Energy 20 November, 2020 10:00 am   
COMMENTS: Mariusz Kawnik

Kawnik: It’s not going to be calm in the energy sector (INTERVIEW)

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“Our region will become an arena for huge investments in the energy sector, over which companies from various parts of the world will compete. So it won’t be calm,” Mariusz Kawnik, Executive Director at Central European Energy Partners, says in an interview with How do Central and Eastern European states cooperate to diversify energy supply and hydrocarbons?

Mariusz Kawnik: We should start by pointing out that today the energy security in Central and Eastern Europe (CEE) seems to be at its best, since the countries of the region joined the European Union. However, this does not mean that CEE is already completely safe, or that it will remain so. We should also remember what actually posed a threat to our region in the last decades when it comes to energy security. That was “dependance”, and to be specific dependance on one source, one provider and one technology.

The dependence on gas and oil imports from one provider created a risk that made the CEE states susceptible to market, economic and even political pressure. Are these states still under that pressure? In comparison to the situation we were in only 10 years ago, the pressure is neither as big, nor as effective. It’s interesting to ask why. There are two reasons. First, the huge effort the CEE states put into diversifying oil and gas supply; and second, their ability to find ways to cooperate with one another, which improved energy security across the entire region.

There are many examples of how the CEE states tried to grapple with the energy dependence on their own. The closest one to us is of course the LNG terminal in Świnoujście, which was built, to a large degree, thanks to the financial support from the EU. It radically increased Poland’s ability to diversify gas supply. The terminal is used at full capacity (highest in the EU), and enables gas import from any place in the world. But, there is one more aspect. In the last five years, the consumption of gas in Poland increased by 5 bcm and reached almost 20 bcm a year. If it wasn’t for the terminal in Świnoujście and the cross-border connection with Germany, which had been launched earlier, Poland would have had no choice but to import more from the east. The new infrastructure allowed Polish companies to choose the supplier, an opportunity they eagerly took up. Despite the fact that Poland has not yet reached full diversification, which will happen only once the Baltic Pipe is up and running, it is already plainly visible that it does not depend on one supplier only. The same process occurred in the oil sector after the oil terminal was opened, and the same thing is happening in other countries, e.g. in the Baltic States, thanks to the new LNG terminal in Lithuania. The new infrastructure allows every CEE state to make independent decisions and reduce the biggest threat to their energy security.

Yet, this short analysis shows that not everything can be achieved individually. Regional cooperation is necessary. None of the CEE states can build an interconnection on their own. An interconnection needs at least two operators. For years this has been a problem in our region. The first plans to build the power link between Poland and Lithuania had emerged in the 1990s, but LITPOL Link was launched in 2015. The gas connections in the region are facing similar delays. Planning took decades, and the actual construction started only in the last 5-6 years. Why did things start to accelerate? There are three major reasons, but I am sure others could be added.

Undoubtedly the most important factor are the experiences we are learning about from Western Europe. By the Atlantic, when joint projects are pursued, the investments are usually made when they are profitable. In the last decade CEE has finally understood that cooperation is profitable. The pace of the construction of the new connections in our region is less and less impacted by politics, or rather political and historical issues. Instead, we are focusing on the economy and on finding new ways to obtain economic benefits.

Next I would point to the permanent partner of all the negotiations on the issues of energy cooperation in the region. That partner usually works behind the curtains, but none of the projects would have been possible without it – it’s the European Commission. And this isn’t just about the fact that the European Commission subsidizes diversification projects. It is also about the fact that the office of the Energy Commissioner has become the most neutral place, where ministers, operators and investors can sit down and come up with a solution that will satisfy all parties with the help from the European Commission.

There is also a third factor, which accelerated diversification. Those are the new EU regulations on the energy market, infrastructure and financing, about which you will probably ask your next question. It is also worth pointing out that diversification is achieved through skillful coordination of investments in national infrastructure with regional cooperation with other states. It cannot be achieved individually.

