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Det Energipolitiske Udvalg 2009-10
KOM (2009) 0363 Bilag 3
Offentligt

COMMISSION OF THE EUROPEAN COMMUNITIES

Brussels, 16.7.2009

SEC(2009) 979 final

COMMISSION STAFF WORKING DOCUMENT

Accompanying document to the

Proposal for a

REGULATION OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL

concerning measures to safeguard security of gas supply

and repealing Directive 2004/67/EC

IMPACT ASSESSMENT

{COM(2009) 363}

{SEC(2009) 980}

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This report commits only the Commission's services involved in its preparation and does not

prejudge the final form of any decision to be taken by the Commission.

Table of contents:

Introduction

Section 1: Procedural issues and consultation of interested parties

Section 2: Problem definition

Section 3: Objectives

Section 4: Policy options

Section 6: Comparing the options

Section 7: Monitoring and evaluation

Annexes

Introduction

The Commission set out in the 2

Strategic Energy Review an

EU approach to security of

energy supply,

including a five-point EU Energy Security and Solidarity Action Plan

. The

approach and the Action Plan have been solidly endorsed by Council, Parliament and

European Council

, and by stakeholders

. This impact assessment concerns one element in the

Action Plan - the strengthening of provisions for crisis prevention and response in the gas

field and in particular, the revision of

Directive 2004/67

on measures concerning the security

of gas supply.

concept of security of energy supply,

from a policy perspective, was put forward by the

Commission in the 2000 Green Paper "Towards a European strategy for the security of energy

supply"

: "The European Union's long-term strategy for energy supply security must be

geared to ensuring, for the well-being of its citizens and the proper functioning of the

economy, the uninterrupted physical availability of energy products on the market, at a price

which is affordable for all consumers (private and industrial), while respecting environmental

concerns and looking towards sustainable development".

In the

gas

field, this general definition of the outcome sought could translate into an objective

of an acceptable level of risk of involuntary interruption of supplies to consumers. What

would an acceptable level be? Gas, unlike electricity, is substitutable by other fuels in several

of its main uses, so some risks of disruption of supplies will be acceptable to many

consumers. Many industrial consumers with possibilities for fuel switching choose

interruptible contracts offered in the market. Thus the 2004 Directive on security of gas

COM(2008)781, "2

Strategic Energy Review: An EU Energy Security and Solidarity Action Plan"

EP Resolution of 2 February 2009 on the 2

Strategic Energy Review (2008/2239(INI)); Energy

Council Conclusions, 19 February 2009 (6692/09); Presidency Conclusions, European Council, 19

March 2009

See report of public consultation, annex 4

COM/2000/0769

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supply protects only household and some other customers who are unlikely to have

satisfactory fuel switching possibilities. It establishes security of supply standards in terms of

the severe weather conditions and other disruptions during which it should still be possible to

supply protected customers from the market, without emergency measures.

The basic idea in the Directive, as in the earlier and subsequent internal gas market Directives,

is that the

internal gas market

should be well-functioning and flexible enough, with

sufficient infrastructure, to mitigate most gas supply disruptions. At the same time, for

disruptions which turn out to be beyond the capacity of the market to mitigate, the 2004

Directive establishes a framework, compatible with the internal market, for emergency

measures by public authorities (e.g. imposition of reduction of supplies to customers). This

joint focus

on the

functioning of the market

and

emergency measures if needed

is a

fundamental structure in gas security of supply policy in Europe. The 2004 Directive

complements the internal energy market Directives, notably by establishing standards for

security of supply which are implemented by market participants. It is self-standing as regards

the framework which it establishes for emergency actions, although compatibility with the

internal market is a prime criterion.

The establishment of robust relations with producer and transit countries is clearly an

important part of EU gas security of supply policy. However,

external relations actions

are

largely

outside the scope of this impact assessment.

In recent years,

much has changed

as regards Europe's security of gas supply. Dependence

on imports is increasing and at the same time, supply and transit risks are growing (see

Section 2). The Russian-Ukrainian gas crisis in January 2009 (summarised in Section 2)

brought an unprecedented disruption of gas supplies to Europe, far greater than any earlier

disruptions. 30% of Europe's imports were cut off for two weeks. This is now a

realistic gas

supply disruption scenario.

The situation within Europe has also been changing. With the

growing importance of long-distance network flows of gas and the development of the

internal gas market, gas supply crises are quickly felt across large parts of Europe and by the

same token, the

internal gas market

is offering an increasingly powerful means of mitigating

gas supply disruptions.

The increasingly important

European dimension

requires an adequate regulatory framework

for security of supply at EU level. This should develop and use the potential of the internal

gas market to deal with supply disruptions and address today's risks of disruptions. If an

integrated liquid EU gas market already existed, it could be expected that most supply

disruptions could be mitigated. But this is not yet the case. Infrastructure and market

integration developments are still needed (see Section 2). In this context and after examining

the implementation of Directive 2004/67, the Commission proposed in November 2008 that

the Directive be revised. After the Russian-Ukrainian gas crisis in January 2009, the Council,

Parliament and the European Council all called for the revision of the Directive to be

accelerated.

The

Member States

are in very different situations as regards reliance on gas in their energy

mixes, their main uses of gas and thus substitution possibilities, indigenous production,

storage, geographical position in gas networks etc. (See Table 1.) The priority attached to

security of gas supply varies among Member States. Very concretely, the risks and impacts of

A monitoring mission to Ukraine and Russia was part of the EU response to the January 2009 gas crisis

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gas supply disruptions are different in different Member States, as are their means of

mitigating disruptions, although the internal gas market is an increasingly important factor.

The

flexibility

allowed to Member States in the 2004 Directive is a reflection of these

differences. Nevertheless, given the external and internal developments noted above, the clear

message from Council and Parliament is to revise the Directive. This is an EU and internal

energy market matter, as is reflected in the areas of importance in the revision of the Directive

indicated by the Council and Parliament.

They focused on an EU framework for emergency action as well as the importance of a well-

functioning internal gas market. The Energy Council "recognizes the need to improve, as an

urgent priority, both national and EU level instruments for ensuring security of gas supply,

through the revision of the Directive, with notably a better definition of the major supply

disruption indicator and a more effective crisis response mechanism (e.g. through predefined

emergency plans at the appropriate levels)"

. For the European Council, the revision should

include "an appropriate crisis mechanism ensuring the preparedness of all actors, including

the energy industry, transparency and prior information through the development of plans for

security of supply; solidarity among Member States through the development of regional

plans; and improved assessment and coordination through the redefinition of the threshold for

deciding actions at Community level"

. For the Parliament, key elements in the revision are

"mandatory and effective national and EU emergency action plans, which among other things,

define a common declaration of an emergency situation, allocation of available supplies and

infrastructure capacity among the affected countries, coordinated dispatching, activation of

emergency measures in unaffected or less affected states in order to increase the amount of

gas available to the affected markets using all means possible, including, among others,

interruptible contracts, fuel switching, storage withdrawal, supply flexibilities for example;

considers that it is essential to improve the functioning of the market through transparency

and increase the availability of gas in the market; calls on the EU and its Member States to

develop gas storage with fast-release capacity"

Table 1: Sectoral consumption of natural gas by Member State 2007 (mtoe) and gas as % of

primary fuel mix

Power

House- Industry

Services District

Other

Gas as % of

generation holds

heating

primary fuel

mix

Austria

29%

18%

37%

Belgium

29%

22%

39%

10%

Bulgaria

26%

46%

17%

Czech

28%

35%

18%

Republic

Denmark

39%

15%

18%

16%

Estonia

12%

36%

39%

Finland

55%

27%

France

15%

34%

28%

21%

Germany

23%

37%

27%

14%

Greece

73%

16%

Council Conclusions, 19 February 2009 (6692/09)

Presidency Conclusions, European Council, 19 March 2009

Par 67, EP Resolution of 2 February 2009 on the 2

Strategic Energy Review (2008/2239(INI))

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Hungary

Ireland

Italy

Latvia

Lithuania

Luxembourg

Netherlands

Poland

Portugal

Romania

Slovakia

Slovenia

Spain

Sweden

United

Kingdom

EU27

32%

64%

40%

46%

31%

41%

33%

59%

28%

10%

44%

31%

33%

31%

30%

14%

23%

26%

20%

26%

16%

22%

12%

33%

26%

15%

24%

21%

49%

34%

23%

40%

27%

32%

26%

74%

30%

40%

14%

25%

16%

10%

19%

13%

19%

13%

12%

15%

10%

-1%

12%

11%

16%

12%

Source: Eurostat

Section 1: Procedural issues and consultation of interested parties

Identification: DG TREN, Agenda planning/WP reference: 2009/TREN/042

Organisation and timing of the Impact Assessment: The impact assessment was prepared in

house in DG TREN, drawing from consultations and expertise, assessments of the January

2009 gas crisis and relevant studies. DGs COMP, ECFIN, EMPL, ENTR, ENV, JLS, JRC,

RELEX, REGIO, as well as SG participated in the Impact Assessment Steering Group which

met on 25 May 2009. LS had a separate discussion with DG TREN on 25 May. The Impact

Assessment Board discussed the draft impact assessment on 10 June, provided a first opinion

on 12 June and a second on 24 June on the resubmitted draft impact assessment of 18 June.

The recommendations of the Board were followed up in the revisions of the draft, notably as

follows:

A definition of "security of gas supply" and the intended scope of the initiative,

starting from the concept adopted by the Commission in its 2000 Green Paper; this

underlined the joint focus of security of gas supply policy on the functioning of the gas

market and emergency measures..

Strengthening of the section on analyses of the January gas supply disruption,

including its economic impacts, drawing from academic research.

Stronger consideration the first policy option, "No new EU action" (the baseline

scenario) including the 3

internal energy market package and the European Economic

Recovery Plan. Inclusion of EERP projects in a calculation of n-1.

Consideration of the application of n-1 at regional and EU as well as Member State

level.

Further material on assessment of costs of additional investments, notably from

Transmission System Operators on reverse flow projects. Comparison with overall gas

costs to consumers.

Consultation of stakeholders on the substance of the impact assessment:

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Public consultation on basis of Commission's November 2008 evaluation report

the implementation of the 2004 Directive on measures concerning the security of gas

supply, November 2008-March 2009 (report in Annex 4).

Gas Coordination Group

discussions (23 February, 2 April, 13 May), responses of

members to questionnaires and issue papers.

Study on natural gas storage in the EU, Ramboll, October 2008

Study on Interoperability of LNG Facilities and Interchangeability of Gas and Advice

on the Opportunity to Set-up an Action Plan for the Promotion of LNG Chain

Investments, MVV Consulting, May 2008

Studies on the January 2009 gas crisis, notably from the International Energy Agency,

the Regional Center for Energy Policy Research at Corvinus University of Budapest,

Oxford Institute for Energy Studies, IEA report

The Ukraine-Russia Gas Dispute

(20.01.2009)

External expertise

Main results of consultations, positions expressed, how taken into account or not:

In the public consultation on the revision of the 2004 Directive, based on the Commission's

evaluation report on its implementation, fifteen responses were received from Member States

(4), European associations of energy regulators and individual regulators (3), infrastructure

operators (1), suppliers (4), traders (1) and users (2). The consensus was that a well-

functioning internal gas market provides the best guarantee of security of supply. At the same

time, there was general agreement on the need for specific efforts across Europe to mitigate

future disruptions. Some Member States noted that only on the basis of shared responsibility

for security of supply can solidarity actions be properly developed. Respondents offered

detailed views and proposals, as summarized at the end of this section.

Thus, there is a consensus amongst EU institutions that a revision of Directive 2004/67 is

necessary, improving the capacity and organisation of the EU, Member States and internal

energy market participants to prevent and deal with gas supply crises. The public consultation

demonstrated a readiness of the main stakeholders to engage in the development of detailed

proposals to achieve an effective revision. The various proposals of the institutions and

stakeholders are considered in this impact assessment. The Commission’s minimum standards

for consultations have all been met.

Summary of public consultation:

(i)

The first question concerned the

definition of security of supply standards

which

would put reasonable, equal burden on market participants while respecting the

different situations of Member States. The 2004 Directive established security of

supply standards in terms of consumers to be protected and extreme weather

conditions and supply disruptions during which it should be still possible to supply

these customers. However, much

flexibility

was allowed, reflecting the very different

COM(2008)0769; report on public consultation in Annex 4

The Gas Coordination Group, established under the 2004 Directive, brings together Member States and

the gas industry and consumers through their European associations (Eurogas, OGP, GIE, IFIEC,

BEUC, Eurelectric)

First two studies at http://ec.europa.eu/energy/gas_electricity/studies/gas_en.htm

The IEA Secretariat's note

Overview of the Russia - Ukraine gas dispute of January 2009

(11 March

2009) also provides a useful chronology of the crisis.

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situations of Member States (reliance on gas in their energy mixes, uses and

substitution possibilities, indigenous production, storage, position in the gas network

etc.), with the result that standards across Europe are very heterogeneous, more than

seems justifiable

The Commission had raised at the Gas Coordination Group, during the public

consultation, the idea of a disruption for which provision should be made - the failure

of the largest supply infrastructure or source. This concept, already established in the

electricity sector, is known as

"n-1".

The January gas crisis demonstrated that this is

now a realistic disruption scenario. The Commission had also raised the ideas of

requiring

bi-directional flows on interconnectors,

and a security of supply

capacity

margin.

Respondents to the public consultation tended to accept the idea of adding "n-

1" to the disruption events specified in the Directive. However, they made clear that

the devil is in the details, with proposals on definitions and comments on the

availability of data. There was less support for the bidirectional flows and capacity

margin ideas, mainly on cost-benefit grounds.

