Thursday, 22 June 2017

Why cannot renewables replace such fossil fuel like natural gas?

Ten years have passed since the European Commission put forward proposals for a reduction in greenhouse-gas emissions in 2007. These proposals, later on, formed the basis for the strategy well known as the EU 20-20-20 strategy, which made it necessary to review different energy resources taking into consideration not only fundamental evaluation criteria for different energies such as efficiency, natural resource base, their availability, security of supplies and energy storage requirements. The EU 20-20-20 strategy attached a particularly great importance to environmental impacts of energy sources. In this regard, one of new environmental targets was to reach 20% of renewable energy in the total energy consumption in the EU by 2020.
The EU Member States have made significant progress in promoting development of renewable energy sources (RES) over the past years. According to the last year's report of the European Environment Agency, the share of gross final energy consumption to come from RES rose to 16.4% in 2015 from 16% in 2014. The Second Report on the State of the Energy Union issued on 1 February 2017 contained the same data and showed that it helped to decouple economic growth from greenhouse gas emissions - during the 1990-2015 period, the EU's combined GDP grew by 50%, while total emissions decreased by 22%.

It is worth recalling however, that apart from alarming climate changes another reason why RES have become a focus of special interest is the declining national potential of primary fossil energy resources in the EU member states. According to Eurostat, in the decade between 2004 and 2014 the production of renewables increased by 73.1%. By contrast, the production levels for the other primary sources of energy generally fell over this period, the largest reductions being recorded for crude oil (-52.0%), natural gas (-42.9%) and solid fuels (-25.5%), with a more modest fall of 13.1% for nuclear energy.
It would seem that the reduction in local production of conventional primary energy should not cause any problems if instead of them consumers in Europe have a possibility to switch to RES. Experience has shown, however, that along with the obvious advantages, RES have revealed some serious weaknesses in operation – it is unstable and fluctuating power supplies. By an unlucky coincidence, those problems became apparent exactly ten years after gaining an official recognition when in January 2017 Europe experienced a sharp fall in output of RES generating capacities.
It is unlikely to find a rational person in Europe, especially in the northern part of the Continent, who would need an explanation of how much stress an unstable energy supply can cause during a winter cold spell. Fortunately, the present generations of European citizens have almost never encountered such problems. Meanwhile, to give everybody an opportunity for imaging such an energy breakdown in winter the German daily "Die Welt" tried to describe the picture of snow-covered solar panels and drooping blades of wind turbines by using an old word Dunkelflaute, which refers to that time of year, when neither sun nor wind occur in necessary abundance.
"Dunkelflaute could be pushing Germany's power supply to its limits," says the title of the article published in Die Welt on 6 February 2017. Let us notice that is what happened in the EU member state with well-advanced energy sector, which in all circumstances is capable not moving beyond that critical boundaries and avoiding unscheduled interruptions in the power supplies. This was possible thanks to the prompt switching over to conventional energy sources to substitute RES when the latter significantly cut their contribution to gross final energy consumption.

According to statistics from the Berlin-based institute Agora Energiewende, by the end of January 2017 as much as 90% of the country's power was provided by coal, gas and nuclear. The chart below illustrates that on 24 January 2017 the generation of electricity by onshore wind power in Germany dropped to its historic minimum 0.486 GW. Later the electricity production by onshore wind returned to the pre-crisis level and after about six months on 7 June exceeded 23 GW.
As Stefan Kapferer, Managing Director of the Federal Association of the Energy and Water Industry (BDEW) told Die Welt, the past January saw a combination of lower-than-average temperatures, a high demand in electricity and extreme fluctuations in input from wind and solar power. "Flexible, conventional power stations are essential if we are to stabilize the electricity network," he said. "We have to be able to cover energy demand regardless of the weather."

Kapferer further noted that all this pointed to the need for flexible gas and coal power stations. Particularly in this case there would be an opportunity to "integrate renewables into the energy provision system," so they become "supporting pillars" of supply.
The January’s green electricity generation crisis requires differently looking at implementation of the Energiewende concept to perform the transition by Germany to a low carbon, environmentally sound, reliable, and affordable energy supply. The target was introduced of a 40–45% share of renewable energy in gross electricity consumption in 2025 and then in ten years achieve 55–60% in 2035. In 2015, as reflected in the figure below, the share of green energy accounted for about 30% mostly produced by wind and solar power.

Meanwhile the increasingly obvious problem of RES insufficient reliability no doubt weakened their position in favour of brining conventional energy sources into sharper focus. In addition, there will now be caps on the amount of green power eligible for subsidies what makes them even more uncompetitive.
It is important to note, however, that although the crisis of wind and solar generation, which had arisen in January, was successfully resolved by increasing the contribution of coal, gas and nuclear stations, in fact only natural gas has clear comparative advantages within this energy triad. As to the future of coal power, it indeed has poor prospects because further decarbonization should expel solid fuel from heat and energy balance in most EU member states. According to the report prepared by experts of the Berlin institute Climate Analytics, the EU will exceed its Paris Agreement-compatible emissions budget for coal based electricity generation by 85% in 2050 if all existing coal-fired power plants continue operating to the end of their full life span. Analysis suggests 25% of currently operating coal-fired power units need to be shut down by 2020, rising to 72% by 2025, before a complete shutdown by 2030.
Nuclear energy will have equally challenging future because its reputation has not been restored after Fukushima and Chernobyl nuclear disasters. According to a recent Greenpeace survey, 85% of Germans over 45 years old believe a disaster similar to Chernobyl could take place in Europe. Now anti-nuclear tensions are arising from the growing number of recent terrorist attacks in Europe that may have made their situation even more difficult.
In this regard, it's not hard to see that RES are going to compete for this emerging market niche, further increasing their share in the energy mix in Germany. However it is evident that this can be done effectively if renewables in Germany pair with natural gas, which, as in the January case, should assist to strengthen resilience of energy system as a whole especially against the vagaries of the weather.

