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EC Pushes For European Energy Union: 10% interconnectivity resolution passed [free access]

February 3, 2016

The European Commission (EC), along with the Members of the European Parliament (MEPs), is making a concerted effort to create an energy union and internal market in the continent. Among the latest developments is the passage of a non-legislative resolution titled ‘Achieving the 10% electricity interconnection target – Making Europe’s electricity grid fit for 2020’, by MEPs in December 2015. The EC has also finalised the second updated list of Projects of Common Interest, commonly known as PCIs. These will form the building blocks of EU’s Energy Union envisaged under a framework strategy adopted by the EC in February 2015. The EC had already adopted the electricity interconnectivity targets for 2020 (10 per cent) and for 2030 (15 per cent) along with the framework strategy in February 2015.


In November 2015, the EC presented the first State of the Energy Union report, which analyses the progress made over the previous nine months along with identifying the key action areas for 2016 and providing policy conclusions for member countries, regions and the EU. Besides the progress report and the second PCI list, the EC also adopted and published eight other Energy Union reports, including the energy efficiency progress report; the climate action progress report; energy consumer trends; EU energy security strategy implementation report; a nuclear safety directive implementation report; the oil stocks summary; a proposal for a regulation on electricity and natural gas price statistics; and a public consultation on the future revision of the Renewable Energy Directive for the period after 2020. The latter is required due to the approval of the 27 per cent renewable energy target for 2030 by the EU member countries earlier in October 2014.


With regard to electricity, some of the key tasks for 2016 include communication by EC on the progress towards the completion of the list of the most vital energy infrastructure projects and on the necessary measures to reach the 15 per cent electricity interconnection target for 2030. The EC is also expected to finalise the legislative proposals with regard to the initiative on market design and regional electricity markets, and coordination of capacities to ensure security of supply, boosting cross-border trade and facilitating integration of renewable energy.


In the following sections, Global Transmission Research presents a brief note on the recently published progress report on the Energy Union, the 10 per cent interconnectivity target as well as the second PCI list.


Energy Union progress report (electricity sector-related progress and conclusions)

During 2015, considerable progress was made in strengthening electricity grid infrastructure, which forms the backbone of an integrated energy market. Key developments include the inauguration of the electricity cable between Italy and Malta in April 2015, ending the energy isolation of the Maltese electricity grid. The completion of Estlink (Finland and Estonia) and Nordbalt (Lithuania and Sweden) facilitated the participation of the Baltic States in the NordPool electricity market during 2015. The Baltic States’ connectivity with the Continental European network was also strengthened with the completion of the LitPol Link (Lithuania and Poland). Further during the year, the Baltic States agreed on the common strategic goal to synchronise their power systems with that of Continental Europe.


The inauguration of a new France–Spain electricity interconnector resulted in doubling the transmission capacity between the two countries during the year. Other key milestones achieved during 2015 include the completion of the interconnector between Hungary and Slovakia as well as installation of reverse flow equipment within the EU as well as on its borders with Ukraine, facilitating bi-directional trade.


The EC worked extensively with member countries to set up a high level group for electricity interconnectivity of the Iberian Peninsula as well as for reform of the high level group for the Baltic Sea region. The EC also worked to remove regulatory impediments to cross-border electricity trade; facilitate full implementation of the Third Energy Package in different member countries; and ensure further alignment of the European regulatory framework with the increasingly integrated European energy market through the market design initiative.


Among the milestones achieved towards the creation of the Energy Union was the establishment of an Energy Infrastructure Forum, which held its first meeting in November 2015 at Copenhagen. The forum is expected to play an important role in establishing best practices on issues such as regulatory barriers, infrastructure development and public acceptance as well as financing.


10 per cent interconnectivity target

A key objective under the Energy Union framework strategy is the implementation of the 10 per cent electricity interconnection target by 2020. According to the latest MEPs resolution, full integration of the EU electricity market is expected to result in consumer savings of up to EUR40 billion annually by 2030. In order to achieve this, an investment of EUR150 billion is required. The European Network of Transmission System Operators for Electricity (ENTSO-E) backed the MEPs’ resolution, but noted that one third of the infrastructure projects identified by it in the Ten-Year Network Development Plan (TYNDP) have been delayed.


The MEPs expressed concern over the fact that a few countries continue to be largely isolated from the internal electricity market and remain below the 10 per cent targeted interconnectivity. It has called for greater regional cooperation. In particular, the resolution calls for the rapid synchronisation of the Baltic States’ electricity network, which is currently synchronised with the Russian electricity system, with that of the Continental European Network.


In the North Sea region, which has the potential to produce over 8 per cent of Europe’s power supply by 2030, savings worth EUR5-13 billion could be achieved annually by 2030 through the construction of a regional offshore grid infrastructure, market access and reserve sharing in the region.


MEPs declared the shared electricity market between Austria and Germany in the central-western European region to be a success model and called for enlargement of the bidding zone.


For cooperation in central and south-eastern Europe, the resolution stressed that the building of regional grid infrastructure must go beyond the EU to include non-EU western Balkan countries as well as Turkey.


Finally, the resolution noted that the current interconnection capacity between the Iberian Peninsula and mainland Europe was insufficient and asked the EC to study the benefits of interconnections between the region and France, UK, Italy and countries on the southern shores of the Mediterranean.