To accommodate the differing situations of Member States, several respondents put

forward the idea that each Member State should do a

risk assessment,

referring to the

agreed disruptions (e.g. n-1, weather), and reflecting their individual situations as

regards the potential impact of disruptions and available ways of mitigating them. The

risk assessments should be peer reviewed by other Member States. If investments or

new measures are needed in order to deal with the disruptions, Member States should

establish

national action plans

and implement them within a transition period.

Some respondents noted that

disruption scenario analyses at regional and

European levels

would make it easier to assess the potential impacts of a crisis and

could help in identifying critical investment needs. Coordination with the proposed 10-

year Network Development Plans

would improve synergy.

(ii)

The second question concerned the extension beyond households of

mandatory

protection

under the Directive. This could concern power generators, small and

medium sized enterprises and other vulnerable customers. Views were split. Some

emphasized the importance of security of gas supply for essential service providers

(e.g. hospitals). Some noted that gas fired power plants and Combined Heat and Power

units without adequate fuel switching possibilities could need protection as residential

consumers are likely to switch to electricity in a gas crisis. Other respondents

considered that overprotection would diminish the ability of the market to handle

shocks and would remove incentives on market participants to increase their own

security of supply.

The third question concerned the actions which should be defined in the Community

mechanism, in

EU emergency plans.

There was consensus that the market should be

allowed to function as long as possible and emergency measures, solidarity

mechanisms and government intervention should come as a last resort. Some argued

that governments should guarantee that contractual obligations (e.g. cross-border

access to storage) could be fulfilled even in emergency situations. A European crisis

November 2008 evaluation report, op cit.

In 3

internal energy market package

(iii)

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management mechanism should include a mechanism for declaring an emergency at

European level. The idea of setting up a network of emergency contact points was

proposed by a Member State. Many respondents considered that the Gas Coordination

Group should have a stronger role in coordination and information exchange in the

event of a crisis. Regulators invited the Commission to ensure that authorities

responsible for dealing with emergency response are the same in all Member States.

There was broad agreement that

national emergency plans

should be communicated

in advance to the Commission and other Member States, as well as to market

participants throughout Europe. Several respondents argued that they should be based

on a harmonized European-level scheme.

Cooperation at

regional level

was widely supported. However, views on the scope and

field of cooperation varied, with some looking for regional emergency plans and

solidarity mechanisms, others focusing on improving regional trading platforms and

infrastructures.

(iv)

The fourth question concerned the

definition of regions

for security of gas supply

purposes. The few stakeholders who responded focused on infrastructural and

technical issues, such as existing and planned interconnections, predominant gas

flows, location of storage and import facilities. Some added that existing bilateral or

multilateral agreements for emergency situations should be taken into account. All saw

ERGEG

's Gas Regional Initiatives as a good starting point. Purely administrative

groupings should be avoided.

The fifth question addressed the

economic compensation of solidarity.

The few

replies suggested that solidarity is seen as a marginal option. Some noted that it should

preferably not be used. If it is used, it should be based on pre-agreements between the

operators with market-based compensation (concerning for example, reservation of

capacity rights or purchase of gas for solidarity reasons).

The final question concerned how security of gas supply can be strengthened

at lowest

cost.

Most respondents considered that a transparent, well-integrated, fully functional,

open and competitive market with supply and demand flexibilities is a basic guarantee

in preventing and mitigating supply disruptions. Better transparency of data would

help better capacity allocation and congestion management. Exposing market

participants to the full costs of disruptions may serve as an incentive to provide

flexible answers to risks, based on knowledge of willingness to pay. Promotion and

transparent operation of commercial storages, diverse supply interconnections, rapid

demand reduction through interruptible contracts can also help. Solidarity and

government intervention may be applied as a last resort only if the market is unable to

cope with the problems arisen. National security of supply measures should be

reviewed to ensure that they do not hinder the internal market excessively.

(v)

(vi)

Section 2: Problem definition

What is the issue or problem that may require action? What are the underlying drivers of the

problem?

European energy regulators, www.energy-regulators.eu

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The fundamental issue is the EU relies heavily on gas and will do so for the foreseeable

future. 24% of Europe's primary energy consumption is gas. It is used directly by households

and industry and in power and heat generation. As demonstrated in the scenario analyses in

Table 2 below, the achievement of the EU's 2020 targets for renewables, efficiency and

greenhouse gas emissions reductions should diminish EU demand for gas, the net effect of

energy efficiency gains, new energy sources (renewables) and the impacts of a carbon price.

However, shrinking domestic production will mean that the EU's dependence on gas imports

is unlikely to drop below today's levels in terms of volumes, and may well increase. Imports

account for a large (60%) and growing part (71-77% in 2020, depending on scenarios) of

Europe's gas consumption.

Security of gas supply is directly important for households, many industries (e.g. chemicals,

fertilizers) and for power generation. At the level of the energy system as a whole, gas is

expected to play an important role in Europe's transition to a high-efficiency, low-carbon

energy system, notably in the period before renewables are competitive. Loss of confidence in

the security of gas supply could undermine the contribution of gas to this transition, as well as

creating major problems for current users. With insecure gas supplies, the issue of back-up

fuels comes to the fore. In power generation for example, in the period before renewables are

competitive and the necessary grid developments have been put into place, and before Carbon

Capture and Sequestration is commercially available, insecurity of gas supply could mean

more investment in coal-fired generation and the lock-in of high CO2 emissions technologies.

Why is security of gas supply in doubt now? Medium-term trends for global gas consumption

point to a sustained increase in demand, particularly from developing countries. At the same

time, remaining reserves and spare production capacities are becoming increasingly

concentrated in a few hands. For the EU in particular, surrounded by several gas producers,

today's questions focus more on transit risks and the adequacy of investments in new supplies

in producer countries. There are growing doubts

about the adequacy of investments in

upstream resources, notably in Russia, the EU's main source of gas imports. Uncertainty about

future gas demand, notably in the EU, is certainly making it more difficult to plan and

undertake investments. The situation as regards transit is worrying, particularly in the case of

Ukraine. The January 2009 dispute between Naftogaz (Ukraine) and Gazprom (Russia) could

be repeated at any stage, the fundamentals have not changed substantially. In this situation,

alongside external action, the EU needs to diminish its

vulnerability to gas supply

disruptions.

Table 2 –

Scenarios for EU-27 in 2020

This Table shows the results of four scenario analyses: (i) baseline scenario (i.e. without the

Energy Policy for Europe

), with oil prices at 61$/bbl; (ii) baseline scenario with oil prices

at $100/bbl; (iii) a scenario with the Energy Policy for Europe and the moderate oil price;

(iv) a scenario with the Energy Policy for Europe and the higher oil price.

EU-27

Mtoe

2005

Baseline

projection, oil

price 61$/bbl

Baseline

projection, oil

price $100/bbl

New Energy

Policy

projection,

New Energy

Policy

projection,

See reports by the International Energy Agency

20-20-20 by 2020, as proposed in the January 2007 Strategic Energy Review and followed up in

legislation: Reduction in greenhouse gas emissions to 20% below 1990 levels, 30% in the context of a

global agreement on climate; 20% contribution of renewables to final energy consumption; reduction in

primary energy use to 20% below the baseline projection for 2020. The baseline scenario includes only

policies implemented by end-2006

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oil price

$61/bbl

Primary energy 1811

demand

Oil

Gas

Solids

Renewables

Nuclear

EU energy

production

Oil

Gas

Solids

Renewables

Nuclear

Net imports

Oil

Gas Mtoe (bcm)

Solids

666

445

320

123

257

896

133

188

196

122

257

975

590

257

(298)

127

1968

702

505

342

197

221

725

115

142

193

221

1301

707

390

(452)

200

303

1903

648

443

340

221

249

774

113

146

213

249

1184

651

330

(383)

194

302

1712

608

399

216

270

218

733

107

108

247

218

1033

610

291 (337)

108

257

oil price

$100/bbl

1672

567

345

253

274

233

763

100

129

250

233

962

569

245

(284)

124

260

Final electricity 238

demand

Sources: Eurostat and analyses based on PRIMES model; see Commission Services Working Paper, "Europe's

current and future energy position: demand – resources – investment".

Based on the outline of the situation in the Introduction, there are

two main issues

in the

reduction of the EU's

vulnerability

to gas supply disruptions. One is whether flexibility in the

internal gas market is developing sufficiently to mitigate gas supply disruptions such as that

of January 2009. Are updated standards or some other incentive needed? The second is the

effectiveness of emergency arrangements as currently implemented at national, regional and

EU levels, their impact on capacity of the internal gas market to mitigate disruptions and on

solidarity. Is a better organization needed?

The

January 2009 gas supply disruption

provided an opportunity to examine Europe's

resilience and preparedness for supply disruptions

Assumes nuclear phase-outs decided by Member States as at end-2006

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Brief resume of the crisis:

The crisis resulted from an unresolved commercial dispute between Naftogaz (Ukraine) and

Gazprom (Russia). Gazprom stopped supplying gas for Ukrainian consumption (111

mcm/day) on 1 January 2009. Gas for transit through Ukraine for European consumption

(about 300 mcm/day) continued to be delivered to Ukraine. From 2 January, gas deliveries to

several European Member States were affected, notably Poland, Slovakia, Hungary, and

above all Bulgaria and Romania. Gas deliveries gradually shrank on the Western Balkan route

and at Western Ukraine entry points. During the night of 6-7 January, all supplies through

Ukraine to the EU were cut. There were no Russian supplies to Europe from 7 January to 20

January.

In response, the EU, led by the Czech Presidency and the Commission, mediated between the

partners at company and government levels. This led to the signing of a monitoring agreement

between Ukraine, Russia and the EU on 9 January, which provided for independent monitors

from government and industry in all parties to establish clearly what was happening as

regards the transit of gas. On 17 January, EU mediation was intensified, with a high level

summit between the parties in Moscow. This resulted in an agreement on 18 January between

the Russian and Ukrainian Prime Ministers. On 19 January, within the political agreement,

Gazprom and Naftogaz signed a new 10-year agreement on the purchase of gas by Ukraine

and the transit of gas to the EU via Ukraine. On 20 January, normal gas transit towards the

EU resumed.

As regards the

impact

of the supply disruption, on the ground in Europe:

Most Member States

were affected, directly or indirectly.

There were considerable

economic and social impacts

in some Member States.

Estimates, related mainly to involuntary restrictions of gas supplies to industry, are

1000m€ in Slovakia, 255m€ in Bulgaria, 70m€ in Hungary

The impact of the disruption in Member States depended on a range of

domestic

factors,

alongside importance of Russian gas in the energy mix. Analyses

suggest

that Member States on which the supply disruption had a low impact (A, CZ, SLO,

RO) had the benefit of some import diversification, some achievements in closer

market integration (SLO-A, CZ-D), and relatively plentiful local production and

storage. In middle impact Member States (HU, SK), local production and massive

storage compensated for a low level of diversification. In high impact countries,

notably BG, key problems were inadequate storage and limited domestic production,

limited import diversification, dependence on uni-directional single lines, distance

from liquid markets (D) and low levels of preparedness for emergencies (e.g. low

levels of oil reserves for heating).

The

internal gas market

responded to the disruption. Almost immediately, flows

changed direction on the UK-Belgium Interconnector and were reduced on the UK-

Netherlands BBL Interconnector, increasing the supplies available on the Continent.

Within a few days, additional spot LNG cargoes arrived in Greece and Turkey, flows

increased from Germany to Croatia, from Hungary to Serbia and Bosnia, and Croatia

See separate report on January 2009 gas supply disruption. See also See International Energy Agency

analysis, based on information from EU Member States; also Stern, OIES, February 2009; Kovacevic,

OIES, March 2009

Peter Kaderjak, Regional Center for Energy Policy Research, Corvinus University of Budapest;

presentation of 3 April 2009

This list from Kaderjak, op cit

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increased its production share off-take from the Croatian-Italian gas field in the

Adriatic. By ten days or so into the crisis, reverse flows had been organised from the

Czech Republic to Slovakia and, on the last day of the crisis, from Greece to Bulgaria.

It was mainly

inadequacies in gas transport

which constrained flows (capacities,

reverse flow capabilities, unusual routes, insufficient integration of gas networks in

Central and South Eastern Europe), not lack of gas. The supply shortfall to the EU

through the Ukraine amounted to 300 million cubic meters per day (mcm/d),

compared to daily consumption of the EU of some 2000 mcm/d. Available storage

withdrawal capacities in the EU were around 800 mcm/d. Gas imports from Norway

increased.

The crisis tested the gas

emergency arrangements

in those Member States which

used them. Some reconsideration of supplies curtailment procedures is underway

Slovakia introduced an emergency regulation prohibiting exports from storage

facilities in Slovakia. Italy introduced an emergency regulation optimizing use of

import pipelines. Such regulations may have

prevented some gas flows

which would

have been useful.

There were no

solidarity actions

between Member State governments.

Information exchange in the Gas Coordination Group was widely considered useful.

However, the

data available

to governments and market participants on gas flows,

stocks and available capacities was inadequate, making market decisions and decisions

on emergencies more difficult.

The January 2009 gas crisis provided a practical demonstration of the European dimension of

today's gas supply disruptions and of the response. By the time Russian supplies via Ukraine

reached Europe again, action within Europe had largely compensated for the supply gaps. At

the same time, the crisis demonstrated that

investments in infrastructures

across Europe to

prevent disruptions becoming crises are still needed (e.g. storage, reverse flows, some new

interconnectors) and that further

market integration

would improve security of supply. The

question of the compatibility with the internal market of

emergency measures

of Member

States has arisen.

