Bolstering European Energy Security

FOREIGN POLICY PAPERS
BOLSTERING EUROPEAN ENERGY SECURITY

JESPER PACKERT PEDERSEN
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About the Asmus Policy Entrepreneurs Fellowship
Tis paper is the fnal product of the authors Asmus Policy Entrepreneurs Fellowship. Te German Marshall Fund of the
United States launched this program in 2011 to honor Ronald D. Asmus, GMF Brussels ofce executive director and direc-
tor of strategic planning. Asmus, a renowned policy entrepreneur who dedicated his life to the principle of freedom, passed
away on April 30, 2011.
Asmus Fellows must be U.S. or European citizens under the age of 40. Te fellowship enables them to pursue a project that
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On the cover: Gas pipeline. ssuaphoto/IStockPhoto
Bolstering European Energy Security
Foreign Policy Papers
June 2014
By Jesper Packert Pedersen
1
1
The author wishes to thank the German Marshall Fund for its generosity, and for supporting the enduring policy
entrepreneur legacy of Ronald D. Asmus. Thanks also to the many experts and policymakers, 77 in total, who were willing
to discuss this project, all of which were off the record. The author can be reached at jesperpackert@gmail.com with any
comments or questions.
Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
European Energy Challenges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Changing Dynamics in European Energy Policy . . . . . . . . . . . . . . . . . . . . . . . . 3
Baltic Sea Regional Energy Policy Case Study . . . . . . . . . . . . . . . . . . . . . . . . . 7
What to Do about Russian Gas? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
European Union Approaches to Energy Security. . . . . . . . . . . . . . . . . . . . . . . 17
The Geopolitics of Energy Efficiency . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
Bolstering Energy Security in Europe: A Case for Optimism . . . . . . . . . . . . . . . . 24
Bolstering European Energy Security 1
Introduction
1
S
ometimes it is the quiet, unassuming success
stories that provide the most instructive
examples for solving intractable problems.
As Europe grapples to climb out of the most
significant economic crisis in generations, it has
been difficult to identify areas where Europe will
maintain a competitive edge over other regions in
the decades to come. Energy security is frequently
listed amongst the problems Europe faces today,
and projections suggest that these problems will be
exacerbated in the future. Europes inclination for
the past half century has been to address common
problems from a central, integrated perspective as a
European Union, but when it comes to cooperation
on energy policy, national leaders and industries
have resisted centralization and even collaboration,
instead opting to fend for themselves and prioritize
national over regional solutions. The result is a
less competitive European continent vulnerable to
energy disruptions and struggling to meet its own
climate policy goals.
That said, an often-overlooked, well-functioning
model for cooperation, diversification, and security
of supply stands out amidst the challenging
scenarios. Nordic
1
countries have connected,
integrated, and opened their energy markets to
each other, achieving a significant level of energy
security and diversification in the process, while
allowing for substantial amounts of renewable
energy to be leveraged in a highly efficient way. The
Nordic model represents a best practice solution
for other regions, and is worth exporting and
duplicating.
1
Countries such as the Netherlands, U.K. and in some cases
Germany are also relevant to this cooperation, so it could be
considered a Northwestern Model in some ways. The most
extensive cooperation, however, is between the Nordic countries,
and hence this offers the best model for consideration.
The German Marshall Fund of the United States 2
European Energy Challenges
2
E
urope faces a number of energy security
challenges, but they are significantly different
across the continent. European nations
have very divergent circumstances when it comes
to energy security, with some nations entirely
dependent on imports to cover their needs while
others are net exporters. A workable, European
model for energy security has existed for decades,
and while the issue of energy security has received
a great deal of attention in recent years, little
attention has been awarded to proven successes and
existing best practices.
From an energy perspective, Europe is exceptional
in an unfortunate way. According to BPs Global
Energy Outlook 2035, all regions of the world
will increase their energy production between
today and 2035, except for Europe. This places
additional demands on other policies, including
energy efficiency and conservation, achieving and
maintaining low energy intensity,
2
and the ability to
secure imports. The latter may become challenging
as the global competition for resources heats up
in the coming decades. Scenarios from corporate
analysts and international energy agencies
unanimously predict a dramatic rise in energy
consumption, particularly outside the OECD, with
an increase of around 40 percent between today
and 2035. This will mainly be led by China and
India.
European countries have a history of conducting
energy policy at the national level, a preference
for national infrastructure investment, and the
associated instinct to protect national energy
markets from external competition. These national
policies generally impede pan-European solutions
to energy security problems.
Many observers of European policymaking would
fail to see anything surprising in this finding, but in
2
Energy intensity in this context is measured by the quantity of
energy required per unit output, activity, or value.
a number of ways, it is puzzling. Not only is it clear
that energy security is a challenge that no country
can fully manage on its own, but on a number of
occasions, national leaders have specifically tasked
the European Commission to advance energy
security at the EU level, only to thwart subsequent
actions by the Commission to carry out this
mandate. As a result, a pan-European energy policy
does not currently exist, and some nations, entire
regions even, do not have access to diversified
energy supply at competitive prices.
A number of steps can be taken both by national
governments and the European Union to achieve
higher levels of energy security throughout the
region. These include breaking down internal
trade barriers, utilizing the full range of domestic
resources, linking together energy markets,
investing in key energy infrastructure, coordinating
and cooperating around energy policies,
subjecting long-term energy decisions to peer
review, developing the capacity to conduct energy
diplomacy, and coaxing along existing dynamics
in the Russian energy sector to facilitate better
relations based on commercial decisions. Each of
these proposals will be described in detail below.
Forward looking EU policy decisions in recent
years provide reason for optimism, but these
have to be accompanied by equally determined
implementation to achieve results.
From an energy
perspective, Europe
is exceptional in an
unfortunate way.
Twenty-first century
policymakers will
continue to grapple
with the complex
triangulation between
energy, climate, and
competitiveness
policies, and Europe has
yet to find a satisfactory
balance.
I
n recent years, European energy security
discussions have centered around the ability to
obtain sufficient supplies, particularly focused on
natural gas through the Southern Corridor from
the Caspian Sea and transiting Turkey in order to
deliver natural gas to European consumers.
Until the summer of 2013, it was unclear exactly
which route would be chosen, and thereby which
consumers would benefit. In a major upset for
Central and Eastern European governments, the
Shah Deniz Consortium in charge of developing
Caspian resources chose to favor the Trans-Adriatic
Pipeline (TAP) over Nabucco-West, which would
have supplied Bulgaria, Romania, Hungary, and
Austria. These countries have great dependency
on a single supplier: Russia. TAP will instead
traverse Greece and Albania before reaching the
sizeable Italian gas market, and could potentially be
expanded to branch into the Balkans in the future.
The Southern Corridor will initially, upon
completion, add about 2 percent to European
natural gas capacity, which does not sound like a
dramatic game changer by any means. However,
the ability to diversify suppliers even a little
improves the bargaining position of Central and
Eastern Europe when it comes to negotiating
long-term contracts with Russia. In years past,
Russia had the upper hand since few alternatives
existed, but this situation has now slowly started
to change. For instance, short-to-medium term
oil and gas contracts have been renegotiated at
more competitive prices than expiring contracts,
as Russian gas has faced competition from both
renewables, coal and LNG
3
and also had to adjust
for increased use of spot pricing and waning
demand in Europe.
4
Furthermore, the Southern
3
http://www.bloomberg.com/news/2014-05-08/lithuania-
offered-lng-cheaper-than-gazprom-natural-gas.html.
4
http://www.economist.com/news/business/21592639-euro-
pean-efforts-reduce-russian-state-owned-companys-sway-over-
gas-prices-have-been.
Corridor is designed to be able to scale up if
additional resources are developed in the Caspian,
or if diplomatic breakthroughs occur in Iraq,
Cyprus, or even Iran in the future. All of these are
long shots at this time, but could potentially bring
significant amounts of natural gas to Europe.
Perhaps the prospect of a new $28 billion, 3,500
kilometer pipeline project
5
connecting two
continents, a classic instrument of Great Game
politics and geopolitical intrigue, has obfuscated
some of the other options that exist for European
policymakers? Decidedly less sexy topics such
as energy efficiency standards, interconnectors,
and market integration could yield far greater
advantages for Europes security of supply and
competitiveness than even the best case scenario for
the Southern Corridor.
In fact, the decision to move forward with the
Trans-Adriatic Pipeline seems to have offered a
broader lens for energy security in Europe. Some
options will be spelled out in greater detail below,
but the overall point is that European leaders would
be well advised to consider this range of policy
options carefully.
Twenty-first century policymakers will continue
to grapple with the complex triangulation between
energy, climate, and competitiveness policies,
and Europe has yet to find a satisfactory balance.
It is difficult to advance all three objectives
simultaneously, but it is reasonable to argue that
European policymakers have not yet deployed
all options available, and that one side of the
triangle climate policy has been prioritized
disproportionately to energy and competitiveness
policies in recent years. But all that may be about to
change.
