Bolstering European Energy Security

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FOREIGN POLICY PAPERS

BOLSTERING EUROPEAN ENERGY SECURITY

JESPER PACKERT PEDERSEN

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About the Asmus Policy Entrepreneurs Fellowship

Tis paper is the final product o the authors Asmus Policy Entrepreneurs Fellowship. Te German Marshall Fund o theUnited States launched this program in 2011 to honor Ronald D. Asmus, GMF Brussels office executive director and direc-

tor o strategic planning. Asmus, a renowned policy entrepreneur who dedicated his lie to the principle o reedom, passed

away on April 30, 2011.

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On the cover: Gas pipeline. ssuaphoto/IStockPhoto

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B E E S

F P P

J

By Jesper Packert Pedersen1

1 The author wishes to thank the German Marshall Fund for its generosity, and for supporting the enduring policyentrepreneur legacy of Ronald D. Asmus. Thanks also to the many experts and policymakers, 77 in total, who were willingto discuss this project, all of which were off the record. The author can be reached [email protected] anycomments 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

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B E E S 1

I

1

Sometimes it is the quiet, unassuming successstories 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 commonproblems 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-functioningmodel for cooperation, diversification, and security

of supply stands out amidst the challenging

scenarios. Nordic1countries 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 casesGermany are also relevant to this cooperation, so it could beconsidered a Northwestern Model in some ways. The mostextensive cooperation, however, is between the Nordic countries,and hence this offers the best model for consideration.

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T G M F U S2

E E C

2

Europe faces a number of energy securitychallenges, 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,2and 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 agenciesunanimously 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 solutionsto 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 ofenergy required per unit output, activity, or value.

a number of ways, it is puzzling. Not only is it clearthat 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 nationalgovernments 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 ofthese 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.

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B E E S 3

Twenty-first century

policymakers will

continue to grapple

with the complex

triangulation betwe

energy, climate, an

competitivenesspolicies, and Europ

yet to find a satisfa

balance.

In recent years, European energy securitydiscussions 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-AdriaticPipeline (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 LNG3and also had to adjust

for increased use of spot pricing and waningdemand in Europe.4Furthermore, 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 ifadditional 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 project5connecting 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 suchas 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.

C D

E E P3

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T G M F U S4

Energy issues are

amongst the least

ntegrated policy areas

in Europe. A pan-

European energy policy

does not exist, and

neither does a singlemarket for energy.

As Europe continues to chart a way out of the eurocrisis 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 energypackage 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.6This 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 climatefrom 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 carbonemissions 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 oftariffs in financing investment.8The 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.

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B E E S 5

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, January29, 2014 and Staff Working Document SWD(2014) 20, March17, 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 andelectricity 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 2020,10and

the explanation for this departure was directlyrelated 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 2020included 20 percent reduction in greenhouse gas emissionsfrom 1990 levels, a 20 percent share of renewable energy, and20 percent improvement in energy efficiency. Emissions cuts

and renewables levels were mandatory for member states, whileenergy 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, thoughnot connected to national targets (several EU countries havealready passed this target by the way), while further reviewingenergy efficiency goals.

11 European Commission Communication COM(2014) 21Energy Prices and Costs in Europe.

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T G M F U S6

he changing dynamics

in Europe are

indicative of a much

broader rethinking of

energy and climate

policies in the context

of a challengingperiod for European

competitiveness.

than required by international obligations,12

and that further subsidies do not lead to

further CO2emission 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 CO2emissions

in Germany have risen despite the rising costs

associated with renewable deployment under

the Energiewende.13Both 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 climatepolicies in the context of a challenging period for

European competitiveness.

12 2014 report from the Chairmen of the Danish Council ofEnvironmental Economics, http://www.dors.dk/graphics/Synkron-Library/Publikationer/Rapporter/Miljo_2014/Disk/English_Summary.pdf.

13 IHS Global, A More Competitive Energiewende: SecuringGermanys 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.

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B E E S 7

B S R E

P C S4

The Nordic model o

energy cooperation

collaboration, and

market integration

should be a model

for best practice an

considered elsewheEurope.

As a case study, this paper will focus on theBaltic 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 ArchitecturePerformance 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 energy15hasenhanced 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, 67.9percent; and Sweden, 41.6 percent according to the BP StatisticalReview of World Energy 2013.

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T G M F U S8

Energy policymakers

should give greater

iority to energy market

architecture to put it

on par with energy

nfrastructure projects.

opportunities to export renewable energytechnology 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, anduncertainty 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 technologywould be cost competitive with coal, gas

and nuclear by 2020, even if reductions in

renewable subsidies are factored in.16The

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.17It 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, isa 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.