To what extent can the undesired effects of the January gas supply disruption be attributed to

poor implementation

of existing regulations, including the Directive on gas security of

supply?

Member States which were most hit,

the factors were poor diversity of imports,

dependence on uni-directional single lines, distance from liquid markets, inadequate storage

and limited domestic production, as well as low levels of preparedness for emergencies (e.g.

low levels of oil reserves for substitute heating fuel). Several of these countries are operating

with energy systems developed in a different context, still relatively poorly geared to

benefiting from the developing internal energy market. Investments are needed, as reflected in

the list of eligible projects in the European Economic Recovery Plan and expenditures under

the Structural Funds. Those

Member States which were able to accommodate

the January

supply disruption had the benefit of some import diversification and some achievements in

closer market integration.

Good implementation of the 2004 Directive would not have directly affected import diversity

nor import infrastructures. It would not have increased domestic production but could have

encouraged further investment in commercial storage. It would have ensured better

preparedness for emergencies. What are the underlying

drivers

for poor implementation,

HU, according to Kaderjak op.cit.

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notably on storage and emergency planning? The lack of clear standards in the 2004 Directive

and the consequent practical limitations on enforcement must come into the picture. As

regards emergency planning, the January crisis was unprecedented and, for many, unexpected.

The January crisis demonstrated the potential already developed in the

internal gas market

to mitigate quite substantial gas supply disruptions. The crisis has encouraged the

identification by Member States and Transmission System Operatorss of necessary

infrastructure investments, so future disruptions should be accommodated at least as

effectively. Thus, although there is still progress to be made in the development of the internal

energy market, the indications from the January crisis were positive.

The introduction of

emergency regulations

by some Member States may have prevented

some gas flows which would have been useful. However, this does not seem to have had a

major impact this time. Nevertheless, market participants in particular want clarity on what is

allowed.

In general, the analyses if the crisis support the two issues identified at the start of this section

– Is flexibility in the internal gas market developing sufficiently? Are emergency

arrangements effective, what is their impact on the mitigation of disruptions by the internal

gas market and on solidarity?

What are the

drivers

of these two issues?

The January crisis suggested that inadequate flexibility on the internal gas market is currently

mainly a matter of

inadequate infrastructures.

A number of missing links and inadequate

capacities were evident in the January crisis (eg reverse flow on Greece-Bulgaria pipeline).

Many were included as eligible projects in the European Economic Recovery Plan, agreed

shortly after the January crisis (see Annex 3).

More generally, there is arguably a

risk of underinvestment in infrastructures

which are

intended to be available for mitigating disruptions, preventing crises. Individual elements of

infrastructure which would not be used much in normal circumstances (e.g. provision for

reverse flows on routes normally used one way) are unlikely to be profitable and attract

financing unless without their wider benefit to the network being recognized. In Europe's

unbundled internal gas market after the

internal energy market package,

it will be for

energy regulators to work this out among themselves and with Transmission System

Operators. The rolling 10-year Network Development Plans, at Member State, regional and

EU levels, agreed in the 3

internal energy market package, should provide a good vehicle for

this. However, the

current situation

is worrying. As demonstrated in the Winter Outlook

prepared by Gas Infrastructure Europe

, a significant part of Europe's gas transmission

capacities is totally or nearly totally saturated during the cold winter temperatures. There is no

spare capacity to increase gas flow if something happens. Spare capacities, more

interconnections and reverse flow capacities must be built in order to have a buffer capacity in

transmission and distribution of gas. With the prospect of further gas supply disruptions,

urgent action on infrastructures is needed.

See Annex1 or www.gie.eu

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There may be a risk of

underinvestment in gas supplies for security of supply.

Costs of gas

supply insecurity are visible to suppliers and consumers (e.g. back-up supplies, uncertainty

about investments) and incentives to diminish insecurity correspondingly clear. However, in

many of the actions to reduce insecurity, benefits are widely shared, which normally

encourages free-riding. The classic example is oil prices. If some consumers act (e.g. stocks,

demand reduction) to reduce pressure on the supply/demand balance, the resultant price drop

is felt by all. Hence international cooperation among consumers on oil stocks. Less research

work has been done on gas but the same factors should operate

. An example would be

power generators making provisions for fuel switching, thereby leaving more gas for others in

a crisis.

Under the 2004 Directive, security of supply standards are already in place. They specify

severe weather conditions and other disruptions during which it should still be possible to

supply protected customers from the market, without emergency measures. For the moment,

there does not seem to be a problem about quantities of gas in Europe. However, with

growing import dependence, the situation should be kept under review.

The flexibility of the internal gas market to mitigate supply disruptions depends not only on

investments in infrastructures and gas but also on its

functioning.

There is currently

insufficient physical network integration, inadequate transparency in network utilisation as

well as inflexibility in capacity reallocation and congestion management. Technical

difficulties in transporting gas over non-standard routes were evident in the January crisis.

There is insufficient market integration, price-response mechanisms are inadequate. All of

these can undermine a market response to a gas supply disruption. Thus the coming into

operation of the

internal energy market package

will enhance the internal gas market's

ability to deal with supply interruptions, through measures such as transparency (obligations

to publish data on forecast and actual gas flows, amount of gas in storage and available

pipeline and storage capacities), harmonisation of access rules through codes as well as clear

roles for Transmission System Operators and regulators, the creation of ACER for

cooperation of regulators and ENTSOG for cooperation of TSOs and for coordination of

investment plans through the 10-year Network Development Plan

The main driver for the issue of the

effectiveness of emergency arrangements

and their

impact on the mitigation of disruptions by the internal gas market and on solidarity is the

evidence of unilateral and uncoordinated action by some Member States in gas supply

emergencies. There are several problems with this. By creating doubt on when emergencies

will be declared in parts of the internal gas market, when non-market actions will be

introduced, confusion is created around the basic agreement on having the internal gas market

mitigate supply disruptions for as long as possible. Once an emergency is declared, clarity is

needed on what this implies. Gas market players from several Member States have raised the

issue of uncertainty about continued access to storage in neighbouring countries in a crisis,

despite commercial contracts, for example. These concerns about getting the functioning of

emergency systems right are influenced by the general sense that there could be further severe

gas supply disruptions in the future and the reality that as the internal gas market develops,

clarity is needed by all participants on when non-market measures might be applied.

CEPS Policy Brief: "National and EU-level Estimates of External Supply Externalities", Arnold and

Hunt, April 2009

Agency for Cooperation of Energy Regulators, European Network of Transmission System Operators -

Gas

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A driver of both issues – adequacy of investments and organization of emergency

arrangements – is the objective of

solidarity

in the EU. In the energy field, reflecting

interdependence of Member States, the ideas of responsibility and solidarity have been linked.

Thus there may be greater readiness to agree in advance on solidarity measures which would

come into play in an emergency when there is trust that all Member States have acted to

reduce the risks of an unmanageable gas supply disruption spilling over into other Member

States. Several Member States repeated this in the public consultation on the revision of the

2004 Directive.

Who is affected, in what ways, and to what extent?

The ultimate sufferers from inadequate and inefficient gas security of supply arrangements in

Europe are

European citizens

(dependent on gas for cooking and heat, directly or via district

heating; many dependent on gas-fired electricity generation) and

industry

(e.g. power sector,

chemicals, fertilizers). Gas supply disruptions are a serious issue for electricity generation in

several Member States, hence the likelihood that a gas crisis can become a much more

disruptive energy crisis

Costs of supply disruptions can be considerable, as demonstrated in the January crisis (see

earlier in this Section), directly affecting industry (e.g. temporary closure of plant;

requirement on power plants to switch fuels, provision of back-up fuels or insurance-type

contracts), then households.

Significant economic damage

was felt in the Member States

most affected in the January crisis.

Supply disruptions will have impacts on

jobs.

Some 25% of gas consumption in the EU is in

industry (fertilizers, other chemicals etc). Interruption of supplies to such continuously

running enterprises is a negative factor, potentially putting jobs at risk.

How would the problem evolve, all things being equal?

As noted earlier in this Section, risks of gas supply disruptions to Europe are growing, with

growing gas demand from developing countries, doubts about adequacy of investments in

new supplies, and uncertain relations between producer and transit countries, notably Russia

and Ukraine. Imports are projected to grow for the foreseeable future and the EU is highly

dependent on a small number of gas suppliers and routes. Crises comparable to that of

January 2009 could easily be repeated, leaving European customers without gas.

If underinvestment and inefficient investment in the capacity of the market to mitigate

disruptions continues while risks of disruptions grow, the impact and costs of disruptions will

increase. The 3

internal energy market package and the European Economic Recovery Plan

will certainly bring relevant improvements although it will be some time before the integrated

liquid internal gas market which could best deal with supply disruptions will be achieved .

Emergency measures and plans of Member States need to be coordinated, lest the

untransparent and difficult situation in January 2009 be repeated in the next crisis,

undermining the effectiveness of the internal market in mitigating the disruption. More

broadly, the development of solidarity between Member States in dealing with emergencies is

likely to be held back by any sense of lack of responsibility of other Member States in making

the necessary provisions to prevent and mitigate gas supply crises.

During the January 2009 gas crisis, problems emerged in electricity (Slovakia) and oil products supply

(Bulgaria, Moldova and Serbia).

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As noted earlier, doubt about security of supply could undermine the contribution expected of

gas in the transition to a high-efficiency, low-carbon energy system, notably in the period

before renewables are competitive.

Does the EU have the right to act and is EU added-value evident – Treaty base, ‘necessity

test’ (subsidiarity) and fundamental rights limits?

On security of energy supply, its inclusion in the Lisbon Treaty energy article and the

endorsement of the 2

Strategic Energy Review point to an EU role, consistent with the

growing reality of the internal energy market.

The 2004 Directive is based on Art 100, EC Treaty, which applies to situations in which

"severe difficulties arise in the supply of certain products"

. Decisions under this Article are

taken by the Council acting on a proposal from the Commission. This is consistent with short-

term and emergency situations, not with longer-term, preventive action in the internal energy

market. The Commission's original proposal for the 2004 Directive was based on Art 95

which deals with "the approximation of provisions laid down by law, regulation or

administrative action in Member States which have as their object the establishment and

functioning of the internal market." The justification was that the Directive related to

provisions, consistent with the internal market, to be made by Member States to address

disruptions which could arise in the market (standards for market participants, publication of

planned measures for use in an emergency, transparency etc). This justification for using Art

95 has become stronger as the internal energy market has developed

. In addition, the clear

purpose of its revision is to achieve advance planning and provisions by Member States and

market participants, not to frame ad hoc responses to crises.

The adoption of the 3

internal energy market package will strengthen the market. In a

situation in which national markets are becoming increasingly integrated, it will not be

possible to consider security of supply primarily as a national concern. This is already partly

the case. Consequently the legal basis of the related EU legislation should arguably no longer

be disconnected from the internal market rules of the EU Treaty. Any proposal should –

consistently with the legal basis for the internal energy market of which it is arguably an

extension – be based on Article 95. This is the legal basis of a similar instrument adopted in

2005 in the field of electricity (Directive 2005/89/EC).

Subsidiarity, proportionality:

No single Member State, acting on its own, can assure a sufficient regulatory framework and

investments in the internal market for security of gas supply. Only EU-wide action can do

this. No single Member State, acting on its own, can ensure that all Member States have

effective provisions in place, consistent with the internal market, to handle gas supply

emergencies. Moreover, individual non-coordinated actions by MS are increasingly likely to

Article 100: 1. Without prejudice to any other procedures provided for in this Treaty, the Council,

acting by a qualified majority on a proposal from the Commission, may decide upon the measures

appropriate to the economic situation, in particular if severe difficulties arise in the supply of certain

products. 2. Where a Member State is in difficulties or is seriously threatened with severe difficulties

caused by natural disasters or exceptional occurrences beyond its control, the Council, acting by a

qualified majority on a proposal from the Commission, may grant, under certain conditions,

Community financial assistance to the Member State co concerned. The President of the Council shall

inform the European Parliament of the decision taken.

The 2005 Directive on security of supply of electricity is based on Art 95.

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hamper further development of the internal market, lead to discriminatory treatment and put

security of supply in other Member States at risk.

As noted earlier, the

Member States

are in very different situations. The risks and impacts of

gas supply disruptions are different in different Member States, as are their means of

mitigating disruptions. The flexibility allowed to Member States in the 2004 Directive is a

reflection of this. Nevertheless, given the external and internal developments noted above, the

clear message from Council and Parliament is to revise the Directive. This is an EU matter.

Section 3: Objectives

What are the general policy objectives?

The general policy objective is to secure an

adequate level of preparedness

in Europe for

gas supply disruptions, developing and using the potential of the internal gas market to deal

with supply disruptions and address today's risks of disruptions. The weaknesses made

evident in the January 2009 gas crisis must be tackled

quickly,

before any further crisis.

Consistency of these objectives with other EU policies:

In the changing global gas market, supply and transit disruptions must be expected. Despite

much effort on developing

international cooperation

and partnership, there are continuing

questions about matching supply side investments and demand, and political dimensions of

supply and transit risks. As set out in the 2

Strategic Energy Review, internal action to

reduce vulnerability to gas supply disruptions supports a strong EU line and action with

external partners.

