Europe must invest in energy security

Reinforcing Europe's security of energy supply will require strong economic and political support, writes François Trévoux.

By Francois Trévoux

18 Dec 2014

Late last year, as events unfolded in Ukraine, the security of Europe's energy supply made its way back to the heart of the political debate. This has been further reinforced in recent months, with a growing recognition that, in the current weak macroeconomic climate across much of Europe, it is necessary to bolster investment in core infrastructure. Commission president Jean-Claude Juncker's investment plan, if agreed, is likely to target investments in European gas and electricity networks.

This renewed political attention on investment in Europe's energy network should be welcomed. But can the projects be delivered in a reasonable timeframe? There are at least two grounds for broad optimism. At European level, solid progress has been made over the last few years to identify investment needs. A comprehensive pipeline of 248 projects of common interest (PCI) required by 2020 has been agreed with member states. Moreover, although many of these projects are undeniably complex to deliver, the technologies involved are broadly mature, the risks are well understood and the standard financing models are, in principle, well known by financial markets. This bodes well. Nevertheless, challenges remain for many proposed projects to overcome regulatory, financial and technical barriers. We offer the following four points within this debate.

"Given the macroeconomic position of Europe, it is critical to select projects which bring real economic net benefits"

First, given the macro-economic position of Europe, it is critical to select projects which bring real economic net benefits. This requires a careful assessment and can be complex for projects with an important supply security dimension. National regulators can and do play an important role in this regard.

Second, sustained high-level political support is required to accelerate delivery, particularly for interconnectors. The PCI framework is an excellent starting point, but more can always be done to align interests across borders over a period which is likely to extend beyond one electoral cycle.

Third, it is easy to underestimate the importance of environmental and social constraints. These are very real and a fine balance must be struck between local, national and European interests, supported through a streamlined administrative process.

Finally, given the capital intensive nature of many of these projects, it is crucial to reduce the cost of capital associated with raising finance – something which ultimately translates into lower energy bills for customers. In this regard, experience shows the importance of involving financiers early into the project planning and design phase. Indeed, should the Juncker plan be agreed, this may provide an additional source to accelerate financing, particularly for some of the network companies in Europe currently finding it difficult to raise commercial debt.

These elements are nicely illustrated by one recent project financed by the European investment bank (EIB) – the French-Spanish electricity interconnector (Inelfe). Given the low interconnection rate between the two countries, and significant differences in the mix of power generation and demand patterns, the project had a strong economic rationale. In spite of this, the project was held up for several decades due to resistance from the local community and environmental protection issues. The project was finally unblocked in 2007 through a combination of strong intergovernmental support, aided through the work of European coordinator Mario Monti, extensive public consultation influencing the project design – notably underground cabling of a key section crossing the Pyrenees – and subsequent financial support from the EU budget and the EIB. Construction started in March 2012, and is due to be completed in the summer of 2015.

 

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