Review of the progress in the creation of the integrated internal EU energy market- one of the five pillars of the Energy Union.

Member States are likely to reach 10% electricity grids interconnectivity target by 2020, yet problems with permitting and/or projects funding hinder the overall performance of the proposal. V4 region is located in a strategic and priority gas corridor "North-South" and has been successful so far in implementing projects intended to facilitate regional electricity and gas markets.

Energy Union as "the most ambitious project on the European continent since the times of European Coal and Steel Community" (note: EC Vice-president Maroš Šefčovič’s quote) adopted on 15 February 2015 consists of five main pillars. Creation of a single internal gas and electricity market plays a crucial role in this project. The first phase of the energy markets integration is the establishment of regional energy markets, which is why EU leaders set 10% interconnectivity target of national electricity grid by 2020. Each country should ensure the tenth of its installed electricity transmission system to be connected with the neighboring networks by that date.

Excessive investments

Several reasons explain a motivation to integrate day-ahead electricity markets.First, available capacities will be utilized more efficiently, leading to a limited price volatility; competition in the wholesale markets will be enhanced and thus the final price for customers in retail markets reduced; and renewable energy will be used more cost-effectively as well. In fact, different levels of gas and electricity prices in the EU energy markets remain a serious issue. Diversification of gas pipeline routes is expected to stabilize energy security, which is the first sphere of the Energy union.

Study prepared for the European Commission estimates that electricity markets’ integration will provide customers annual savings of €2.5 to €4 billion and gas markets’ integration of €30 billion per year with expected €82 billion investments by 2022 in both groups of projects. This is disproportionately high sum compared with previous energy investments in the history. Margins between costs and benefits of each project vary, in some cases planned investments even exceed the estimated benefits, ACER’s report states.

Projects of Common Interest

Projects of Common Interest (PCIs) with budget of €5.3 billion for 2014-2020 serve as a fundament for achieving the connectivity target. The projects are aimed at creating both cross-border gas and electricity interconnections, but also at developing national infrastructures. The second list of PCIs issued in 2015 (the first was published in 2013) contains 111 electricity projects and 77 gas projects. The European Commission authorized the Agency for the Cooperation of Energy Regulators (ACER) to monitor the progress in implementation of these projects by publishing annual reports.

Critical evaluations

Report on State of the Energy Union published in November 2015 finds "certain success in the integration of wholesale markets for gas and electricity", but also adds that progress is not sufficiently dynamic due to several factors. Different national energy policies (particularly pricing, regulation and energy tariffs), slow decision-making and permit granting are considered the most serious obstacles to the development of energy interconnection in the EU countries. At present, merely third of the Member States possesses a comprehensive strategy on energy and climate after 2020. As regards electricity infrastructure, 22 Member States have already met the 10% interconnectivity target. Gas markets have also undergone positive developments, but large price differences and inadequate market integration impede the achieved results, despite some price convergence.

ACER’s assessment of the progress is even more skeptical. In its annual report on the progress published on 05 June 2016 the agency evaluates "limited overall progress in the implementation of PCIs", as 42% of electricity and 54% of gas projects on both lists are in delay. The most common predicament for both types of projects is "permit granting," which is associated with an inadequately prepared project documentation. Project delays do affect Slovakia in particular, as it is linked to 11 projects, although there are only 2 being implemented on its territory (interconnection with Poland and interconnection with Hungary).

The regional dimension of Energy union in the V4 countries

Regarding electrical energy, the V4 countries are currently working on harmonization of electricity transmission networks and successfully completed the coupling of their national markets. Integrated day-ahead electricity market between Slovakia and the Czech Republic was established by Memorandum of Understanding in 2009. Hungary joined in 2012, and Romania on 19 June 2014. The V4 countries are hosting comparable number of PCIs -  6 in Poland, 5 in the Czech Republic, 4 in Hungary and 4 in Slovakia, which is explained by the interconnection capacities of every country.

Slovakia possesses high potential of cross-border interconnectivity due to small-scale power system. The country holds the first place among the V4 countries in terms of interconnectivity capacity since it reached 61% level of interconnectivity capacity in 2014, which exceeds 2020 and 2030 targets.

The other V4 countries perform feebler, but still above-average results, which is associated with the construction of linear structures. While construction of power transmission line in Slovakia lasts from six to eight years, for instance in the neighboring Czech Republic it takes from ten to twelve years. Hungary has 29% of interconnectivity capacity and the Czech Republic 17%. Poland is the only state in the V4 group, which is unlikely to achieve the 10% target by 2020, as it had only 2% interconnectivity capacity in 2014.

As for gas sector, the adoption of the “Road Map towards the regional gas market among Visegrad 4 countries” (source) was a significant milestone. By signing this document on 16 June 2013, Slovakia, the Czech Republic, Hungary and Poland agreed to develop and extend existing infrastructure, as well as to create a single V4 gas market. The parties pledged to "take all steps needed to establish physical interconnections between the four countries within the North-South corridor", which is a priority for the European Commission and more than half of all gas PCIs are being under way in this corridor.

Overall, the V4 countries are implementing 19 gas Projects of Common Interest (Poland- 8 Hungary- 8, the Czech Republic- 3, Slovakia- 2). This high figure is explained by poor infrastructure and lack of gas supply security. Gas connection between the Slovak Republic and Hungary became operational in June 2015, providing transmission capacity of 4.5 billion cubic meters of gas a year in the direction from Slovakia to Hungary. Interruptible capacity of 1.8 billion cubic meters of gas a year is available in the opposite direction (source).

Need to accelerate the progress

Integration of European energy markets is a key prerequisite to achieve greater stability of the EU’s economy; to respond more effectively to such challenges as imbalance of energy prices in European countries, the insecurity of gas supply; as well as to improve consumers’ conditions. Based on the achieved results of the PCIs implementation it is very problematic to determine whether Member States will manage to meet the 15% electricity interconnectivity target by 2030.

Nevertheless, V4 successfully achieve the outlined plans, as there are only two delayed projects (both related to the interconnections between Slovakia and Hungary), yet their implementation is set for 2019. In this respect, bureaucracy plays, as in many other infrastructural projects, a negative role, since the majority of PCIs are in delay resulting from bureaucracy. Therefore, consistency in drafting projects as well as a realistic assessment of their feasibility are vital and needed. It is necessary to harmonize national energy policies, which will lay the foundation for successful market organization after the creation of physical connections. Nevertheless, it is a fact that the regional and pan-European energy cooperation is a major catalyst for the development of European and national energy sectors.

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The project has received funding from the European Union’s Horizon 2020 research and innovation program under grant agreement No 785277.