Terrorism and other criminal activities, natural hazards and other causes of accidents are not

constrained by borders within or outside

the EU. The directive on the identification and

designation of European Critical Infrastructures

lists the energy sector as one of its

priorities. This includes as particular infrastructure assets gas production, storage,

transmission by pipelines, as well as LNG terminals. A strengthened regulatory framework on

gas security of supply and

EU policy on critical infrastructures

could be mutually

supportive.

Inadequate European responses to gas supply disruptions would have impacts on other EU

policies, notably

internal energy market

development (undermining of efficient market

response, unclear investment signals),

environment and climate

(avoidable switching to

fuels with greater greenhouse gas emissions e.g. coal, fuel oil),

economic development

(insecure supplies, involuntary closure of plant, loss of competitiveness and jobs),

poverty

alleviation

(relatively great impact of disruptions on vulnerable customers),

external

relations

(suppliers not helped by unclear European market rules).

What are the more specific/operational objectives?

Reflecting the two issues identified earlier and the discussion of the drivers of the problems,

the specific/operational objectives for the revision of the 2004 Directive are:

The Commission has recently started a dialogue with the Member States about an external dimension of

the EU policy on critical infrastructure protection. This strand of work would address the issue of

critical infrastructures located in third countries, which if disrupted or destroyed would have an adverse

effect on a certain number of Member States or the EU as a whole.

Council Directive 2008/114/EC of 8 December 2008

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(i)

Achievement of sufficient

flexibility

in the internal gas market to mitigate most gas

supply disruptions, by establishing the necessary incentives for investments in

infrastructures and gas and the well-functioning of the market.

Effective cooperation in dealing with gas supply

emergencies

in Europe, with pre-

defined emergency plans involving all players, at Member State, regional and EU

levels, minimizing any undermining of the internal gas market response to the

disruption and geared to supply disruptions of the size and scope experienced in

January 2009.

(ii)

On flexibility in the internal energy market to enable it to mitigate most supply disruptions,

the main focus today, bearing in mind the January gas crisis, is on infrastructures. As noted in

the previous Section, existing incentives for gas supplies seems to be adequate. The 3

internal energy market package will improve market functioning and the conditions in which

investments can be made. A missing element may be a standard relating clearly to

infrastructures. This is neither in the current Directive on security of gas supply (which only

specifies "a partial disruption of supplies") nor in the 3

internal energy market package. A

security of supply standard focused on infrastructures

could complement the 3

internal

energy market package. The package has created a new situation in which infrastructure

investments will be made in future. With clear roles and cooperation among Transmission

System Operators and regulators in Europe, a 10-year Network Development Plan will be

developed, at Member State, regional and EU level. A clear security of supply standard for

gas infrastructure could support the development of such network development plans.

The Commission put forward for discussion in the Gas Coordination Group the idea of a

disruption for which provision should be made - the failure of the largest supply infrastructure

or source. This concept, already established in the electricity sector, is known as

"n-1".

The

January gas crisis demonstrated that a disruption scenario of this scope, previously considered

unlikely, is now realistic. The Commission also raised the ideas of requiring

bi-directional

flows on interconnectors,

and a

security of supply capacity margin.

The differences between Member States as regards risks and impacts of gas supply

disruptions would clearly be a factor to be borne in mind in requiring an infrastructure-based

security of supply standard. An approach based on n-1 would allow a response tailored to the

specific situation of each Member State, while ensuring the development of a network with

the capacity to deal with crises as well as normal circumstances.

Thus, to summarize why a

security of supply standard for infrastructure

may now make

sense as a specific/operational objective for the revision of the 2004 Directive, it is because

large-scale failures of supply and the need to replace supplies from other infrastructures is

now a realistic disruption scenario; gas flows across Europe are increasing and the internal

gas market is developing; and the 3

internal energy market package will provide new means

of implementing such a standard.

The

n-1 concept

as a basis for a security of supply standard for infrastructure was accepted by

many respondents to the public consultation. However, respondents made clear that the devil

is in the details, with proposals on definitions and comments on the availability of data.

Compared to the

capacity margin

concept which would be applied to all existing

infrastructures, the n-1 concept would enable a focus on missing infrastructures. Many

respondents rejected the capacity margin concept, mainly on cost-benefit grounds. The idea

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of requiring

bidirectional flows on all interconnectors

could be assessed on its own merits,

it would not conflict with the n-1 concept, indeed it could be accommodated within it.

In principle, the n-1 concept could be applied at any level –

Member State, regional or EU.

The choice as to which level would be best would be influenced by very concrete

considerations of existing interconnections, existing cross-border arrangements (e.g. access to

storage), existing cooperation frameworks. A pragmatic approach is justified. The responses

from the public consultation support a pragmatic approach, at least as regards regional

cooperation.

It would clearly be necessary also to have

disruption scenario analyses

at EU level, to

support analyses and risk assessments at regional and Member State levels. These analyses at

EU level should be consistent with and contribute to the planned 10-year

Network

Development Plan,

to be developed by ENTSOG. The maps in Annex 2, for example,

produced using the Joint Research Centre's MC-Genercis model, give an EU-level view of gas

flows. They show gas flows in Europe on a normal day and on the first day of the January

2009 gas crisis. Transmission System Operators in GTE+ are already working on gas

disruption scenarios in an EU perspective.

Section 4: Policy options

What are the possible options for meeting the objectives and tackling the problem?

4.1

No new EU action – the baseline scenario

Can achievement of the objectives set out above be expected from the existing EU policy

framework and from incentives already in place?

(i)

Achievement of sufficient flexibility in the internal gas market to mitigate most gas

supply disruptions, by establishing the necessary incentives for investments in

infrastructures and gas and the well-functioning of the market.

As noted in Section 2, the January crisis suggested that flexibility in the internal gas market to

handle gas supply disruptions is most immediately a matter of

inadequate infrastructures.

Europe's unbundled internal gas market, when the

internal energy market

provisions are

operational, it will be for energy regulators to work out among themselves and with

Transmission System Operators the costs and benefits of additional investments, including

those to strengthen the capacity of the market to mitigate disruptions. The rolling 10-year

Network Development plans, at Member State, regional and EU levels, agreed in the 3

internal energy market package, should provide a good vehicle for this, when they are

developed. Security of supply is one of the factors which TSOs and regulators will consider in

their infrastructure development plans.

In general, strengthened cooperation on security of supply should be possible, through the

clearer roles, responsibilities and cooperation obligations established in the 3

internal energy

market package, within Member States and at regional and EU levels.

It will take some time before all the elements in the 3

internal energy market package are

operational and before their impacts are felt in an integrated, well-functioning liquid internal

gas market.. If the 3

package is to address imminent gas supply disruption, there will have to

be early implementation of its provisions by the relevant players. In response to the January

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gas crisis, Council encouraged the early formation of ENTSOG and the start of its work on

the 10-year Network Development Plan. TSOs in GTE+ have started working on EU-level

gas supply disruption scenarios. Thus, even before full implementation of the 3

internal

energy market package, some work towards proper reflection of security of supply in network

developments in Europe can be expected.

This is a strong argument for

early agreement on a clear security of supply standard for

infrastructure,

providing guidance and support at EU level to enable regulators and

Transmission System Operators to address the need for additional investments. The issue of

financing investments which are primarily designed to ensure security of supply is not easy

and experience, particularly in an unbundled internal energy market environment, still needs

to be built up.

Agreement on the disruptions which each Member State should be able to compensate could

simplify the lives of regulators and facilitate a fair burden-sharing. Under the 2004 Directive,

the definition of such a disruption goes no further than "a partial disruption" of supplies,

during a period to be determined by Member States, taking into account national

circumstances. This gives no guidance. Incentives for investment in infrastructures to

strengthen the capacity of the market to mitigate disruptions are not clear enough at this stage.

A significant part of Europe's gas transmission capacities are totally or nearly totally saturated

during the cold winter temperatures. There is no spare capacity to increase gas flow should

something happen. With the prospect of further gas supply disruptions in the near future,

urgent improvements in infrastructures

are needed.

The

European Economic Recovery Plan

includes a list of eligible gas infrastructure

projects, to be started in 2009-2010 (Annex 3), many of which would strengthen the capacity

of the market to mitigate disruptions. This will certainly help, as will the continued

implementation of the TEN-E programme. The impact of the Recovery Plan projects on the

meeting of an n-1 standard (details in Annex 1) can be calculated. The following Table 3 does

not include the Recovery Plan projects concerning reverse flow capacities as it is not yet

possible to attribute the support.

Table 3: Preliminary calculation of n-1 for Member States:

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300%

250%

200%

N-1

150%

100%

50%

DK GR DE BE SK AT PL NL LV CZ EE ES

HU FR UK RO SE LU PT BG

Normal

EERP

If all projects in the Recovery Plan are implemented, it would certainly take several Member

States nearer to meeting an n-1 standard for security of supply. However, the projects

included in the Recovery Plan are eligible projects, construction cannot be guaranteed. The

planned revision of

Council Regulation EC N° 736/96

on notification of investment projects

in the gas, electricity and petroleum sector will help to establish greater transparency

regarding the development of energy infrastructure and better understanding of the reasons for

project delays or withdrawals.

The guidelines for the TEN-E programme will be revised in 2010. One of the ideas put

forward by the Commission for the public consultation is to tailor the programme more

closely to energy security needs. This may involve greater financing.

Against this background of the 3

internal energy market package and its early

implementation, the European Economic Recovery Plan and the TEN-E programme, is there

need for a

security of supply standard relating to infrastructure?

What added value would

it provide? Firstly, the 3

internal energy market package does not provide such a standard,

only much improved means for reflecting one in decisions on investments and in network

development plans. The existing 2004 gas security of supply Directive does not provide one

either. The Recovery Plan will at best only partially deal with the problem of inadequate

infrastructures. Agreement on a standard would provide

guidance and support at EU level

to enable regulators and Transmission System Operators to tackle, at Member State, regional

and EU level, the difficult questions of which additional investments make most sense, how

should costs be allocated. In timing terms, it would support early advance work by ENTSOG,

ACER, the TSOs and regulators.

Other factors influencing flexibility in the internal gas market to mitigate most gas supply

disruptions should also improve somewhat in the next years. On the functioning of the

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market, after the 3

internal energy market package, the Commission proposes to strengthen

gas network transparency

through detailed rules through comitology by a proposal to

amend the Annex of the current Gas Regulation 1775/2005. On availability of

substitute

fuels,

the recently-agreed revision of the oil stocks Directive, for example, will provide a

more clear assurance of supplies.

(ii)

Effective cooperation in dealing with gas supply emergencies in Europe, with pre-

defined emergency plans involving all players, at Member State and EU levels,

minimizing any undermining of the internal gas market response to disruptions.

The January 2009 gas crisis has certainly stimulated greater awareness of the need for

effective cooperation on crises, at Member State, regional and EU level and in relations with

supplier and transit partners. As noted in the problem definition section, confusion on timing

and content of emergency plans of Member States can undermine the effectiveness of the

internal energy market in mitigating supply disruptions. The

Gas Coordination Group

has

already started working on emergency plans as well as security of supply standards.

Work underway on strengthening

international energy cooperation

could diminish the risk

of gas supply disruptions (EU-Russia Energy Dialogue, Energy Charter Treaty, Energy

Community, EU-Russia New Agreement etc).

Thus, the baseline scenario may well partially deliver the objectives over the next years,

through the 3

internal energy market package, the European Economic Recovery Plan, the

revision of Council Regulation EC N° 736/96 on notification of investment projects in the

gas, electricity and petroleum sector, the TEN-E programme, the existing 2004 gas security of

supply Directive and cooperation on emergency planning following the January gas crisis.

Nevertheless, given that the internal gas market is far from the integrated, liquid, well-

functioning market which could best deal with supply disruptions, an EU framework is still

needed to ensure that

actions of Member States

for security of gas supply, notably during

crises, do not undermine the growing capacity of the market to deal with disruptions and that

the

standards for security of supply which market participants should meet

are clear to

all. Such standards have not been provided in the 3

internal energy market package nor in

the 2004 gas security of supply Directive. More positively, an EU framework is needed to

ensure that the

potential of the internal gas market

to deal with supply disruptions is

developed and used. The 2004 Directive does not provide sufficient concrete provisions to do

this. The 3

internal energy market will radically improve the framework for investments in

the internal energy market but a clear indication of what is needed for security of supply has

not been provided.

4.2

(i)

Better enforcement and implementation of the 2004 Directive

Achievement of sufficient flexibility in the internal gas market to mitigate most gas

supply disruptions, by establishing the necessary incentives for investments in

infrastructures and gas and the well-functioning of the market.

The Commission's evaluation report on the implementation of Directive 2004/67

demonstrated heterogeneity of standards among Member States for mitigating gas supply

November 2008 evaluation report on implementation of Directive 2004/67

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crises. Member States are required to establish security of supply standards based on certain

criteria (customers to be protected, their demand to be met during specified weather

conditions and partial disruptions of supplies). In their transposition of the Directive, Member

States have adopted heterogeneous security of supply standards and in several cases

, they

have not adopted any standard at all. Eight Member States have extended the scope of the

protection beyond households. The national definitions of partial disruption vary from around

10% (in Slovenia) to around 30% (Slovakia) of average gas consumption with durations

ranging from 48 hours (Bulgaria) up to 6 months (France). Most Member States use 1-in-20

or 1-in-50 rules for weather but details such as peak duration vary. Thus, even though some

flexibility was intended in the 2004 Directive, the result in practice does not seem to follow

any pattern. The uneven implementation across the EU is not surprising. With such imprecise

standards, strict

enforcement

is impossible.

(ii)

Effective cooperation in dealing with gas supply emergencies in Europe, with pre-

defined emergency plans involving all players, at Member State and EU levels,

minimizing any undermining of the internal gas market response to disruptions.

