The European Union, thanks to the ECB and its quantitative easing, has finally shown a hint of financial unity, but much remains to be done to foster the single market. The case of energy is paradigmatic: despite many efforts, the creation of a single, Europe-wide market is still far away. Even if there's no need for a "big bang", also a piecemeal and progressive evolution is a major challenge whose timing cannot be taken for granted.
For two decades, much attention has been paid to regulatory aspects: several legislative acts have been approved, national monopolies have been broken and national markets have become more open and contestable, albeit at different degree. Nonetheless, the picture still tells the story of several national markets, partially and heterogeneously connected.
The importance of the normative framework for the creation of a European energy market can be hardly underestimated, and much has still to be done (a fourth energy package?). But regulation it’s not enough.
A European market is made of borderless operators and customers, guided by price signals. A fascinating vision, whose feasibility in the case of gas and electricity rests on a rather material reality: the existence of a working and consistent grid. After decades of closed markets, national grids are indeed relatively isolated systems, with only limited connections among them.
In the case of natural gas, this feature is quite apparent: international pipelines are essentially a direct link between a producer and one or more final markets, where until recently long-term contracts and legal monopolies deprived of rationale any connection with other markets.
This pattern was quite rational when the first goal was to establish a captive market and provide guarantees to exporting countries, but its legacy is now a major hindrance to a real completion of the European market. Indeed, with a small interconnection capacity, the purely theoretical notion of price-led allocation within a European market is limited, at best.
Against a backdrop of partially state-owned incumbents, widespread risk of local opposition to any major infrastructure and lack of appetite for large investments, private operators cannot be expected to take the lead and try to bridge together national grids without a consistent and credible political backing.
In fact, some hesitant steps have been taken since the end of the past decade. Firstly, Europe is doing something in terms of financing: in 2009, the European Energy Programme for Recovery devoted 1.3 billion euros to gas infrastructures, among which several projects of reverse flow capability, mainly focused on Central and Eastern Europe.
For the period 2014-2020, under the Connecting Europe Facility nearly 650 million euros have been recently allocated to support key priority infrastructural projects, and the bulk of this money will be devoted to gas projects in the Baltic region, in Central-Eastern and South-Eastern Europe.
Moreover, there has been an improvement of reverse flow capabilities as a security measure, as imposed by Regulation 994/2010. The importance of improving interconnections has also been expressed by several provisions in the Gas Target Model, the guidelines developed three years ago by the Council of European Energy Regulators (CEER) with the aim of creating a competitive gas system constituted by entry-exit zones and sustained by adequate infrastructures.
After the approval of the first target model in 2011, the updated Gas Target Model suggests introduction of further market incentives aimed at reinforcing security of supply, particularly through new storage facilities and gas pipelines.
Despite those efforts, much still has to be done before we can talk about something more than a patchwork in progress. Indeed, besides the core North-western markets, interconnections are very limited and recent improvements had a real impact mostly on Central-Eastern Europe. At the same time, North-South and West-East connections remains almost irrelevant.
The case of Spain is the best example. One third of the whole European regasification capacity is located in the country, and due to the economic crisis it is sitting largely idle, potentially representing a spare import capacity for the rest of Europe and thus fostering security and market competition.
However, this is not the case. As regards natural gas, Iberian is more an island than a peninsula: export capacity towards France amounts to a few billion cubic meters per year, with no perspectives of an actual improvement. Definitely not enough to allow significant physical flows and create the conditions for a convergence between Spanish market and the rest of Europe, and between liquefied and piped supplies.
The enduring fragmentation of the European national grids has a negative impact on European consumers. It limits liquidity in the market, therefore reducing the efficient allocation of supplies. Interconnection capacity, even if not used, introduces more competition by simply existing. Albeit consumers in lower-prices countries may risk an increase in final prices, the overall effects of an interconnected grid at European level can safely be expected to offset local costs.
Moreover, several loosely connected national grids with diverse supply systems would be more resilient, once bundled. Keeping them divided inevitably entails a lower level of security and raises the costs of ensuring the security of supplies for each of them.
Overall, interconnecting national grids is an unavoidable step to create a truly single European market. Nonetheless, two major hurdles persist. Firstly, weak demand and uncertain energy policies limit the appetite of private companies for new investments, which at the same time national and European governments cannot currently afford, at least not entirely.
Even more importantly, national governments lack the political will of pushing for a step which would spell the end for their residual control of national energy markets. In a fully integrated European gas market with a consistent grid and no legal nor physical boundaries, national regulation and state ownership in energy companies would be eventually deprived of their original rationale.
How long will those interconnections remain just pipe dreams