An example of this collaboration between two kinds of energy has already excited in the United Kingdom where energy business are making progress in exploiting the advantages of natural gas in comparison with other primary energy sources. They include flexibility of supplies and responsiveness reflecting fluctuations of actual daily demands in the gas market, all-weather capability, technological opportunity to create significant reserve and emergency stock to overcome current uneven distribution and seasonal variations in demand, much higher environmental safeness incomparable with other fossil energy resources, competitive prices and transportation costs, development of NGV fuel markets, etc.
So guided by the classic SWOT analysis (analysis of strengths, weaknesses, opportunities and threats) it should be noted that natural gas can be considered not only as RES close rival but to a much greater extent as their partner, which can compensate energy consumers for still existing weaknesses of the latter. Of course, partnership conditions can change initiating an impact on the future energy mix.

Meanwhile, those who doubt whether such a partnership between RES and natural gas is possible especially emphasize that EC member states actually do not have their own natural resources of this fossil fuel. In that regard, it is worth pay due attention to the report prepared by the Oxford Institute for Energy Studies in January 2017, which argues that "the European gas industry has reason to panic about its future up to the mid-2020s. Falling domestic production will mean that additional gas will continue to be needed (and will be available) from upstream producers and exporters". Clearly, in the foreseeable future of natural gas imports by the EU member states much will depend on whether RES can be enough competitive and on further development of innovative technologies of storing large volumes of electricity.

Why do not admit any realistic sustainable scenario of economic development, as if shaped by the laws of physics, should have several energy pillars where natural gas shall be deemed to provide one of prospectively vital resources along with RES?

Monday, 29 May 2017

Why do consumer expectations of a higher competition between LNG and pipeline gas in Europe now perceive as even more problematic than before?

A year ago, forecasts for development of the European gas market suggested that expansion of a global gas glut would tend to increase competition between LNG especially the first American shale LNG to arrive in Europe as well as conventional LNG on the one hand, and pipeline gas on the other hand. However, these hopes have not materialized yet. In 2016, there were only four shale LNG cargoes delivered to the EU market from the US, including Portugal, Spain, Italy and Scotland. In the latter case, ethane from US shale gas was shipped to company INEOS' petrochemical plant at Grangemouth. Two more LNG shipments from the US were made to Turkey. In total, the volume of American LNG delivered to Europe in 2016 was about 500 mcm. For comparison, that is approximately 40 times less than the increase in gas imports to Europe via pipelines from Russia reaching almost 20 bcm in 2016.

Despite overall natural gas demand growth in Europe in 2016, in the majority of the European countries LNG had been driven out by the competition of pipeline gas and many of them saw a decline in LNG imports as most of this fuel went to better-priced markets in Asia and the Middle East. As a result, utilization of the total installed capacity at the European LNG import terminals had been declining during 2016 to a very low level. According to the LNG World News, the average rate of LNG terminal utilization in Europe has decreased significantly since 2010 to below 20% of the total send-out capacity last year.
This trend seems to be continuing. For example, LNG FSRU in Lithuania has a particularly low rate of utilization. During the first four months of this year LNG FSRU Independence located in the port of Klaipeda regasified 2,977,000 MWh of LNG, 54% down compared to 6,478,000 MWh for the same period of 2016. It has to be admitted that since the beginning of this LNG project the fundamental rules of market competition and economic feasibility have not played their usual role. Lithuanian company Klaipėdos Naptha has a 10-year lease with Norway’s Hӧegh LNG for use of an old LNG tanker as FSRU at an annual cost of 61.45 million Euros. Installation of the terminal in the port of Klaipeda, and its connection to the gas transportation system cost 101 million Euros. It is not hard to calculate that lease payments for 10 years including other costs will exceed 710 million Euros, which indeed is a heavy burden for the country since, as a comparison, in 2016 the State budget revenue of Lithuania accounted for 9.3 billion Euros only. Thus, regrettably, the Lithuanian LNG project is not fulfilling its mission efficiently, nor did it represent the best use of funds for energy development aimed at competitive retail pricing in the gas market.

Retail prices - an attribute of the "game" on several playgrounds for price formation but common principles of market competition do not apply to all of them.

The formation of prices can be compared with the sports game that reveals an important distinction - this "game" is going on three playgrounds each with different rules to settle the score. Three playgrounds correspond to the three components of the diagram of different colors below. There are those playing on blue color game site that determine cost of the energy component, thereafter, toffee color – cost of the gas network component, and the last one, green color – cost of the taxes and levies component.

It should be clear to everyone that competition occurs just on blue playground. Only there competition is exercising direct influence on formation of the energy component within a retail price in gas market. According to Report on Energy prices and costs in Europe, published by the European Commission on 30 November 2016, due to competition the share of the energy component in the total price decreased by 5 percentage points from 59% to 54% for the period from 2008 to 2015. The average energy component accounted for 3.54 Eurocent per kWh in 2015.

Unlike the above-mentioned, the competition is absent, by definition, on toffee color and green color playgrounds. In this case, the formation of retail price components is governed by state regulations. The share of the network component marginally increased from 21% to 22% and amounted to 1.49 Eurocent per kWh in 2015. The biggest increase by 4 percentage points occurred with the taxes and levies component from 20% to 24% and accounted for 1.56 Eurocent per kWh in 2015. According to the recent Eurostat data, the EU-28 average price of natural gas for household consumers during the second semester of 2016 amounted to 6.4 Eurocent per kWh.

Thus, owing to competition in the gas market the share of the energy component declined although gas consumers could hardly benefit from it because both of the other price components related to the network cost as well as taxes and levies still make up half of retail price for household consumers in the majority of the EU member states.

On these last two price components, it is commonly believed that only they are regulation objects. Meanwhile, non-market administrative and regulatory forces actually interfere in the formation of the energy component, in particular influencing competition through selective imposing certain import barriers and conditionalities on the routes of gas supplies to the market. However, fundamental analysis of commodity markets claims that the greater the supply, the lower the price tends to fall benefiting gas consumers.

In practice the arguments in favour of "concerns about potential disruption of gas supplies" to Europe because of the ongoing conflict in Ukraine, which still remains a major transit route for Russian gas, do not seem convincing any more. Attempts to limit natural gas imports from Russia, for example via pipeline OPAL can negatively affect the supply-demand balance and leads to undesirable changes in competitive prices. Quantitative restrictions imposed on gas supplies are known to contradict the core principles of the WTO, although it seems as if Brussels does not care about it. What is more, for the European Commission it seems to be the normal thing to consider initiatives of some EU member states, particularly Poland, which are standing for limiting of gas supplies from Russia, while European companies fulfilling the Russian gas imports recognize its ability to compete in the European gas market.

