FAQ on EU Coordination to Improve Security of Natural Gas Supplies

July 21, 2009 // Published as a news service by IHS

The new regulation was proposed to improve the internal natural gas market for the European Union (EU).

Why is EU legislation necessary?
Security of gas supply is essential to the smooth running of the EU economy and for the comfort of citizens at work and at home.

One quarter of all energy used in the EU is natural gas. More than 20% of electricity supplies depend on gas. 60% of all gas used in the EU is imported. In some member states, all gas is imported.¹ In terms of volume, gas imports have doubled since 1990. Even at a time of economic recession, gas demand both in the EU and particularly in developing countries continues to grow.

In 2004, EU member states already agreed that legislation was necessary to help the EU deal with potential threats to gas supplies. Directive 2004/67 - the Gas Security Directive - set out a basic framework that EU member states had to respect in order to make sure that gas consumers would be helped in the event of a serious supply disruption.

In 2008, the EC analyzed this directive and concluded that it was likely to be ineffective in the event of a major gas supply crisis. There was a wide debate on how to improve the situation. The gas dispute between Russia and Ukraine in January 2009 confirmed many of the weaknesses of the existing legislation. It also helped to shape the EC's ideas on how to improve the mechanisms to ensure secure gas supplies to Europe's citizens.

The EC concluded that a more consistent approach was necessary, whereby all member states will have shared and equivalent responsibilities to help the EU gas market deal with an emergency, wherever this arises. The new regulation will create a common indicator and set of standards that must be respected by each member state.

In this way, gas customers in all parts of the EU can be assured that they will benefit from high standards of crisis prevention and emergency management, and that the exposure of individual member states and regions is reduced by a EU-wide security and solidarity framework.

What does the proposed regulation aim to achieve?
The basic principle underlying the regulation is to allow the market players (suppliers and consumers) to manage supply problems as far as possible. Gas companies would continue to have the main responsibility for keeping gas flowing to customers. Public authorities would only need to intervene as a last resort once companies, consumers and producers have done all they can to resolve the difficulties.

The main objective of the proposal is to increase the security of gas supply by making it easier to anticipate, avoid and respond to a gas supply disruption that seriously affects one or more member state.

To this end, the proposed regulation creates a common indicator for gas security, known as N-1. The N-1 indicator refers to a situation where the most important gas installation is out of operation, such as an import pipeline or production facility. The proposed regulation also defines a supply standard, which ensures that vulnerable customers, particularly households, continue to receive gas supplies even under exceptionally difficult supply circumstances.

EU member states have to designate a competent authority with specific responsibility for security of gas supply. This may be a regulatory or government authority. The authority should be responsible for implementing the regulation and coordinating with other member states and with the EC. It should also be responsible for the constant monitoring of gas supplies at a national level to identify weaknesses early on.

The competent authority would have the task of setting up a preventive action plan. This would be based on an assessment of the risks to gas supplies and include measures, such as investment in new interconnections or access to reverse flow pipelines, that could reduce these risks.

It would also prepare emergency plans for dealing with a crisis. These would have to fulfill certain criteria - for example, procedures that would come into effect following supply disruptions and mechanisms for coordinating with other national authorities. An important element is making sure that everyone can have access to up-to-date and reliable information on the state of gas flows in the whole EU network.

At the European level, there would be collaboration among the national competent authorities to prevent a supply disruption and limit damages if one occurred.

The Gas Coordination Group would also help to implement the regulation at the European level. It would coordinate between the national authorities and industry and exchange information on an ongoing basis.

Why does this require legislation by the EU?
The European gas market is fed by a relatively small number of pipelines and production fields, and most member states are, in practice, connected to the same basic supply network.² Therefore, if there is a problem somewhere in the European gas system, it is likely to spread very quickly to other parts of the EU, as happened in January 2009.

The EU has a clear responsibility to ensure that the European gas market is able to function properly - that is, to supply customers with gas. The EC's role is to propose, and then enforce, measures that achieve this goal. An EU regulation will provide directly the legal guarantees that action will be taken if factors get in the way of gas supplies that companies ultimately cannot deal with on their own.

It will also avoid the risk that unilateral measures by one member state do not jeopardize the supply of gas elsewhere.

How does this benefit individual people?
Individual consumers, whether households or companies, may be reassured that public authorities monitor, as a routine matter, what is happening in gas supplies, that they can spot threats to supplies promptly and that plans are in place to deal with emergencies.

If a crisis does arise, all gas users can be assured that the industry will take steps to deal with it - if necessary, with the help of public authorities and in collaboration with other EU member states.

The regulation will also make it easier for companies to assess the risks to supply and to plan their investments accordingly. This is particularly important to people living in those parts of the EU that have limited gas links, as it is likely to lead to more investments in interconnections, storage and reverse-flow capacities.

Is the emphasis on crisis prevention or on dealing with the management of emergencies?
Both. The preventive action plan would cover longer-term or permanent measures, such as access to adequate gas supplies to deal with surges in demand, or investment in new infrastructure to tackle gaps and bottlenecks in infrastructure, in collaboration with the European Network of Transmission System Operators for gas.