How do EU regulations impact this cooperation?

Exactly! EU regulations, which frequently irritate us because of their complexity and level of detail, in reality are one of the most important elements that make regional cooperation simpler, when it comes to diversification.

Just try to imagine the construction of an interconnection without the EU regulation on the energy market or gas. Try to imagine the cooperation between operators without ownership unbundling provided for in the Gas and Electricity Directives from 2009. Finally, try to imagine attempts at coming up with a methodology for splitting the construction costs of new infrastructure without the Regulation on trans-European energy networks. And try to imagine trading gas and energy across EU’s internal borders without the Network Codes on Capacity Allocation and Congestion Management.

As late as in 2007 a large percentage of energy was imported to Poland on the basis of long-term historical contracts with companies from Austria and Switzerland, which were similar to those in the gas sector. This was accompanied by blockages in cross-border capacities, similarly to what is still happening today on some gas cross-border connections. Without EU regulations for the energy sector, without ACER and the cooperation between ENTSO-G and ENTSO-E, our energy companies would still be forced to buy on the basis of long-term contracts, whereas decisions on the price and contract terms would be made in ministries. It is thanks to EU regulations, that energy trade in Central Europe is almost completely taking place only on the basis of market principles, and Polish companies can buy gas on the German exchange and sell it, even with a large profit, in the Czech Republic.

What is the future of cooperation with the U.S., China and other foreign partners?

You are asking difficult questions for which short answers are hard to give. But I will try. The global market ensures that CEE has access to every technology and every raw material, including energy resources, that it needs.

The media usually report on big contracts, such as the ones on importing gas from the U.S., or on the support America has offered to Poland and Bulgaria with regard to nuclear energy. It seems that once we complete the projects that are key for energy security for any state in the region, it would be smart to cooperate with our allies, rather than states that only see us as an outlet. As I have already mentioned, the economy should be the foundation, but exchanging know-how, learning how to organize nuclear surveillance, or, e.g. gaining knowledge and skills on trading LNG on the global market, are all better done in a friendly political environment. And for the CEE states that environment is the Transatlantic community, which includes the United States as well as EU members.

When it comes to China, things get more complicated. Traditionally one could state that the biggest perspectives for cooperation pertain to the import of cheap and widely-available technologies, solutions and products for the energy sector in Asia, where their production is the cheapest. This will be the case for many more years. However, there is a number of initiatives, which are introduced by China at a global scale, which may turn out to be interesting in a 15-30 year perspective, e.g. the “global grid integration,” an idea developed by a Chinese organization GEIDCO. I think that 25 years ago, PGNiG did not expect that in 2020 the 100th LNG delivery would arrive to Poland. Similarly, today we should not expect Poland’s grid operator – Polskie Sieci Elektroenergetyczne – to be interested in so much as initial talks with, e.g. EDF, on the cost of power transmission from French nuclear power plants via Poland to India. But perhaps thanks to the technologies that are being developed in China, in 25 years such negotiations will have to happen. This is because there is no reason to turn away from ideas from Asia, which is and will remain the center of global energy trends. However, we should still remember that cooperation with China should be based on market rules only, so as not to accidentally replace a dependence on one provider with a dependence on another.

When it comes to other states, I don’t know which ones you have in mind, but from CEE’s perspective it is the cooperation with Belarus, Ukraine and Russia that will remain the most important one. And it is teeming with challenges. I am sure that in 2021 we will be monitoring the situation in the oil, gas and power sector in Belarus very closely. Cooperation is not easy, which was evidenced by the oil crisis in 2019 and the growing dispute over the Astravets NPP. The constant tension caused by the negotiations between Russia and Belarus on the natural gas price will not help either. Whereas, in 2022 we will anxiously await news from PGNiG and GAZ SYSTEM on the progress of replacing gas from Russia with imports from Norway via Denmark and through the Baltic Pipe gas pipeline. In the meantime all states in the region will keep an eye on the changes in Russia’s energy policy and Gazprom’s trade policy. I admit that in the coming years, it may be more interesting to analyze Russia’s pursuit of the hydrogen economy, rather than to follow the level of gas storage in Ukraine.