For effective cooperation between governments on crises which are beyond the capacity of

the market to handle, Member States must have real emergency plans, they must be shared in

advance and cooperation arrangements must already be in place. The Directive only requires

national emergency measures to be defined in advance of any crisis, published and

communicated to the Commission. Eighteen Member States have done so. Ten of these have

developed their national emergency measures in a systematic way, creating national

emergency plans. Others stay at the level of measures. It became clear in the January crisis

that those Member States which had emergency plans in place and tested, were better able to

mitigate the disruption than other Member States.

The emergency plans are rather different between Member States. For example, there are

substantial differences between Member States in the roles and responsibilities for security of

gas supply. In some cases it is the Ministry, in others the regulator, in others the Transmission

System Operator. The net effect is not conducive to easy cooperation at European level in a

crisis. There are few instances of cooperation or solidarity arrangements in place between

governments in advance of any crisis.

The Community mechanism set out in the Directive is poorly defined, weak and slow.

Member States may indicate to the Commission events beyond their capacity to manage

nationally. In such a case, or in a major supply disruption, the Commission convenes the Gas

Coordination Group and if necessary, the Commission submits a proposal to the Council

concerning further measures. In practice, the Commission has not chosen to use this relatively

lengthy, heavy procedure and has preferred to use the Gas Coordination Group set up under

the Directive. The information exchanges, discussions of best practice etc. in this group which

brings together Member States and the gas industry and consumers representatives through

their European associations (Eurogas, OGP GIE, IFIEC, BEUC, Eurelectric), have proven

useful and suggest that a process based on review of plans by Member States would be

feasible, effective and flexible to adapt to sudden crises if necessary.

Bulgaria, Greece, Ireland, Luxemburg.

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As noted earlier, agreement on timing of introduction of emergency action is important,

particularly if it allows the use of non-market measures. Confusion on timing can undermine

the effectiveness of the internal gas market in mitigating supply disruptions.

In the January 2009 gas crisis, many considered the current degree of transparency in gas

flows to be inadequate for decisions by market participants and governments during the crisis.

A good understanding of the situation, Europe-wide, in the market and particularly during

crises, is needed. The

reporting

required in the 2004 Directive is clearly insufficient for

dealing with crises. In addition, implementation is poor, some Member States do not collect

the relevant data. Regulators have proposed developing a harmonised minimum level of

information to be made available to the market, especially in crisis situations when quick

decisions have to be made.

All of these issues constitute weaknesses now, far more than they were in the past, in today's

situation in which a gas supply crisis quickly spreads to several Member States and when a

crisis such as occurred in January 2009 cannot be excluded.

The Policy Option "Better enforcement and implementation of the 2004 Directive" is not

analysed further, essentially because the requirements are so weakly established in the 2004

Directive that stronger enforcement is not possible.

4.3

(i)

Voluntary approach by industry (self or co-regulation)

Achievement of sufficient flexibility in the internal gas market to mitigate most gas

supply disruptions, by establishing the necessary incentives for investments in

infrastructures and gas and the well-functioning of the market.

There is a strong consensus in Europe that a transparent, well- functioning market with

supply and demand flexibilities and adequate infrastructures is the best way to mitigate gas

supply disruptions. Exposing market participants to the full costs of disruptions will serve as

an incentive to provide flexible answers to risks, on both supply and demand sides. Thus

voluntary approaches by some stakeholders to some aspects of security of supply

inadequately covered by the Directive are underway and could be imagined. For example,

improvement of the

information and analysis base:

Gas Transmission Europe +

already working on gas supply disruption scenarios at EU level and on investments in

reverse flows.

coordinated commitments

by infrastructure operators (transmission, storage, LNG,

interconnections), supported by regulators, to invest in spare capacity for security of

supply purposes could be envisaged. This could be related to the 10-year Network

Development Plan which should now be prepared at Member State, regional and EU

level by Transmission System Operators.

information pooling

to achieve improved transparency on gas stocks and flows.

Regulators have already started working on this.

commitments by shippers or suppliers

to have back-up contracts or some equivalent

insurance or flexibility for a certain proportion of their supplies could be envisaged.

GTE+, the association of gas TSOs in Europe

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The issue of what contracts (fixed, flexible or back-up) need to be in place, in a cost-

effective security of supply system, is being discussed by the industry

ii)

Effective cooperation in dealing with gas supply emergencies in Europe, with pre-

defined emergency plans involving all players, at Member State and EU levels,

minimizing any undermining of the internal gas market response to disruptions.

A disadvantage of a voluntary approach is that reliance on market forces to deliver security of

gas supply has limits. Provisions for emergencies cannot be left to the market. Participation of

all participants cannot be guaranteed. Many aspects of security of supply rely on a collective

effort. Any work of industry on developing standards would need to be followed through into

a binding instrument. On these grounds, the Policy Option "Voluntary approach by industry"

will not reach the objectives sought and is not analysed further.

4.4

(i)

Revision of the 2004 Directive

Achievement of sufficient flexibility in the internal gas market to mitigate most gas

supply disruptions, by establishing the necessary incentives for investments in

infrastructures and gas and the well-functioning of the market.

The 2004 Directive established

security of supply standards

in terms of the severe weather

conditions and other disruptions during which it should still be possible to supply protected

customers from the market, without emergency measures. In principle, these standards should

provide clear incentives for investments in infrastructures and gas.

The Directive left

flexibility

for Member States to adapt the prescribed security of supply

standards to their own specificities and choose their own measures to enable their standards to

be met. This reflected the very different situations of Member States as regards reliance on

gas, nature of demand, substitution possibilities, availability of indigenous production,

geographic position, geological potential for storage facilities, varying levels of existing

interconnections etc. Concretely, as demonstrated in Table 1, the reliance of Member States

on gas in their primary energy mixes varies from 2% (Sweden) to 40% (Netherlands,

Hungary). Member States differ also in the sectoral distribution of gas use. In Estonia, almost

40% of the gas is used in district heating. In Ireland, 64% is used in power generation. In

Slovenia, 74% is used in industry. These figures imply different needs for seasonal flexibility

(greater for heating), different short-term peak demand requirements, different possibilities

for interruptible contracts and fuel substitution and fundamentally, different degrees of

importance attached to security of gas supply. Alongside this, crisis mitigation possibilities

differ substantially between Member States. Some Member States are well-supplied in

storage, some are well-interconnected, some have flexible demand.

The idea of flexibility in the choice of measures to deal with gas supply disruptions is

therefore still valid. The idea of flexibility to set different standards for the type of crisis

which should be prevented and mitigated is less valid. Gas supply disruptions now spread

easily throughout the internal market, so it is reasonable to require all Member States to make

provisions to deal with a

standard set of supply disruption events.

There is little

justification for the set of disruption events to be different. The growing reality of the internal

market, the prospect of further major gas supply crises, and the consensus that solidarity must

Eg: Private Initiative for Security of Supply, under auspices of German Federal Minister for Economics and

Technology.

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be underpinned by

responsibility,

all argue for

clear, common security of supply

standards, with maximum flexibility in the measures used to meet them.

The supply

disruption events in the 2004 Directive need to be precise and they must relate to today's

supply disruptions.

In the 2004 Directive, the security of supply standards relate to (i) customers to be protected,

(ii) weather conditions during which their demand should be met and (iii) partial disruptions

of supplies.

Regarding

customers to be protected,

the 2004 Directive specifies households and allows

Member States to extend protection to small and medium-sized enterprises and other

customers without fuel switching possibilities. The security of the electricity system can also

be a criterion. It is arguable whether the scope of customers to be protected should be fixed as

a common standard or left to Member States. The importance of protecting gas supplies to

particular customer groups (e.g. gas-fired electricity generation) varies between Member

States, which suggests that only a common minimum scope of protected customers (e.g.

households) should be fixed. In addition, extension of protection would diminish the ability of

the market to handle shocks and would remove incentives on market participants to increase

own security of supply (as was pointed out by a number of respondents in the public

consultation). Given internal energy market developments and the objective of increasing

flexibility in the market, an extension of the scope of protected customers does not seem

justified.

Regarding

weather conditions,

for the peak weather standard, the 1-in-20 rule is currently

specified but not the peak duration. There is no clear justification for the heterogeneity of

durations among Member States which has resulted. Thus duration should be specified (e.g.

extremely cold or hot temperatures during a 7-day peak period occurring statistically once

every 20 years). Similarly, an extreme winter or summer should be specified (e.g. any period

of 60 days of exceptionally high gas demand during the coldest or the hottest weather periods

statistically occurring every 20 years).

For partial disruptions of supplies, the concept needs to be updated as well as better specified.

The

failure of the largest single infrastructure or supply source

is a realistic scenario

today, as was demonstrated by the January 2009 crisis.

The Commission raised for discussion in the Gas Coordination Group the "n-1"

concept

commonly used in electricity network planning and operations. It refers to the failure of the

largest single infrastructure (entry point, production field, LNG terminal, storage etc). In

principle it could also refer to the largest single supply source. The remaining capacities

should be capable of meeting domestic demand for a specified time period (e.g. 60 days).

The idea of using this concept in the EU framework for gas security of supply has been

cautiously welcomed by most stakeholders, many offering proposals on the details of its

implementation

. It could be applied at Member State, regional and at EU level. Its

calculation would demonstrate how far from the standard the infrastructure provisions in that

Member State, region or the EU are. If n-1 is below 100% (see explanations of calculation in

Some Member States (e.g. France, Spain) already use the n-1 concept already in their planning for security of

gas supply. Spain's disruption scenario, for example, encompasses the failure of a major LNG terminal

(Barcelona)

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Annex 1), it suggests that the Member State, region or EU risks not being able to deal with a

gas supply crisis which removes from service the main supply infrastructure The gas situation

in the Member State, region or the EU may be such that despite the indicator being below

100%, the risk of an unmanageable supply disruption is low. This could be the case in a

Member State with low reliance on gas and strong provisions for fuel switching, for example.

The important issue is whether the risk of a supply disruption which the market cannot handle

is sufficiently low. This is what is of interest to Member States and market participants in the

increasingly integrated internal energy market. Thus, n-1 could be a benchmark, a reference

scenario against which each Member State, region or the EU would do a risk assessment for

its own situation, and if necessary develop a Preventive Action Plan to diminish the risk of an

unmanageable disruption. These risk assessments and the Preventive Action Plans would be

shared among Member States. The Commission would organise a

review of risk assessments

and Preventive Action Plans,

involving the Gas Coordination Group, with attention not only

to the adequacy of the current and planned provisions for security of supply but also for

compatibility with other Member States' and regions' risk assessments, coherence of

provisions in the internal market, possibilities for cooperation on crisis prevention and

mitigation and best practice. The Commission would issue

recommendations

to the relevant

Member States or require changes..

N-1 is a relatively flexible concept although

availability of data

is an important

consideration. A calculation is shown for illustrative purposes only in Annex 1. This

calculation has been kept simple. Security of supply measures, notably on the demand side,

are not included in the calculation. They could be brought into the risk assessments. Thus,

interruptible contracts and provisions for fuel switching, if not included in the calculation of

n-1, could come into the risk assessment as security of supply measures.

N-1 could in principle apply to supplies as well as infrastructure. In that case, the

Commission would propose a definition of what would constitute the "same source of

supply", reflecting physical and commercial realities.

In practice, reducing the risk of unmanageable gas supply disruptions may depend on

neighbouring states so a

regional approach could

make sense and indeed be necessary.

Given the current state of development of the internal gas market, the choice as to whether to

apply n-1 at Member State or regional level should be pragmatic, based on the realities in the

regional market and infrastructures. For many Member States, it could make sense in cost-

effectiveness terms. The regions would not necessarily coincide with the regions defined in

ERGEG

's gas regional initiatives. For a given Member State, the regional approach should

include all interconnected and planned-to-be-interconnected neighbouring Member States.

The application of n-1 would also be envisaged at EU level, with use of EU-wide models such

as MC-Genercis

(see Annex 2). Supply disruption scenario analyses at regional and

European levels would support the assessment of potential impacts at Member State level of a

disruption and could help in identifying critical investment needs. Coordination with the

proposed 10-year Network Development Plans

would improve synergy. Risk assessments

at Member State level could feed into and be reviewed against the background of analyses of

ERGEG – association of European renergy regulators

MC-Genercis, being developed by the Joint Research Centre, currently enables the impact of a supply

disruption in an import pipeline on pipelines and other infrastructure throughout the EU to be modelled

In 3

internal energy market package

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gas supply disruption scenarios at regional and EU level. GTE+, the association of TSOs, has

already started working on EU supply disruption scenarios. In the public consultation, there

was support for the preparation of a yearly

European winter outlook report.

There is also

readiness in the Gas Coordination Group to periodically discuss supply disruption scenarios

and levels of preparedness.

An advantage of using n-1 is that attention is focused on infrastructures and possibly supplies

which are particularly risky in the EU supply system and internal market. A second is that in

the subsequent risk assessment and Preventive Action Plan, Member States would have

flexibility to bring into play to the whole range of security of supply measures on both supply

and demand sides which are open to them in their particular situations. A third is that a

region-level application is reasonable and could be chosen by Member States. These three

advantages are far less true of

two other options

for supply and infrastructure standards put

by the Commission to the Gas Coordination Group.

