The next Cold War?

If EU policymakers are serious about fighting climate change, bolstering competition and ensuring security of supply then they must face up to a resurgent Russia and its energy monopolist Gazprom, writes Simon Taylor.

The EU’s debate about security of energy supplies took on renewed intensity last week when Russian gas giant Gazprom warned that it would reduce supplies to Ukraine unless the country settled an outstanding €1 billion bill for gas.

The threat reawakened memories of January 2006, when Gazprom cut supplies to Ukraine for several days, reducing the pressure in Austria and Hungary, which receive Russian gas supplies piped through Ukraine.

The two episodes bring into sharp focus the geophysical reality of the EU’s reliance on imported energy supplies and the fear that relations with its largest gas supplier, Russia, have a geopolitical dimension that is even harder to manage than the import dependence.

The EU needs to import 50% of its energy needs and this figure is expected to climb to 70% by 2030 as domestic sources of energy, such as North Sea gas, run out. For gas, future dependence on imports is expected to reach 84% by 2030 while for oil it is forecast to increase to 93%.

Last week, Johannes Teyssen, chief operating office at E.ON, warned that the EU was making it more difficult to respond to the risks of an energy crisis because of the cost of carbon dioxide (CO2) emission permits and delays in planning and building new energy-generation plants and transmission projects. Teyssen said that the EU needed to invest €2 trillion in upgrading power networks over the next 25 years to meet rising demand but highlighted that several large projects had been blocked in Germany recently.

The EU’s policy response has been to try to reduce reliance on oil and gas and on a handful of key suppliers by diversifying sources of supply and increasing the share of low carbon or renewable energy sources in the energy mix. Last March EU leaders agreed to reduce greenhouse gas emissions by 20% by 2020, increase the share of renewables in the energy mix to 20% and ensure that 10% of transport fuels are derived from biofuels. Germany and Denmark have already had major success in increasing the share of energy from wind turbines while Spain has led the way in using liquefied natural gas (LNG) - it has six LNG terminals, more than any other EU country.

But the main challenge for EU energy policy in tackling the security of supply issue is the need for the 27 member states to act in unison. Individual member states and their national energy champions have rushed to agree long-term contracts with Gazprom, signing up to back new pipelines even where they might undermine what passes for a common EU position on relations with Russia (see page 17).

This is not the only area of EU energy policy-making where member states are divided. Member states agree that a more competitive and integrated energy market is needed to keep prices as low as possible when input costs are rising; but they do not agree on the best response to this challenge.

Only by ensuring fair access to transmission networks for new entrants will the EU be able to exploit the potential for new suppliers from, for example, the renewables sector where individual generation units will tend to be very small compared to large power stations. Open grid access is also crucial to take advantage of the opportunities for increased LNG supplies.

The Commission and several member states including the UK, the Netherlands and Sweden believe that strict separation of ownership of generating and transmission businesses is the best way to create a level playing-field and spur the massive infrastructure investments needed to remove existing cross-border bottlenecks. Yet EU energy giants such as Germany’s E.ON and France’s GdF are dead set against being forced to sell off their shares in transmission businesses. They argue, often with the support of their domestic government, that only large companies have the market weight to negotiate with suppliers like Gazprom.

The EU’s newest member states, most of them former Soviet bloc satellites, are afraid that if they are forced to put their transmission businesses on the open market then Gazprom will snap them up. The EU is trying to put in place reciprocity clauses that would bar third-country companies from buying transmission businesses if they own supply and generation activities. Gazprom points out that Russia has been a reliable gas supplier for more than 50 years, helping the EU meet its aim of security of supply.

Gazprom’s sheer market dominance will keep it in a powerful position towards EU energy-hungry companies for years and possible decades to come.

Some energy-sector analysts believe that Russia’s position could be weakened by its growing need for international investment, technology and expertise to modernise its infra-structure and maintain its ability to extract less easily accessible reserves. But it is clear that Gazprom will remain at the centre of the EU’s debate about security of supply for the foreseeable future.

If EU policymakers are serious about fighting climate change, bolstering competition and ensuring security of supply then they must face up to a resurgent Russia and its energy monopolist Gazprom, writes Simon Taylor.