The European Energy Union

The integration of energy markets in Europe could provide stagnating local economies with some important economic stimulus. Huge investments are at stake. Together with climate change mitigation and increased immunity from supply shocks, the integration seems to be very attractive for the region at first sight. Nevertheless, there exist huge concerns and disagreements related to the issue.

To begin with, three main dimensions should be mentioned when one speaks about the European Energy Union. These are economic growth, climate change, and security of energy supply. As to economic growth, real gross domestic product (GDP) growth rate in Europe in 2015 was nearly 1.9 percent. In particular, the increase in GDP in Germany, which is the key economy of the European Union (EU), was under 1.5 percent. According to forecasts, the situation is not going to improve. European authorities are therefore searching for economic measures that will give a fresh start to the EU’s economy. The European Energy Union could become such a measure. Truly, the merger among separate energy markets in the Pan-European energy market presumes sufficient economic benefits such as the elimination of barriers in trade, the reduction of costs and remarkable investments in energy sector in upcoming years. This will result in both some extra numbers added to European GDP growth and the creation of tens of thousands of jobs in energy industry. The latter one is very important in terms of noticeable unemployment in some European countries. Take for example unemployment rates in Spain and Greece as for 2015 that are equal to 22.5 percent and 25 percent respectively.

Furthermore, the integration presumes the reduction of current energy generating capacities. Here, a market coupling on the electricity market is in focus. This refers to optimal electricity flows within the country and between the countries with respect to available transmission capacities. Logically, more clever management in electricity transmission reduces the demand for energy generation capacities like fossil-fuel power stations. This will in turn result in lower greenhouse gas emissions.

Referring the security of supply issue, some EU members, mainly from Eastern and Central Europe, depend heavily on natural gas supplies from Russia. In total, above a quarter of natural gas supplies to the EU comes from Russia. Some countries, however, meet almost 100 percent of their needs in natural gas by Russian gas. Estonia and Finland are cases in point.

The problem of Russian gas is that from time to time supply shocks happen and clients of Russian natural gas monopolist Gazprom do not obtain the amounts of natural gas ordered. The reason for this is political. Take for example so called “natural gas wars” between Russia and Ukraine in 2006 and 2009. In particular, 2009 was the year of very long and intensive contract negotiations between Russia and Ukraine for the purchase of natural gas. The counterparts were not able to agree on price and as a result, Gazprom banned the export of natural gas to Ukraine. At that time, Ukraine was responsible for approximately 80 percent of natural gas transit from Russia to the EU. Hence, since natural gas had ceased to enter Ukrainian pipeline, the shortage of natural gas on the other end of the pipe, meaning on the European market, followed.

In addition, the prices of Russian gas vary dramatically country to country and it is often difficult to explain the rationale for such a price variation. For example, France and Germany paid less for Russian gas in 2014 than Poland and Lithuania did. The transportation costs are much higher for the former two countries, though.

As already mentioned, the idea of common European market for energy faces some challenges because of a number of economic and political concerns. Truly, the major opponents to the idea of energy union are politicians. Their arguments vary country to country, but the most common argument is the loss of national sovereignty. This one is a very popular argument in Hungary produced by Hungarian Prime Minister Viktor Orban. Mr. Orban explains that he wants from energy sector to be nonprofit, which is impossible in the case of common energy market. Non-profitability argument will, it is argued, provide the manufacturing sector and households with lower prices for energy and increase the competitiveness of national economy. At the same time, it will enhance Orban’s reputation in the eyes of voters.

Another argument against the integration is that European Energy Union will result in the equalization of prices for electricity and natural gas in Europe. Nowadays, electricity prices in countries such as Poland, the Czech Republic and Hungary are almost two times lower than power prices in Germany. Electricity is a very politically sensitive commodity meaning that a rapid increase in prices that will follow after the establishment of the energy union could cause political instability and even the defeat in the next elections for the ruling party.

Judging from the papers today, the arguments in favor of the European Energy Union outnumber the arguments against the integration despite the challenges mentioned. When it comes to benefits, the most widespread point of view is that the common market for energy will cut costs, attract investments, create workplaces and so it will trigger economic growth. According to Maros Sefcovic, who is the vice president of the European Commission and thus the official who is responsible for the common energy policy in the EU, the Energy Union is the most ambitious project in Europe that will result in annual savings for households and manufacturers equal to EUR 40 billion. This contradicts Orban’s statement about the negative impact of energy union on households’ budgets and the competitiveness of manufacturers.

The President of the European Commission Jean-Claude Juncker has formerly announced the investment plan worth EUR 315 billion which is supposed to provide a stagnating economy of the EU with some economic stimulus. Particularly, around EUR 87 billion should be spent on interconnection projects, meaning on construction of cables that will connect various European electricity islands into common power market. A crucial part of this sum will be used in the North Sea Countries’ Offshore Grid Initiative that aims at linking offshore wind farms. The initiative makes sense, as it is estimated that Europe could satisfy near 10 percent of its need in power with the help of carbon-free wind energy generated in the North Sea. One clear benefit is the creation of new jobs. Another one is the reduction of CO2 emissions.

In addition, the integration presumes that member states of the EU will rely on the European Commission when it comes to contract negotiations for import of natural gas from Russia. It is believed that the EU will have better negotiating position compared to 28 member states that act separately.

Nevertheless, it should be admitted that the equalization of power prices will adversely affect the customers from countries where power prices are currently subsidized. Local political elites will suffer from electricity price growth too. A potential solution could be to avoid rapid fluctuations in power prices and establish the plan of gradual increase in electricity prices.

In the end, despite some political and economic controversies, the European Energy Union could become a valuable factor to establish economic growth, increase energy security in Europe, and fight climate change. The EU has to use this chance to modernize its economy. Otherwise it will become technologically underdeveloped in comparison to the USA and China, which heavily invest in their energy sector nowadays.