Energy infrastructure – a kick-start from Brussels?

David Buchan

Why infrastructure?

• Because it links us to new sources and types of energy, so promoting competition by giving new entrants access to grids, and security by creating diversity and alternative supply. Of low carbon energy, new infrastructure essential to renewables, less so to nuclear.

• Because the establishment of cross-border infrastructure, sometimes in physical and often in regulatory terms, is what the EU is traditionally all about.

• In energy infrastructure European Commission proposing in 2011 to extend EU involvement into three new areas – permitting/financing/external policy.

Why a kick-start?

• Not enough is being built. ENTSO-E estimates need for 35,000 km of new lines and 6,900 km of upgraded lines by 2020. Requires doubling of grid extension over next decade.

• Even with EU’s 3rd package, the market won’t deliver sufficient investment, as OIES has pointed out and the European Commission now realises, following UK U-turn.

• Closer coordination, at EU and regional level, of regulators and TSOs creates better strategic planning ability.

• Awkward political context for new EU initiatives. But streamlining of national permitting procedures useful, if politically feasible. A public sector bank like EIB is valuable to countries like UK which don’t have one.

What Cost Where

High voltage transmission on/offshore, storage and smart grids

Euros 140bn

Northern offshore grid, Baltic interconnection,Pyrenees power links,Central & southern Europe power links

Electricity infrastructure

What Cost Where

High pressure pipelines, storage, LNG terminals and reverse flow infrastructure

Euros70 bn

Southern Gas corridor from Caspian, north-south connections in central Europe, and north-south links in west Europe (viz Iberia)

Gas infrastructure

Regional pattern in electricity TSO investment

Roland Berger financing study 2011

Regional pattern in gas TSO investment

Roland Berger financing study 2011

Total TSO investment – past and future

Roland Berger financing study 2011

Permitting problems

• Non-delivery of Euros 100bn infrastructure, 40bn due to permitting and 60bn due to financial and regulatory issues.

• Objections – EWEA says on average 55 months needed to get onshore turbine permit, and 32 months for offshore.

• Habitats and Birds directives, and Natura network of 26,000 protected sites across the 27 countries = 18 % of all EU territory.

Permitting solutions? • Selection of 12 priority ‘projects of common interest’ (PCIs)

eligible for streamlined national planning process and EU finance.

• Set up ‘one-stop shop’ authorities in MS to coordinate permitting process or take actual permitting decision. UK got this, East Europeans especially bad (ie.Hung 5 different types of permit from 3 diff authorities & Romania worse)

• Set max of 3 years ( 2 yrs for pre-application & early consultation + 1 yr for ultimate decision. Current average is 2 yrs for preparation of documents + 4 yrs to issue permit.

• Shied away from restricting legal appeals and from setting compensation or rewards to local communities

Climate v. landscape • EIA directive (individual projects), SEA directive (policy

development) + international conventions: all these allow scrutiny of X-border effects, but tend to be costs, not benefits (viz climate mitigation).

• Commission proposes to add climate mitigation to factors in selecting PCIs. For electricity, capacity to transmit RES to consumption centres, for gas back-up of RES and pipe biogas. This could count against short-term environmental concerns – long-term benefit to biosphere v. short-term damage to biodiversity.

• Benefit of gas displacing coal could have counted in permitting of Nord Stream and Nabucco (passing through 240,000 plots in 5 jurisdictions)

Infrastructure financing problems

• Funding regulated networks ought to be easy, but often isn’t.• Pressure on regulators to keep tariffs low.• Congestion fees used to keep tariffs low instead of investing• Low returns depress incentive to invest, esp. when TSO is part

of larger group competing internally for investment funds • Majority state-owned TSOs (esp. in East Eur) have problem

raising debt (if trying to avoid over-leverage) and equity (if want to stay state-owned, because owners strapped for cash) Sovereign status no longer a plus.

• Only 12 TSOs in electricity and 4 in gas have stand-alone credit rating (to issues corporate bonds); rest no rating or part of larger groups.

Ownership structure of electricity TSOs

Roland Berger financing study 2011

EU role in improving investors’ rewards

• Regulators to use common method to assess cost/benefit for PCIs with costs following benefiting country, but also to reward own TSOs for essential investment in other states.

• PCIs to be given “appropriate incentives”. • Proposed Euros 40 bn infrastructure fund in 2014-2020

financial framework, of which Euros 9bn for energy and for the new PCIs. Clearly intended as the start of regular EU funding of infrastructure.“Experience shows that national budgets will never give sufficiently high priority to multi-country, cross-border infrastructure investments”

• EU Structural Funds: Euros 4.7bn 2007-2013, but tilted at RES• NER300 = 300m ETS permits = Euros 3bn, but aimed at CCS

EU role in reducing investors’ risks

• EIB now a huge investor in energy – Euros 14.8bn in 2010.• EIB as equity investor (Marguerite Fund with 5 public banks),

as debt investor project bond initiative to act as guarantor bonds repayment (like monolines did) or take junior debt position, which improves position for senior creditors.

• EIB role as anchor investor, up to 50% for 15 yrs, relatively low interest rates, holds to maturity. Value of public banks

• Much new infrastructure tied to RES; RES tied to subsidies; subsidies come from EU states (Euros 35bn in 2009).

• This is out of Brussels’ control, but Brussels acts as rebuker of governments that cut subsidies retroactively & re-assurer that they will continue in the future with road maps. Effective??

Infrastructure rationale in external policy • Commission proposed in Sept 2011 that it should vet member

states’ Inter-Governmental Agreements (IGAs) accords with non-EU countries for conformity with EU law, and that it should be able, on the EU’s behalf, to negotiate infrastructure agreements with foreign partners.

• Surprise - EU role always weakest in external energy policy. • Yet EU governments invited Commission to come up with

these proposals. The 2009 Gas Security Directive already requires EU governments to inform Brussels of all their bilateral gas agreements, and in September 2011 EU governments gave the Commission the green light to negotiate a legal framework with Azerbaijan and Turkmenistan for gas supplies to Europe. Why?

Pressure from the east

• Central & east European states have been pushing for a EU external policy since they joined in 2004. This pressure, plus the Commission’s role in helping Poland get a better long-term gas deal with Gazprom in 2010, has paid off.

• The Commission should now be able to answer, and possibly remedy, the east Europeans’ suspicion that they buy Russian gas on worse terms than bigger west European states. EU intervention, viz the Polish deal, has made it harder for Gazprom to segment the EU market. Together with better intra-EU physical links, this should equalise the price of Russian gas throughout Europe.

• Most IGAs with non-EU states relate to gas pipelines. Like all fixed infrastructure they create dependent relationships

Concluding paradox

• Any expansion of the European dimension in energy policy would run counter to everything else happening in the EU.

• We are clearly headed for a 2-speed Europe, certainly in macroecononics, tax,financial regulation, and if the UK gets its way social policy also.

• Why should the EU go on making energy policy at 27? Certainly the 10 central & east Europeans would love a separate climate policy.