5
http://www.bp.com/en/global/corporate/press/press-releases/
shah-deniz-final-investment-decision-paves-way.html.
Changing Dynamics in
European Energy Policy
3
Energy issues are
amongst the least
integrated policy areas
in Europe. A pan-
European energy policy
does not exist, and
neither does a single
market for energy.
As Europe continues to chart a way out of the euro
crisis and global recession, ambitious but costly
climate policies are currently being reconsidered,
particularly as the EU is putting together a climate
and energy package with targets for 2030.
When the Barroso II EU Commission was seated
in 2010, a new climate action commissioner was
established specifically to advance the EUs already
bold climate policy agenda, both inside and outside
the EU. The position was naturally at odds with the
energy commissioner, whose responsibilities are
primarily guided by internal market and energy
package implementation.
The two policy areas climate and energy were
not exactly in parity in 2010. Climate action was a
new EU portfolio that few countries had addressed
as a separate, cabinet level issue.
6
This is significant
because the European Commission was able to
expeditiously consolidate political initiative on
climate policy at the EU level, in part as a result of
not having to engage in the usual turf battles with
vested interests in member states, since the climate
portfolio was new. In addition, it made sense to
approach climate policy from a pan-European,
supranational perspective, since national-level
policies are insufficient and ineffective in terms of
addressing the problem of global warming.
In comparison, the European Union itself was
established partially as a result of energy concerns
and evolved from a coal and steel union, and
long-standing energy issues are deeply vested in
European countries political architecture. Energy
issues are amongst the least integrated policy areas
in Europe. A pan-European energy policy does not
exist, and neither does a single market for energy.
Member states have the ultimate say on energy
6
Prior to her job as the first EU climate action commissioner,
Connie Hedegaard was the first Danish minister for climate
from 2007-09.
policy, and they often have competing or non-
cooperative policies.
When Energy Commissioner Gunter Oettinger
visited Washington, DC in summer 2013, he
described the evolution of the two commission
posts at a public event: When I started [as Energy
Commissioner], European energy policy was
just an instrument for climate change policies.
Climate change was secretary and energy was
undersecretary, just a service provider.
7
Competitiveness concerns have rebalanced this
relationship over the last year or so, and arguably
elevated the energy portfolio as the main driver
of the EU climate-energy relationship. Several
developments support this assertion:
In April 2013, the European Parliament voted
against a reform to bolster the EUs flagship
climate policy, the Emissions Trading System
(ETS). The vote itself was an acknowledgement
that the system was not working properly. A
back loading proposal to address the fact that
too many allowances and exceptions had been
granted, thereby reducing the price of carbon
emissions to a point where it made economic
sense for European countries to import U.S.
coal for power generation use rather than use
less-polluting gas.
In May 2013, the European Council convened
to discuss the interconnections between energy
prices, competitiveness, jobs, and growth. One
of the main conclusions was: The impact
of high energy prices and costs must be
addressed, bearing in mind the primary role of
a well-functioning and effective market and of
tariffs in financing investment.
8
The Council
tasked the Commission with an in-depth
7
http://csis.org/event/transatlantic-energy-revolution, 43:30.
8
European Council conclusions, Brussels, May 22, 2013, http://
europa.eu/rapid/press-release_DOC-13-4_en.htm.
analysis of energy prices and costs in Europe,
subsequently published in 2014, highlighting
amongst other issues the following
points:
9

The relative share of the energy element in
the retail price of electricity has generally
diminished over time, while the tax/levy
component has increased. In other words,
taxes contributed more to retail price
increases than energy price hikes.
In the gas market, in addition to
concentration and price regulation, there is
often a supply constraint (with low numbers
and competition) and gas prices are still
often indexed to oil prices, though with
significant regional differences.
Successful European energy efficiency
measures have offset but not fully
compensated for the costs of rising electricity
prices. However, despite Europes global
leadership position on industrial energy
efficiency, there is still potential for further
efficiency measures.
The intended convergence of energy prices
across Europe as a result of the internal
market for energy has not materialized.
Consumers in the highest priced member
states are paying 2.5 to 4 times as much as
those in the lowest priced member states,
with the gap widening over time. The
European Commission notes that persistent
differences in national energy prices indicate
an inefficient internal market for energy.
9
EU Commission Communication COM(2014) 21/2, January
29, 2014 and Staff Working Document SWD(2014) 20, March
17, 2014, Energy Prices and Costs in Europe, COM(2014) 21/2.
http://ec.europa.eu/energy/doc/2030/20140122_communica-
tion_energy_prices.pdf.
The energy price differential for gas and
electricity with external competitors is
increasing, particularly compared with the
United States, where lower energy costs
contribute to greater economic growth and
job creation.
In January 2014, the EU Commission
released its policy framework for climate and
energy in the period from 2020 to 2030. This
framework took a significant departure from
the 20/20/20 framework toward 2020,
10
and
the explanation for this departure was directly
related to energy security and competitiveness
concerns. For instance, the report cites rising
energy prices as a major political concern,
and describes Europes constant struggle
for adequate and affordable energy, all in
the context of a widening energy price gap
between the EU and major economic partners
that Europe has little influence over.
11
In February 2014, independent reports
commissioned by the German parliament
and Danish government, respectively, argued
for significant scaling back or complete
elimination of all subsidies for renewable
energy, and placing greater emphasis on
international competitors comparative
advantages. The Danish report concludes:
Denmark has chosen to pursue an energy
policy that in some areas is more ambitious
10
Established in 2008, the targets to be attained by 2020
included 20 percent reduction in greenhouse gas emissions
from 1990 levels, a 20 percent share of renewable energy, and
20 percent improvement in energy efficiency. Emissions cuts
and renewables levels were mandatory for member states, while
energy efficiency goals were not binding. The 2030 framework,
by contrast, includes a 40 percent mandatory emissions reduc-
tion target, an EU-wide target of 27 percent renewables, though
not connected to national targets (several EU countries have
already passed this target by the way), while further reviewing
energy efficiency goals.
11
European Commission Communication COM(2014) 21
Energy Prices and Costs in Europe.
The changing dynamics
in Europe are
indicative of a much
broader rethinking of
energy and climate
policies in the context
of a challenging
period for European
competitiveness.
than required by international obligations,
12

and that further subsidies do not lead to
further CO
2
emission reduction at the
European level, but shift emissions to other
firms or sectors, and have direct opportunity
costs on overall employment and economic
growth. The German report concludes: The
current route is neither competitive nor low-
carbon. For this reason, the German economy
is increasingly at a disadvantage compared to
its key global competitors, owing to German
industrys growing energy price burden
compared to its international competitors.
And in the great paradox CO
2
emissions
in Germany have risen despite the rising costs
associated with renewable deployment under
the Energiewende.
13
Both reports indicate a
shift away from a renewables-led strategy to a
broader approach toward reducing greenhouse
gas emissions while seriously considering the
economic implications.
The changing dynamics in Europe are not just
about personal rivalries or turf wars, but indicative
of a much broader rethinking of energy and climate
policies in the context of a challenging period for
European competitiveness.
12
2014 report from the Chairmen of the Danish Council of
Environmental Economics, http://www.dors.dk/graphics/
Synkron-Library/Publikationer/Rapporter/Miljo_2014/Disk/
English_Summary.pdf.
13
IHS Global, A More Competitive Energiewende: Securing
Germanys Global Competitiveness in a New Energy World,
March 2014, page 73.
Recommendation
Europeans can pride themselves
on extremely ambitious climate and
environmental policies, but the lessons
of recent years call for a rethinking that
has already been initiated. While the
United States has managed to increase
energy production dramatically with
gains in employment, reduction in energy
prices, reduction in greenhouse gas
emissions, and a reduction in energy
import dependency trends have
gone in the opposite direction for many
European countries. European energy
policy discussions should look at ways
to emulate the U.S. energy revolution or
find ways to benefit more directly from
it. For instance, by exploring shale gas
options that could meet high European
environmental standards instead of
issuing national bans, by allowing for
scaled up renewable energy projects to
gain most economic advantage, and by
standing firm on creating a market-based,
competitive internal market for energy.
Baltic Sea Regional Energy
Policy Case Study
4
The Nordic model of
energy cooperation,
collaboration, and
market integration
should be a model
for best practice and
considered elsewhere in
Europe.
A
s a case study, this paper will focus on the
Baltic Sea region: the Nordic countries
(Norway, Sweden, Denmark, and Finland),
the Baltic countries (Estonia, Latvia, Lithuania),
Poland, and Germany.
While a great deal of attention has been devoted to
energy policy developments in Southern Europe,
Central and Eastern Europe, and the Baltics in
recent years, particularly in connection with
decisions over the Southern Corridor for gas from
the Caspian to Europe, much less attention has
been devoted to energy policy in Northern Europe.
This is regrettable for two reasons. First, some
of the Northern European countries have well-
functioning policies in place that can be used as a
model for other parts of Europe (or broader for that
matter). Second, focusing on the Baltic Sea region
allows for an interesting evaluation of EU energy
security policies, as examples of both best and
worst practices on energy security. Areas in need
of significant attention and improvement can be
drawn from this region.