"Europe is "dependent on Russia" in terms of a secure and affordable gas supply," Chief Executive of Germany’s largest crude oil and natural gas producer Wintershall, Mario Mehren, said in an interview with Handelsblatt in April, explaining that Europe needs additional gas imports and Russian gas can withstand any competition.

According to Reuters, in 2016 the average gas price was expected to be 167-171 USD per 1,000 cubic meters (1.60 – 1.64 Eurocent per kWh). By way of contrast, Lithuania, for example, was purchasing imported LNG at the price of 2.19 Eurocent per kWh in the first quarter of 2016. Such a high price obviously did not resulted from the market competition but was politically motivated. During a presentation for investors in Singapore in February Gazprom announced that following the trends in the world oil market prices of export gas contracts to Europe would rise in 2017 to 180 -190 USD per 1,000 cubic meters (1.72 -1.80 Eurocent per kWh) remaining competitive.

So why not start considering competition at gas market not only within business environment but also at the policymaking level of the EU member states entirely as means to reduce costs and improve energy services rather than a tool for advancing narrow political interests?

Friday, 28 April 2017

Why would the EU Commission concerns raised about competition in the gas market still hardly helpful to save consumers’ pockets?

It has been over two years since the EU Commission adopted "A Framework Strategy for a Resilient Energy Union with a Forward-Looking Climate Change Policy" on 25 February 2015 as one of major initiatives of the newly elected Commission Team. In short, the main objectives of the Energy Union are to provide EU households and businesses with sustainable, competitive, secure and affordable energy.

In March, this year in Berlin European Commissioner for Climate Action and Energy Miguel Arias Cañete underlined once again the importance of competition in the gas market speaking about completing a competitive, reliable and innovative Energy Union. "In order to make the European energy system more competitive, our objective is to ensure that costs and prices can be gradually aligned towards the most competitive levels," said Commissioner Arias Cañete.

Nevertheless, time has proven that although the EU countries generally share the objectives of the Energy Union and include them into their national energy policy, there remain significant disparities in some of them and even whole regions in in shaping the objectives’ priorities.

On the one hand, all the member states are giving a high priority to sustainable development and climate change mitigation that requires decarbonizing the energy sector. In Central and Southeastern European EU member states, on the other hand, it gives place to competition and security of supplies. This is usually attributed to a high reliance of those countries on the supplies of gas from Russia, which de facto determines the level of competition in the market.

In line with the classical view of gas market development the cornerstone of competition is the assumption that gas buyers should be able to make а well-informed choice based on comparison of prices, terms of delivery and essential qualities of natural gas. Given that the list of the latter begins with the physical state in which gas is supplied to the market. Almost everybody knows that there are a number of options of delivering natural gas from oil and gas fields to market, including pipelines, LNG, CNG and some others. Thus, theoretically, the acceptable level of competitive prices forms in the process of competition between different options for terms of delivery, as well as between supplies of natural gas in a certain physical state and related specific qualities. 

Meanwhile, if after this brief overview of theory our gas consumers return to a current practice to consider the actual presence of competition in the EU gas market they may have the following questions:
- How much are gas buyers and consumers able to be sure that the choice of price formation mechanisms has a significant impact on natural gas import price?
- How has competition between traditional pipe gas and LNG evolved recently in Europe?- Why do gas consumers have to convince themselves that they are paying competitive prices formed by the market but in fact, on average, half of the retail gas price is regulated by the State and local administrations?
Transition from the pricing formula that takes into account inter-fuel competition to market-based pricing principals have not caused noticeable effect yet on retail prices in the EU gas market.Competition between different price formation mechanisms had begun to increase with the development of spot gas trading hubs in northwest Europe from the late 1990s, starting in the UK’s NBP market and then spreading over following decades to Continental European hubs including the Dutch TTF, and Germany’s GASPOOL and NCG.
Since the middle of 2014 less stable and unpredictable oil markets have changed the terms of the competition between price formation mechanisms in favour of growing elements of spot indexation. It would seem that transition to pricing for gas as commodity, independent of oil, will favorably affect the conditions of competition in the market and it will be beneficial for consumers due to lower prices. However, obtaining the independence of gas prices from oil indication has not yet led to their noticeable decrease.
To illustrate this point, we need only compare the charts below displaying retail prices movements (the left side) and the transition to an alternative price formation mechanism (the right side) in Central and Southeastern European EU member states.
As the charts show, in Central European EU member states the linking the price of gas to that of oil for the period from 2005 to 2015 decreased threefold approximately from 87% to 29%. Meanwhile, over the same time period, in the South East Europe countries the extent of the applicability of the price formation mechanism linked to competing fuels remained roughly the same and continued to fluctuate around 40%. In contrast, the price movements in both regions did not reflect the existence of these differences and revealed almost similar picture of retail pricing fluctuations.
Perhaps it suggests that the importance of competition between two price formation mechanisms was exaggerated or at least under the gas market conditions existing in the South East Europe countries, breaking away from oil indexation has not provided yet significant incentives for reducing retail prices for gas.
Don't know why? Obviously, because retail prices for natural gas to a certain extent just have dropped out of traditional competitive market environment to stay under the influence of non-economic motivation at policymaking level that is now dominating in some EU member states.

Friday, 10 March 2017

Why does the EU gas infrastructure development seem to have been following a zigzag course, which is allegedly attributed to the impact of security of supplies?
Greatly curved pipes can be seen in the photos of different parts of the physical facilities through which gas moves in transportation such as transmission pipelines or gas compressor stations. These curved pipes occur where there is nothing that may block to lay the pipes straight. The existence of such curved pipes actually has a reasonable explanation - this design is necessary for technical safety of gas transportation.

Natural gas, while being transported through gas pipelines, needs to be pressurized by means of compressor stations up to a very high pressure, which is required to ensure a specified transportation capacity. The temperature of compressed gas at the exit of compressor station rises to 80-100 °C that creates rather severe operational conditions and may even causes buckling of pipes. Specially curved pipe sections are applied for pipe breakage protection. These zigzag-shaped expansion spools should be capable of compensating for any possible pipeline thermal expansion or contraction throughout the lifetime of the pipelines. As can be seen from the pictures below, expansion pipes are installed at various, sometimes very considerable distance from the compressor stations.

