March 27, 2017    5 minute read

Fortress Europe: An Energy Union

Sticking Together    March 27, 2017    5 minute read

Fortress Europe: An Energy Union

The EU was established on the foundation of sharing the vital commodities of coal and steel; it, thus, has its roots in energy. A sector characterised by national champions and substantial subsidies has produced inefficient, fragmented and isolated industries.

Historically, the energy market has been vertically integrated with high levels of state intervention and public transfers. National competence has reduced competition and induced divergent pricing across the continent with no homogenous policy approach among member states.

Cross-border interconnection of energy infrastructure and forced unbundling could be the catalyst for major energy consolidation. However, the market still suffers from severe underinvestment and an unhealthy dependence on Russian gas, exacerbated by austere spending following a severe financial crisis.

The Energy Union

Donald Tusk first touted the Energy Union in 2008, following Russia’s cutoff in gas supplies in Ukraine and has since become ‘one of the flagship projects’ of the Junker Commission. EU stress tests carried out in 2014 in EU countries predicted Finland, as well as a number of Soviet satellites such as Estonia and Bulgaria which had dependence levels on Russia of almost 100%, would be the most severely affected by a halting of Russian supplies.

Competition between member states is fierce, and this results in a political straitjacket giving Russia potential leverage to blackmail by threatening to disrupt gas supplies. There is no common policy or integrated approach to negotiating with third party countries. Tusk’s ambitious agenda of creating a single gas-purchasing platform has been gradually watered down.

Numerous proposals have been suggested. There is a consensus that coordinated action by member states would be a cheaper, more efficient and a long-term solution to the diversification issues facing the bloc.

Individual countries have so far pursued divided strategies. For example, Lithuania established an LNG terminal, and they initially had one of the highest gas prices in Europe. In response to the new supply, Gazprom discounted their gas prices by 20%.

Poland’s attempt to increase drilling for shale gas has had mixed results, though endowed with large reserves they have struggled to successfully drill and falling gas prices have led to an exodus from the sector.

A One Entity Solution

A single European Agency to purchase natural gas would reduce the need for excessive investments into finding alternate sources of energy. Russia is the lowest cost base gas producer and realistically depends heavily on its energy exports to Europe, thus it would not make economic sense to look for alternatives.

The European Commission has also taken a key role within the proposed union, the successful implementation of three internal energy orders and numerous directives have seen improvements to critical infrastructure as well as diversification of energy supplies. They have also made increased use of their legal base by bringing legal action against Gazprom for abusing its monopoly power as the sole supplier.

A symbol of solidarity, it will be an opportunity for the Commission to showcase its ability to protect European interests. It also deemed the South Stream pipeline illegal on the grounds that it is uncompetitive for the same company to run both the pipeline and to own the gas it pumps.

In such a strategic sector, which has historically remained solely confined to national competence, the commission has the opportunity to showcase not only the powers it gained from the ratification of the Lisbon Treaty but also its ability to represent the EU in the global order.

Following the 1970s oil crisis, the EU nations sought to diversify their dependence on Middle Eastern oil. Reliable suppliers are hard to find and many of the energy endowed countries suffer from the resource curse and an accompanying breeding pool of corruption and volatility. Instead, the Union should focus on solidarity, providing affordable prices and consistent energy supply.

What the Future Holds

The Energy Union, however, is not a quick fix. It not only requires increasing encroachments on sovereignty but also a prolonged period of political will which seems optimistic given the populist sentiment sweeping the continent and impending Brexit. The continuing unrest exacerbated by the recession and ensuing austerity is hardly a promising climate for changing policy.

As much as Russia insists that it is an energy superpower, it is heavily dependent on the European Union for demand. The Russian energy sector has been blindsided not just by the crash in oil prices but by the disruption in China, the slower growth rates in major emerging markets and the shale revolution in the US. Thus their reputation as a stable supplier has never been so vital to their economic health.

In an arena where the EU can contribute substantial added value by using its leverage as one of the biggest trading entities in the world, its collective bargaining power could be unrivalled – thus an opportunity for the EU to develop a realistic and pragmatic approach.

For such an inherently global problem it seems foolish to attempt to combat it with a purely sovereign approach. Founding father John Monnet predicted Europe would be ‘forged in crisis’. ‘Fortress Europe’ could still be on the books.

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