The Nordic Model
The Nordic model of energy cooperation,
collaboration, and market integration should be a
model for best practice and considered elsewhere
in Europe. The Baltics, Germany, and Central and
Eastern Europe in particular could successfully
adopt aspects of the Nordic model to leverage their
respective energy mixes and infrastructure toward
greater utility, and other regions in Europe would
benefit similarly from a cooperative approach.
In December 2013, the World Economic
Forum conducted a Global Energy Architecture
Performance Index (EAPI), where a series of
indicators are used to monitor and benchmark
a range of 124 countries performance against
the competing goals of economic growth and
development, environmental sustainability, and
energy access and security.
14
In the global context,
the top-performing region in the EAPI study is
the EU28, and within the EU, the Nordic countries
stand out even further, with their combination
of advanced economic development, carbon
abatement and efficiency measures, renewable
energy deployment, and regional energy security.
Interconnected electricity markets to transfer excess
hydro, wind, and nuclear power across borders
would improve the energy mix of various countries
and regions, and better utilize their respective
renewables strengths and excess production,
and alleviate concerns from intermittent
power generation while eliminating risk from
overpowered national grids.
The motivation for expansion of renewable energy
in the Nordic countries is usually articulated
in relation to greenhouse gas reduction and
combating climate change. However, the historical
context is actually closely related to achieving
regional energy security in the wake of the OPEC
embargos in the 1970s.
Ambitious deployment of renewable energy
15
has
enhanced Nordic energy security in several ways:
reducing fossil fuel imports from volatile
suppliers and thereby strengthening the
regions balance of payments for energy supply;
bringing price stability to electricity markets by
decoupling pricing from fluctuations in fossil
fuel markets;
stimulating domestic and regional economies,
frequently the high tech sectors, with
14
World Economic Forum Global Energy Architecture Perfor-
mance Index 2014, page 3.
15
The percentage of renewable energy (including hydroelec-
tricity) in the primary energy consumption in the Nordic coun-
tries is Denmark, 20 percent; Finland, 24.2 percent; Norway, 67.9
percent; and Sweden, 41.6 percent according to the BP Statistical
Review of World Energy 2013.
Energy policymakers
should give greater
priority to energy market
architecture to put it
on par with energy
infrastructure projects.
opportunities to export renewable energy
technology and services globally; and
long-term economic predictability
whereas fossil fuel reserves may fluctuate
as a consequence of new discoveries or
technologies, renewables offer a certain base
that reduces volatility of supply and thereby
price fluctuations.
In addition, renewables offer ample opportunities
to integrate regional economies, as displayed in
the Nordic case with a patchwork of wind, hydro,
biomass, and nuclear power generation traded
across national borders, which further enhances
economic stability, interdependence, and security.
What the Nordic model ultimately provides is a
blueprint for energy security, based on market
principles, regional cooperation and collaboration.
As stated in the World Economic Forum, Global
Energy Performance Index 2014,
[] energy security is also about relations
among nations. Security of supply from trade
partners, the risks of energy autarchy, and
uncertainty over prices all creating volatility
are critical concerns that must be managed.
The Nordic model is not without downsides:
Nordic consumers and industry pay high energy
prices across the board, whether it is for electricity,
natural gas, gasoline or other products. However,
significant percentages of the retail price are
environmental fees and taxes, somewhat masking
the fact that the base price of energy is often
competitive.
Recommendations
The Nordic countries could provide a
model for future energy production
if efforts to produce non- (or limited)
subsidized renewable energy at scale
are successful. As some of the major
initial subsidy schemes are about to
sunset amongst the Nordic countries,
policymakers believe that this will evolve
into the largest global demonstration
project for non-subsidized renewable
energy generation, and proof that
renewables will eventually be competitive
with fossil fuels. Wind turbine prices
have dropped 30 percent in the past four
years, and production and installation
costs for photovoltaic solar power have
dropped even further during the same
period. The consulting firm McKinsey
predicted in 2012 that solar technology
would be cost competitive with coal, gas
and nuclear by 2020, even if reductions in
renewable subsidies are factored in.
16
The
financial services firm Morgan Stanley has
calculated that in certain windy regions of
the United States, large-scale wind farms
are frequently generating power at prices
competitive with gas, coal, and nuclear
power plants.
17
It is reasonable to point
out that context matters and that some
regions are better disposed for utilizing
renewable energy at scale than others, but
the point is that Europes full potential for
utilizing renewable energy is far from met
at this time.
Following one of the main strengths of
the Nordic model, energy policymakers
should give greater priority to energy
market architecture to put it on par with
energy infrastructure projects. Energy
market developments are so dynamic
(as are energy technologies, which are
often subject to disruptive technological
evolutions) that accurate prediction, and
in turn long-term energy policymaking, is
a complex undertaking. Take for instance
the U.S. LNG facilities that are currently
16
McKinsey & Company, Solar Power: Darkest Before Dawn,
April 2012.
17
http://www.greentechmedia.com/articles/read/midwest-
wind-cost-competitive-with-gas-and-coal.
More than two decades
after gaining political
independence, the
Baltic nations are
struggling to gain their
energy independence
from Russia.
being retrofitted for export use, just a few
years after they were built to facilitate
imports, or the mothballed gas plants
in Germany and the Netherlands built
only a few years ago. As these examples
show, any policy- or decision-maker will
face difficulties in evaluating the long-
term viability of any major project, be it
a pipeline, power plant, or LNG terminal
projects that often come with billion
dollar price tags. However, policymakers
can hedge their bets by focusing more on
the overall architecture of regional energy
markets, including market integration,
reverse-flow interconnectors, mixed-fuel
power generation, and integration of
various forms of renewables, in order to be
better positioned toward future shifts or
transformations in energy markets.
Baltic Regional Challenges
The Baltic nations would appear to be a natural fit
for extensive energy cooperation, but for a number
of reasons, this goal has remained elusive. The
combination of small energy markets (the total
population of the three Baltic nations is just over
6 million), modest domestic production, high
dependency, and insufficient cooperation results in
low energy security and outright vulnerability.
More than two decades after gaining political
independence, the Baltic nations are struggling to
gain their energy independence from Russia. The
Baltic region has paid a high price for this state
of affairs, enduring threats of energy cutoffs or
politically motivated price hikes by their dominant
supplier and paying exorbitantly high energy prices
since the regions independence in 1991.
Compliance with EU environmental policies has
in some cases been at odds with the ambition to
achieve Baltic energy independence. Lithuania
agreed to close its Soviet era nuclear plants as
part of its EU accession process. When the last
functioning reactor closed in 2009, Lithuanias
import dependency jumped from near-EU-
average 50 percent to over 80 percent. One of
the few domestic energy resources in the Baltics,
Estonian oil shale, faces an uncertain future, as
it is amongst the most polluting fossil fuels, and
the industry faces an existential threat from any
future EU environmental, climate, or fuel quality
directives. As 70 percent of Estonias total primary
energy supply in 2012 came from oil shale, the
vast majority of which was used for electricity
production and heat generation, this is an issue
of great concern for Estonia and the entire Baltic
region.
It is well known that the Baltic nations have a
difficult energy relationship with Russia, but it is
also relevant to point out that they have complex
mutual energy relationships with each other.
Several planned regional projects have failed to
materialize, some of them after being voted down
through national referendums or plebiscites, to
the consternation of neighboring countries as
well as EU and U.S. policymakers. Infrastructure
projects have moved slowly forward, then
rapidly backwards, at times risking EU funding
opportunities and ultimately contributing to a
situation of continued dependency on Russia
despite a high degree of political attention toward
energy independence. In spite of a high level of
regional commonalities, the Baltic nations have
significantly different energy circumstances that
are relevant to forward-looking policy proposals.
For one, energy import dependence numbers vary
greatly, with Estonia at 17.2 percent, Latvia 56.4
percent, and Lithuania 80.3 percent.
18
This situation will likely improve over the course of
the next decade. A series of infrastructure projects
will link the Baltic region with Nordic and Polish
18
http://epp.eurostat.ec.europa.eu/tgm/table.do?tab=table&init
=1&plugin=1&language=en&pcode=tsdcc310.
The largest single
supplier of Polish coal
imports is Russia,
accounting for over two-
thirds of imports since
2009.
gas and electricity grids, and the Baltic nations are
cooperating in regional projects such as the Baltic
Sea Region Energy Cooperation (BASREC), the
Baltic Energy Market Integration Plan (BEMIP),
and the Nord Pool Spot power market.
Infrastructure projects are also moving forward.
Lithuania is scheduled to receive a floating
LNG barge (aptly named Independence), and
underwater electricity cables will link Lithuania
to Sweden and Poland, and Estonia to Finland.
Lithuania is home to the NATO Center of
Excellence for Energy Security, and the region is
a leading participant in European policymaking
to ensure increased diversification and domestic
production, and lately also in the transatlantic
energy agenda with a strong emphasis on
facilitating U.S. exports of liquefied natural gas.