The option of a

security of supply margin

to be maintained in all interconnectors and import

infrastructures as a percentage (e.g. 5%) of the total interconnector capacity was raised in the

Gas Coordination Group. The definition of this margin for security of supply would have to

be precise, to distinguish it from other provisions for flexibility. It would normally be

bookable only on a short term basis, so as to retain flexibility for use in managing a crisis. In

the public consultation, a number of respondents pointed out that this security of supply

measure would be expensive. Relative to the n-1 approach, it would be less focused on risky

or missing infrastructures and supplies in the EU system. Thus in an EU, regional or Member

State perspective, it is likely to be poor in cost-benefit terms.

The option of a requirement for bidirectional

gas flows

at all borders with other Member

States was also raised. A variant is that the reverse flows should be at least enough to enable

supply of all household consumers, if this supply can be distinguished from supply of other

customers. The same arguments of limitation of flexibility and relatively poor focus on

particularly risky infrastructures would apply as in the security of supply margin idea.

However, in cost-benefit terms, given the relatively low costs of reverse flow provisions, it

could make sense. GTE+, the association of TSOs, is well-advanced on a study of reverse

flow projects. Provision has been made in the European Economic Recovery Plan for funding

a number of such projects.

To conclude, a security of supply standard for infrastructure, based on the n-1 concept, could

be defined. It could allow flexibility in its implementation, including the possibility of

application at regional level. An EU-level application, with supply disruption scenarios, could

support its application at regional and Member State level and facilitate consistency with the

rolling 10-year network development plan. Such a standard, and the accompanying risk

assessments and preventive action plans, would require a revision of the 2004 Directive.

It is true that most Member States already meet an n-1 standard (see Table 3). The focus in

terms of necessary infrastructure developments is on a number of missing elements, not in all

Member States. However, agreement on a standard would provide the starting point of a

framework of regular risk assessments. In the developing internal energy market, these risk

assessments are of mutual interest.

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(ii)

Effective cooperation in dealing with gas supply emergencies in Europe, with pre-

defined emergency plans involving all players, at Member State and EU levels,

minimizing any undermining of the internal gas market response to disruptions.

Member States are already obliged under the 2004 Directive to publish security of supply

measures. These need not be emergency plans in the sense of a comprehensive, systematic set

of measures, with a clear trigger. The January 2009 gas crisis underlines the need for

real

emergency plans

to be established in all Member States, well in advance of any crisis. An

emergency plan also needs to be defined in advance at

European level

and could also make

sense at regional level. Currently, only a procedure is defined at EU level

. The idea in the

2004 Directive is that supply crises would be addressed first by the market, then at Member

State level if necessary and finally at EU level if necessary. Yet in practice, the EU role is

important from the earliest stages, supporting the management of the crisis in the market. In

the January gas crisis, the Gas Coordination Group met regularly, exchanging the latest

information, and common external action was developed in an EU process led by the

Presidency and supported by the Commission. In practice, EU and Member State action

should be mutually-supportive, while the market is working and when an emergency has to be

declared and non-market measures launched.

To facilitate cooperation at regional and EU level in dealing with emergencies, it would make

sense to agree a

common structure and minimum content

for the plans of Member States.

The Preventive Action Plans as set out in the previous section, and the risk assessments

underpinning them would be fundamental in developing emergency plans. It should be clearly

specified when an emergency would be declared

. Particularly for emergencies, the roles,

powers and responsibilities of market participants and public authorities should be defined,

and procedures and measures must be established in advance. There must be an obligation on

market participants to cooperate. The identification of a crisis manager could enable rapid

cooperation at EU level, inter alia. There should be an obligation to test out emergency plans.

Non-market based instruments can be justified only

for the emergency level

and measures

that could impede flows in the internal market should be specifically

authorised by the

Commission.

In general, security of supply policies must be non-discriminatory and compatible with the

internal energy market. In the January crisis, several Member States brought into operation

regulations concerning imports of gas or alternative fuels

. In some instances, the effect was

to undermine the functioning of the market and impede some useful gas flows. Such security

of supply measures must be proportionate, should disrupt the internal market as little as

possible and there should be prior information. Some stakeholders argue that assurances are

needed from all Member States that contractual commitments (e.g. to give access to stored

If measures taken in the market and then by Member States are not sufficient to deal with the supply

disruption, the Commission convenes the Gas Coordination Group on its own initiative or at the request of a

Member State. The Group can assist in the coordination of national measures. The Commission can provide

guidance to Member States on further measures to assist Member States particularly affected by the disruption.

Finally, the Commission can submit a proposal to the Council regarding further necessary measures.

For example, a) normal operational conditions; b) exceptional disruption, but the market is still able to handle

it; c) Emergency – conditions or sudden crisis in the energy market, where the physical safety or security of

persons, apparatus or installations or system integrity is threatened.

See OIES, March 09

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gas), particularly cross-border commitments, would not be impeded, even in emergency

situations.

The

triggering of a European emergency

has been much discussed. In today's internal

energy market, it is likely that a major disruption in any Member State will have an impact,

direct or indirect, across much of Europe. European action could arguably be triggered when

triggered in one or more Member States.

The crisis managers identified in the national emergency plans should work together in a

European network,

with a clear statement of powers, organisation and actions. The day-to-

day management of the emergency response should be managed by the European

Commission in cooperation with national competent authorities. The Gas Coordination Group

should continue in its advisory functions. The composition of the Gas Coordination Group

would need to be updated to encompass ACER

, ENTSO-G

and the network of crisis

managers.

In the November 2008 evaluation report, the Commission listed for comment a number of

actions which could possibly be included in an

EU emergency plan:

a common declaration

of an emergency situation, allocation of available supplies and infrastructure capacity among

the affected countries, coordinated dispatching, activation of emergency measures in

unaffected or less affected states in order to increase the amount of gas available to the

affected markets.. At EU level, an EU process could be envisaged to temporarily relax

security of supply obligations in all Member States, affected or not, for the purpose of

increasing the amount of gas available to the affected markets. Similarly, transmission system

operators could be requested to ensure available capacity in their transmission systems.

Some of these ideas for EU emergency actions arguably make more sense at regional level.

No such measures were formally taken in the January crisis, as part of an emergency

response. The market response brought additional supplies to the affected areas.

Developing further the experience of the January crisis, the deployment of a

monitoring

mission

within or outside the European Union could be envisaged.

Where they make sense in terms of practical cooperation,

regional emergency plans

could be

established and tested. However, it is likely that most major disruptions at Member State level

will be taken up at European level. In practice, it is difficult to define the appropriate regions,

several factors enter into play. A pragmatic "immediate neighbourhood" approach, focusing

on instances in which a regional approach makes sense (e.g. Baltic Energy Market

Interconnection Plan) would make more sense that an artificial layer of cooperation.

In general, transparency and exchange of information between Commission, governments,

regulators, TSOs and other market parties, both under normal market operations to monitor

the risk of an emergency, and in case of an emergency need to be improved. Regulators are

working on a

harmonised minimum level of information

to be made available to the

market, especially in crisis situations. However, this improved transparency should be

achievable on the basis of the third internal energy market package, once adopted, and the

(future) Agency for the Cooperation of European Regulators

Organisation for the cooperation of European TSOs dealing with gas

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planned revision of

Council Regulation EC N° 736/96

on notification of investment projects

in the gas, electricity and petroleum sector.

To conclude, the January crisis provided ample demonstration of the need to emergency plans

to be established in advance of any crisis, at Member State and EU level and at regional level

when this makes sense. Given the likely EU dimension of any disruption and response, there

must be an obligation to cooperate. These would require substantial amendments to the 2004

Directive.

Thus, amendments to the 2004 Directive, notably on security of supply standards, related risk

assessments, regional cooperation, an EU process to ensure mutual consistency of plans,

supported by EU-level analyses, obligations concerning emergency plans, would achieve a

framework ensuring better preparedness of the EU for possible gas supply disruptions and

more effective response, primarily in the internal gas market.. The various possible

amendments have been much discussed by stakeholders in the public consultation and

elsewhere. This is the first short-listed Policy Option.

4.5

(i)

A Regulation on gas security of supply

Achievement of sufficient flexibility in the internal gas market to mitigate most gas

supply disruptions, by establishing the necessary incentives for investments in

infrastructures and gas and the well-functioning of the market.

(ii)

Effective cooperation in dealing with gas supply emergencies in Europe, with pre-

defined emergency plans involving all players, at Member State and EU levels,

minimizing any undermining of the internal gas market response to disruptions

The main issue here is whether a Regulation would be a better and feasible vehicle for the

substantial amendments to the 2004 Directive outlined in the Policy Option "Revision of the

2004 Directive".

Timing is one factor. A Regulation could be operational well before a Directive. There is a

real risk of repetition of gas supply disruptions such as in January 2009 in the short and

medium term, so the sooner a clear EU framework is in place, the better.

Clarity is a second factor. In a Regulation, common standards for security of supply could be

directly applicable

to the market participants, notably the Transmission System Operators

and the gas suppliers. The current situation in the Directive of having Member States set

standards to be implemented subsequently by market participants, may well be a weakness,

having the effect of distancing participants from their responsibilities. As the internal gas

market develops, the need for a

level playing field

in terms of obligations on market players

for security of supply increases in the competitive part of the market.

As noted earlier, Member States are in very different situations as regards reliance on gas and

possibilities of mitigating supply disruptions. The n-1 approach envisaged for an

infrastructure standard focuses on weaknesses in infrastructures. Those Member States which

are already well provided with infrastructures would have no extra burden in meeting such a

standard. The implementation of an n-1 approach could also allow a certain flexibility, with

the possibility of regional approaches, for example.

The arguments for direct application are even stronger as regards emergency plans. There

must be a clear obligation to cooperate. There must also be clarity on who is doing what,

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when, coming up to and during an emergency. A wide range of participants across Europe

will be involved. Clear definition of roles and procedures and a clear obligation to cooperate

in this

collective

effort is essential. A Regulation could establish this more effectively and

quickly than a Directive.

Thus, a "Regulation on gas security of supply" would enable the achievement of the

objectives, should be feasible, could offer advantages over a Directive in terms of timing and

clear, direct application, and is the second short-listed Policy Option. There has been some

support in the public consultation for this option.

Section 5: Analysis of impacts

5.1. Economic impacts

Investment costs

The economic impacts of both short listed Policy Options would be dominated by the

investment costs and the resultant benefits of the implementation of

n-1

and subsequent

Preventive Action Plans.

Reverse flow capacities could be included in the calculation of n-1

or in the Preventive Action Plans. Costs could be spread over a number of years.

A very

preliminary calculation

of n-1 for Member States has been done, for illustrative

purposes only in this Impact Assessment.

Table 4: Preliminary calculation of n-1 for Member States:

See Annex 1 for explanation of the calculation

Production

withdrawal

capacity

12,16

0,00

0,30

0,00

0,30

45,00

29,90

0,00

2,40

0,00

9,00

1,00

24,00

0,00

440,00

6,48

0,00

34,30

Storage

Withdrawal

capacity

48,00

22,80

4,20

0,00

55,01

463,32

18,80

0,00

10,54

0,00

231,00

0,00

47,50

2,60

295,85

0,00

14,69

0,00

153,02

34,20

7,00

25,80

LNG

send-

out

capacity

0,00

24,70

0,00

160,90

0,00

42,44

13,69

0,00

35,00

0,00

14,20

0,00

Incoming

Pipeline

Capacity

137,52

321,61

72,00

0,00

185,98

579,44

0,00

22,99

67,01

20,68

156,28

38,36

58,04

30,00

284,80

39,11

11,30

24,64

0,00

95,62

147,56

13,21

113,00

Single

Largest

Infrastructure

125,94

94,43

72,00

0,00

141,94

105,96

29,90

16,80

39,70

20,68

50,00

19,20

39,80

30,00

114,60

30,00

4,93

24,64

0,00

300,00

108,00

14,20

102,00

Mcm/day

Maximal

Consumption*

49,41

139,20

15,60

0,00

67,60

400,00

25,70

4,30

160,20

1,00

370,00

14,00

92,50

20,30

425,00

16,00

5,98

9,00

0,00

235,00

59,71

19,30

75,00

N-1

145%

197%

29%

147%

245%

73%

144%

124%

103%

235%

81%

18%

124%

57%

107%

163%

165%

134%

105%

95%

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0,00

0,30

231,00

*(1-in-20 winter case)

6,00

5,80

29,90

536,00

0,60

0,00

34,87

126,57

0,00

84,56

8,49

14,53

301,00

241,34

8,49

10,13

301,00

73,70

10%

76%

118%

114%

Sources: IHS, Gas Coordination Group

The major infrastructure – "1" in "n-1" - is the main import pipeline in most Member States.

For UK, Netherlands and Denmark, it is the main production facility. For Spain and Portugal,

it is the main LNG terminal. In many of the importing countries, storage is important but

usually the main import pipeline has a higher capacity than the main storage facility.

Based on this preliminary calculation, nine Member States do not meet the n-1 standard (see

also Table 3). These Member States are in a variety of situations, and can bring a variety of

security of supply measures to bear and could develop regional cooperation. Sweden, Finland,

Denmark, Lithuania and Ireland, for example, are relatively poorly connected to the network.

However, Sweden relies very little on gas in its energy mix (2%). Finland's gas users, mainly

in industry, have made substantial fuel switching provisions. Denmark, Lithuania and Ireland

are focusing on the construction of new interconnectors and other infrastructures. Bulgaria

and Hungary are far from meeting the standard, Romania and Slovenia somewhat less so. The

impact of these infrastructure inadequacies was evident in the January gas crisis. On the basis

of such calculations, and subsequent risk assessments and Preventive Action Plans by

Member States, a good idea of necessary infrastructure developments can be developed.

