EU’s energy conflict

Russia’s invasion of Ukraine and ensuing Western sanctions have roiled European energy markets. EU nations are scrambling to find alternatives to Russian supplies, while Moscow is demanding payments be made in rubles. Who will win this energy conflict?

Listen to an update on the EU’s strategy to wean off its dependency on Russia.

Guest: 

• Siobhan Hall, Brussels Correspondent, Montel

Transcript

Richard Sverrisson, Editor-in-Chief, Montel: 0:05

Hello listeners and welcome to the Montel Weekly podcast, bring Energy Matters in an informal setting. This week, we take the pulse of what's happening in Brussels. In particular, we hone in on several key areas that policy makers are currently grappling. Central to this, of course, is securing alternative gas supplies at a European level and quickly. Also, there's the tricky issue of sanctions. Can we expect a collectively your response? And in the midst of all this many member states have called for intervention into an energy market, they claim is failing. Helping me, Richard Sverrisson. To unravel all of this, is our Brussels correspondent Siobhan Hall. A warm welcome to you Siobhan. Busy days in Brussels?

Siobhan Hall, Brussels Correspondent, Montel: 0:49

Absolutely. Thank you Richard.

Richard Sverrisson, Editor-in-Chief, Montel: 0:50

Just wanna start off by, maybe talking more generally about the EU response to the war in the Ukraine, and what's your view or your take so far?

Siobhan Hall, Brussels Correspondent, Montel: 0:59

So what we've seen is the EU responding, like you said, very much in a collective way. To the war in Ukraine. So we've seen several rounds of sanctions, each progressively tightening Russia, and the whole aim of the EU is to try and undermine Russia's economy to the extent that it's no longer worthwhile to continue with the war. But it's been very careful to protect energy trade so far in the sanctions. So the whole emphasis has been on financial constraints. Bans on new investments and access to capital markets. And we see the effect because we see European companies are already putting outta Russia, which is not because they're not allowed to have business in Russia, but they see that having business in Russia is now a problem, a reputational damaged problem. So you have. The eus response at a high level, and then you have these secondary responses, which reinforce the EU response.

Richard Sverrisson, Editor-in-Chief, Montel: 2:07

But yet, as you mentioned, there's no sanctions on energy trade as yet. What's the main reason for that? Would you say?

Siobhan Hall, Brussels Correspondent, Montel: 2:14

Europe is too dependent on Russian gas to say goodbye to it overnight and that's. That's been the case for a long time. I think what is interesting is that Europe is in a better place now than it was. In 2009 when there was an interruption of Russian gas supplies, and so there is a bit more resilience than there was, and there is an understanding that Russia can cut gas supplies to the EU because before it happened, people think it would never happen. So psychologically people are aware that it could happen, and now the EU is scrambling to figure out. What it can do if the worst does happen.

Richard Sverrisson, Editor-in-Chief, Montel: 2:56

But would you expect any kind of sanction on the companies that supply gas or actually on, on potentially a cut to the imports of gas from Russia?

Siobhan Hall, Brussels Correspondent, Montel: 3:06

I wouldn't my personal opinion is I don't see the EU putting a ban on energy imports. What we see at the moment, of course, is this. Conflict about how to pay for the gas and that's quite a significant. Problem because if Russia demands rebels and the EU doesn't want to pay in rebels, then Russia has pushed the bull back into the eus court of how it will respond. So I don't see the EU putting a ban on imports. The EU is obviously aware that Russian may behave in ways which would then cut supplies,

Richard Sverrisson, Editor-in-Chief, Montel: 3:44

but isn't there, we were discussing this yesterday, Siobhan. As long as the industrial heartland of Europe could be affected by an overnight cut in a gas imports, it's unlikely to ever sanction it. And I'm thinking, and you were saying. That in order for sanctions on gas imports to work, the whole of the EU has to agree. Is that right?

Siobhan Hall, Brussels Correspondent, Montel: 4:06

Yes. So as long as there's one country that doesn't want sanctions on energy trade and there's more than one country in the EU that doesn't want the sanctions on any energy trade, there will not be sanctions on energy trade.

Richard Sverrisson, Editor-in-Chief, Montel: 4:17

It's as simple as that. Pretty much. Yeah. This whole issue of rubles is a legal, mindful, that would be a breach of contract. And it would mean that gas pro is changing its behavior quite dramatically. Instead of being this reliable supply that it's been for years and years, it would say no, actually we are gonna, we are quite happy to change the details of our contracts and forced payment and rubles.