Recommendations
Ultimately, a number of energy security
agendas in the Baltic nations appear
to serve as distraction and divergence
instead of much needed convergence. The
Baltic region has opportunities to enhance
its energy security, but these require
close cooperation rather than operating
individually. Analysts doubt whether
there is a market basis for more than one
regional LNG gasification plant and one
nuclear power plant, so a priority for the
Baltic nations is to settle on a mutually
agreed upon plan for future energy
infrastructure investment and deployment
and to start implementing it.
The Baltics would benefit from a
broader perspective on value-for-money
evaluations. For instance, interconnectors
may be more important than new LNG
facilities or nuclear power plants, even if
the former are not considered prestige
projects amongst policymakers.
Focusing on regional, near-term projects
would be beneficial for the Baltic nations.
Cooperation should be stimulated at the
regional or EU levels in order to secure
open and connected markets and the best
options for infrastructure development.
Utilizing Domestic Resources in Poland
Poland has staked its energy future on affordable
domestic coal, and while this will ensure a level
of economic competitiveness above the EU
average in the short-to-medium term, long-term
options are complicated by the fact that older coal
power plants will eventually have to be retired.
New plants that comply with EU environmental
standards are prohibitively expensive and
potentially very difficult to finance, plus they
face both domestic and international opposition,
so Polish policymakers will soon have to think
beyond coal in order to maintain a competitive
economy. Economically recoverable coal reserves
accessible from existing mines are declining fast,
and despite sizeable domestic production, Poland
has become an importer of coal in recent years.
Perhaps surprisingly, given a fraught relationship
over gas trade and Polands stated interest in
diversifying its energy mix in order to hedge against
its dependency on Russian gas imports, the largest
single supplier of Polish coal imports is Russia,
accounting for over two-thirds of imports since
2009.
Poland has undertaken a number of infrastructure
and policy developments to address its energy
security situation. An LNG gasification plant is
under construction in the Baltic port Swinoujscie,
Poland, with expected completion by the end of
2014. Licensing to explore shale gas has attracted
major players such as Chevron, even though other
majors abandoned projects in 2013. If Poland is
successful in developing unconventional resources,
it could set a new standard and guide policy
options for other European countries. This could
also significantly reduce carbon emissions if the
predominantly coal-based power generation is
substituted with lower-carbon content gas power
generation.
Polands difficult history with neighbors has had a
direct impact on its energy security circumstances
and vice versa, as energy security issues have
complicated Polands relationships with Russia
and Germany significantly in recent years. Russia
continues to be a major concern as Poland is
vulnerable to any future cutoff or price hike
resulting from political turmoil between Russia
and Europe. In some cases, principle has trumped
pragmatics. Poland could technically have chosen
to establish interconnectors to Germany in order
to avail itself of the Nord Stream pipeline project
delivering Russian gas to northern Germany and
thereby hedged against future cutoffs through
Ukraine or the Yamal pipeline connecting Poland
and Russia directly. Considering, however, that
then-Polish Defense Minister Radoslaw Sikorski in
2006 compared Nord Stream to the 1939 Molotov-
Ribbentrop Pact, and that Nord Stream was
deliberately conceived by both Russia and Germany
to bypass Poland in the first place,
19
this was never
a realistic option.
Justified geopolitical concerns aside, if Polish
policymakers are truly focused on utilizing
domestic resources, a minimum of investments in
renewable resources should be considered to ensure
a better energy mix. Renewable energy producers
have complained that an uncertain policy and legal
environment (mainly favoring the coal industry)
is not encouraging expansion of renewables, and
in 2013, the two major international investors in
Polish onshore wind, Iberdrola and DONG Energy,
divested their Polish wind farms and withdrew
from the Polish renewables market.
19
International analyses differ on whether a land route
traversing Poland would have been cheaper than the sea route
passing Poland by.
Recommendation
Renewable energy production does not
currently appear to be connected to the
important discussion over energy security
policies in Poland, but it should be. If
Poland invests in energy infrastructure
links to neighboring countries, it could
not only trade domestically produced
energy or imported LNG, but also receive
competitive virtually free in some
instances renewable energy from
Germany or elsewhere. Instead, Poland
has created deliberate bottlenecks
and energy trade barriers by erecting
phase-shifters at the German border in
order to avoid cheap renewable German
energy from entering the Polish grid and
competing with coal.
20
The German Energiewende
In the wake of the March 2011 Fukushima nuclear
power plant catastrophe in Japan, German
Chancellor Angela Merkel, backed by strong public
sentiment and a large parliamentary majority,
moved swiftly to phase out nuclear energy in
Germany. Until the time of Fukushima, Germany
had 17 nuclear power plants; as of March 2014,
eight of them are shut down and the rest are
scheduled to shut down in 2022.
This has left a gaping hole in Germanys energy
calculus at a time when Europe is still struggling to
recover from an economic recession. Germany has
ambitiously sought to transform its entire energy
system in a renewables-led Energiewende. As
noted under the Nordic model, some European
countries have already managed to generate one-
third of their electricity demand from renewable
energy, but no country has sought to achieve this
percentage as rapidly as the Germans, particularly
20
As indicated in the next section, both Poland and Germany
share blame for this situation.
Justified geopolitical
concerns aside, if
Polish policymakers
are truly focused on
utilizing domestic
resources, a minimum
of investments in
renewable resources
should be considered to
ensure a better energy
mix.
not while being at the center of a continents
industrial and manufacturing base.
If successful, Germany would represent a
counterbalance to the U.S. unconventional energy
revolution a model not just for European energy
security, but also for the non-OECD countries that
will double global energy demand between now
and 2035.
However, the short-term results are mixed at best.
Something had to give on the energy-climate-
competitiveness triangle, and climate lost out,
in part because of a simultaneous collapse of the
European Emissions Trading Scheme (ETS), which
has led to a surge in coal being used for power
generation. For a period, Germany was importing
cheap U.S. coal, which had been priced out of
the U.S. market by shale gas, but this has since
subsided. Coal will remain an important part of
Germanys energy mix for many years to come,
and some analysts have pointed to the paradox of
Germany using coal power as the bridge fuel to
a future low-carbon or carbon-free economy as
opposed to the U.S. utilization of lower-emission
gas. The varying market mechanisms have worked
exactly opposite in these two countries. In the
United States, a surge of domestic gas led to
plummeting prices and pushed coal off the market,
while in Germany, a collapse of the ETS led to
plummeting coal prices that pushed gas off the
market.
Furthermore, the competitiveness angle has also
come under serious reconsideration following the
latest German election. Shortly after assuming
the position of economy and energy minister in
the new coalition government, Sigmar Gabriel
stated that: We have reached the limits of what
we can ask of our economy
21
in terms of energy
21
Sigmar Gabriel speech at the 21
st
Handelsblatt Jahrestagung:
http://www.sigmar-gabriel.de/reden/rede-bei-der-handelsblatt-
jahrestagung-energiewirtschaft-2014-am-21-januar-2014.
prices, and that Germany will face a dramatic
deindustrialization if it remains on the current
course. As a consequence, subsidies for renewable
energy are expected to be scaled significantly back
in the coming years, but it is unclear whether this
will be accompanied by a greater emphasis on shale
gas exploration and production,
22
and what the
future impact will be on German energy policy.
German decisiveness on implementation of the
Energiewende led to a feeling of resentment and
political friction from neighboring countries
who felt that the German government did not
sufficiently coordinate this transformation.
Furthermore, it led to an under-utilization of
the renewable resources in which Germany has
invested very heavily. In some instances, spikes
in renewable energy generation overpowered
the German grid (which has not been expanded
as rapidly as renewable generation, hence the
problem). Because the German and neighboring
grids are connected, excess electricity spilled
over into Polish, Czech, and Dutch grids, in
some instances sending utility rates into negative
territory and wreaking havoc on the economics
of national energy infrastructures. Poland and
the Czech Republic have disconnected their grids
from Germanys on several occasions, and have
since installed special transformers to prevent grid
disruption in the future. However, going forward,
these countries expect to export increased amounts
of nuclear and coal-generated electricity to the
German market, which is no small irony.
The example raises an additional concern for
the Energiewende: with the combined forces of
German ingenuity, political willpower, and social
acceptance of stomaching the costs, it may be
22
The coalition government agreement from November 2013
between SPD and CDU called for a continued moratorium on
shale gas development, but a subsequent government-solicited
report and a spirited campaign by German industry continues to
challenge this position.
If successful, Germany
would represent a
counterbalance to the
U.S. unconventional
energy revolution.
possible to scale up rapidly to, say, 20-30 percent
renewables in the overall electricity mix, but
what happens from there? Experts point to the
inherent difficulties of scaling up to 40-50 percent
and beyond, especially if both nuclear and coal
are ultimately phased out leaving few options
to balance the intermittency of renewables, not
to mention an even greater likelihood of over-
powering both the national and neighboring grids.