From a technical point of view, it is clear that the requirements regarding safety of gas supplies are the genuine reason for unusual curves of pipelines. The interest in these specific features of pipelines is generated by the fact that somehow such zigzag-shaped gas routes resemble the course of the EU energy policy development aimed at security of gas supplies. However, unlike the technical sphere some zigzag-shaped shifts in the EU’s policy to secure gas supplies virtually have not been provided with a satisfactory explanation.

Brussels energy policy has proven to be particularly elusive, by any means avoiding arguments against the `reasonableness' of the measures for security of gas supplies

In February 2015, the EC published its Framework Strategy for a Resilient Energy Union. One of the most widely discussed projects of the first months in office of the Juncker Commission was the Energy Union package designed specifically to pave a direct way for the creation of an integrated European energy market, which should be built upon the three pillars of security of supply, sustainability and competitiveness.
The proposal to create the EU Energy Union was first made by the former Polish prime minister (now president of the European Council) Donald Tusk in April 2014. He argued that this would prevent "Russia’s energy stranglehold" on Europe. In keeping with this, the security of supplies task in the Energy Union Package has been mainly targeted at reducing EU dependence on Russian gas.

Two years have gone by since then - it is time for summing up some results because now it would be timely to reflect on the Energy Union role and prospects for the future. This is what was discussed in the special press conference of Vice President of the European Commission Maroš Šefčovič held in Brussels in February this year to present the second State of the Energy Union Report.

As regards the results Vice President of the European Commission, in charge of the Energy Union specifically alleged that the EU has taken sufficient steps to reduce import dependency on a single gas supplier - a role generally played by Russia. In general, these measures are already well known. Firstly, according to Vice President Maroš Šefčovič, the Member States are using less electricity and heat energy than before achieving better energy efficiency. Secondly, the volume of renewable types of energy has become more significant and especially in countries dependent on energy imports. Thirdly, another important factor, "we have learnt lessons from recent events, better using interconnectors with their inversion possibilities," Maroš Šefčovič said at a press conference in Brussels.

Energy efficiency improvements, promotion of renewable energy technologies, diversification through embracing LNG exports from alternative suppliers and market integration by building gas interconnections among EU Member States - these things are certainly all contributing to much better provision of primary energy. The current situation on the EU energy market, however, indicates that, the measures mentioned above are still insufficient to meet completely the growing demand for energy. According to the European Network of Transmission System Operators for Gas (ENTSOG) gas provides more than 20% of the EU energy consumption. About half of the energy needs for heat and air conditioning are covered by gas. In recent years, the demand for gas in the EU market has been in a steady state of growth - EU gas demand increased by some 6% in 2016 to around 447 bcm, according to Eurogas, following a rise of around 4% in 2015.

The Eurostat report shows that "natural gas dependency in EU-28 was 69.3 % in 2015, up from 67.4 % in 2014." As to imports from Russia, the EU bought an unprecedented volume of Russian gas in 2016. According to Platts, total volume of Russian gas supplies to Europe including Turkey amounted to 179.3 bcm. As a result, the share of gas from Russia in the energy balance of 28 EU countries in 2016 increased to 33.5% after 31% in 2015.

Meanwhile, the Second Report on the State of the Energy Union presented by the European Commission in February 2017 claimed that "import dependency seems to have stabilized in recent years: since 2005, it has fluctuated between 52 % and 55 %; it was 53.5 % in 2014." Is it valid to use such outdated statistical information in their report? It looks as if Brussels tries by means of such a zigzag-shape survey of key data to interpret the results of its energy policy making deliberately the mistake of confusing the security of gas supplies with reducing European dependence on Russian gas, which actually continued to grow. Whether it is difficult to suppose that a politically motivated maneuvering is aiming at reassuring the EU Member States to step into another level of energy unity where it would be more easily to convince them to escape "Russia’s energy stranglehold", the fatal image of which has been boosted further since Donald Tusk proposal three years ago.

Giving precedence to geopolitical objectives over economic and energy interests of some EU Member States can become a serious risk factor, which would eventually lead to an Energy Union failure

In this case, the first pressing question is whether some EU Member States really want such an Energy Union would oblige them to dodge between deliberate energy policy of Brussels and the economic reality and to call for reducing the dependence on Russian gas. When, to all intents and purposes, a certain number of EU Member States continue actively to increase gas imports from Russia and to benefit from gas transit services or from reverse gas supplies to Ukraine. In January 2017, Europe got 19.1 bcm of gas from Russia, a 26% increase compared with the same period in 2016. At the same time, gas imports from Russia to Germany grew by 23.2%, to Italy by 48.2%, to France - by 68.1%, to Austria - by 123.5%.

Meanwhile, the reserves in the underground gas storage facilities (UGS) in Europe fell to the lowest level – according to Gas Infrastructure Europe (GIE), on 11 February there was only 35.46% working gas volume in storage, as outlined in the diagram below. Last year, by comparison, on 11 February 2016, the UGS in Europe were filled with natural gas by 51.19% and the heating season of 2015-2016 ended in early April when there was 35% working gas volume in storage.

The question that then arises: is not it necessary in the context of the supply of gas security to consider very carefully the historically low winter reserves of natural gas in Europe. That is just what might be a good way to proceed with a joint dialogue of the EU Member States to outline preventive measures to tackle possible difficulties with winter gas reserves.

Zigzagging Polish energy policy - at first Poland had taken initiative for strengthening an energy unity but later this Member State shifted sharply pursuing solely their own interests thereby contravening the very spirit of the Energy Union.
According to Reuters, Russian gas deliveries to Germany via the Opal pipeline fell by around 30 % on 1 February 2017 because Poland despite the fact that this pipeline has nothing to do with its national economy successfully blocked a deal giving company Gazprom a bigger share of the pipeline's capacity. Thus, disregarding the interests of the neighboring Member States Poland just disrupted important additional gas supplies to Germany and Central European countries in the middle of winter. On the side of these countries' citizens, some cannot help but think that if gas supplies via OPAL pipeline in Germany kept going on the same level there would be much less to worry regarding winter gas reserves.

However, unfortunately, it happened otherwise - it turned out that Member States using OPAL pipeline had remaining gas reserve even much below the EU average: on 11 February 2017 there was only 33.71% working gas volume in storage in Germany and 30.12% in Austria. At the same time, Poland kept the remaining UGS reserves almost half full - 47.14%. Therefore, it may be concluded that initiating the blockade of OPAL pipeline, it is Poland, and not someone else can tighten "the Tusk energy stranglehold" on Germans and Austrians.

