The EU Should Invest in Energy Infrastructure

Alternative analysis suggests how European quest for energy security and economic growth might be mutually beneficial.

By Pikria Saliashvili
Contributing Writer
March 10, 2015

The European Union has so far proven unable to energize its economy. Economic growth forecasts remain modest and economic restructuring reforms face steep opposition. France barely passed economic reform legislation mandated by the European Commission and Greece just renegotiated its reform agenda. In short, no drivers of growth currently exist in Europe. As such, the EU should consider integrating energy infrastructure development into the economic agenda. A liberalized and unified energy infrastructure will increase EU economic competitiveness and ensure the long-term stability of energy supplies.

First, investments in energy infrastructure will increase the competitiveness of the EU energy market in the long term. For example, Lithuania successfully negotiated a 20% discount in natural gas imports after the opening of its Klaipeda LNG terminal. As for shale, President Hollande of France recently faced an active political debate about upholding the ban on hydraulic fracturing a mere two years after the legislation was unanimously approved. Given the right market conditions of high energy prices and increasing energy security concerns, shale has the potential to play a significant role in European energy markets. While the growth of both LNG and shale remains limited, a premium on energy security should prompt EU capitals to accept higher risks and costs associated with both energy sources.

In any case, a diversification of energy sources will strengthen EU political independence. For instance, Latvia is currently spearheading an effort to both create a unified energy market and reduce its reliance on Russia. The EU as a whole relies on Russia for 27% of natural gas imports. While Western European markets are more diversified, Central and Eastern European states import proportionally far larger amounts from a single source. For instance, Finland, Bulgaria, and the Baltic states import near 100% of natural gas from Russia. This dependence limits the competitiveness of the energy sector and increases the political risk of foreign policy options.

The EU should seek to minimize this foreign policy liability of energy import dependence. Russia’s cancellation of the South Stream pipeline is a direct result of the political fallout between the EU and Russia. The Kremlin claims that purely business interests motivated the shift away from building a pipeline through Bulgaria, and Moscow now talks of building a gas hub in Turkey to reach Europe through Greece. Yet the timing of the cancellation, announced in December during a downturn in the Ukrainian conflict, makes it evident that political calculations drove the decision.

The positive effects of an energy infrastructure build-up will be universal across the EU. Europe needs to account for geopolitical risks and reconfigure supply sources. Investments and development in the energy sector should become a priority for European capitals. The European Central Bank’s quantitative easing program signals an increasing willingness for expansionary spending. As a way to promote spending, finances could be devoted to energy infrastructure projects.

Any plans for energy security should comport with existing EU policy. The recently launched Energy Union project aims specifically to increase EU energy security. The EU will need to further transform its patchwork of tightly regulated national gas systems into an integrated, efficient, and unified energy market. The Energy Union project still needs to be approved by all 28 member states and represents a significant policy and a regulatory challenge. However, if explicitly linked to economic growth, this challenge would become easier to overcome politically.

To a degree, European governments already play an active role in all levels of the energy sector. The heavy involvement of the French government in the merger between G.E. and Alstom evidences the reach of politics into the private sector. Furthermore, international contracts usually take place between national government-backed utilities in Europe and government-owned foreign suppliers. These factors set up a structure in which politics of energy security sometimes outweigh business considerations.

As such, a policy subsidizing or supporting diversified sources of energy supply would not be a significant shift from current policy. Economic, business, and political considerations will not always align. Nonetheless, the three sectors can and should align on this one strategic objective of energy sector diversification.

Pikria Saliashvili is a Master’s candidate in International Affairs at the Elliott School of International Affairs. She specializes in transnational security. Her interests include exploring the dynamics between business, politics, and economics. She received a BA in Political Science, Music, and French, with a minor in economics from the University of Alabama in Huntsville.

Photo by David Wright is licensed under CC-BY-2.0

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