In the long run by 2030, the resolution requires regional complementary interconnection targets to be set based on parameters such as open access and availability of interconnectors to ensure the smooth functioning of the EU electricity market.


The second PCI list

The latest PCI list is an updated version of the PCI list adopted in October 2013 and consists of 195 key energy infrastructure projects that will help in achieving Europe’s energy and climate objectives. In terms of the break-up, the list includes 108 electricity projects, 77 gas, 7 oil and 3 smart grid projects. The goal of the PCIs is to integrate the energy markets in Europe by diversifying energy sources and transport routes. These projects are expected to play a vital role in ending the energy isolation of some of the member countries in the region. Further, they will provide a boost to the integration of renewable energy into the grid, thereby reducing carbon emissions.


To be included in the PCI list, projects must demonstrate significant benefits for at least two member countries, contribute to market integration and competition, enhance security of supply and reduce CO2 emissions. In turn, PCIs enjoy the advantage of accelerated permitting procedures; improved, faster and more streamlined environmental assessment; and improved regulatory conditions. They are also eligible for funding support from Connecting Europe Facility (CEF), under which a budget of EUR5.35 billion has been allocated for the 2014-2020 period. So far, during 2014 and 2015, EUR797 million has been allocated to co-finance studies and implementation of PCIs. EU has also set up other funds like the European Fund for Strategic Investment (EFSI) to help leverage the investment needed.


In terms of the progress made on the first PCI list released in 2013, 13 projects had been completed or commissioned by 2015 and 62 more projects are expected to be completed by the end of 2017. The list is updated every two years to ensure new needed projects are included while the obsolete ones are removed.


The concept of PCIs was introduced under the guidelines for trans-European energy infrastructure (TEN-E Guidelines) released in 2011. It has identified nine strategic infrastructure priority corridors in electricity, gas and oil, besides three EU-wide infrastructure priority areas for electricity highways, smart grids and carbon dioxide transportation networks. The latest PCI list was finalised after a rigorous evaluation process conducted by the Regional Groups (established under the TEN–E Regulation), which comprise representatives from member countries, the ENTSO-E and the European Network of Transmission System Operators for Gas (ENTSO-G), transmission system operators (TSOs) and project promoters, national regulatory authorities, and the Agency for Cooperation of Energy Regulators (ACER). After due public consultation process, EC has adopted the final list.


Challenges and way forward 

At the policy level, all efforts are being made to facilitate the creation of an Energy Union. However, things are different at the ground level. For instance, in the case of the PCIs, over 100 projects are in the permitting phase while another 31 per cent of the electricity projects are facing delays on account of financing or permitting issues. There is an urgent need for a political push to ensure that the permit granting procedures recommended by the TEN­­–E Regulation are fully implemented.


Another important area that needs attention is investments in national network infrastructure to avoid regional constraints. This is more of a concern in cases where inadequate national infrastructure causes distortions, particularly in large single bidding zones. The bidding zone review process carried out by ENTSO­–E must identify critical network constraints and separate bidding zones for constrained areas, which will help highlight the need for greater grid investment.


As mentioned earlier, during 2016, the EC is expected to finalise the measures required to reach the 15 per cent interconnectivity target for 2030. The first benefits of the EFSI are also expected to materialise in 2016.


The overall framework and strategy is in place for the envisaged Energy Union in Europe and countries are also making efforts, although in varying degrees, to ensure its attainment. Greater political push and timely implementation of projects will go a long way in its effective implementation.



     Policy conclusions for integrated internal energy market


  • Several member countries have made good progress in opening up their wholesale markets to competition, leading to significant benefits. However, there remain large differences between countries, and several countries are yet to fully implement the necessary rules that allow for competitive and liquid markets.


  • In terms of electricity infrastructure, 22 member countries have already reached or are on track to reach the 10 per cent electricity interconnection capacity target for 2020. The eight countries that remain below the 2020 interconnection target are Cyprus, Ireland, Italy, Poland, Portugal, Romania, Spain and the United Kingdom.


  • More interconnections are needed to further strengthen internal electricity markets (for example in south-western Europe) as well as the connections between countries in northern and eastern Europe (for instance Germany, Poland and the Czech Republic), or further connect countries (such as Ireland and the United Kingdom) with the rest of north-western Europe.


  • In order to improve demand-side participation and retail competition, retail price regulation must be limited in time and confined to exceptional cases in line with a recent ruling of the European Court of Justice. While some countries like Ireland and Latvia recently successfully moved away from end-user price regulation, household prices remain regulated to different degrees in about half of the member countries.


  • There is a need for all member countries to better inform consumers about energy efficiency options and to further improve the investment conditions for private consumers.


  • Consumer empowerment through rollout of smart metering has been effectively implemented only in some countries like Finland, Italy and Sweden. In several other countries, administrative issues act as barriers for consumers intending to switch to new suppliers and better contractual conditions.


  • At the regional level, by mid-2015, most of the EU wholesale electricity markets were coupled to one or several of their neighbours, with signs of price convergence. Retail markets continue to be national or sub-national. All member countries need to make greater efforts to advance regional market integration.