Nevertheless, time is passing and that it is not favoring the EU. The European Commission led by Jean-Claude Juncker took office on 1 November 2014 to begin serving its five-year term. Before that in his opening statement ahead of the vote, President Juncker presented the new team as the "last chance Commission" pointing out that from the very beginning the Commission would not have any opportunity for wasting time. It was two and a half years ago – now half of a five-year term is already behind.

Why would the European Commission, instead of spending the remaining time on performing often zigzagging political maneuvers around the security of supplies, far better take another path leading to economically justified relations beneficial for all the Member States and for their international partners?

Is this not more short and reasonable path to a sustainable Energy Union?

Tuesday, 28 February 2017

Why it is still not possible to set up completely a road map for lifting Greece out of energy poverty and providing energy services of European level?

Various media sources of Southeastern Europe countries noted that in 2016 gas supplies to Greece from Russia increased by 35% to 2.68 bcm. At the same time, gas imports from Russia also rose in other South and South East Europe countries. Russia’s gas supplies to Italy went up 1.1% in 2016 compared with 2015 to 24.7 bcm, to Bulgaria - by 2.1% to 3.18 bcm, Serbia - by 4.3% to 1.75 bcm, Romania - by 740% to 1.48 bcm, Croatia - by 54.8% to 0.76 bcm and FYR Macedonia - by 56.5% to 0.21 bcm.

In Greece, the remarkable increase in gas consumption presents a concrete evidence of recovery of the national economy. Besides, impact of sharp seasonal climatic fluctuations should also be taken into consideration, which in the beginning of this year led many to talk about energy problems caused by insufficient abilities of national gas suppliers fully and promptly to meet the demand in seasonal peak periods. The newly formed EDA THESS gas distribution company, for example, serving the wider Thessaloniki and Thessaly regions, announced a very high level of retail demand for gas. In early January, daily consumption in these regions increased from 2.5 mcm per day on average to 4.5 mcm per day, including up to 3 mcm in Thessaloniki and up to 1.5 mcm in Thessaly.

Back in December last year it became known that company EDA THESS planned to invest roughly 90.7 million euros over the five-year period covering 2017 to 2021 in order to develop infrastructure facilitating natural gas supply to both regions. Recently the necessity of company EDA THESS plan has been more than demonstrated by an unusually cold winter for the Mediterranean country. Along with that after a stressful experience like this not only energy companies, but the population of Greece also should get used to take more care in advance, according to the words of politicians, about their own energy security. On such occasions, residents of Northern Europe and mountain regions in Central Europe rather often providently remember a well-known saying of Thomas Fuller, one of the first English writers who said, "In fair weather prepare for foul." Apparently, this old advice is not sufficiently known yet to energy end-users in such southern country like Greece because, for example, only after the January sharp cold snap company EDA THESS just within a ten-day period received more than 400 applications for installation of gas heating equipment.

Although gas is in high demand not only for heating in the winter season, but also for a comfortable cooling in the summer heat, which consumes a lot of energy generated also from gas. Ongoing provision of support for the development of the gas distribution infrastructure in the domestic market - it is, of course, an important thing for Greece. At the same time, there is another no less important but even more difficult question: where are these energy goods required throughout the whole year going to come from? Whose gas will Greece get in response to increasing demand?

Greece should pursue its own path leaving energy poverty to access energy services of European level
It is often stated that a household is considered to be energy poor, if it spends more than 10% of its income on energy bills. As noted by the leading EU affairs newspaper New Europe, Bulgaria, Greece and Cyprus are European record-holders as regards this indicator. According to the recent evaluation of this indicator one out of three Greek households in 2016 were faced with energy poverty.
The European Commission has proposed many measures to solve the problem of energy poverty including notably improvements in energy efficiency using various methods, and among them building insulation materials and new windows and doors to reduce heat transfer. However, it is obvious that reduction of households energy use alone would be insufficient to alleviate the problem of energy poverty particularly where energy consumption is already critically low. Consumers in Greece primarily should be provided much wider access to new more powerful and reliable sources of energy supply. Therefore, to lift one third of Greek households from the energy poverty trap special attention should be given to development of energy infrastructure necessary for energy resources imports to the country such as gas pipelines, gas storages, LNG facilities, etc.

Realistically, all of that can be expected in the near future is included in a short list of such projects, which are also well-known in Europe because the countries neighboring Greece share critical interests in their implementation.

First among those project by commencement dates in Greece is the Trans Adriatic Pipeline (TAP). With a total length of 878 km, TAP will connect to the Trans Anatolian Pipeline (TANAP) at the Greek-Turkish border, will cross Greece, Albania and the Adriatic Sea. Once completed, the TAP project will transport gas from the Shah Deniz II gas field in Azerbaijan into Europe. The length of the pipeline in Greece is approximately 550 km. Construction officially began 17 May 2016. Around 10 bcm per year of Azeri gas should reach Europe by 2020 through TAP and after reaching the European market around one bcm will go to gas distribution companies intending to supply to each of Greece and Bulgaria and the rest 8 bcm will supply Italy.

After Greece TAP will run 211 km through Albania to the coast of the Adriatic Sea. Since the TAP capacity is actually divided between three countries, it is as yet uncertain whether Albania is going also to get gas from this transit pipeline for its own growing needs. According to the Energy Ministry of Albania, annual demand for natural gas will be 1.8 bcm by 2020 in the country.

It is unlikely coincidence that many media sources have been silent at all on a certain issue: how TAP capacity will be distributed within European gas market. This may be explained by the fact that the 10 bcm of gas provided by TAP is a rather modest contribution to the energy supply of the EU. Although the pipeline was designed with the option to double capacity to 20 bcm per year, it depends on extra gas volumes to come on stream. However, that can happen only if new sources of supply will be connected to TAP because Azerbaijan alone will not be able to provide so much gas supplies.

