Secure energy: Market First

By Adina Ioana VĀLEAN, Vice-President of the European Parliament (pictured)
Autumn 2016

Earlier this year on April 19th, the first LNG tanker left the US terminal Sabine Pass bound to Portugal, making Europe the third continent supplied with US LNG after Asia and South-America. This is happening exactly at the same time when Gorgon LNG, the world's most expensive terminal starts producing Australian LNG, at a time of steeply dropping demand for gas worldwide.

New Australian and US LNG will dramatically change global gas flows by displacing US and Middle Eastern LNG exports to Asia, and by redirecting these volumes towards Europe. This will work as a strong price balancing mechanism which will lower wholesale prices for Russian Gas in Western Europe by heavily increasing competitiveness and market liquidity.

Meanwhile, in Eastern Europe wholesale markets are still dominated by external suppliers and long term contracts with fixed delivery and price clauses. Underdeveloped markets and low competition among suppliers are keeping wholesale prices for imported gas up, and allow gas to sometimes be used as a political tool. There is currently no disruptor to the current situation where most Eastern Member States are heavily dependent on Russian supplies, and where no real liquid trading hubs are operational.

Actually, there is no disrupter yet...for I strongly believe that Eastern Europe and its energy industry will be that innovative disrupter which will initiate competition and will increase security of supply for the whole European Union.

By connecting our networks with the Sothern Gas Corridor and the LNG terminals in Greece as well as the new gas fields in Eastern Mediterranean, eastern Member States such as Romania can facilitate the access for consumers and industry to the Global Gas market and its competitive prices. Further connections to Hungary and Austria can expand this beneficial influence of more liquidity to all central European markets.

The newly discovered gas reserves in the Black Sea will transform Romania from a very stable self-sustainable gas market, with virtually no imports, in a regional exporter. If we can increase interconnection capacity and link these new indigenous capacities to neighbouring markets, then there will be enough liquidity on the regional gas market to create the first Eastern European Gas HUB.

A new gas HUB will be able to replicate the competitive prices which we find on the National Balancing Point in the UK and on TTF in the Netherlands, thus securing low prices for consumers and a stable and predictable market for investors. That is why aggregating liquidity in a Central Eastern European Hub, wherever you find indigenous production, is a key pillar of the Energy Union because it will allow businesses and consumers to have access to gas on gas competition. With competition, politics will give way to economics and cooperation.

Energy markets today are becoming more dynamic and interconnected than ever. Enabling industrial consumers and households to benefit from this market integration will bring important financial advantages for our citizens and businesses.

As we have seen with the EU electricity market coupling, electricity trading across our internal borders has enabled a strong congestion cost optimization and has triggered a price reduction and approximation. The industry has been the main driver of this development without any regulation being passed at EU level, simply because the market setup allowed higher priced surplus electricity to match lower priced deficit areas. The success of the EU wide electricity-trading platform shows how instrumental digital platforms are for creating new products and lowering prices. It is exactly this kind of innovation that our industry needs in order to regain competitiveness.

Gas markets however, have not yet reached the same level of liquidity and hub trade. Therefore gas market integration remains a challenge for regulators and industry if we want gas to be traded freely across Europe, thus enabling price and network congestion cost reduction. For this, we need to embed innovation in our interconnectors as well as in our transmission networks. Smart grids at distribution level have to be complemented by smart LNG terminals, storage facilities, compressors and pipelines, which would allow gas to immediately balance intermittent renewable power generation, and reduce price peaks generated by congestion, or extreme weather conditions. For all this to happen we need more investment.

I am sure that the Energy Union and the European Fund for Strategic Investments provide the Union with a unique window of opportunity to re-launch long term investment in our infrastructures and thus make our economy's return to economic growth. But in order to succeed, we need to use the EFSI as a vehicle for turning infrastructure investment into a fully liquid asset class with bonds that can be pooled and traded on European and global markets.

In gas as in trade, success will come if we put the market first!