Siobhan Hall, Brussels Correspondent, Montel: 4:39

It'll be really interesting to see how that plays out because obviously a breach of contract in normal times. Is a very significant problem. So it just depends whether this is considered normal times or if this is considered part of acts of aggression between the two parties. So there is a war going on in Ukraine. The EU is trying to take decisions to encourage Russia to stop the. And Russia is obviously looking for ways to fight back. So the demand for payment and renewables obviously is an attempt by Russia to undermine the effects of the EU sanctions, which tells you that the EU sanctions are working. So we hear EU leaders saying that it's a breach of contract and they won't stand for it. It just depends whether gas Prom is willing to burn its bridges or whether there is any chance that something else may get resolved before then. This is not for us to discuss really, is it? We see changes in. In the war in Ukraine at the moment, there appears to be, it's not getting worse at the moment.

Richard Sverrisson, Editor-in-Chief, Montel: 5:39

Thankfully not. It'd be very interesting to see how this sort of say ruble play will evolve and what, how it'll potentially be resolved, if at all. And the gas problems role there.

Siobhan Hall, Brussels Correspondent, Montel: 5:50

Yeah. What we've seen is the EU has been very clear. That it does not want to pay in rebels and it sees it as a breach of contract. So it would be quite difficult now for the EU to go back on that because that would be a capitulation. So it seems like the ball is back in gas bronze court.

Richard Sverrisson, Editor-in-Chief, Montel: 6:08

The EU has quite, I dunno how much breathing space it has to source alternative gas supplies. Other than that, it received some Russia. But we've seen, EU politicians as well as national politicians the German chancellor traveling on a world tour trying to source gas. Is there a collective effort from the EU to source gas from other, from countries other than Russia? Siobhan?

Siobhan Hall, Brussels Correspondent, Montel: 6:28

There has always been this idea that from some countries in the eu more, more the eastern countries that are more used to being dependent on Russian gas. That the EU would get better prices if it bargained collectively for its gas, and that has never really taken off before. But now in the current situation, the European Commission has specifically proposed a voluntary joint gas buying platform, and it's important that it's voluntary, which means that any country can choose to join it, and the commission wants to start that. This summer because the urgent need is to have gas storages in Europe refilled before the winter in order to ensure that. There is enough supply this winter so that's the priority for this year. Getting gas into storage, it seems unlikely that all countries would join the platform and some countries have economies of scale anyway. A country like Germany is a very big gas market. It doesn't need to club together to get better prices. And that's something that the German chancellor. Has said himself, so there are plans of it, and this is a very new area for the eu. They can only buy gas that is available in the global gas market. So it would be interesting to see whether the, how many people want to join the platform and whether that gives them enough volumes to actually make a difference in the prices that they can get.

Richard Sverrisson, Editor-in-Chief, Montel: 7:54

Have there been any takers so far? Have any countries joined it?

Siobhan Hall, Brussels Correspondent, Montel: 7:57

No, it's very early stages. The commission literally announced that it would. And that was the idea last week.

Richard Sverrisson, Editor-in-Chief, Montel: 8:03

Okay. So it exactly at a very early stage. If Germany doesn't join, how much clout can such a kind of collective effort have?

Siobhan Hall, Brussels Correspondent, Montel: 8:11

I suppose it's all relative, isn't it? The markets in the east are all relatively small markets. But from their perspective, if they join up together, then they have a bargaining power, which could be two or three times their power by themselves, and yet they would still be less than the bargaining power of Germany.

Richard Sverrisson, Editor-in-Chief, Montel: 8:30

You mentioned gas storage, Siobhan, can you highlight or outline the plans that the commission has laid and what is your view of those targets being met?

Siobhan Hall, Brussels Correspondent, Montel: 8:38

Last week, the commission put forward new legal proposals, which it proposed legally binding rules to force member states to ensure that their storages are filled on average by 80%. By the 1st of November this year, and then the rules would be for every, for the following years, it should be 90%. But this year, because these rules, first of all, they have to be approved and then applied. So there's not much time, everything is very time sensitive this year. So for this year it would be 8%. How easy it is to do that. One of the key problems is to be that some storage is owned by gas prom. And then we're back to this idea of in normal times, GPRO might want to comply with EU rules and not being breach a contract. But at the moment it is difficult to know how the EU could comply, GPRO to fill its storages. And so that's the problem that we will have to wait and see how that develops.

Richard Sverrisson, Editor-in-Chief, Montel: 9:39

Could the countries where those storage facilities are present is, the nationalization or the forced takeover of such, the appropriation of such storage? Is that a possibility?