While the detailed risk assessments would still need to be done by Member States, it is clear

that many of the necessary infrastructure projects are in the list of eligible projects in the

European Economic Recovery Plan

(Annex 3 for details). N-1 goes above 100% for several

Member States if eligible projects are included (see Table 3). The assumption that these

projects will all be constructed has been made in the Table. Provisions in the Recovery Plan

for reverse flow projects (80m€) have not been allocated in it.

As the total European Economic Recovery Plan support for gas infrastructure projects is

1440m€ over two years, a maximum of 50% of the eligible project costs during that time, then

as an order of magnitude, the n-1 standard applied Europe wide, could imply an investment

cost of a few b€. However, if the projects are already launched under the European Economic

Recovery Plan, the extra investment costs from the application of the n-1 standard Europe-

wide would be smaller.

Gas Transmission Europe has prepared a preliminary overview of reverse flow projects which

would improve security of supply in Europe. Over forty projects have been identified for a

total investment cost of about 1.5b€.

All of these investment costs would normally be reflected in regulated gas transport tariffs,

through an allowable rate of return. Thus the costs would normally be spread over all gas

consumers. A very rough estimate of what this could mean for households could go as

follows: natural gas prices for households in EU-27 including excise taxes were 18.01€/GJ

(GCV)

; final gas consumption by households and services is some 8,000,000 TJ(GCV)

;

Eurostat, 2007 prices

Eurostat, 2005 consumption

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thus some 144b€ is spent by households and services on final gas consumption each year.

Thus, additional costs amounting to as few b€ over several years for investments in

infrastructures for security of supply would be relatively small compared to total household

gas bills and smaller still compared to total gas bills in Europe. It is evident, however, that this

is the roughest of calculations. Gas prices still vary substantially across Europe and between

households and industrial customers. Investments are needed more in some Member States

than in others. Thus the impact on household customers and industry in some Member States

could be significant.

The January gas crisis gave some idea of the benefits of avoided gas supply disruptions at the

level of consumers. Estimates, related mainly to involuntary restrictions of gas supplies to

industry, are 1000m€ in Slovakia, 255m€ in Bulgaria, 70m€ in Hungary

. Thus 1-2b€, which

is still small compared to the total paid for gas in Europe, but concentrated in a small number

of Member States.

A regional approach to n-1 could in principle be more cost-effective. However, it must be

justifiable by market integration in the region and existing infrastructure links.

Impact on the internal market and other economic impacts:

Security of supply has a cost. One way or another, there needs to be some flexibility and

redundancy in the system if gas supply disruptions are to be managed. The main benefit of the

n-1 standard and related risk assessments and Preventive Action Plans would be in focusing

efforts on the remaining weak infrastructures and supplies in Europe, requiring improvements

where they are actually needed.

Both Policy Options would build confidence in provisions for security of gas supply across

Europe. They would also create the conditions for effective cooperation and solidarity in

dealing with emergencies, allowing the internal market to work as long as possible. Thus

there would be a

positive interaction with the internal market

through strengthening

incentives for investment, assessing investments in a regional and EU process, creating a level

playing field in terms of security of supply obligations, and clearly delimiting emergency

situations in which non-market instruments could be brought into play. The infrastructure

improvements, such as more flexible interconnections, should improve trade possibilities,

liquidity and price formation in the internal market as well as security of supply.

A Regulation, through the direct application of standards to market participants, could

arguably encourage investment and ensure internal market benefits more directly.

The spillover from gas security of supply into security of electricity supply raises the stakes,

given increasing reliance of the European economy on electricity. For example, in late-2008,

reserves in the Spanish hydroelectrical system were very low. As evidenced in the Quarterly

Report on European Electricity Markets

, the stored energy that could have been retrieved

from the hydro system during a given week in the fourth quarter was some 1,4 TWh lower

than the 10-year average. Spain uses 44% of its gas for power generation. About a third of its

Peter Kaderjak, Regional Center for Energy Policy Research, Corvinus University of Budapest; presentation of

3 April 2009

"Quarterly Report on European Electricity Markets", Market Observatory for Energy, Vol 1, Issue 3, Oct-Dec

2008

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power generation is gas-fired. Thus a gas supply failure during this time would have been felt

throughout the electricity system. The reverse situation in South East Europe during the

January 2009 gas crisis (see 5.2 below) was simply fortuitous.

Administrative burden

The administrative costs for businesses of both short-listed Policy Options are marginal.

There are no new reporting obligations. This is why the EU Standard Cost Model has not been

used in this Impact Assessment.

There could be an increase in administrative costs for public authorities compared to the

current situation. These would be related to the calculation of n-1 and development of

emergency plans. The administrative costs would be lower for a Regulation which is directly

applicable and would require no transposition to national legislation. The costs would be

marginal compared to investment and other costs. This is why the EU Standard Cost Model

has not been used in this Impact Assessment.

5.2

Social impacts

As regards

jobs,

the substantial use of gas in industry suggests that job losses are possible as a

direct result of any lack of confidence in supplies. Some 25% of gas consumption in the EU is

in industry (fertilizers, other chemicals etc). Industry has a particularly high share of

consumption in Finland (91%), Bulgaria (89%), Slovenia (81%). Interruption of supplies to

such enterprises, often continuously running, is a negative factor, undermining

competitiveness. Provisions for fuel switching at customer level are normally quite costly. In

addition to the cost of set-aside resources, there would often be a CO2 emissions cost related

to relatively higher emissions from back-up and substitute fuels (see below).

Some 26% of gas in Europe is used directly by households, others rely on gas-fired district

heating. Gas supply crises will have a direct impact on these consumers, often vulnerable.

There is a limit to how easily households can resort to electricity for heating or cooling. A gas

crisis in Europe will normally put electricity prices up. The January crisis could have been

much more difficult for people in South East Europe but for the coincidence that heavy rain

facilitated very large hydropower production, averting an electricity crisis

While provisions for security of supply will certainly be felt in the prices paid by customers

for gas, a Directive or Regulation enabling a focus on the necessary provisions would

minimise the additional costs and limit tariff increases.

5.3

Environmental impacts

The continuation of inefficient gas security of supply arrangements in Europe could have an

impact on the environment, climate and sustainable development.

The question of whether Europe should be investing further in infrastructures for fossil fuels,

given prospects of depletion, uncertainty about future energy and gas demand and the

growing contribution of alternative fuels has been raised. However, as demonstrated by

alternative scenario analyses

, Europe will continue to depend on imports of gas until at least

"The impact of the Russia-Ukraine gas crisis in South Eastern Europe", Kovacevic, OIES, March 2009

See scenarios in 2

Strategic Energy Review

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2020 and on to 2030. Gas has an important role as a transition fuel in the move towards a

high-efficiency, low-carbon energy system.

Like any other infrastructure development, new investments in gas infrastructures will have

environmental impacts (e.g. biodiversity). The fact that many gas pipelines are underground

should help. Planning of additional infrastructures to identify those which would have most

impact on security of supply, using the flexibilities offered by the internal energy market,

should minimise the total environmental impacts. The minimisation of necessary provisions

for back-up fuels should also help, particularly in the period when low-carbon fuels are not

sufficiently developed or available.

Section 6: Comparing the options

The impacts of the baseline option and two short-listed Policy Options can be compared as

follows:

Policy

Option

No new

EU policy

Effectiveness in

achieving objectives

May partially deliver,

through the 3

IEM

package, the European

Economic Recovery

Plan, TEN-E, the

existing 2004 gas

security of supply

Directive and

cooperation on

emergency planning

following the January

gas crisis.

Nevertheless, an EU

framework is still

needed to ensure that

actions of Member

States

for security of

gas supply, notably

during crises, do not

undermine the growing

capacity of the market

to deal with

disruptions, that the

standards for security

of supply which

market participants

should meet

are clear

to all, and that the

potential of the

internal gas market

deal with supply

disruptions is

Efficiency

Implementation of 3

package likely to need

support, notably

assessments of

potential gas supply

disruptions at EU

level and practical

guidance to TSOs and

regulators; current

security of supply

standards in the 2004

Directive too

imprecise.

Coherence

Not relevant

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developed and used.

Revision

Directive

Yes

New

Regulation

Yes

Would imply well-

focused, limited

investment costs;

would ensure that the

potential of the

internal gas market to

deal with supply

disruptions is

developed and used.

would imply

administrative burden

on public authorities

as regards calculation

of n-1 standard and

emergency provisions

Compared to a

revision of the

Directive, would have

the advantage of being

operational more

quickly; a major gas

supply disruption

could happen

anytime; also a more

direct impact on

provisions and

investments by market

participants; would be

more effective in

achieving clear

arrangements for

cooperation around

emergencies with

clear obligation to

cooperate; comparable

administrative burden

on public authorities

as regards emergency

provisions;

Would have a positive effect

on the development and

functioning of the internal

energy market; positive effect

on the environment, notably

by reducing unplanned

recourse to higher-emissions

substitute fuels; positive

effect on competitiveness and

jobs in gas-using industry,

and on households.

It would constitute a more

direct engagement of public

authorities and market

participants in security of gas

supply in an EU perspective,

with systems in place earlier.

The costs would not be very

different from those implied

in the revision of the

Directive

Both short-listed Policy Options would have similar economic, social and environmental

impacts compared to the option of no new EU policy. The major difference between them

concerns the speed and effectiveness of their implementation. Arguably the Regulation option

is more likely to be effective (clearly attributing responsibilities to market participants, clear

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obligation to cooperate around emergencies), fair (a level playing field in terms of security of

supply obligations) and could be in place and in effect more quickly.

The importance of getting the necessary improvements in the EU regulatory framework in

place quickly needs to be appreciated. Decisions taken now in the energy system (e.g. on

coal-fired power generation) will lock in technologies for decades to come. Investment

decisions not taken now will lead to energy supply and transport constraints and high prices in

due course, when economic growth restarts. As demonstrated in the preliminary calculation of

n-1, the projects in the European Economic Recovery Plan are crucial in meeting reasonable

security of supply standards. In the current economic and financial climate, clear incentives

for investment are of fundamental importance. The Skanled gas pipeline, for example, an

eligible project in the Recovery Plan, has been suspended by its promoters. In this context, it

is all the more important to have a clear, relevant regulatory framework for security of supply

quickly in place.

Section 7: Monitoring and evaluation

A reporting and monitoring system is in place for the internal energy market. This system

yields data which is relevant for security of supply purposes. Council Regulation EC 736/96

on notification of investment projects in the gas, electricity and petroleum sectors will be

revised. With input from these, monitoring and evaluation mechanisms specifically focused

on security of supply can be strengthened.

The role of the Gas Coordination Group could be expanded to include regular monitoring and

assessment, drawing inter alia from the envisaged review of risk assessments by Member

States.

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ANNEX 1: Possible calculation of the n-1 standard

Please note that the proposal for a Regulation includes a more precise calculation of n-1.

This simplified calculation is for illustrative purposes only in this Impact Assessment.

Nevertheless, the results in terms of the n-1 indicator are unlikely to be very different.

Technical capacity

(contracted capacity

plus available capacity

) of all gas supply

infrastructure in the event of disruption of the single largest infrastructure should be greater

than demand for deliveries in a 60 days period of high demand, after taking into account

interruptible contracts and demonstrated fuel switch possibilities.

The N-1 indicator, calculated as below, should be higher than 100%.

……………………….

IPm+Pm+Sm+LNGm

– Im

N-1[%] = --------------------------------------------- * 100, N-1 > 100%

……………………………………….

Dmax

Definitions required for the calculation of the N-1 indicator:

IPm – Maximum technical capacity of import pipelines (mcm/d) to the calculated region. It

includes reverse flow possibilities, transit inflow and outflow capacity.

Pm – Maximum production capacity (mcm/d) in calculated area for at least the 60 days

period.

Sm – Crisis deliverability (mcm/d) – the sum of maximum rates at which storage facility users

in the calculated area can withdraw gas from the storage facility over at least the 60 days

period.

LNGm – Maximum LNG facility capacity (mcm/d), taking into account critical elements like

maximum ships and storage capacities availability and technical send-out capacity to the

system, providing gas over the 60 days period to the calculated area.

Im – Single largest gas infrastructure (mcm/d) suppling the calculated area with gas.

Dmax – Gas demand in mcm/d, related to the lowest temperature in last 20 years

50 Draft Regulation (EC) No …/… of the European Parliament and of the Council on conditions for access to the natural gas transmission networks and repealing Regulation

(EC) No 1775/2005 Art.2 (18) "technical capacity" means the maximum firm capacity that the transmission system operator can offer to the network users, taking account of

system integrity and the operational requirements of the transmission network;

51 Art.2 (19) "contracted capacity" means capacity that the transmission system operator has allocated to a network user by means of a transportation contract;

52 Art.2 (20) "available capacity" means the part of the technical capacity that is not allocated and is still available to the system at that moment;

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Annex 2: MC-GENERCIS model

The Joint Research Centre has developed a model of the European gas network which helps in

understanding the distribution of flows in any given situation. Starting from a particular

situation in a given region, the model distributes the eventual surplus of gas using the Monte-

Carlo approach

. A situation is only defined by the following set of variables:

Production withdrawal capacity

Consumption

Storage withdrawal capacity

LNG send-out capacity

Incoming pipeline capacity, including possible reverse flows.

The model can handle any modification of the set of variables, for example, the January gas

crisis or any kind of technical problem affecting the above mentioned capacities. MC-

GENERCIS calculates for the gas system of each region the likelihood of disruption, the

mean value of imbalances (supply/demand), as well as the pipeline utilisation rate. The

following maps compare the situation of the European gas network during a normal winter

day with the first day following the outbreak of the January Ukraine-Russian crisis.