The emergency plan (which may also be jointly developed by two or more member states at a regional level) would focus on measures to be taken to reduce the impact of a gas supply disruption and to keep supplies flowing to customers. These would include, for example, the nomination of a crisis manager, specific measures to increase alternative supplies or reduce demand, and obligations to report on key market data, such as gas availability, demand forecasts and gas flows.

Both the preventive action plan and the emergency plan would be managed by the competent authority in each member state. The EC would ensure that the plans were coordinated and information was exchanged with all other member states.

What is the Gas Coordination Group and why is it important?
The Gas Coordination Group was set up by the 2004 Gas Security Directive. It is a forum for member states, the gas industry and gas customers, including European federations, to exchange information and debate policy developments. It proved to be a very useful body during the January 2009 gas crisis, as it was the only venue where member state officials, the gas industry and other market stakeholders could meet and find out exactly what was happening. It was also useful for discussing the options for finding a solution to the crisis.

Therefore, the new regulation proposes to strengthen the Gas Coordination Group and improve its coordination with key industry bodies, such as the new European Network of Transmission System Operators for gas and the new Agency for the Cooperation of Energy Regulators. Representatives of the national competent authorities would also join the group. The EC would continue to chair the group.

How would the N-1 indicator work?
The N-1 indicator essentially refers to the disruption of the largest gas infrastructure in a member state. The regulation describes how to define what the largest infrastructure is, depending on the specific situation in each member state. The indicator would apply at a future point agreed upon by all EU member states.

The competent authority in each member state would be responsible for ensuring that the infrastructure has the capacity to deliver the necessary volume of gas to satisfy total gas demand of the area concerned in the event of such a disruption. In practice, this would mean, for example, ensuring that adequate interconnections, storage and reverse-flow options exist, or demand measures such as fuel switching of power plants, depending on the particular arrangements agreed upon within each member state.

In line with the principle of subsidiarity, each member state would decide how best to achieve the N-1 benchmark for its particular circumstances.

The competent authority would have to report to the EC if the N-1 indicator is not fulfilled.

But if gas supplies are disrupted outside the EU, how can an EU regulation help?
The draft regulation will help ensure that, in an emergency, all EU customers can benefit from the gas supplies that are already available in the EU gas system, including if the emergency is caused by a disruption to gas imports. Emergency arrangements could be made at the national or cross-border (regional) level. They might involve operating pipelines in reverse-flow to take gas to where it is most needed, or making regional arrangements whereby neighboring member states react jointly in a supply emergency.

The proposed regulation also provides for the setting up of an EU task force that may be deployed to monitor and report on the gas flows within or outside the EU, in cooperation with the supplying and transit countries.

It will also make it easier for the EU to work together and speak with a common purpose with external suppliers and transit countries. This will give the EU more influence when trying to resolve supply difficulties involving non-EU countries.

There is a directive on oil stocks, so why not rules on gas storage?
The EC has discussed this issue at length with member states and industry. It was concluded that gas storage is, in principle, a very useful tool to ensure security of supply. However, the costs of gas storage are high and not every member state has the geological conditions to build gas storage. While the proposed regulation clearly encourages investment in commercial storage, it is up to each member state to decide how best to meet the supply standards set in the proposed regulation.

Gas storage is already on the increase. Storage projects now at the planning stage could double the gas storage capacity of the EU by 2015.

What will be the impact on consumers' bills?
The proposed regulation will not create new costs compared to the existing rules.

However, in order to take full account of security of supply requirements, gas companies and suppliers will need to invest in the necessary infrastructure and tools to enable them to meet these standards. However, these investments are required with or without the regulation, because otherwise the risks to security of gas supply are likely to grow to serious levels over the medium term. It should also be remembered that gas supply disruptions come with a cost, both economically and socially, as demonstrated in January 2009.

Companies will, as always, integrate investment costs into customer bills, subject to the approval of the regulatory authorities. However, the new N-1 approach, described above, allows each member state to find the most cost-efficient solutions for its particular situation.

Where the cost of meeting EU security of gas supply requirements requires investments that the market or individual member states may not be able to pay, EU financial support may be available. For example, the European Economic Recovery Plan has allocated €1.4 billion to gas infrastructure projects that aim at improving security of supply in the most vulnerable parts of the EU.

Consumers can themselves play a part in helping gas security, while also reducing their bills, by using gas more efficiently.

¹ EU member states that import gas to cover all, or very nearly all, gas consumption are Belgium, Bulgaria, Czech Republic, Estonia, Lithuania, Latvia, Greece, Spain, France, Luxembourg, Portugal, Slovenia, Slovak Republic, Finland and Sweden. Gas is not used in Malta and Cyprus. The main gas suppliers into the EU are Norway 24% (Norway is part of the internal gas market though the European Economic Area agreement and would be covered by this regulation), Russia 42% (77% for the eight member states in eastern Europe), Algeria 18% and Nigeria (5%). The only member states that produce more gas than they consume are the Netherlands and Denmark.

² The exceptions are some of the new member states in eastern Europe, such as the Baltic states and Bulgaria.

Source: European Commission (EC).