And that is not all. In order for a renewable-led
power generation to actually work in a country
the size of Germany, it will be necessary to erect a
substantial transmission grid from offshore projects
in the north to energy intensive manufacturing
hubs in the south, and popular discontent is
already mounting against such projects. If the
Energiewende is essentially based on a popular
demand for renewables and against nuclear power,
how will a future German government manage
demands that essentially undermine the logistical
basis for renewables?
Compounding German energy challenges, utilities
were slow to catch on to the rapid expansion of
renewables, so solar power generation in particular
was adopted quickly by individual, private
consumers, decreasing market shares for utilities
that are not likely to ever come back. In 2010, of
the 53GW renewable energy generated, about
50 percent was owned by private individuals and
farmers (39.7 percent private individuals, 10.8
percent farmers)
23
and less than 10 percent from
the four largest utilities, which in turn generated 80
percent of conventional power production (fossils
and nuclear).
Both the Energiewende and the deliberate
bypassing of Poland and the Baltic nations via
the Nord Stream gas pipeline are seen by some
analysts as a German propensity to fend for itself
23
The Oxford Institute for Energy Studies, The Energiewende
Germanys Gamble, http://www.oxfordenergy.org/wpcms/
wp-content/uploads/2012/06/SP-261.pdf, page 11.
when it comes to energy infrastructure decisions.
Some might appreciate this, as Germany after
all remains the crucially important economic
and industrial engine of Europe, but others
allege that consequences such as higher energy
prices in a region of key importance to German
exports actually erodes the purchasing power,
competitiveness, and ultimately the energy security
of an entire region.
As the 2014 Crimea crisis played out, fingers were
once again pointed toward German energy policies.
In March 2014, the day before Chancellor Angela
Merkel visited Poland to discuss Crimea, Ukraine,
and Russia, Polish Prime Minister Donald Tusk
stated publicly what many European policymakers
have been saying off-the-record for years: In the
future, we will not be able to successfully resist
against aggressive or expansionist steps by Russia
if so many European countries will be dependent
on [Russian] gas and will go even further down
the road of dependence [] German dependence
on Russian gas could effectively limit European
sovereignty.
24
Prime Minister Tusk points to a fascinating aspect
of the European energy relationship with Russia:
while this relationship is usually described as a
liability and a vulnerability, seen from the German
perspective, Russia is actually a stable, reliable,
dependable, and affordable energy supplier. In this
sense, Germany showcases the need for energy
imports, demonstrating that dependence on foreign
suppliers is not in itself a security liability. However,
energy diversification and a strong negotiating
position (economic as well as political) can be
leveraged to gain a high degree of reliability as well
as competitive prices.
Germany plays an outsized role in European energy
policy, far beyond the Energiewende, and in this
24
EUObserver, Poland urges Germany to buy less Russian gas,
March 10, 2014, http://euobserver.com/foreign/123410.
Seen from the German
perspective, Russia
is actually a stable,
reliable, dependable,
and affordable energy
supplier.
sense, a tendency to go-it-alone and resist pan-
European or regional cooperation is an energy
security challenge and a liability for Europe and
therefore for Germany itself. Solutions outlined
in greater detail below include enhanced
regional cooperation, open energy markets,
and domestic energy production, in particular
unconventional resources.
Recommendations
If all European countries could have the
same energy relationship with Russia
that Germany has, Europe would not have
significant energy security problems to
deal with. Instead of seeking to terminate
Europes energy relationship with Russia,
which is an unlikely scenario in the first
place, Europe could expand the flow
of Russian gas to Europe, but ensure
that Germany, the unions strongest
interlocutor vis-a-vis Russia, act as the
steward and guarantor of this relationship.
This would allow Germany to live up to the
promises made when Nord Stream was
created, and Russia would always think
twice before cutting off supplies or spiking
prices on gas to Germany.
If supply could meet demand without the
political and economic uncertainty brought
about by cutoffs and geopolitical events,
a Northern Corridor could deliver stable,
competitively priced, lower-carbon content
gas to Central and Eastern Europe. And
if planned reverse-flow interconnectors
materialize in coming years, the Baltics
and Ukraine could also benefit from such
a project, as it would undermine the serial
threats of cutoffs and price hikes. This
scenario would have to be accompanied
by strong antitrust and competition
rules enforced at the EU level, as well as
interconnectors and diversified supply
options coordinated amongst EU member
states. A Northern Corridor would also
benefit Russia and help reduce EU use of
coal.
Germany should establish opportunities
to engage in regional energy security
cooperation forums with her neighbors,
where issues of mutual discontent can be
addressed at a constructive working level.
A tendency to go-it-alone
and resist pan-European
or regional cooperation
is an energy security
challenge and a liability
for Europe.
A
ny extensive solution to European energy
security challenges must address the issue of
European dependency on Russian energy.
At least three overall concerns exist: 1) potential gas
cutoffs as a result of political problems, 2) non-
competitive pricing, and 3) associated rampant
corruption. Of the three, corruption issues may be
the least discussed and most difficult to address in
the long run.
In many ways, Russia can be seen as the main
driver of EU energy policy a policy area where
member states have traditionally been reluctant
to coordinate at the EU level. As one EU official
noted, Vladimir Putin should receive the
Charlemagne Prize for European integration
25

when it comes to development of an actual EU
energy policy. Regardless of who is actually to
blame for the gas cutoffs to Europe in 2006 and
2009, it is fair to say that these events jolted efforts
to approach energy security from a European-
wide perspective, as opposed to purely national or
regional.
Following the Russian invasion of Crimea in March
2014, energy security once again jumped to the top
of the European agenda. At an EU Council meeting
on March 20-21, national leaders requested that the
EU Commission conduct an in-depth study of EU
energy security and a comprehensive plan for the
reduction of EU energy dependence,
26
. Subsequent
news headlines addressed ideas to wean Europe
off Russian gas, some describing a total gas war,
when all pipelines are turned off.
27
This is no small
task, as Russia is usually the top exporter of gas to
European markets, only occasionally topped by
25
The International Charlemagne Prize of Aachen is awarded
annually for distinguished service on behalf of European unifica-
tion.
26
http://www.consilium.europa.eu/uedocs/cms_data/docs/
pressdata/en/ec/141749.pdf.
27
http://www.nytimes.com/2014/03/24/business/international/
weaning-europe-from-russian-gas.html.
Norway. The notion of Europe ridding itself, and
somehow replacing, 130 billion cubic meters of gas,
one-third of the European market, is daunting, and
begs the question of whether this should ultimately
be a policy goal for Europe.
Rather than blocking out Russian gas altogether,
a more realistic approach for policymakers, at
least for the next decades while Russia remains
a significant supplier for Europe, would be to
maximize the amount of Russian gas entering the
European market under competitive contracts
and prices. The European Commission is working
toward this outcome, but national policies continue
to dominate the energy landscape, so European
leaders should seek to strengthen central decision-
making and enforcement on energy matters. In the
best case scenario, with a fully implemented Third
Energy Package and a settled Gazprom antitrust
case, European energy would be traded as a purely
economic commodity on spot markets, without
take or pay clauses or oil price indexing, and
resources would be fungible as soon as they enter
the integrated European energy market, allowing
for distribution anywhere in the EU through built-
out, reverse-flow infrastructure.
Such a scenario would address many of Europes
current headaches toward dependency on Russian
energy supplies. Even if Gazprom remains a state-
owned enterprise with the ability to use energy as a
strategic, political tool, it would be forced to adopt
(or at least play by) market principles in Europe.
It is worth considering that increased Russian gas
could help reduce EU use of coal and replace it with
a lower-carbon, economically competitive fuel in
order to improve climate policy goals.
Neither European nor Russian energy policymakers
should lose sight of the fact that longer-term
developments could play out to Europes advantage.
With waning European demand as a result of
energy efficiency and renewables investments,
What to Do about Russian Gas?
5
Regardless of who
is actually to blame
for the gas cutoffs to
Europe in 2006 and
2009, it is fair to say
that these events jolted
efforts to approach
energy security from
a European-wide
perspective.
combined with little or moderate economic
growth, the outlook for Russian energy in Europe
is flat lining at best, even with declining European
domestic production. Add to this the future options
for diversification through the Southern Corridor
and increased LNG trade. If these dynamics
continue over time, Russia could face security of
demand issues with associated downward pressure
on pricing.
In the current scenario, Russia benefits from
European energy markets being walled off and
poorly connected and from the lack of cooperation
between European energy decision-makers.
Gazproms ability to negotiate politically motivated
energy deals is one reason why prices for Russian
gas follow an inverted economic logic, which makes
it cheaper in Armenia and Serbia than for instance
in Ukraine, even though Russian gas transits
Ukraine to reach both destinations and Ukraine
consumes significantly greater quantities. In order
to reduce Russias ability to use energy resources as
a political commodity, and to ensure that European
competition and antitrust regulations are being
honored, DG Energy
28
could place negotiators
in EU government teams to bolster adherence,
add competence, and to signal European unity on
energy issues.