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B E E S 9

More than two dec

after gaining politic

independence, the

Baltic nations are

struggling to gain th

energy independen

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 shif ts 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 over6 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, Lithuaniasimport 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 Balticregion.

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, thenrapidly 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.

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T G M F U S10

The largest single

supplier of Polish coal

imports is Russia,

ccounting for over two-

thirds of imports since

2009.

gas and electricity grids, and the Baltic nations arecooperating 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 isa 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 enhanceits 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 relationshipover gas trade and Polands stated interest in

diversifying its energy mix in order to hedge agains

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 of2014. 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

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B E E S 11

also significantly reduce carbon emissions if thepredominantly 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 Russiaand Europe. In some cases, principle has trumped

pragmatics. Poland couldtechnically 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 Germanyto bypass Poland in the first place,19this 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 inPolish 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 routetraversing Poland would have been cheaper than the sea routepassing 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, Germanyhad 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 renewableenergy, 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 Germanyshare blame for this situation.

Justified geopolitica

concerns aside, if

Polish policymaker

are truly focused on

utilizing domestic

resources, a minim

of investments inrenewable resource

should be consider

ensure a better ene

mix.

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T G M F U S12

not while being at the center of a continentsindustrial 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 economy21in terms of energy

21 Sigmar Gabriel speech at the 21stHandelsblatt 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 dramaticdeindustrialization 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,22and 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 notsufficiently 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 economicsof 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 socialacceptance of stomaching the costs, it may be

22 The coalition government agreement from November 2013between SPD and CDU called for a continued moratorium onshale gas development, but a subsequent government-solicitedreport and a spirited campaign by German industry continues tochallenge this position.

f successful, Germany

would represent a

counterbalance to the

U.S. unconventional

energy revolution.

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B E E S 13

possible to scale up rapidly to, say, 20-30 percentrenewables 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 projectsin 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 particularwas 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)23and 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 deliberatebypassing 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 AngelaMerkel 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 wellas 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 Germ

perspective, Russia

is actually a stable,

reliable, dependab

and affordable ene

supplier.

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T G M F U S14

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 havesignificant 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 asinterconnectors 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.

tendency to go-it-alone

d resist pan-European

r regional cooperation

is an energy security

hallenge and a liability

for Europe.

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B E E S 15

Any extensive solution to European energysecurity 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 reluctantto coordinate at the EU level. As one EU official

noted, Vladimir Putin should receive the

Charlemagne Prize for European integration25

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.27This 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 awardedannually 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, andsomehow 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 workingtoward 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,

W D R G

5

Regardless of who

is actually to blame

for the gas cutoffs

Europe in 2006 an

2009, it is fair to sa

that these events jo

efforts to approachenergy security from

a European-wide

perspective.

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T G M F U S16

combined with little or moderate economicgrowth, 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 cooperationbetween 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 Energy28

could place negotiatorsin 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 aswell. 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 startedto 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, withoutdestination 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 EuropeFacility 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.

n the current scenario,

Russia benefits from

European energy

arkets being walled off

and poorly connected

and from the lack of

cooperation betweenEuropean energy

decision-makers.

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B E E S 17

In recent years, events such as the Fukushimadisaster, 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 bycrisis 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 emergeif 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 integrationand 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

E U A

E S6

In the longer term,

failure to meet ene

supply needs in the

United States or

amongst U.S. allies

raises questions of

strategic importancfuture national sec

international stabil

and economic grow

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B E E S 19

In December 2013, the World Economic Forumestimated 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 2035,29however, 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 percentby 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 greatlystrengthen 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.

T G E E

7

An alternate global

ranking for energy

security would flip m

conventional findin

their head.

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T G M F U S20

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 intolaw,30which 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 diplomacyefforts 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 withglobal issues transcending the regional bureaus

30 HR6/Public Law 110-140, Energy Independence and SecurityAct of 2007, 110thSession of Congress.

31 For further details, see S. 193, Energy Security and DiplomacyAct of 2007 and Senate Foreign Relations Committee report110-54.

where policy coordination and development isusually 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)33is

currently led by Special Envoy and Coordinator

for International Energy Affairs Carlos Pasqual,

an accomplished career diplomat34who 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 establishmentof 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. Whenthe European External Action Service (EEAS) was

32 2010 Quadrennial Diplomacy and Development Review, page40.

33 http://www.state.gov/e/enr/ .

34 http://www.state.gov/r/pa/ei/biog/164148.htm.

S. capacity to conduct

energy diplomacy is a

model for success and

should be emulated by

Europe.

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B E E S 21

launched in 2010, it was done along a traditionalarchitecture, 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 2013,35the 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 expertsand 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 inherentlyregional 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 di