Siobhan Hall, Brussels Correspondent, Montel: 9:50

So what the commission has proposed is that storages that are considered strategic, which is particularly large storages. Or storages, which have been historically underfilled ahead of winter would have to be certified by national regulators. And this is likely to affect storages owned by Gas Pro. And the proposal is that if a regulator finds that the owner of a storage is a risk to European Supply Security, then the commission will be able to tell to make that owner divest. It shares in the storage facility. So that's not the same as nationalizing. That's more like EU competition law, where you see if there is a behavior or an ownership of assets in a market which is causing a problem in the market, then the commission can make that company change its behavior or sell it shares The problem is because everything's under such time pressure, so the commission's proposal is that. Storages would have to be certified. These priority storages would have to be certified within a hundred days. But given that this proposal is unlikely to be. Enforce until the autumn, even if they fast track it, that would be really fast. And then you've got another three months after that for a storage to be certified. You still got a problem for this year and for this winter about how those storages are operated?

Richard Sverrisson, Editor-in-Chief, Montel: 11:16

Yeah. So the 1st of November looks. Very ambitious then. And of course the, the impact then on, on getting these facilities 80% full across Europe. The impact on prices, on, on wholesale market prices could also be quite staggering. They're already very high. Simon, I wanted to talk to you a little bit also because we're in the midst of an energy crisis across Europe and it started pretty much after the summer last year when gas flows from Russia primarily, started to be reduced quite significantly. And there were fears, many fears that the gas imports would be cut significantly. And of course. Energy. We all know the story. Energy prices, gas, wholesale, gas and power saw to extents that we have never seen. And on the back of this, we've seen several countries in Europe call for market intervention. Now what's the latest status here? There seems to be a split between northern and Southern Europe. Would that be a correct interpretation?

Siobhan Hall, Brussels Correspondent, Montel: 12:13

I think the split is between countries whose retail consumers are more closely linked to the spot price and countries where consumers are more on hedged and longer term contracts. So we see. Particularly countries which have a lot of renewables like in Spain, and they don't have very big interconnection capacity with the rest of Europe, but the prices being set by marginal gas fire plants, and the difference is very high in places like Spain. So Spain, a country like Spain is thinking, we've got all this cheap renewables and yet we're forced to pay this high power price. Which is linked to gas, which is not a big player in our market. And they have a lot of consumers who have taken out contracts that are linked to the spot price. So the impact of those high prices transfers very quickly to domestic consumers. So they have a problem, which is not the same as in other parts of Europe. And so that's why you see countries like Spain, particularly pushing for. The ability to intervene in the power price.

Richard Sverrisson, Editor-in-Chief, Montel: 13:23

So that, that, that's Spain primarily, but also France and Italy? As far as I understand.

Siobhan Hall, Brussels Correspondent, Montel: 13:28

Yes. Yes.

Richard Sverrisson, Editor-in-Chief, Montel: 13:29

Yeah. Maybe for similar reasons, although there's a lot of gas burning in Italy. But then the countries that oppose such moves who would they be then?

Siobhan Hall, Brussels Correspondent, Montel: 13:37

So the classic market oriented countries Germany, Netherlands. Germany. Obviously Germany is the big market and Germany is not a fan of market intervention, and they say that every time.

Richard Sverrisson, Editor-in-Chief, Montel: 13:49

But what's the outcome here? Do you think the commission will give in and allow some form of market intervention, at least temporarily?

Siobhan Hall, Brussels Correspondent, Montel: 13:55

Yes, it seems that way. Last week there was a meeting of EU leaders and they agreed that Spain and Portugal have this very specific problem of high renewables and low interconnect interconnection, and they. Are they will be allowed a temporary exemption. And to intervene in the power market, they have to make proposals to the commission, to the European Commission who would have to assess them and. They have to be proposals that don't distort the rest of the EU market. So there is some flexibility there for some temporary interventions. Some of the countries, like France has been pushing for a wider overhaul of the European power market to move away from marginal pricing. But it is difficult to see that would get enough support to be taken up. But the commission is going to come with some proposals and ideas in May on how to adjust the power market to reflect the fact that there is more renewables and there's more volatility. And these are not new ideas. The EU reformed its power market just a couple of years ago in this direction. We will wait to see what the commission proposes in May. Anything that they propose that is going to be legal is gonna take several years before it would actually be enforced because of the time it takes to approve legislation so that you've got these parallel track. You've got things that governments can do immediately, which would come under state aid rules, possibly and would need approval from the commission. And then the longer term track, which is changes to legislation, which is what France is pushing for.

