Banking on natural gas as it moves away from coal, the European Union (EU) in September adopted new rules that require member states to help neighbors affected by supply disruptions.
The new rules adopted by the European Parliament on September 12 are in response to past disruptions to critical gas supplies. In 2006, Russia turned off all gas exports through Ukraine for three days owing to tensions simmering between the two countries. Russia again cut shipments in 2008 by 50%. In 2009, a renewed debt spat with Ukraine led to a total disruption of supply, which lasted more than 13 days, and in 2014, gas supplies were again temporarily halted owing to the Crimea dispute.
For the EU, the supply disruptions highlighted how vulnerable the bloc is to potential blackmail concerning gas imports. Member states collectively need about 400 billion cubic meters of gas annually, which covers a quarter of the EU’s energy demand. But roughly 65% of its gas is imported—nearly half comes from Russia, a third from Norway, and the remainder from Algeria, countries that are not part of the EU. And as the UK, a major gas producer, prepares to leave the EU, imports have been growing, jumping 10% in the first quarter of 2017 compared to a year before.
Meanwhile, EU gas consumption has been soaring on the back of continuous growth of gas use in the power sector, especially in Greece, Portugal, and the Netherlands. In 2016, consumption jumped 7%, compared to a 4% hike in 2015, driven by a cold winter and an increase in gas power (Figure 5). Profitability is the primary reason for a surge in gas generation: EU wholesale gas prices dropped 50% between 2013 and 2016, as global demand weakened, the U.S. ramped up exports of shale gas, access for liquefied natural gas improved in Europe, and oil-indexed gas prices fell. Over the past two years, meanwhile, coal prices remained relatively high owing to market tightness in Asia after China restricted domestic coal output. Oil-indexation accounted for only 30% of European gas consumption in 2016—unchanged from the year before—and the EU noted a “clear trend” in the decline of oil-indexation in long-term contracts.
Especially after the events in 2006 and 2009, the EU moved to reinforce its gas supplies by adopting the first security of gas regulation in 2010, which required member states to share national plans for crisis mitigation, obligated companies to ensure gas supply to protected customers, and provided for the installation of bidirectional capacity of gas supplies. However, stress tests conducted later showed that many EU countries are still vulnerable to supply disruptions, the EU said.
The new rules adopted in September aim to “put solidarity first,” requiring member states to help ensure gas supplies get to households and social services first, the European Commission said in a press release. But they also call on regional groups to jointly assess common security supply risks and develop agreements to prevent emergency measures. A key requirement also seeks to increase transparency on the gas market. Key EU lawmakers noted that the resiliency measure for a regionally coordinated and common approach to security and supply is a key mission of the Energy Union.
—Sonal Patel is a POWER associate editor