Still it has to be admitted that the future gas supplies through the TAP, which have already planned for 2020 actually will not be capable to meet the energy demand in the South Eastern Europe market. Obviously, Greece are becoming more aware of this. According to Greek information agency Energypress, speaking at the forum on energy, economic growth and geopolitical future in December 2016, Theodoros Kitsakos, the CEO of Greece’s DEPA public gas supply corporation noted that the EU had been exploring opportunities to implement small scale energy projects such as TAP. Indeed, there can be little debate that even taking into account a market size in Greece TAP can only be consider as a relatively small-scale project in terms of its supplying capacity. Moreover, so far there is no plan for TAP expansion to supply gas to the neighboring countries in the Balkan region, which are also within the zone of energy poverty in Europe.

Besides, as Reuters has recently reported, there are new ecological problems in Italy's Puglia region concerning the construction of the TAP landfall. Local authorities want the pipeline constructors re-routed away part the grove with very old olive trees. Ensuring these ecological requirements would cause a significant delay in the TAP implementation.

Another project currently close to the implementation stage in Greece is FSRU (Floating, Storage and Regasification Unit) LNG terminal near the northern city of Alexandroupolis, which should be built jointly by Greek natural gas company Gastrade and Bulgarian state energy holding company BEH. LNG tanker fleet operator GasLog has recently closed a deal to take a 20% stake in Greek energy company Gastrade to take part in developing the planned floating LNG facility at Alexandroupolis.

The FSRU will be connected to the Greek gas transmission system through a 28 km pipeline that will allow the transportation of regasified LNG to consumers in the local market and to other countries, in particular Bulgaria via the planned Greece-Bulgaria gas interconnector (IGB). The Alexandroupolis FSRU LNG terminal will cost about 370 million Euros and is expected to be operational at the end of 2018. This new capacity of the FSRU import terminal at Alexandroupolis of 6 bcm per year together with the 5 bcm per year capacity of the exciting Revithoussa terminal that is planned to upgrade to an additional 2 bcm per year will give Greece a total LNG import capacity of as much as 13 bcm per year.

The Alexandroupolis FSRU LNG terminal was included in the list of CESEC Conditional priority projects approved during the meeting of the High Level Group on Central and South Eastern Europe Gas Connectivity (CESEC) in July 2015. The condition of the project implementation is "(location-specific) market demand for regasification capacity in Greece".

In the context of gas supplies prospects to Greece, it is also necessary to mention the Interconnection Greece–Italy project (IGI). The feasibility study for the Greece–Italy pipeline was conducted in 2003 with funds provided by the European Commission. The final part of IGI is the Poseidon project that entails the construction of a new offshore gas interconnection between Greece and Otranto in Italy.

Meanwhile, the future of IGI pipeline project is still unclear due to the competing TAP because both pipeline projects were originally intended to transport the Azeri gas. In 2012 IGI project was postponed since everybody realized that there is not enough gas in the Shah Deniz II gas field in Azerbaijan to keep completely filled both pipelines.

In addition to that new strategic opportunities cannot be ignored, which will arise for IGI to develop further as well as for TAP to maximize its capacity utilization owing to implementation of Turkish Stream pipeline project. According to intergovernmental agreement signed between Turkey and Russia in October 2016 in Istanbul, this offshore pipeline will consist of two parallel branches running through the Black Sea, each with capacity of 15.75 bcm. The pipeline’s offshore section is expected to equal about 910 km and its overland part on the Turkish territory 180 km. The delivery hub would be close to the town of Luleburgaz, while the pipeline would terminate on the Greek border in the area of Ipsila. Turkish stream project is scheduled to be completed by the end of 2019.

The first branch of the pipeline is intended for Turkish market while the second branch is planned to deliver gas to Greece, Italy and the Balkan region countries. Unlike the unsuccessful story of South Stream project canceled by Russia in December 2014 in case of Turkish Stream the decision to designate the entry point for gas deliveries at the Greek-Turkish border seems to be more tempting because it would enable to avoid the impact of the EU Third Energy Package.

In February 2016, Greek firm DEPA signed a memorandum of understanding with Russian company Gazprom and Italy's Edison SpA on supplying Russian natural gas along the bottom of the Black Sea and through third countries into Greece, and then from Greece onto Italy. Thus, the supplier of gas from Russia to the EU joined the project IGI Poseidon. It is planned that the capacity of IGI onshore segment of will be 9-16 bcm per year, and offshore part - Poseidon - 10-12 bcm per year. Poseidon pipeline is mentioned in the latest Italian National Development Plan (NDP) while in the Greek NDP there is no reference to the project, since it constitutes an Independent Natural Gas System (INGS). According to the Ten Year Network Development Plan in the EU (TYNDP 2017) prepared by ENTSOG the commissioning of Poseidon pipeline is stipulated in 2020.

Greece can become a new energy gateway to Europe
In the future as a result of projects reviewed above Greece can not only significantly increase the consumption of gas in the domestic market, but also become the country providing transit of more than 20 bcm of gas to other European countries. All of this can make a significant contribution to the gradual recovery of the Greek economy. A prospect such as the present rarely occurs and Greece should not pass up the chance to benefit from available opportunities. It is, therefore, no coincidence that the media in Greece like Energypress now regard natural gas as the leader of Greece's energy diplomacy.

But it looks like we got used to wait for winter energy shortages and other climate troubles to start making progress in solving the vital issues of energy development, why it is so.

Haven't we gained yet enough experience and prudence in the XXI century to see behind mirages of political ambitions and through an absolutely real snow storm a new energy gateway not counting only on Santa's generosity?

Tuesday, 31 January 2017

Why does the snowy Acropolis of Athens become a lighthouse showing the way to the gas suppliers to Southern Europe?

Several media, including Reuters, reported that in January Central and South East Europe suffered an atypical cold spell and snowstorms, unprecedented in the recent history, and parts of Greece was covered in rare snow with temperatures dipping to -20 degrees Celsius. Snow also fell in Athens. In the Greek town of Alonissos at Thessaly region 130 km North of Athens, a snow covering thickness reached over 2.5 m. There were enthusiastic comments in and some other websites that now the Acropolis in Greece looks like a winter wonderland. However, it is evident that Greek population as well as many tens of thousands of refugees seeking asylum in this country cannot be happy about the advent of "winter tale". When Greece is buried in deep snow, it more remind an image to match a verse drama "Hellas" by Percy Bysshe Shelley.