The biggest loser from the conflict in Crimea and
Ukraine may well be Gazprom, as Europeans will
escalate energy diversification and interconnection
routes and insist on renegotiated contracts without
take or pay and destination clauses. As a greater
percentage of the European gas market will be
sold through spot pricing contacts in years to
come, Gazprom will be forced into this market as
well. An antitrust case against Gazprom is under
development at the European Court of Justice, and
the South Stream project has been put on hold
by the European Commission. If Gazprom, and
28
The European Commissions energy experts.
thereby the Russian national budget, has not started
to feel the pinch from these measures yet, they
will soon. In the long run, Russia needs security of
demand from European markets, but its actions as
an unreliable supplier will undermine this goal at
least for the foreseeable future.
Recommendations
Europe must complete the internal
market for energy and ensure that any
energy resources that enter the union are
fungible, and able to be sold or transferred
elsewhere along market principles, without
destination clauses.
Strong antitrust and competition
measures such as unbundling of
upstream, downstream, and transit assets
must be put in place to ensure a diversity
of energy providers with access to transit
infrastructure into the European market.
Interconnected infrastructure has to
be put in place, either through market
incentives or central EU funding where
market mechanisms do not currently
support it. The Connecting Europe
Facility and Projects of Common Interest
should receive increased funding for
the specific purposes of strengthening
energy infrastructure in order to complete
the internal energy market and enhance
energy security for all of Europe in the
event of cutoffs or political standoffs.
In the current scenario,
Russia benefits from
European energy
markets being walled off
and poorly connected
and from the lack of
cooperation between
European energy
decision-makers.
I
n recent years, events such as the Fukushima
disaster, North American hurricanes, the Libya
conflict, and even a short lived strike by offshore
workers in the North Sea have led to energy market
gyrations with the potential to disrupt fragile
economic recovery in the transatlantic space. In
the longer term, failure to meet energy supply
needs in the United States or amongst U.S. allies
raises questions of core strategic importance to
future national security, international stability, and
economic growth.
If it is true that European integration is driven by
crisis response and external pressure, gas cutoffs
in 2006 and 2009 to Central and Eastern Europe
and the Baltics exposed the need for integration
of European energy markets, not just to protect
against occasional threats from cutoffs, but also
to hedge against uncompetitive pricing and poor
negotiating positions when acquiring energy
resources on international markets.
Establishing a European internal market for
energy has been an official EU objective since
2005, although conceivably it could be argued that
because the European Union evolved out of the
Coal and Steel Community, this has been a latent
objective for European cooperation since the outset.
While there are tangible results to show, including
three significant reform packages at the European
level, many EU member states remain completely
dependent on imports to meet their energy needs,
while others are forced to pay non-competitive
prices because they lack alternative options.
National leaders routinely request policy responses
from the EU Commission to address diversification
and pricing issues but subsequently undermine the
Commissions options for action by maintaining
national authority over energy decisions. Energy
issues, which are inherently transnational, end
up as a patchwork of national policies, often in
tension or outright competition with each other. No
common Europe-wide energy policy will emerge
if this setup is maintained. European consumers,
workers, and industry will pay a price over the long
term, and European competitiveness will suffer.
In the wake of Europes economic crisis from 2008
onwards, competitiveness challenges have come
into much greater focus, including European
energy prices, which in some cases are two or three
times higher than prices paid by U.S. industry and
consumers. High energy prices and the lack of
energy diversity are currently the two main policy
drivers for European energy market integration
and should convince European leaders to place
greater powers at the EU level. These dynamics
have already led to a shift in the relative influence
between the EU climate and energy commissioners
and their respective policy portfolios.
In recent years, discussion and analysis of European
energy security has focused narrowly on the
need for diversification of external resources,
specifically a Southern Corridor from the
Caspian to European markets. While this is indeed
an important goal for a number of reasons, the
initial capacity of the Trans-Adriatic Pipeline will
be approximately 10 billion cubic meters per year,
which amounts to around 2 percent of Europes
annual gas demand. It is reasonable to consider
this an important element in an overall solution
to Europes energy security, but it is hardly the
deciding factor.
Stringent application and enforcement of EU
competition rules toward the internal energy
market is one of the strongest policy options for
European energy security, but would have to
be applied to both existing and potential future
infrastructure in order to be truly effective.
Recommendations
The EU Commission must receive a
stronger mandate from national leaders in
European Union Approaches
to Energy Security
6
In the longer term,
failure to meet energy
supply needs in the
United States or
amongst U.S. allies
raises questions of core
strategic importance to
future national security,
international stability,
and economic growth.
order to strengthen central coordination
of European energy policy toward market-
based, competitive solutions. This would
raise revenue opportunities for energy
infrastructure, lower costs for consumers,
and guarantee a far more efficient use of
the full range of energy mixes.
Following the 2008 economic crisis,
European leaders subjected their budgets
and economic policies to peer review and
scrutiny. The same should happen with
long-term energy decisions in the form of a
European Semester for energy policy, as
these affect the economic well-being and
security of the union as a whole.
The EU Commission should develop an
annual report on energy cooperation,
analyzing the level of bilateral
collaboration on energy issues throughout
Europe, including market integration,
bottlenecks, and energy-related trade
restrictions.
The technical skills and expertise of DG
Energy and DG Competition should be
utilized in any future energy negotiations
conducted by EU member states,
particularly smaller ones with weaker
negotiating positions, for instance by
placing EU Commission staff in negotiating
teams throughout Europe (this has already
happened in some cases).
European leaders can rightfully pride
themselves on global leadership on
climate issues, but precisely because of
this leadership, further steps should be
proportional and competitive. Further
lowering of European CO
2
emissions will
not have any impact on global climate
change unless other regions follow
along, so Europe has to prove that
emission reductions can happen through
economically competitive policies. The
U.S. example of achieving emission
reductions through energy policy is
instructive because lower carbon content
gas has replaced coal through economic
mechanisms. Europe should therefore
explore all options to increase domestic
production of natural gas, including shale
gas, toward this end, while continuing
to expand renewable energy production.
It is not likely that European gas prices
will reach U.S. price levels, but increased
European production will lower prices
as well as import dependency, both of
which are needed. Europes leadership on
energy efficiency can also be leveraged as
an example of how to achieve economic
results through conservation and
innovation.
EU climate policy is ambitious and
impressive by any measure, but a
rebalancing of climate and energy
policies with significant attention paid to
competitiveness concerns is long overdue.
This could be achieved by increasing the
amount of joint hearings between the
relevant committees of jurisdiction on key
legislation and reports.
As a thought experiment, EU policymakers
should be forced to answer the question
of what the most optimal arrangement for
energy infrastructure would look like if the
EU were one large country. It is difficult
to answer the question precisely, but
most analysts, when asked, would agree
that the current arrangement is far from
optimal. If an internal market for energy is
to materialize, someone has to be able to
answer this question.
Europe should explore
all options to increase
domestic production of
natural gas, including
shale gas.
I
n December 2013, the World Economic Forum
estimated that the average GDP per unit of
energy use extracted in BRICS economies is
$5.40 dollars, compared with an average of $10.00
in EU28. In other words, EU countries get more
bang for their buck when it comes to generating
value out of energy sources. This is very significant,
but rarely considered.
Most discussions about energy security are likely
to focus on security of supply, first and foremost.
However, energy security should reasonably be
construed as a broader phenomenon, involving,
at minimum, supply, cost, reliability, commercial
sustainability, source diversification, and
environmental impact.
An alternate global ranking for energy security
would flip many conventional findings on their
head. For instance, three of the lowest achieving
regions for energy efficiency and energy intensity
are the Middle East, Russia, and Central Asia,
all regions with significant energy resources and
therefore little incentive to focus on conservation
on efficiency. Yet this is rapidly changing. These
regions are challenged by skyrocketing domestic
energy consumption, poor resource management,
excessive industrial and residential subsidies that
are very difficult to reform, poor fuel economies,
and poor energy mixes.
European industry and consumers may reasonably
complain about excessive prices of energy, but these
prices do force efficient behavior and innovative
approaches to creating more value with less energy.
If international projections are correct, global
demand for energy will rise by about 40 percent
from 2012 levels over the next two decades, almost
exclusively driven by non-OECD countries such
as China and India. According to the BP Energy
Outlook 2035,
29
however, energy demand in the
29
http://www.bp.com/content/dam/bp/pdf/Energy-economics/
Energy-Outlook/Energy_Outlook_2035_booklet.pdf.
EU has peaked and is expected to fall by 6 percent
by 2035. The regions energy intensity is expected
to decline by 36 percent during the same period.
Energy demand per capita in the EU will decline
by 8 percent and will be overtaken by China in
2032. Its share of global energy consumption will
fall from 13 percent in 2012 to 9 percent in 2035.
If the major impacts of resource scarcity or rising
prices on energy resources are felt primarily in non-
OECD countries, this may eventually balance out
Europes non-competitive energy prices. If Europe
manages to increase domestic production and
lower prices in decades ahead, this would greatly
strengthen Europes energy security circumstances.