Even though MC-GENERCIS is already producing promising results, it still has potential for

improvement. The current version is time-independent and the spatial resolution is limited to

country level. In addition, the iteration process could be improved to eliminate unrealistic

dispatching strategies.

MC-GENERCIS has clear connections to the N-1 approach. Both try to evaluate the

vulnerability of the gas system. The N-1 approach looks at the vulnerability of each country in

absolute terms, and provides a benchmark; MC-GENERCIS estimates the likelihood of

disruption deriving from a concrete situation, in each and every region of the gas network.

Taking the recent January crisis as an example, we can compare the average value of

imbalance calculated by MC-GENERCIS with the N-1 results, for each Member State.

Similarly, we can compare the normal winter day case from GENERCIS to N situation, with

the supply-demand balance of the system using the N-1 approach and not taking into account

the removal of the single largest infrastructure.

As it is impossible for to predict the behaviour of TSOs in real time during a disruption, the

model evaluates the possible set of “dispatching strategies” the system offers, applying a large

number of iterations.

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ANNEX

Extract from European Economic Recovery Plan - Eligible projects

Project

INTERCONNECTORS

Gas interconnectors

Location

supported

projects Envisaged

Community

contribution

(€ million)

200

100

150

Southern Gas Corridor

Nabucco

ITGI – Poseidon

Baltic interconnection

Skanled

LNG network

Liquefied Natural Gas terminal at Polish coast at

port of

Świnoujście

Central and South East Europe

Slovakia-Hungary Interconnector

(Velky Krtis –

Vecsés)

Gas transmission system in Slovenia between the

Austrian Border to Ljubljana (excluding the

section Rogatec-Kidričevo)

Interconnection Bulgaria-Greece

(Stara

Zagora - Dimitrovgrad-Komotini)

Romania-Hungary gas interconnector

Expansion of Gas Storage Capacity in the Czech

hub

Infrastructure and equipment to permit reverse

gas flow in the event of short term supply

disruption

Austria, Hungary,

Bulgaria, Germany,

Romania

Italy, Greece

Poland, Denmark, Sweden

Poland

Slovakia, Hungary

Slovenia

Bulgaria, Greece

Romania, Hungary

Czech Republic

Austria, Bulgaria, Czech

Republic, Estonia, Greece,

Hungary, Latvia,

Lithuania, Poland,

Portugal, Romania,

Slovakia

Slovakia, Poland

Hungary

Bulgaria, Romania

Slovakia-Poland interconnection

Hungary-Croatia interconnection

Bulgaria-Romania interconnection

Mediterranean

Reinforcement of FR gas network on the Africa- France

Spain-France axis

200

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GALSI (Gazoduc Algérie-Italie)

Gas Interconnection Western Axis Larrau Branch

North Sea area

Germany-Belgium-United Kingdom pipeline

France-Belgium connection

TOTAL

Italy

Spain

Belgium

France, Belgium

120

200

1440

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Annex 4:

Main findings of the public consultation on the revision of the 2004/67

Directive concerning measures to safeguard security of natural gas supply

General remarks

As a follow-up of the publication of the Second Strategic Energy Review package, a

public consultation was open between November 2008 and March 2009, in order to seek

views and proposals on the revision of the 2004/67 Directive concerning measures to

safeguard security of natural gas supply. The Commission received 22 feedbacks from

Member States (5), Regulators (1 individual and 2 umbrella organizations), infrastructure

operators (1), one member of the electricity industry (1) and members of the gas industry (12).

Apart from the individual companies, the main associations of gas supplier, trader and

infrastructure undertakings also expressed their views.

Questions

1. How to define comparable security of supply standards that put equal, reasonable

burden on market participants while respecting the differences between Member

States?

Seven respondents – two Member States, infrastructure operators, and members of the gas

industry emphasized that differences among Member States (in supply diversity, demand side

flexibility, storage position, public sector obligations, risks to supply, fuel mix etc.) are

significant, therefore an individual approach respecting these differences is needed. At the

same time it was considered essential by these respondents that a common and comparable

level of security – which is defined by the EU – is reached so shortages or supply disruptions

can be managed successfully on European level. Creation of a “toolbox” of security of supply

measures was considered, to reach the afore-mentioned level of security.

The comparable security of supply standards and level of preparedness is a precondition to

prevent "free-riding" when solidarity actions are implemented. Standards could also reduce ad

hoc political intervention in case of a crisis. Those Member States bearing more risks should

consequently take additional measures (e.g. demand side responses, greater storage levels

etc.) to provide the adequate level of security.

Two Member States and a company suggested that the Commission should organize a

workshop on preparedness in cooperation with IEA.

Members of industry, a Member State and a regulator organization [CEER] emphasized

that Member States should have autonomy in setting these standards. A Member State and a

company fully rejected the idea of having EU-wide standards for security of supply.

The following ideas were submitted for the proposals of security of supply standards:

•

In case of the

N-1 rule

the general idea was supported but short-term feasibility was

questioned – as data is difficult to collect – and a transition time for its introduction was

recommended. Other contributions asked for further information and more detailed

definition on the application of the rule.

Member States submitted proposals to this rule such as:

- not only the infrastructure but availability of gas should be taken into account

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- demand side measures (fuel switch, interruptible contracts) and supply flexibility should

also be considered

- only the infrastructure supplying the domestic market should be taken into account

(excluding transit and stocks to other markets)

- “N-1” should be the only standard, no need for separate bi-directional-flow or security of

supply margin standards

While for some respondents "N-1" could constitute a robust and single security of supply

standard, others doubt that it should be introduced as an EU-wide standard.

•

Bi-directional flows

were seen as a useful tool for enhancing security of supply. In their

case the definition of an exact percentage of bi-directional capacity, the question regarding

tariffs, covering of costs (the beneficiary is sometimes different than the investor) and gas

quality harmonisation are to be further examined.

The concept of

security of supply margin

was challenged. It is yet to be decided upon

who would cover the costs and how could unused capacity be utilized at locations where it

may not be needed under normal market conditions. One way to solve this problem was

proposed in the form of using the extra capacity in the form of interruptible contracts.

Another proposal was to define the margin on country or on regional but not single entry-

point level. Some views supported security of supply margin to be introduced based on its

practice in the electricity sector.

"Expected energy unserved"

- measuring the likelihood of different gas supply

shortfalls in one probability/weighted measure. Its drawback however is that it is

complicated to calculate and depends on many input assumptions.

"Supply/demand margin"

- 3 types:

1. capacity margin measuring the "spare" capacity - domestic production, import

infrastructure, storage vs. peak day demand in a cold winter

2. de/rated capacity margin estimating not only the capacity but also the likelihood -

applying less than 100% probability to each piece of infrastructure based on models

3. duration-based capacity margin calculating margin over all 180 days in the winter

assuming storage withdrawal and no re-fill

•

Standards measuring two or three key risks

that a Member State could face and

calculate the likelihood of those events and gas shortfall.

Supply diversity indicator

showing the rate of diversity for both source and route in the

supply portfolio.

•

One MS proposed new standards:

•

Four members of the gas and electricity industry, infrastructure operators and two

Member States recommended conducting risk assessments based on a harmonized

methodology for each Member State about national gas markets, fuel switch opportunities,

range of protected customers, bottlenecks, congestion points, demand in extreme situations

and other vulnerabilities. Such assessments could provide a solid base for emergency response

plans.

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Scenarios and disruption models – preferably coordinated and developed on regional level

– would make it easier to assess the impacts of a crisis and may help in identifying critical

points of investment. Coordination with the proposed 10-year Network Development Plans

would improve synergy in this aspect.

The possible need for transition periods was mentioned by two members of the industry.

A Member State suggested that compliance with the standards on the medium term could be

an objective for all European countries.

2. Should the Directive extend mandatory protection beyond households to power

generators, small and medium sized enterprises or other vulnerable customers?

Views on the extension of mandatory protection were split. On one hand according to two

respondents, the importance of security of essential service providers (e.g. hospitals) was

emphasized and it was noted that certain gas fired power plants and CHP units may be

considered eligible for protection (residential consumers are likely to switch to electricity in

time of a gas crisis, which results in increased demand in power generation). However,

obligatory protection of certain customers (e.g. power plants) may prove unnecessary in

certain Member States with low share of gas in the fuel mix, representing additional burdens.

Market-detrimental effects could be minimized by setting a time limit for the period of

protection.

According to the approach of six other respondents, market should face the risks and

market participants should look after their own security as alternative means are available

even in case of a high level of dependency. Broadening the scope would put supply of

households to a risk and "overprotection" would decrease the ability of the market to handle

shocks and remove incentives to increase own security of supply.

There were also more flexible responses stating that it should be Member States' privilege

to define the range of protected consumers, and that mandatory protection should be extended

only to those consumers that have no real alternative to using gas. Consumers with dual-firing

capabilities, interruptible contracts or storage capabilities should not be protected.

3. What should be the precise actions defined in the Community mechanism, in the

regional and EU emergency plans?

Contributions were clear and unambiguous that in case of an emergency, market

mechanisms should be used as long as possible and emergency measures, solidarity

mechanisms and government intervention should be a last resort.

Respondents also emphasized that transparency of data is essential for the market to be

able to deliver.

Both these topics are covered in the upcoming Third Package, therefore they are not

further discussed in the public consultation.

Several respondents highlighted the need for harmonized roles and responsibilities of

regulators and market participants. As these are also described in the Third Package, any

further legislation is required only for those cases, when these roles and responsibilities are

changed or expanded.

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Respondents agreed that national emergency plans are needed, to provide mechanisms to

manage a supply crisis. These plans should be transparent, regularly updated and

communicated in advance to market participants and also to other Member States (peer

review). They should preferably be based on a harmonized European-level scheme and

planned on regional level so measures of a Member State do not have any unexpected adverse

effects on another country.

Regional coordination would in itself contribute to a higher level

of security of supply.

Regulators invited the Commission to ensure that authorities responsible for defining

security of supply schemes are the same in all Member States and adequate methods are

developed to harmonize national emergency plans. The idea of setting up a network of

emergency contact points was proposed by two Member States.

Cooperation on regional level was supported by both Member States, regulators and the

industry. However, views on the scope and field of cooperation varied. The following

proposals were put forward:

•

regional trading platforms

regional emergency plans ,

regional solidarity mechanisms,

Member States to establish regional emergency response communication networks

declaring emergency and applying measures should be decided and coordinated on

regional or EU level.

The question of emergency levels was also reflected upon. At present, Member States

define different levels of emergency with different measures. In many cases one or more "pre-

emergency" levels exist that reflect a deviation from normal situation but which can still be

managed efficiently and effectively by open market mechanisms. In order to ensure

comparability and compatibility, it must be discussed to what extent the levels (concerning

their scaling and basic characteristics) should and could be alike on the regional or on a

Community level. The different structure of gas markets, consumption patterns and public

service obligations of market participants in the Member States require careful examination to

see if such compatibility and comparability may still be reached.

The Gas Coordination Group was proposed to receive a more serious role of monitoring

and coordination and information exchange in the event of a crisis.

There was no clear view on solidarity mechanisms. IE proposed that each Member State

should be required to provide assistance to neighbouring countries to ensure that supply of

households is provided.

4. How should the regions for security of gas supply be best defined?

The regional approach was supported by respondents. When defining the regions,

technical issues, such as existing and planned interconnections, predominant gas flows,

location of storage and import facilities and existing bi- or multilateral agreements for

Regulators [CEER] expressed that Member States should have autonomy in defining the measures to to ensure

security of supply.

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emergency situations should be taken into account. ERGEG's Gas Regional Initiatives could

be a good starting point. Purely administrative grouping should be avoided.

5. How can solidarity be economically compensated?

The answers to this question reflect that solidarity is considered a marginal option, which

preferably should not be used. However, if it is, then it should be based on pre-agreements

between the operators and it should be compensated by market terms (extra tariffs etc.).

Reservation of capacity rights or purchase of gas for solidarity reasons is to be compensated

also in non-emergency situations. In order to enhance solidarity through market-based

measures, regulators consider it should be guaranteed on governmental level that contractual

obligations are fulfilled also in emergency situations.

Possible solidarity measures should be known to market participants and conditions must

be examined how the extra costs of a solidarity action would be covered.

6. How can security of gas supply be strengthened at lowest cost?

It is of common understanding among the respondents that a transparent, well-integrated,

fully functional, open and competitive market with supply and demand flexibilities is a first

step and a basic guarantee to prevent and mitigate supply disruptions. (Existing legislation

and the proposals of the Third Package should be correctly implemented.) In case of a failure,

market mechanisms should be the first set of tools to be used. Solidarity and government

intervention may be applied as a last resort only if the market is unable to cope with the

problems arisen. (National security of supply measures should be reviewed to ensure that they

do not hinder competition in an excessive way.)

In an open, fully liberalized gas market, where effective gas-to-gas competition exists and

market participants can access transmission and storage infrastructure, both producers and

consumers can flexibly respond to changing market circumstances. Transparency of

information should help better capacity allocation and congestion management.

At the same time, exposing market participants to the full costs of disruptions, may serve

as an incentive to take precautionary measures and provide flexible answers to risks.

Promotion and transparent operation of commercial storages, diverse supply interconnections,

rapid demand reduction through interruptible contracts are also suitable tools to tackle supply

problems.

The idea of setting up ACER (Agency for Cooperation of Energy Regulators) and

enhancing the power of regulators is considered as a step towards greater predictability of

European energy regulation.