Even the millennial history of Greece ever hardly heard of citizens in this southern, nowadays frozen country do ask Greek Santa Claus - Agios Vassilis for a Christmas gift to bring warmth into their homes this winter. While hoping for Agios Vassilis generosity now Greek people obviously must themselves better comprehend a tangle of new energy projects as well as the interplay of political intrigue around them especially distinguishing modern development of the energy market in South East Europe. It's almost like we're being forced by the freezing weather into more careful looking at the energy future of Greece.

Hellenic energy horizons - looking from the present towards the future

According to BP Statistical Review of World Energy 2016, Greece's energy supply comes mainly from fossil fuels – oil and coal. As shown in the graph below natural gas is the third largest energy source whose consumption amounted to 2.5 million tons of oil equivalent in 2015 or 9.5% of total energy consumption in Greece. In accordance with market trends in Europe, natural gas together with renewables will enhance their role in development of the Greek energy sector.

Meanwhile, the development of gas consumption in Greece followed the path that, as the graph above shows, resembles more a winding road on a steep mountain slope in Thessaly than an ascent to leading positions in the Greece’s energy market. In 2011 Greece experienced the highest level of gas consumption of 4.4 bcm but thereafter for three years it drastically dropped by about 38% till 2.7 – 2.8 bcm in 2014 - 2015.
Preliminary estimates suggest that in 2016 gas consumption in Greece demonstrated a notable progress. As reported by, according to DEPA Group assessments, annual consumption of gas should exceed 4 bcm. Now the question is whether the gas distribution infrastructure in the domestic market of Greece is ready to handle further increase in gas demand. Moreover, of course, it is not only cold spells and snowstorms in winter generate this demand. Natural gas is equally necessary for heating and cooling during different seasons over a year because air conditioners are powered by electricity, which, largely, is produced from gas.

At the same time, there is another, even more complex and long-term questions: where should this energy marketable for all seasons come from? What kind of suppliers should fill in tomorrow the Greece's gas transport system?

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Friday, 30 December 2016

Why should Bulgarian gas pawn not lose hope yet to get another chance of becoming a new hub queen in South Eastern Europe?

Looking back at the expiring year to see once again a dramatic picture of EU gas market development filled with conflicts of interest we can note a number of important events, which triggered the transformation of priorities and put forward new objectives. One of such events occurred even earlier - two years ago when in December 2014 Russia made a decision to abandon the South Stream gas pipeline project blaming Bulgaria for delays in the issuing of necessary permits for the pipeline construction and announcing that under the circumstances it was not possible to continue the project implementation.

That event was welcomed openly in Brussels, Washington DC and some other capitals. By contrast, in South Eastern European countries the failure of the South Stream implementation caused a wave of mixed emotions when there was a prevailing sense that they had been falling victim to missed opportunities as well as a growing uncertainty in future development of their gas markets. Yet such an unenthusiastic response can be accounted for the fact that these countries have long been at the forefront in enhancing of their gas supplies, but no matter they are the most dependent, they were subjected to this painful blow.

Many of us have become aware that Sofia and Brussels did not share equally the primary responsibility to create the conditions that proved unacceptable for the South Stream project continuation. Very essential for future steps towards the integration of the gas market in South Eastern Europe was distinctly different decisions made by the European Commission with regard to the only two really existing projects that had been already commenced for provision of gas imports by pipelines to the EU. Those projects are the Trans-Adriatic pipeline (TAP) and the South Stream pipeline of which just the first one obtained an exemption from third party access to its pipe required by the Third Energy Package. As a result, the European Commission added another page in the historic way from the dusk of WTO that has been idealistically focused on the non-discrimination principle as applied in the context of trade in goods till the current dawn of global protectionism.

A common way to somehow extinguish the growing frustration and other negative reactions is a launch of new promises and initiatives. Therefore, it is no coincidence that right after the abrupt cancellation of South Stream project, Bulgaria's political leaders urged their country to create a modern gas hub. Bulgaria wants to build a European-scale gas storage facility to replace the canceled South Stream gas pipeline, and become ‘number one’ in terms of diversification, said Prime Minister Boiko Borisov in December 2014.

Slow and uncertain steps towards the implementation of the gas hub

One whole year had passed before in December 2015 Bulgaria and the EU Commission agreed to establish a joint working group to support the development of a gas hub in Bulgaria designed to serve the Balkan region. It was expected that the working group should begin with an assessment of legal, regulatory and financial requirements for this project. However, the gas hub initiative proceeded slowly unless to say that there was no any appreciable progress in its promotion.

In particular, this could be seen in results of the meeting of the Central Eastern and South-Eastern European Gas Connectivity High Level Working Group (CESEC) meeting, which took place in Dubrovnik on 10 July 2015. The meeting was devoted to integration of the EU and Energy Community energy markets. EU Commission Vice-President for Energy Union Maroš Šefčovič, EU Commissioner for Climate Action and Energy Miguel Arias Cañete and by the Energy Ministers and their representatives from 15 European countries (including Austria, Bulgaria, Croatia, Greece, Hungary, Italy, and others) signed the Memorandum of Understanding and Action Plan with project list in the appendix. There were 21 projects listed in the appendix that were considered to provide benefit to the region, particularly in terms of contributing to security of supply.

In fact, three projects in Bulgaria were given a prominent place in the list of CESEC Priority projects, among which are two new interconnectors - the interconnector Greece-Bulgaria (IGB) and the interconnector Bulgaria-Serbia (IBS). At the same time, no direct reference was made to the Balkan gas hub project in these outcome documents, but instead of it, there was a rather general task - "Phased Bulgarian system reinforcement (necessary to allow utilization of existing interconnections and interconnections being developed)."

Implementation of priority interconnector’s projects of course would improve conditions for the creation the Balkan gas hub. However, a well-developed gas transportation infrastructure actually is important, but it is not the sole condition, which is vital to making the gas hub project feasible.

A European-scale gas hub has to serve transit flows of gas currently lacking in Bulgaria

It is noteworthy that neither the majority of politicians nor least of all representatives of the expert community try to ignore the problem of accessibility to one of main primary energy sources - natural gas. It means that Bulgaria must gain access to gas sources and receive sufficient supplies to carry out all the gas hub operations competitively for local market and especially for the EU neighboring countries.


