Should the EU get tough on the gas network codes?

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Following the recent publication of the EU Agency for the Cooperation of Energy Regulators’ (ACER) annual reports on the implementation of two of the five gas network codes, it has become clear to some in the European gas industry that, at this stage, the EU’s vision of a single energy market is still something of a pipe dream.

Countries across the bloc are at drastically different stages in implementing the codes, and the question for many is whether it is time for the European Commission to turn to legal enforcement action to kick member states dragging their heels into gear.

The EU-wide gas network codes were drawn up by the commission, with help from ACER and the European Network of Transmission System Operators for Gas (ENTSOG), to harmonise gas trade and flows across Europe. The vision is to create liquid markets where users of gas networks can trade gas in an economic and comparable way, from the UK to Romania.

But realising this ambition has proven anything but plain sailing so far, with infrastructure, politics, and the way of doing business varying enormously from country to country.

In many cases, a simple unwillingness in local governments to engage has proven to be the main stumbling block – where the codes are seen more as cumbersome obligations than opportunities for development.

Delays

A trawl through the European Commission’s infringement database shows that up until this point, the commission has not taken any legal enforcement action against member states for failing to comply with requirements under the gas network codes. This is despite the fact that many countries are behind in terms of implementation.

The capacity allocation mechanism (CAM) network code, for example, was meant to be implemented by November 2015, but in its recently-published annual report on the code, ACER said that the UK and Belgium are the only EU countries to have fully implemented CAM. ACER provided a score for individual member states representing overall implementation of the code. Bulgaria achieved the lowest average score, of just 28%, followed by Croatia, which is considered to be 66% compliant.

ACER noted that the average EU compliance level for the CAM code was 82%, meaning that overall countries were on track to meet the core requirements. However, a subsequent update on the balancing code – which seeks to harmonise the way in which network users balance their positions in different balancing zones – made for much less encouraging reading. The agency said that different interpretations of the code across EU countries were leading to inconsistent national implementations, and that this flexible approach was undermining the codes and leading to delays.

It is in this context that the debate over whether the commission should turn to legal action has begun, with ACER themselves noting in its balancing code report that enforcement may be necessary in the coming years.

Benefits

Doug Wood, chairman of the gas committee at the European Federation of Energy Traders (EFET), said that while legal action may be necessary down the line, in the short term it would be better for EU countries to see what there is to gain from the codes and implement accordingly.

“We hope that individual TSOs will recognise the benefits of implementing the network codes, rather than being forced to action through a heavy-handed legal solution,” said Wood.

“There is plenty of help available to any country that seeks it in becoming compliant with the codes, but the TSOs must adopt an attitude where they see the benefits of the codes and seek help to implement them”.

This was a sentiment echoed by some other industry stakeholders, including one UK energy consultant who helped draft the codes.

“With the balancing code for example, some member states see that they have until 2019, and have become complacent and have missed opportunities. What they’ve missed is that a proper balancing market involves subtle interactions between TSOs and market players and needs carefully managed transition,” he said.

“Member states need to see that balancing is not just about obligations but also about options to improve what they’re doing and safeguard consumer interest. I’m not entirely sure that rigorous enforcement is necessarily the best way of doing things.”

Political will

The difficulties faced by regulators and transmission system operators (TSOs) in implementing the code are complex and myriad, but none is as obstructive as a simple lack of will to put them in place.

In Romania, for example, there has been an unwillingness to abolish tariffs, while Hungary is in the process of renationalising some energy assets – things that run completely counter the EU principles of free markets and competition.

“If the EU had been really strict from the get go, maybe we would be well on the way with the code,” said a second UK-based consultant.

“However, given the lenient approach that’s been taken, some member states have adopted an attitude of taking it at their own speed, not the EU’s. At the moment, the EU’s vision of a single gas market is looking less and less likely to happen.”

The enormous technicality of the code means that it is difficult to know what enforcement action would look like, and exactly which countries would be penalised.

With nearly every EU country behind with at least some aspects of the codes, it is likely that any member state facing legal action would point to others’ failures and ask why they had been singled out.

In the short term at the very least, it seems that the most sensible way to move forward would be a practical approach which encourages both sides – the commission and local governments – to recognise the legitimacy of the other. The codes need to be approached as opportunities, not as obligations.

Ultimately,however, if this mutual willingness to move forward is not adopted, then things could become far less cordial in the years ahead. jack.elliott@icis.com

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