international analysis and commentary

Energy challenges in Europe: the Russian and Turkish factors

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Considerable dependency on Russian supplies and the lack of a well-functioning energy market are the most challenging legacy of Europe’s forty years without a common energy policy. A combination of factors – specifically the negative Turkish attitude toward the upcoming Cypriot presidency of the EU and Vladimir Putin’s strategy to be elected president once again – now poses the serious risk of disruptions in EU gas supply. Despite many problems, the European Commission has been trying to develop a common policy since 2004; however, national interests and the presence of a few big gas players have hindered the Commission in its goal. The Commission’s new “Connecting Europe Facility” (CEF) program, which aims to build missing energy infrastructures, should raise Europe’s energy security, as should the new “Energy Efficiency Directive”, currently under scrutiny. However, the competition in Central Asia for new gas sites and potential synergies between Turkey and Russia pose several challenges for the EU.

Europe suffers mostly from a self-imposed lack of integration in the energy sector. Existing national energy giants – who aim to keep their dominant role – tend to be associated with old gas and power networks, and are thus unable, for example, to connect the sunny South directly with the windy North, thereby further reducing the European Union’s energy security. Such a failure has led the European Commission to take action against no fewer than 25 governments, for not having correctly implemented liberalization measures. In addition, the Commission has published the CEF program to encourage countries to upgrade and to connect current energy networks. The CEF is meant to substitute the old “Trans European Network – Energy”, whose measures have been unable to help the private sector build key energy infrastructures. The new facility identifies twelve corridors and areas that the Commission believes must be developed to improve Europe’s energy infrastructure. As regards gas in particular, the CEF considers strategic the “Baltic Energy Market Interconnection Plan in gas” (BEMIP) and the “Southern Gas Corridor” (SGC), as well as infrastructures that aim to improve the North-South gas interconnections between Central Eastern Europe/Balkans and Western Europe. BEMIP would end the isolation of the Baltic states and Finland, as well as their dependency on Russia; SGC would provide the EU with direct links to the Caspian basin, Central Asia, the Middle East and the Eastern Mediterranean countries.

Although the Commission, during the June 2011 Energy Council, declared it would need €200 billion to fill the energy infrastructure gap (€70 only for gas), the Multi-Annual Financial Framework for 2014-2020 (just presented and now under scrutiny by the European Parliament and the Council) devotes just €9.1 billion to the sector. The Commission, together with the European Investment Bank, is considering launching Eurobonds in an attempt to cover the difference. These would provide energy groups with low interest loans to partially fund key infrastructures. As the credit crunch and low energy consumption are still strongly reducing gas players’ cash flow, such Eurobonds could be extremely useful, in the medium term, to fund infrastructure development.

The other crucial policy area is energy efficiency: the new Energy Efficiency Directive is based on the assumption that the capacity of gas pipelines should not be overstretched, and that the alternative is to invest as much as possible in making consumption more efficient. However, though the Commission has publicly declared that the text could generate a potential economic growth of 34 billion euro and create 400,000 new jobs, several conservative MEPs and some governments remain skeptical. In particular, southern European countries do not support the Commission’s proposal to promote the development of cogeneration power plants (plants that are able to generate both electricity and heat, to be supplied directly to households) as these are not economically viable in sunny countries. As winter temperatures are much more moderate in Mediterranean countries, the demand for household heat would be too low to justify its generation, encouraging power operators to raise electricity bills to cover losses.

The infrastructure regulation (CEF) and the Energy Efficiency Directive aim to raise the EU’s energy security, diversifying supply and reducing consumption. Both will directly impact Gazprom’s business, and, indeed, not only the company but also Prime Minister Putin have openly criticized the EU for its legislation on the gas market. This is also a symptom of the political climate in Russia in light of the 2012 presidential election: since 2004, Gazprom has represented an important foreign policy tool for Putin, and has been used systematically to reaffirm Russian dominance over Central Asia and Ukraine as well as to raise Russia’s bargaining power with the EU.

Given that Gazprom has not invested enough in the exploration of new gas fields in Russia and given that the company faces a constantly growing domestic demand, Putin is likely to try to obtain new gas deals with Turkmenistan. Such efforts would undoubtedly benefit from Turkish activism in the region: as President Erdogan is trying to develop the country as a gas transit hub, Turkey is becoming more and more important for all players in the sector. In addition, Erdogan’s declarations about the forthcoming Cypriot presidency of the EU have raised tensions between Brussels and Ankara. Although Turkey may need the EU more than Ankara seems to believe, the constant delays in the EU accession process, together with strong Turkish growth rates, are producing a very active and autonomous foreign policy. This could be good news for Putin, who could seize the opportunity to develop joint strategies with Erdogan on Central Asia: Gazprom could provide Ankara with cheaper gas, while Moscow could secure an important ally in the region. Moreover, Gazprom could sign a large amount of new gas deals, massively reducing European gas groups’ possibilities in the region and potentially threatening EU’s energy security once again.

In coming months, as the Commission is expected to present its 2050 Energy Road Map, Putin’s political campaign and his stance regarding the potential rift in EU-Turkey diplomatic relations will represent an important test for Europe. Given the euro crisis, instability in the Middle East and North Africa, and a constantly growing energy demand, European policymakers are navigating extremely difficult waters.