of diversifying gas supplies.

 Encourage the Member States to transpose the provisions of the Third Energy Package into national legislation.

 Interconnect and integrate regional markets.

 Promote the development and the implementation of the Network Codes.