Recommendations
Europe should build on its strengths
and capitalize on leadership in energy
efficiency, energy intensity, and energy
diversity. Europe is a global leader in these
fields and will be able to benefit from a
flat-lining or even decreasing demand in
coming decades as other regions of the
globe increase their demand and struggle
to invest in similar efficiency gains.
Europes leadership position on these
measures will eventually translate into
a competitive edge. EU should see itself
as the global leader in the geopolitics of
energy efficiency.
European policymakers should focus more
on system architecture than on individual
infrastructure projects. This would
enable better use of diverse national
resources and also hedge against future
disruptive evolutions in energy markets
(for example U.S. LNG terminals). The
best way to hedge is to integrate markets
(Nordic example), build reverse-flow
interconnectors, and lower trade barriers.
The Geopolitics of Energy Efficiency
7
An alternate global
ranking for energy
security would flip many
conventional findings on
their head.
U.S. Leadership on International
Energy Diplomacy
The U.S. energy revolution has certainly caught
the attention of European policymakers, and led
to lively public debate about the possibilities for
developing unconventional resources in the U.K.
and Poland; Baltic, Croatian, and Polish interests
in purchasing U.S. LNG; and EU trade negotiators
seeking to address U.S. energy export restrictions.
Another significant U.S. development has been less
noticed in Europe. In December 2007, President
George W. Bush signed an omnibus energy bill into
law,
30
which contained forward-looking provisions
designed to enhance the U.S. governments ability
to engage on energy issues across the globe.
A key provision was championed by U.S. Senator
Richard Lugar (R-IN), capping multi-year
efforts to integrate energy security interests into
foreign policy decision-making and provide a
government framework to address the foreign
policy implications of energy. Specifically, Senator
Lugar sought to ensure a more robust coordination
of the U.S. Department of States energy diplomacy
efforts by creating a position of coordinator for
international energy affairs to manage and lead
these efforts.
31

From 2009-10, the State Department conducted a
Quadrennial Diplomacy and Development Review
(QDDR), a study to establish a long-term blueprint
for leveraging U.S. civilian power through the U.S.
State Department and U.S. Agency for International
Development. The QDDR report suggested a
number of initiatives to ensure that the State
Department was properly structured to deal with
global issues transcending the regional bureaus
30
HR6/Public Law 110-140, Energy Independence and Security
Act of 2007, 110
th
Session of Congress.
31
For further details, see S. 193, Energy Security and Diplomacy
Act of 2007 and Senate Foreign Relations Committee report
110-54.
where policy coordination and development is
usually anchored.
The QDDR specifically recommended the
establishment of a new Bureau for Energy
Resources, under the under secretary for
economic growth, energy, and the environment,
32

tasked with wide ranging goals such as fostering
international cooperation toward a global clean
energy future and bringing together diplomatic
and programmatic efforts on energy commodities,
electricity, renewable energy, transparent energy
governance, strategic resources, and energy poverty.
The Bureau for Energy Resources (ENR)
33
is
currently led by Special Envoy and Coordinator
for International Energy Affairs Carlos Pasqual,
an accomplished career diplomat
34
who oversees
a network of diplomats with energy expertise
stationed at U.S. embassies across the globe to
monitor, analyze, and report on current and long-
term developments on energy policy and markets.
This investment in international energy diplomacy
dwarfs anything the European Union or individual
EU member states have to offer. The establishment
of the Bureau of Energy Resources and energy
attachs deployed abroad will enable the United
States to analyze, react to, and ultimately shape
long-term energy developments across the globe.
U.S. capacity to conduct energy diplomacy is a
model for success and should be emulated by
Europe, both at the member state and EU levels.
Europeans would have a lot to gain from developing
the capacity to integrate energy security interests
into foreign policy decision-making, including
into EU climate and development policies. When
the European External Action Service (EEAS) was
32
2010 Quadrennial Diplomacy and Development Review, page
40.
33
http://www.state.gov/e/enr/.
34
http://www.state.gov/r/pa/ei/biog/164148.htm.
U.S. capacity to conduct
energy diplomacy is a
model for success and
should be emulated by
Europe.
launched in 2010, it was done along a traditional
architecture, with five managing directors to cover
geographic regions and an additional two to cover
crisis response and global and multilateral issues.
The EEAS has not devoted any significant resources
to focus on cross-cutting issues such as energy
security, in part because such issues traditionally
fall under the auspices of the commissioner and
director-general for energy. In an internal review
conducted by the European External Action Service
in 2013,
35
the EEAS concludes:
Close co-operation between the EEAS and the
Commission is also vital on the various global
issues where the external aspects of internal
EU policies have a growing foreign policy
dimension. This includes areas such as energy
security, environmental protection, and climate
change [] Yet, following the allocation of
responsibilities and resources at the creation
of the EEAS, virtually all the expertise and
capacity to manage the external aspects of
these polices remained in the Commission
services.
36
In other words, EEAS has limited expertise when
it comes to working on international energy issues,
so the commissioner and director-general for
energy does not have direct access to a sprawling
network of delegations (embassies) and staffers
deployed abroad to engage directly in energy policy
development and analysis, and report back to the
relevant policymakers.
National foreign services throughout the EU have
similar limitations, where energy issues are most
frequently handled by regional or national experts
and viewed exclusively through this lens. This
creates a natural tendency for tunnel vision or
35
http://eeas.europa.eu/library/publications/2013/3/2013_eeas_
review_en.pdf.
36
ibid, page 8.
an overly narrow view of issues that are inherently
regional if not truly international by nature.
The EU may not be on the cusp of solving this
challenge. As one EU bureaucrat noted, If your
long term policy is to phase out fossil fuels and rely
exclusively on domestically or regionally produced
renewable energy three or four decades from
now, why would you care about the international
implications of fossil energy?
To this point, one could argue that even if countries
(all of the Nordic countries have explicit long-term
policies to de-carbonize their economies, for
example) are successful in achieving this goal a
big if there is little evidence that the rest of the
globe will follow suit any time soon. Herein lies
an additional motivation for engaging ambitiously
in international energy diplomacy. Breaking the
demand curve of China and India, the largest
projected consumers of energy resources from
around 2035, would be a crucially important factor
toward the EU achieving their global climate
change ambitions. This is a multifaceted goal to be
sure, but would certainly require hands-on policy
work with China, India, Russia, Central Asia, and
beyond, specifically around international energy
issues. Notably, the ENR Bureau is engaged in this
endeavor.
37
Recommendation
European governments should follow the
U.S. example of developing competent,
long-term energy analysis as a core
function of government. Investing in this
ability allows for serious energy diplomacy
and economic statecraft, not just during
37
For example, in a September 25, 2013, speech at Columbia
Universitys Center on Global Energy Policy, Special Envoy and
Coordinator for International Energy Affairs Carlos Pasqual
addressed how non-OECD energy demand growth will likely
determine international energy pricing, in turn generating a
national security and economic interest for the United States:
http://www.state.gov/e/enr/rls/rem/2013/218820.htm.
Breaking the demand
curve of China and
India...would be a
crucially important
factor toward the
EU achieving their
global climate change
ambitions.
crisis situations such as Egypt, Libya, or
Ukraine in recent years, but also to guide
long-term policies toward future demand
hubs such as Asia and Africa.
A Transatlantic Energy Alliance
The transatlantic dialogue on energy security
is oddly incongruent. Decision-makers in the
United States often appear to have greater concern
about European energy security than Europeans
themselves. Consecutive U.S. administrations
have advocated forcefully for energy supply
diversification in Europe, greater domestic
production, lowering energy prices, and conducting
hands on pipeline politics and energy diplomacy,
for instance in relation to a Southern Corridor to
transport Caspian oil and gas to Central, Eastern,
and Southern Europe to hedge against over-
reliance on Russian energy resources. Washington
policymakers have also expressed greater concern
about the potential repercussions of both Nord
Stream and South Stream projects than many of
their European counterparts.
Significant improvements in the U.S. energy
outlook following advances in unconventional
resources may lead to a change in Washingtons
approach to the geopolitics of energy, but the
United States can ill afford to disengage from
Europes energy calculus, because collective security
and resilience could ultimately be undermined by
threats to allied energy needs.
Europeans, on their end, seem more focused
on achieving a fossil-free economy in order to
address the impacts of climate change. While
far outpacing the United States and other parts
of the world on climate policy, this strategy has
exacerbated European dependence on gas imports
from Russia in the short term and created the
potential for tangible strategic security threats.
European policymakers are frequently frustrated
with the lack of U.S. buy-in on the climate change
agenda and struggle to find an attentive audience
for these concerns in Washington, DC. Despite
public acknowledgements about the importance of
energy security from many European governments,
the European Union, and NATO, Europeans have
ultimately failed to bring about the conditions
needed to establish energy security, and some
nations remain as dependent as ever on a single,
unreliable supplier.
