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European Energy Union

The union grows through crises – this phrase yields some 20 million search results about the European Union, even without clarifying what kind of union is meant, while searches related to the growth vision for the European Union, run in various configurations, return 500 thousand results at best. This is several times less than in the case of similar queries about the United States (1.7 million results).

Slogans express commonly held truths or beliefs. Crises have immediate painful consequences, which can be overcome through immediate action, typically an emergency response which is expected to improve the situation as soon as possible. Growth, on the other hand, is a process which can take years or decades, and the long time frame does not elicit quite as much effort as crises. Moreover, the neoclassical theory suggests that growth does not require any special economic policies as crisis-prompted adjustments provide the driving force. If growth in between crises is a universal economic process rather than a quirk of the European Union, what is the problem?

The problem is that the European Union is more likely to be associated with crisis than with growth that follows. Indeed, the European Union is still struggling with the aftermath of the global financial crisis, which has laid bare its structural weaknesses resulting from the excessive sovereign debt of many of its member states, ageing societies and high energy costs compared with other, competitive economies. Returning to the path of economic growth entails economic reform, which can affect individual member states to various degrees, putting to the test the integrity of the entire European Union.

The complex landscape of the European energy sector is an outcome of many years of leaving energy matters to the sole discretion of individual countries. The concurrently implemented EU climate policy has created a regulatory commotion which will be difficult to sort out: the EU climate targets make up the underlying framework of national energy policies − this has automatically made the targets a priority, inflating energy prices across the EU. At the same time, the current structure of the European energy sector largely reflects the divisions that existed before 2004, when a large group of post-communist states, for many years tied to the former Soviet Union, joined the EU.

The idea of the European economic union, which in March 2015 the European Commission concretised by proposing specific goals and a course of action, is an opportunity to finally include this strategic sector of economy in the process of integration. Today, the goal is to put the European Union back on the competitive front-line and to revitalise European industry.

There is a risk, however, that national egoisms will impede this potentially great project which the European Energy Union definitely is, because the old EU countries have already taken the steps necessary to secure uninterrupted energy supplies, particularly of natural gas. What they are doing now (expansion of the internal energy market and development of a low-emission economy) are medium- and long-term actions: the results of their today’s decisions will only become visible after the end of investment cycles, spanning many years. Meanwhile, Central and Eastern Europe needs action now to improve its security.

An approach which could mitigate potential conflicts around the EEU is to divide the necessary adjustments into three time horizons (short-, medium- and long-term) depending on the time needed for their effects to materialise, as well as a selective approach to tasks, taking account of differences in the hierarchy of energy union goals between member states. A full spectrum of actions must be taken, although with intensity varying by country, and with due account taken of the stage of development of the energy sector, its risk exposure and flexibility to change.

A possible short-term achievement would be to improve, based on the existing infrastructure, the sense of energy security in the countries that are most exposed to the risk of supply disruptions (mainly of natural gas), by introducing uniform standards and principles to assess supply security and coordinating actions designed to ensure regional security of supplies. But are these measures necessary? According to the countries which have already solved the problem, this is an unnecessary step backwards, as the common market is bound to provide the solution. However, is it possible to build a common energy market despite such profound differences in the countries’ exposure to the risk of current supply disruptions? It will be difficult if a level playing field is not provided through appropriate decisions at the Community level to immediately improve the security of gas supply in Central and Eastern Europe, where the common market is still under construction.

The development of a uniform energy market, higher energy efficiency and low-emission economy are the objectives which require investment in infrastructure and available technologies. Actions taken today will take some time to bear fruit, and the time needed will depend on the length of investment cycles. In the case of medium-term measures, uncertainty is a factor. Will a single gas and energy market solve the problem of energy security? Will it not replace the physical risk (of supply disruptions) with an economic risk (of strong price growth)? What can be done to bring back competitive prices in the energy sector? Will not the investment projects planned until 2050 (i.e. wind and solar farms and necessary infrastructure, such as power grids) create an exposure to technological risk (emergence of game-changing technologies), leading to the loss of competitive prices? How can technological shocks be factored into these investment plans?

We know, however, that achieving lasting and sustainable energy production requires scientific progress and technological development in areas not yet explored. To this end, we need immediate incentives to drive the development of new technologies, friendly both to the climate and to the wallets of energy consumers. These are long-term investments in developing knowledge necessary to break technological barriers and in creating conditions for collaboration between science and business. Considering that benefits of these actions, in the form of commercialised revolutionary innovations, will not emerge sooner than in 15 to 20 years, steps must be taken now, just like in the case of short- and medium-term actions specified above. How can the current, selective system for supporting technological development (wind – yes, coal – no, nuclear power – sometimes yes, sometimes no) be abandoned in favour of a technology-neutral model?

The search for answers to these questions is ongoing, with PKN ORLEN taking an active part, carrying out analyses and research into a broad range of aspects related to energy security. Our proposed analytical/research procedure was put to its first practical use during consultations with the European Commission on the security of gas supply in the European Union. A team of Polish experts I had the pleasure to head was commissioned by the Energy Union Steering Committee of the European Financial Congress to prepare a response to the EC questionnaire, delivered to the European Commission on April 8th.

All conclusions of the work have been included in PKN ORLEN’s report entitled ‘European Energy Union − a compromise for growth and good energy’, which was officially presented in late June, at the European Financial Congress in Sopot.

 

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