There was a recent attempt to look ahead to this challenge within the framework of the Investors Round Table held in Varna on 4-6 September 2016, where company Bulgartransgaz presented the concept for the construction of the Balkan gas hub on the territory of Bulgaria. In his address to participants of this event Klaus-Dieter Borchardt, Director Internal Energy Market at the EU Commission's Directorate-General for Energy underlined the importance of the Balkan gas hub for the European integrated market. "If we manage to attract considerable amounts of natural gas supplies the Balkan gas hub will become competitive with the already existing hubs in Germany, Austria and the Netherlands," added Borchardt.

The EU model for diversifying the gas supplies to Central and Eastern Europe and a competitive gas hub

"Each Member State in the region should have access to at least three different sources of gas," stated many times the senior European Commission officials, noting especially that it important for security of energy supply. At first sight, the EU Commission's suggestion should not cause any objections. However, in practice the Brussels gas supply model based on "at least three different sources of gas" seems idealized too much and far-removed from the reality all around us. If certain EU member states now do not have enough gas even to meet their growing domestic demand not to mention reaching and/or maintaining high levels of gas hub competitiveness then committing themselves to provide three more or less equal sources of gas supplies. In fact, it just may increase the risk that the implementation of the Balkan gas hub project would be postponed for many years.

Look at the map above - isn't that what reminds us a chessboard? There are chess figures like gas projects that generally can move in any direction. The only thing is that on the European energy "board" efficient gas volumes now can come from the east only as European gas trading and utility companies well know.

There are not too many projects, which are capable to keep a window of opportunity for Bulgaria's gas imports open, these include:

The Trans-Balkan pipeline has entry capacity 24.7 bcm, 99% of which comes from Russia and a very small part from Romania. It is important that a completion of the Turkish stream pipeline in December 2019 should reduce significantly the need for the entry capacity of the Trans-Balkan gas pipeline. It is planned that a new gas pipeline running from Southern Russia across the Black Sea to Turkish Thrace will replace the transit of Russian gas to Turkey through the territory of Ukraine, the volume of which in 2015 amounted to 12.7 bcm. Moreover, the current transit contract between Ukraine and Russia will expire in 2020 and its extension is hardly possible because of growing tension between the two countries. According to Gazprom, even though Ukraine and Russia manage to sign a new transit contract, gas transit across Ukraine would be reduced to 10–15 bcm, about half of which will be transported by Trans-Balkan pipeline to Bulgaria, Greece and FYROM. Meanwhile it is an undeniable fact that Ukraine’s Naftogaz are apparently already preparing for reduction of gas transit since Naftogaz refused to buy equipment worth 156 million USD for modernizing three gas-compressor stations that provide gas transit in southbound direction via Romania to Bulgaria.

The Turkish offshore pipeline currently under construction will consist of two parallel pipelines with a capacity of 15.75 bcm each. The first pipeline is intended for gas supplies to Turkey. It is planned that the route of the second pipeline will continue to its end point at the Turkish town of Ipsala, near the Greek border to deliver 15.75 bcm of gas to Greece, Italy and the Balkan countries. As you can see in the map above, the routes of the second pipeline line of the Turkish stream and the existing Trans-Balkan pipeline will cross giving an opportunity of transforming the latter to a reverse mode to supply gas to Bulgaria.
The Gas Interconnector Greece-Bulgaria (IGB) will provide a direct link between the Greek GTS and the Bulgarian GTS with an entry point in Komotini and an exit point in Stara Zagora. According to preliminary assessments, the project’s budget is estimated at 240 million Euros, of which 220 million Euros concern construction costs. By means of IGB Bulgaria intends to import gas from Azerbaijan prior to the commissioning of the Trans Adriatic Pipeline (TAP). The 182-kilometre IGB pipeline will carry 3.0 bcm of natural gas annually in its initial stage with a possibility for upgrading up to a maximum capacity of 5 bcm. According to Central and South-Eastern European Gas Connectivity (CESEC) High Level Group information, its construction was planned to start in December 2016 and be completed after two years. One bcm from the Shah Deniz gas field of Azerbaijan will be annually supplied to Bulgaria effective 2020.
    A joint initiative of Bulgarian Energy Holding (BEH) and Greek natural gas company Gastrade to prepare a proposal to construct a floating LNG terminal in Alexandroupolis, northern Greece. This new facility would supply gas to Bulgaria via the IGB. Earlier Reuters reported that with an estimated capacity of 6.1 bcm. Alexandroupolis terminal will cost about 370 million Euros and is expected to be operational at the end of 2018.
As for the development of domestic gas E&P, Bulgaria would only be able to count on gas imports because the hopes for its own natural gas deposits have not been fulfilled yet. According to Financial Times, Bulgaria’s annual gas consumption could rise to four bcm in 2020 from roughly three bcm at present, partly because of growing demand from chemical and fertilizer companies. Although the amount of the above-mentioned sources of gas supply corresponds to the model proposed by the European Commission, in terms of volumes they apparently would be enough just to meet the growing internal demand in Bulgaria. Nevertheless, these incoming volumes of gas are clearly insufficient for creation of a European-scale gas hub.

The competitive position of Bulgaria is obviously inferior to Greece and Turkey, which are promoting their interests in gas hubs development relying on the new opportunities ensured by TANAP, TAP and the Turkish Stream pipelines in the near future. Implementation of these projects is going to make these countries main applicants for the crown of hub queen in South Eastern Europe.

However, the presence of other potential candidates does not diminish, but on the contrary may even increase the Bulgaria's chances of seeking a wider market access by means of a national gas hub. The optimistic scenario would be reasonable if the European Commission and Bulgaria considered the situation objectively and acknowledged that in the near future it is not possible to increase the volumes of gas imports up to the level necessary for the Balkan hub operations without adequate expanding of infrastructure capacities to supply much more gas especially from Russia. In August 2016, Bulgaria and Russia took a certain step towards that when the two countries agreed to set up working groups on joint energy projects.

Ultimately the European motivation for creation of the Balkan gas hub should be based on the understanding that development of these gas facilities both in Bulgaria and in the other countries of South Eastern Europe can improve competition in the interests of gas consumers by ensuring the greater availability of gas supplies for all consumers, especially for those most in need at present.

Why does Brussels - a fully-fledged chess grandmaster in the geopolitical game in the gas market of South Eastern Europe resembled a chessboard, instead of treating the EU countries like Bulgaria as a sacrifice, begin really to promote them to the position of hub queens?

There can be little doubt that it would also benefit many other EU countries.