The European Commission recently presented a roadmap for its climate and energy policies up to 2030.
It did so for the right reasons, stating that energy investors “need certainty and reduced regulatory risk”. I agree, wholeheartedly.
The energy industry needs a transparent, rule-based and non-discriminatory policy framework, where investment decisions are taken by market players, not bureaucracies.
Coal is elbowing gas out
But while the EU has been busy debating its energy future, coal has re-emerged as fuel of choice in Europe. Indeed, the US shale gas boom has led to the American excess coal getting dumped on the old continent.
This unexpected shift in Europe’s energy mix is a symptom of failing EU climate change policies: while large sums of public money are used to subsidise expensive renewable energy technologies, the very same policies set perverse incentives to burn heavily polluting coal. As a result, gas is being squeezed out, with gas-powered plants mothballed across Europe.
And yet gas is the flexible and clean balancing fuel that is necessary for the EU climate policies to succeed.
How do you fill the impending gas supply gap?
Burning gas instead of coal reduces CO2 emissions by 50-60%. Increasing the share of gas in the EU energy mix by only 1% will reduce the emissions by 3%.
But forecasts suggest that domestic gas production in Europe will fall sharply.
In a best-case scenario shale gas can partially compensate for this, going on estimates from the EU’s Joint Research Centre. It is external suppliers and large importers who have the most incentive to help close this import gap. Often, they are also the only players that can afford to take large shares in big infrastructure projects.
Half empty Nord Stream pipe shows red tape is absurd
Unfortunately, infrastructure rules recently adopted by the EU do not encourage such investments. They imply the Commission gets to pick so called ‘projects of common interest’ and make them subject to fast-track procedures. All other projects will continue to face red tape.
Such an approach reduces EU aspirations for smart regulation to absurdity; more importantly, it also sends the wrong message to investors.
Take the example of the OPAL pipeline, the German extension of Nord Stream through the Baltic Sea. For years, it has been standing half-empty because Brussels decided that 50% of the pipeline’s capacity must be auctioned to third parties, even though no one has expressed an interest in acquiring this capacity. Given that Nord Stream was an EU priority project, this exemplifies how far away Europe is from reducing regulatory risks. This is a real issue – and it needs to be addressed before 2030.
South Stream must not fall to same red tape
We are not asking for special treatment for our South Stream pipeline project, which is to deliver large quantities of gas through the Black Sea and on to Italy.
But we do urge Brussels to apply existing rules in a way that allows market players to do their job: deliver energy and not at half-speed.
If Europe is serious about the twin objective of building a competitive, low-carbon economy, it must finally put cost efficiency at the heart of its energy and climate-change policies.
Solution? Slash red tape bureacracy
Firstly, the EU should reduce the number of policy instruments. The complex interactions between quotas, subsidies, and market mechanisms lead to unexpected and unintended consequences. This is the opposite of clear investment signals, which everyone agrees we need. The European coal boom is a case in point.
Secondly, the EU should focus its efforts on putting its emissions trading scheme (ETS) back on its feet, for a period way beyond 2020. This will not be easy.
In my view, instead of debating political ad hoc interventions into the carbon pricing mechanism, Europe should establish a carbon floor price. These measures would decrease pressure on already strained state coffers and leave the choice of energy technologies where it belongs: to the market.
Alexander Medvedev is Director General of Russian energy firm Gazprom’s export arm Gazprom Export and Deputy Chairman of Gazprom Management Committee.