Energy 23 November, 2017 1:00 pm   

Jesień: Energy sector is facing major challenges

What will be the future of energy sector in Europe? Leszek Jesień, Chairman of the Board of Directors at Central European Energy Partners, describes the biggest challenges in this area.

What are the main challenges for the EU energy policy?

The European energy sector is facing major challenges, which are mainly the result of rapid and fundamental change of paradigm in power generation, but also in the use of electricity. So far divided, the markets of the EU countries are becoming better connected and integrated. The transformation of the sector into a more decentralized generation, with the increasing share of renewable energy and the potential for storing electricity on a larger scale, may create challenges, however, at the same time, it opens the door to new opportunities. At this point, it is impossible not to mention the potential of electric cars that will not only change the landscape of our cities, but also – as I assume – will disseminate individual transport and change the way electricity is consumed.

Fossil fuels domination is still far from over, but we should be prepared to reduce the scale of its use. This will have an impact on the existing infrastructure, new projects and their financing, as well as on the existing business models of traditional companies.

The key issue remains the attempt to reconcile the internal contradictions of EU energy policy, which, unfortunately, are far from being just a few. For example, one of the priorities is the creation of a liberalized energy market, but on the other hand, another priority is the development of renewable energy, which still requires significant subsidies. Moreover, its intensity in variety and diversity leads to distortion of the internal electricity market. This results in the paradox of low electricity prices on the wholesale market and high final prices for the consumers. Disturbances of wholesale prices lead to incorrect allocation of investment resources, whereas high retail prices are difficult for consumers to understand. Another example may be the contradiction between the functioning of the emissions trading system (ETS) and the development of renewables or energy efficiency – the more progress in these two areas is done, the lower the price of GHG emission allowances will be. It results from the fact that every now and then there is a temptation to administratively raise prices of these allowances, which contradicts the original assumptions of ETS, that it is the market alone that – due to the cost of the greenhouse gas emission allowance – will make the most efficient choice, rather than on an administrative basis. And the list of examples can continue.

How do you assess the cooperation within the framework of Energy Union. What are the basic differences in the approach to this project in the EU?

Energy Union, which is one of the ten priorities of the current European Commission, constitutes an important and a necessary project. Based on the five priorities: security of supply, integration of markets, development of energy efficiency, research, innovation and competitiveness and decarbonisation, it is designed to bring more consistency and clarity into the field of EU energy policy. Until now, it was mainly a political project, but it is also slowly gaining a legal form – from 1 November 2017 a new regulation on security of gas supply, which is part of the gas package, entered into force. If the regulation on the governance of the Energy Union is enacted in 2018, it will settle the mechanism of its functioning in the European legislation. The regulation introduces an extensive system of cooperation and consultation between the Member States and the Commission, based on the Integrated National Energy and Climate Plan. Many of the provisions of this act are controversial and interfere with the competences of the Member States, but its overall objective is to introduce greater coherence in the development of national energy policies.

The main differences in approach to this project stem from internal conditions that result from different energy landscapes or visions on the development of energy policy in individual Member States. For example, the Central European states regard the security of supply as a priority, the Scandinavians highlight the decarbonisation urgency, while the smaller countries place the importance on a better integration of markets to allow free trade. This translates into different negotiation strategies and different sensitivities in the perception of priorities. The main challenge for the EU remains the way to reconcile these different approaches, to maintain a proper balance between the Member States and not to take actions that could pose a potential threat.

Unfortunately, some countries still do not take into account the interests of others and selfishly make decisions that compromise the energy security of their neighbours. An example of this is the construction of the Nord Stream gas pipeline. This is a project that openly violates the rules of the Energy Union, concerning the diversification of supplies and reducing dependence on external suppliers, nonetheless it enjoys political support in Germany.

How can the EU’s energy policy be strengthened so as not to discriminate against individual approaches in each country?

Energy policy is a shared competence of the EU. Such a legal situation in itself assumes that there is some room for individual approaches by the Member States. At the same time, it must not be forgotten that art. 194 contains a paragraph confirming that Member States have the right to determine the conditions for the use of their energy resources, to determine the proportion between different sources of energy and the overall structure of energy supply.

Unfortunately, in recent years, we have seen a repeated bending of the Member States’ rights in order to define their energy-mix, for example by discriminating against the use of certain fossil fuels (e.g. coal vs. gas). Such proposals are already concrete, in the form of the idea to​introduce emission performance standards in the capacity markets.

EU energy policy should remain technologically neutral. This is one of the conditions for its proper development, since it assumes the free use of resources to achieve the objectives, through the use of market decision potential and enterprise innovation. The lack of technological neutrality is a mistake, because it already and administratively determines which technologies will be better in the future. Such a choice belongs to the nature of the market game and unrestricted scientific and technological research, not to the sphere of politics and regulations.

Is it possible to strengthen the cooperation of our region in this area?

