The EU must settle its gas bills or face problems down the road
Prompted by Russia’s February 2022 invasion of Ukraine, Regulation EU 2022/1032 was enacted updating the earlier legislation.
The Regulation mandated that gas storage facilities should be fully employed to “ensure the security of (gas) supply,” that the facilities should not “remain unused” and that storage capacity be shared across the Union, “in a spirit of solidarity”.
The 18 member states with underground gas storage facilities were required to fill the facilities to a minimum of 80% of their storage capacity by 1 November 2022. From 1 November 2023, the target would be set at 90%.
The member states without established gas storage infrastructure were required to agree to bilateral arrangements for sufficient quantities of gas for their use to be stored in ‘neighbouring countries.’
Regulation EU 2022/1032 was formally signed into law by the EU’s co-legislators on 29 June 2022. EU Energy Commissioner Kardi Simson commended the “spirit of solidarity” that allowed the legislative changes to be made in record time.
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With the new legislation in place, players in Europe’s gas market were obliged during the summer and autumn of 2022 to source the supplies needed to meet the ambitious gas storage targets.
As the players in Europe’s gas sector scrambled to fill the mandatory gas storage targets prices rose dramatically.
The primary driver of the upward price spiral was the war in Ukraine and concerns about its continuing impact. The volume of gas being bought to fulfill the EU storage targets was another accelerant.
By the turn of the year, EU storage targets had been met. Doing so came at a very significant cost. In January 2023 estimates put the gas storage filling cost at more than €120 billion.
By the end of the 2022-2023 winter heating season, a degree of calm had returned to the European gas market. A mild winter and success in identifying and tapping into new sources of gas drove prices down rapidly.
Prices were also impacted by the huge EU reserves of gas. At the end of the 2022-2023 heating season, almost 50% of Europe’s underground gas storage was full. Less space for storing gas accelerated downward prices.
The fact that almost half of Europe’s underground gas storage capacity was already taken up posed a particular problem for EU gas suppliers. With less storage space than usual available they had less capacity to buy in supplies at a time when gas prices are traditionally at their lowest: an ‘opportunity cost” with longer-term implications.
A related and bigger headache for Europe’s gas suppliers was that the gas that they had in storage, bought when prices were spiraling upwards, was now worth very significantly less than it was when it was ‘injected’ into storage.
All of this meant that the gas suppliers who had played a vital role in ensuring that the EU had sufficient gas in hand to get through the 2022-2023 winter heating season found themselves on the horns of a dilemma. They faced the problem of either funding the cost of holding very expensive gas in storage or taking a massive ‘hit’ from selling the gas at a fraction of the cost of acquiring it. For private suppliers, either option spelled a major financial hemorrhage or even bankruptcy.
The Compensation Mechanism
Those who drafted the EU’s gas storage regulations were aware that the interventions from the private sector needed to achieve ambitious gas storage targets carried risks.
To address those risks and to prevent massive costs from being passed on to consumers, Article 6b(1) of the Regulation obliges member states to “ take all necessary measures, including providing for financial incentives or compensation to market participants” involved in meeting the ‘filling targets’ which the Regulation sets.
The compensation mechanism envisaged in the Regulation should, if fully operational protect the gas suppliers who played their part in the EU’s efforts to come through the winter of 2022-2023. Unfortunately, that is not how things worked out.
On 27th March the Commission, as required in the Regulation, issued its report on the operation of the gas storage arrangements.
The report is tightly subscribed. It gives ‘overviews’ of measures taken by Member States to fulfil storage obligations, of the time needed for certification procedures, of measures requested by the Commission to ensure compliance with “filling trajectories and filling targets” and an analysis of the impact on gas prices and potential gas savings.
While the report contains impressive statistical material it is silent on the compensatory mechanism. The word “compensation” appears only once.
If Member States had implemented the compensatory requirements as envisaged in the Regulation that silence would be understandable. However, adherence to the compensation requirements of the Regulation has anything but uniform.
Many Member States were slow to put in place arrangements to fulfil their compensatory obligations.
In the case of Bulgaria, there has been not only an outright failure to come up with an equitable arrangement to compensate private suppliers who supported the gas storage drive but the arrangements put in place support the state-owned operator Bulgargaz — to the detriment of private suppliers.
A last-minute flurry and a flawed outcome
In the weeks before the 28th March meeting of the EU Transport, Telecommunications, and Energy Council, the issue of compensation featured repeatedly in political statements in Bulgaria.
In early March Bulgaria’s Minister for Energy, Rosen Histov announced that he was working with stakeholders to find a compensation mechanism to cover the very expensive gas in Bulgaria’s underground storage.
Days before the March Council meeting Bulgaria’s President Rumen Radev proposed that the EU should step in to support Member States, like Bulgaria, to meet the drop in value of the gas injected into storage. The EU didn’t ‘bite’.
On the eve of the Council meeting Minister Histov announced that he was planning to raise the cost of gas stored by Bulgaria with fellow energy ministers in Brussels. Gas was on the agenda for that Council — it considered proposals aimed at setting common internal market rules for renewable and natural gases and hydrogen.
Two months after the flurry of statements Bulgaria has still to produce proposals that align with the compensation provisions of Regulation EU 2022/1032.
Instead of a scheme to cover all gas suppliers the Bulgarian administration has produced an arrangement that provides low-interest loans of up to €400 million to the state-owned gas operator Bulgargaz, a company fined €77 million by the EU Commission in 2018 for blocking competitors’ access to key gas infrastructure in Bulgaria, in breach of EU antitrust rules.
Loans under the scheme have not been made available to Bulgaria’s private-sector gas suppliers, a clear case of market distortion. Those companies face potential bankruptcy unless the Bulgarian authorities allow them access to the sweetheart arrangements that are available to Bulgargaz — even as a temporary measure pending the adoption of a full compensatory mechanism.
Time to step up to the plate
Having participated in the rapid creation of the mechanism of the scheme to secure the EU’s gas supplies in May 2022 all member states now need to fully ‘step up to the plate’ on the issue of compensation and adopt mechanisms that are equitable and workable. Where any Member State fails in that regard the Commission must step in.
By ensuring the security of natural gas at a time of unique challenge the gas industry did a significant service not only to gas consumers but to the wider European economy.
Without the cooperation of the gas industry as a whole governments acting alone could not have met the ambitious underground storage targets.
Failure by any member state to fulfil the compensation obligations assumed in 2022 puts suppliers and in particular private gas suppliers in difficult if not fatal financial situations.
Besides being immoral putting a financial gun to the head of the gas industry is not smart. Europe needs to preserve all the energy assets that it has. The private gas suppliers that were key players in 2022 will be needed to meet the challenges of next winter.
The Commission, the Council, and, indeed the EU Parliament instead of resting on their laurels over the success of what was achieved in the last year, need to wake up to that reality that work needs to be done to ensure that all Member States live up to the full range of requirements – including the compensatory commitments – that were signed when they agreed Regulation EU 2022/1032.
The EU must settle its gas bills or face problems down the road.
Dick Roche is a former Irish minister for European Affairs and a former minister for the environment.
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