For years it seemed that a diversified and energy-safe CEE, would be finally able to take a break and focus on topics other than energy. However, it looks like we shouldn’t keep our hopes up that the next decade will be calmer than this one. Our region will become an arena for huge investments in the energy sector, over which companies from various parts of the world will compete. So it won’t be calm.

What could undermine energy cooperation in CEE?

Thank you for asking me this one and only simple question. The answer is simple – nothing.

We are facing very tough challenges, including finishing the construction of gas connections from Poland to Denmark, to Slovakia and Lithuania, the second power link between Poland and Lithuania, construction of offshore wind farms on the Baltic, the Black Sea and most probably the Adriatic Sea, improving the integration between south and east Europe with the rest of the EU. None of these tasks face risks. They will go according to their own schedules, and I am sure they will be successfully completed.

If you are going to ask me about the problems we should expect in our relations in the region, I will answer that that list is longer. I will reiterate for the third time that the economy will defend itself. Regional cooperation is beneficial. The only way problems may occur is if politics gets the upper hand. This happens when projects that are driven by politics are pursued, such as Nord Stream 2. This happens when reports from “independent think-tanks” emerge in Brussels, claiming that methane emissions during gas production are a few times higher in North America than in Russia and Algeria. Finally, this happens when operators cannot free their cross-border capacity in gas interconnections, because historical contracts with their main suppliers don’t allow that – that’s when CEE energy cooperation is at risk, because politics starts to play a more important role than economics.

What is the significance of the European Green Deal for this cooperation?

I don’t think we know how to assess that yet. The next year or two will be a test on how the cooperation in the region works with regard to negotiating the legal acts that the European Commission will publish. Will we find allies in CEE during negotiations on the regulations on the taxonomy, which may make it impossible for all states of the region to limit GHG emissions by using natural gas as a transition fuel in the energy transition process, and make it difficult for the gas industry to invest in new technologies? Instead of competing, will we be able to come up together with a position on the new regulation on trans-European energy networks, which will develop our potential in energy generation in a way that will utilize the existing resources, such as the gas infrastructure? Finally, will we argue (too much) about how the EU funds are spent on energy transition. Surely, regional cooperation under such circumstances will be a big challenge.

However, once the regulations are agreed on and once they enter into force, we will have to find new ways to cooperate to make sure the energy transition in our region is just and sustainable. We can cooperate on a lot of projects. Most probably dozens of new offshore wind farms will be built on the Baltic. We will need to find a way to link them with the grids in Poland, Germany, Denmark, Sweden, Finland and the Baltic States. While Bulgaria, Romania, Turkey and Ukraine will have to face a similar challenge on the Black Sea. The CEE states will phase out their coal industry, which should be done in a well-thought-out and coordinated way. We will build completely new branches of the economy – the construction of a hydrogen fuel cells factory in Poland will impact the shape of this market in the Czech Republic and in Hungary, whereas starting hydrogen storage in Latvia will definitely impact what will happen in this sector in Lithuania and Estonia.

In the past, the new directions of the climate and energy policy that were hammered out in Brussels frequently caused fear and concerns among CEE states. However, it seems this is behind us. The European Green Deal is an opportunity to use large sums from the EU budget to finally go through with the energy transition, which had been postponed for too long. This transition is necessary not only because of climate change. It needs to happen because our economy needs uninterrupted energy supply, whereas the technologies and infrastructure we have been using until today have become completely ineffective from an economic point of view. Therefore, it’s a good thing we will not do this transition alone and that we will need to cooperate with other EU states and use EU funds. If we had to do this on our own, it would be too difficult, perhaps impossible.

Interview by Wojciech Jakóbik