Let the market decide about energy investments

The EU should strengthen energy markets, not bureaucracies

Shortly before Easter, the European Commission 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.  

Unfortunately, this is not what we saw in the infrastructure rules recently adopted by the European Union. They imply that the Commission gets to pick ‘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.

If I were a commissioner aspiring to build a free and secure energy market in Europe, I would make this market as open as possible to all potential investors. I would strive to ensure that conditions for building energy infrastructure are not determined by political support for some projects and absence thereof for others. And I would certainly not send a message that external gas suppliers should no longer invest in supply infrastructure.

Forecasts suggest that domestic gas production in Europe will fall sharply. The EU’s Joint Research Centre estimates that in the best-case scenario, shale gas can partially compensate for this reduction. It is more likely, many market players believe, that Europe will face an import gap for natural gas. It is external suppliers and large importers who have the most incentive to help close this gap. Often, they are also the only players that can afford to take large shares in such investments.

But Europe does not welcome investors, to put it mildly. Take the example of the OPAL pipeline, the extension of Nord Stream that brings Russian gas to Europe through the Baltic Sea. For years, it has stood half-empty because the Commission decided that 50% of the pipeline’s capacity must be auctioned to third parties. The EU is sticking to this decision, 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.

Gazprom nevertheless remains committed to helping meet Europe’s needs. Its South Stream pipeline project – which is to deliver large quantities of gas through the Black Sea and on to Italy – proves this point. South Stream will be a privately financed investment that will comply with all relevant EU laws and regulations, including on the environment and energy. We are not asking for special treatment. But we do urge the Commission to apply existing rules in a way that allows market players to do their job: deliver energy, and not at half-speed.

Regulatory risks also overshadow the question of the EU energy mix. The 2030 framework at least starts to ask questions about the effectiveness of legally binding targets and open-ended subsidy schemes. These policies did not deliver. While Europe was busy picking winners by decree, the United States reduced its emissions down to 1992 levels and exported its excess coal to Europe. Now, the US is celebrating the return of energy-intensive industries, while the EU is lamenting that its climate-change goals are covered in coal dust.

If Europe is serious about avoiding the deindustrialisation and sunset of Europe, it must put cost efficiency at the heart of its energy and climate-change policies. The EU should therefore focus its efforts on putting the emissions trading scheme back on its feet, for a period way beyond 2020. This will not be easy. Instead of spending ever more on politically selected technologies, Europe should establish a modest carbon floor price. This would decrease pressure on already strained state coffers and leave the choice of energy technologies where it belongs: to the market.

Alexander Medvedev is the deputy chairman of Gazprom and director-general of Gazprom Export.

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