Richard Sverrisson, Editor-in-Chief, Montel: 15:35

In a way it's a bit of a slippery slope though, isn't it? If you start, because every power market or national power market has its own characteristics and could be exempt from certain aspects of the wholesale price.

Siobhan Hall, Brussels Correspondent, Montel: 15:45

So this is why one of the criteria. Is that any such measures should not distort the wider European market or cross-border trading. And obviously, like you say, there is a big risk that if you've got measures that are capping prices in one market, it's going to muffle the signals for where power should flow in Europe. So it could affect cross border trading. So that's the kind of things I'll have to look at and. Guard against.

Richard Sverrisson, Editor-in-Chief, Montel: 16:13

It's been quite interesting. This is my interpretation, Siobhan, but as I, at the start of the energy crisis, late last year or or mid last year, really. You saw a lot of sort of isolationists, maybe call them nationalistic moves to protect their own consumers and within their own borders. But now, after the war in Ukraine, there's been a far greater collective response, and you see really the EU standing together, don't you?

Siobhan Hall, Brussels Correspondent, Montel: 16:37

You suddenly see the EU together in terms of its response to. Agreeing to sanctions on Russia and agreeing on some policy ideas like the need to save energy, the need to use more renewables. I think domestic energy markets will always be. National because politicians are voted in by their citizens, and energy prices in that sense are always a national issue. We've seen governments fall because of high energy prices. So it is something that national governments are very interested. In making sure that their citizens feel that their governments are doing the right thing by them.

Richard Sverrisson, Editor-in-Chief, Montel: 17:24

And we've seen several moves, all across the Europe and there's price cap, retail price caps or direct subsidies in other countries. So absolutely that. That's very clear. If I can ask you about, we, we've talked about the commission, so it's the EU executive. How about the parliament? Is that more interventionist? Is that more, are meps calling for more action to combat high prices?

Siobhan Hall, Brussels Correspondent, Montel: 17:46

That's a very good question. I would say so in the European Parliament, you would normally get those on the left who are very keen to protect the vulnerable in society. And then those on the right would normally be more market oriented. When it comes to intervening in the markets, the parliaments tends to favor citizens because it is the only directly elected body in the EU decision making system. So in that sense, they are a bit more like a national government in that they are. They rely on citizens being happy to get voted in, and so I think the Parliament would probably veer towards protecting citizens. But to be fair to the commission is not. Not against people, citizens, vulnerable, citizens being protected. It just doesn't want the process of doing that to distort the entire internal energy market, which brings benefits to people in other ways, in the economies of scale and efficiencies and so on. So it's not the case that you protect customers and consumer. Only by directly intervening the market, if you've got a very efficient market that's also benefiting consumers.

Richard Sverrisson, Editor-in-Chief, Montel: 19:00

No, o of course, it's a regular theme, if you like, in, in the Monte Weekly podcast and in many episodes, and this is a question of the energy crisis or the current issues, is there any chance that they could derail the fit for 55 and the moves to a faster energy transition? Or is it gonna speed it up?

Siobhan Hall, Brussels Correspondent, Montel: 19:22

My view is it will speed up. There's nothing to indicate that anyone thinks. Using more fossil fuels is a good idea these days. I think what will be interesting is seeing people who previously would've said, it's too expensive, it's too ambitious, it is going too quickly. Those people are going to be. Changing their minds. Essentially.

Richard Sverrisson, Editor-in-Chief, Montel: 19:46

So it's the key card to play here is the independence card as well?

Siobhan Hall, Brussels Correspondent, Montel: 19:51

Absolutely. This was always one of the arguments, and it just depends which politics are in play at to say which one gets put forward first, but. The energy security was always one of the pillars of the policy. Energy security, affordability, and climate change were the three pillars of the commission's energy policy or the eus energy policy for decades now. And at the moment, obviously energy security is very high. I would hope that within a few years, energy security is resolved and then they go back to it being. Climate change, but at the moment, energy is security and affordability have gone to the top, and hopefully those policies. The policies that I've taken now will reassure people that energy will become secure and bring back, if not lower prices, but more predictable prices.

Richard Sverrisson, Editor-in-Chief, Montel: 20:45

Fingers crossed Siobhan. Yes, many thanks for joining them onto our weekly podcast this week.

Siobhan Hall, Brussels Correspondent, Montel: 20:49

Thank you, Richard. It was a pleasure.

Richard Sverrisson, Editor-in-Chief, Montel: 20:51

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