Central Europe is effective in the EU as long as there is a sense of community of interests. I believe that this region is facing similar problems and challenges, although sometimes they are differently articulated in different countries. Central and Eastern Europe in terms of energy infrastructure development is still oriented towards the East-West, while the North-South connections are poorly developed. This is particularly obvious in the gas and oil transmission infrastructure. All countries in the region are too dependent on Russian gas and oil supplies, while having little domestic resources. From the point of view of electricity, the Baltic countries are still, in fact, part of the former Soviet system.

Deepening the cooperation in the field of energy has a great potential and can take place in the areas such as the creation of a regional gas market, the development of interconnections in the North-South axis, electro-mobility, innovation, technical control of cross-border electricity flows (loops flows) or climate policy.

How can the Three Seas Initiative contribute to a better integration of the sector in Central Europe?

The Three Seas Initiative in the energy sector emerges from the search for synergy, which embraces the countries of our region. We notice here similar challenges. In the electricity sector, difficulties in supplying the Bulgarian and Serbian population in the winter of 2017 can be compared to the challenges of the Polish electricity market in 2015. The development of LNG (liquefied natural gas) in Poland, on the Baltic Sea, makes it even more sound to develop LNG on the Adriatic, for example in Croatia. Gas security cannot be understood in isolation from the regional structure of gas pipelines and connections between them.

The implementation of ambitious infrastructure projects requires strong political support, which facilitates technical and logistical difficulties, fosters financial mobilization and promotes business co-operation. The Three Seas Initiative is a field of cooperation among like-minded people in the region, who should now focus on implementing specific sectoral initiatives.

CEEP intends to play a significant role in this initiative. We would like to provide a platform for energy cooperation that will comprehensively support the development of the energy sector in the region of Three Seas. The platform could become a valuable instrument for the dialogue and discussion on the strategic direction of energy policy, bringing together companies and stakeholders in the region and giving them support in relations with Brussels. In this way, we want to help in establishing contacts and mutual understanding of business strategies and activities of enterprises. This would facilitate the implementation of projects of common interest and foster the development of infrastructure (North-South corridor, LNG). It would also provide support in identifying potential threats (loop flows) and challenges (climate policy), and the search for the right solutions.

How does CEEP intend to influence decision-makers in the EU so that regional conditions are taken into account?

CEEP’s activity can be divided into three main areas. The first one is the analytical activity. In this regard, we intend to present analytical reports and studies, indicating the common problems of the countries in the region, i.e. the diversification of gas supplies, the development of LNG and the problems with power adequacy.

The second is the organization of events that deal with issues of regional importance. Our flagship project is the Central European Day of Energy organised in cooperation with the European Commission, whose second edition will take place on 11 December 2017 in Brussels. It provides the opportunity for Central European energy companies to present their position directly to EU decision-makers. Last year the main theme of the event was security of supply; the current – innovation and energy transition. A similar event is the annual CEEP Energy Summit, during which we discuss the challenges of the sector with the Vice-President of the European Commission for Energy Union. This meeting takes place in one of the countries from the region, holding the Presidency of the EU Council, this year it took place in Tallinn, next year in Sofia. In addition, on a regular basis, we organize conferences, among other topics, the impact of Nord Stream 2 on Central Europe, or the so-called circular flows (loop flows) of electricity in the region.

The third area of ​​our activity is direct meetings with officials of the European Commission, Members of the European Parliament and their advisors, during which we present a regional perspective and try to persuade them to adopt optimum solutions for our members.

CEEP’s activity stems from a deep conviction about the need for greater presence in Brussels of companies from the region and from Poland and the need for more active strive for business interests. The activities of the association is an additional channel for communicating problems and concerns related to energy in the region to European decision-makers. At the same time, our actions support mutual understanding and contribute to better integration of the sector in the region.

CEEP is an offer of cooperation directed to all stakeholders in the energy sector of Central and Eastern Europe. We see synergies between generators, distributors, supply and consumers of energy. I think that the region needs more equitable energy market. Cooperation and the market are good fields for the flourishing of a regional energy sector.

Professor Leszek Jesień has been the chairman of the Board of Directors of CEEP since September 2017. He is the Director of International Relations and Strategy at PSE, responsible for inter-TSO relations, strategy and innovation. He is a professor of international relations and sustainable development at Collegium Civitas University. Co-author of many publications on the energy sector, among others, New Electricity and New Cars. Previously, advisor for European affairs and energy to three Polish prime ministers, and ministers of economy and environment.

Central Europe Energy Partners (CEEP) is an association representing the energy and energy-intensive companies from Central Europe, with its headquarters in Brussels. Its main task is to promote fair energy transition in line with the principle of technology neutrality and to strengthen the regional cooperation and energy security of the region within the framework of the EU’s energy and climate policy.

CEEP represents 13 energy companies and organizations from four Central European countries, employing more than 100,000 people, whose total annual revenue exceeds EUR 20 billion. It is the only association of energy companies from the region active at the EU level.