Divergent transatlantic approaches lead to a lack
of coherence and prohibit forward movement on
resolving energy security issues. As a consequence,
an additional Russian pipeline to Europe could
soon become a reality, further entrenching regional
dependency. Because U.S. and European economies
and security interests are so highly integrated and
interdependent, energy security remains a common
transatlantic interest, and leaving key strategic
issues unresolved is not a tenable option. Together,
the United States and European allies could meet
these challenges, but progress will remain elusive
if additional convergence amongst executive,
legislative, and private sector stakeholders does not
occur soon.
Substantive engagement could reasonably be
expected from transatlantic lawmakers and
governments on issues ranging from connecting
Central Asian and Caspian energy resources to
European consumers, to bringing northern Iraqi
resources to market, active diplomacy following
Eastern Mediterranean energy discoveries in
contested waters, permanently securing the Shah
Deniz consortium from Iran related sanctions, and
ending Russian dominance as European energy
supplier. If transatlantic decision-makers award
insufficient attention to energy security issues, it
would draw into question a series of assumptions
about the priority of achieving energy security
as a core security concern at both national and
international levels.
Despite public
acknowledgements
about the importance
of energy security...
some nations remain
as dependent as ever
on a single, unreliable
supplier.
The on-going negotiations over the Transatlantic
Trade and Investment Partnership (TTIP) offers
a rare opportunity for the transatlantic alliance
to address European energy security issues by
establishing a transatlantic energy alliance based
on open and liquid energy markets.
38
The European
Commission has published a forward-looking
negotiating position on raw materials and energy,
which includes preferences to address export
barriers, support open trade, non-discriminatory
access, and market principles regarding access,
distribution, trade, and sale of raw material and
energy at the multilateral trade level. In an effort to
wrench open the discussion of U.S. energy export
restrictions, the EU Commission is seeking a broad
agreement encompassing crude oil, natural gas,
electrical energy, and renewable energy. According
to the EU position, Disciplines agreed in the
transatlantic context could serve as a model for
subsequent negotiations involving third countries.
It also sends a powerful signal to other countries
that trade in raw materials and energy can be and
will be subject to global governance, including the
fundamental principles of transparency, market
access, and nondiscrimination.
39
A transatlantic
energy alliance could affect global energy trade
and contribute to economic growth, but hinges on
whether the United States is willing to implement a
long tradition of opposition to resource nationalism
at home.
Energy security represents a potential area of
collaboration between the European Union and
NATO, two influential policy organizations that
seem to have a permanent interest in cooperating
but have very few tangible results to showcase.
38
I have previously expanded on this idea together with David
Koranyi from the Atlantic Council and I am deeply grateful
for his insights. Towards a Transatlantic Energy Alliance?
February 5, 2014, http://www.huffingtonpost.com/david-
koranyi/toward-a-transatlantic-energy-alliance_b_4730227.html
39
http://trade.ec.europa.eu/doclib/docs/2013/july/
tradoc_151624.pdf.
Essentially, the EU has the soft power tools to
alleviate NATOs hard security concerns, but
various bilateral squabbles stand in the way of
actual cooperation and represent a lost opportunity
for both.
Recommendation
Europe should develop a more strategic
approach toward energy security issues,
for instance by incorporating energy
trade in major trade agreements, and
addressing the non-commercial aspects
of energy trade through classic diplomatic
tools.
Energy security
represents a potential
area of collaboration
between the European
Union and NATO.
A
chieving energy security in Europe requires
significant international coordination
across a broad range of policies. However,
the ability of transatlantic governments to secure
mutual strategic and economic interests in relation
to energy security is reduced if policymakers are
not prioritizing the issue. European energy security
will not be advanced by wishful thinking, and
setbacks from entrenched national protectionism
remains are always likely. Forward movement
will require specific, dedicated policies to address
shortcomings and barriers, even if solutions
upset well-established constituencies or national
champions in some instances.
The Ukraine and Crimea crises have exposed a
deep-rooted European vulnerability and significant
policy disagreements. Europe must decide
whether to utilize all available options to improve
circumstances, or to simply continue coping with
the current arrangement of high energy prices, high
energy import levels, and regional dependency on
an unreliable supplier.
That said, there is a case to be made for optimism
going forward. The European Union has made
great strides in advancing pan-European energy
policies, and significant developments will
come to fruition in the next five to ten years,
including implementation of the Third Energy
Package, the Connecting Europe Facility and
Projects of Common Interest, advancement of
the Energy Community, and settlement of the
Gazprom antitrust case. All of these will act as
drivers of positive policy evolution and market
developments and strengthen the security of
supply, competitiveness, and efficient use of energy
resources.
Europe has an opportunity to identify and correct
its apparent weaknesses through targeted initiatives,
which include improved energy cooperation and
market integration, enhanced competition, removal
of internal energy trade barriers and bottlenecks,
and increased European production and storage
investments.
This report has identified a range of
recommendations to bolster European energy
security. The Nordic practice of integrating
energy markets and trading renewable energy
could be a model for other regions, particularly
as renewable energy technologies continue to
become cost effective and less dependent on
government subsidies. Policymakers in Europe
should place greater emphasis on energy market
architecture than specific, often politicized projects
and position their nations better if disruptive
evolutions were to occur in international energy
markets in the future. In some instances, energy
policy in Europe has become a partisan or national
distraction, as opposed to an opportunity for
mutual gains through collaboration. It is not an
easy task to predict what Europes future needs or
circumstances will look like, but Europe as a whole
should address the common interest in funding
costly interconnectors, storage facilities, and other
critical infrastructure that will be necessary across
a range of scenarios, even if these projects are less
prestigious for national policymakers to embrace.
An open and connected European energy market is
a prerequisite for progress.
Some Europeans will have to move out of their
comfort zone and acknowledge the need for
development of unconventional resources, while
others will have to embrace renewable energy
or phase out fossil fuels at a slower pace than
currently envisioned. If a real energy emergency
were to occur, it is currently unclear which reserves
Europeans would be able to lean on, apart from U.S.
coal or Qatari gas perhaps.
Germany plays a unique role in European energy
security, and while its Energiewende is still at an
early stage, successful implementation will be a
If a real energy
emergency were to
occur, it is currently
unclear which reserves
Europeans would be
able to lean on.
Bolstering Energy Security in Europe:
A Case for Optimism
8
game changer not just for Europe but far beyond.
Germany has another special role in its energy and
economic relationship with Russia, simultaneously
a matter of controversy and opportunity. Germany
could play a key role in securing competitively
priced Russian gas to a large part of Europe if it
agrees to manage relations with Russia on behalf
of other European gas importers. A successful
relationship would achieve security of supply for
Europe and security of demand for Russia, but only
if European antitrust and anti-monopoly rules are
rigorously applied and enforced.
Positive steps are being taken in this direction,
as the European Union continues to implement
an internal market for energy, where energy
resources entering the EU are fungible, and
external suppliers must observe EU competition
regulations. Sadly, national interests have stymied
progress, but the Ukraine crisis may turn out to
be a turning point that focuses sufficient political
attention to make progress. The EU has also made
significant investments in infrastructure through
the Connecting Europe Facility and Projects of
Common Interest, which will progress until at least
2020.
Greater emphasis should be applied to cooperation
across Europe. The EU could utilize a European
Semester model of forced peer-review amongst
national leaders of major energy policy and
infrastructure decisions, and the European
Commission could aid this process by analyzing
and publicizing an annual report on energy
cooperation between nations and regions, in
order to stimulate collaboration and market
integration and eradicate deliberate bottlenecks
and restrictions. The Commission could also aid
individual nations by lending technical expertise
to negotiating teams and utilities as they negotiate
future contracts with external suppliers.
European climate and energy security ambitions
are at loggerheads in certain instances, but this
situation is evolving as European leaders seek to
address competitiveness concerns relating to high
energy prices. European policymakers should
analyze the U.S. example of achieving emission
reductions through energy policies that favor lower
carbon-content fuels such as gas, and examine
whether this strategy could be replicated in Europe.
The U.S. governments ability to conduct energy
diplomacy and developing long-term energy
analysis at the global scale should be another area
of inspiration for Europeans, as this has allowed the
United States, particularly the State Department,
to respond in a targeted way to the current crisis
in Ukraine, and likely to future energy-related
conflicts as well. As Europes import dependency
will increase in the future, it is critical to develop
these capabilities at the EU level in order to respond
and react accordingly.
Finally, Europe should seek to capitalize on its
competitive advantage as the global leader in the
geopolitics of energy efficiency. As global demand
for energy resources will rise during the next
decades, Europe will benefit from decreased energy
demand since prices are likely to rise and resource-
related conflicts likely to ensue. This leadership
position could provide opportunities for European
competitiveness and a potential rejuvenation of its
production and manufacturing industries.
It is reasonable to conclude from the current
conflict in Ukraine that the 2006 and 2009 cutoffs
did not spur sufficient European action. European
energy security could very well be improved five to
ten years from now, but real political action has to
take place today to achieve results in this timeline.
European energy
security could very well
be improved five to ten
years from now, but
real political action has
to take place today to
achieve results in this
timeline.
OF F I CE S
Washington Berlin Paris Brussels
Belgrade Ankara Bucharest Warsaw Tunis
www.gmfus.org

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