Introduction

The European Union (EU) has set objectives to achieve a number of energy targets including the reduction of CO2 emissions and raising the share of the EU’s energy consumption produced from renewable resources – the 20-20-20 targets. In order to achieve these objectives and to continue building a fully internal market whilst also bringing renewable energy from where it is generated to where it is needed and providing additional sources of gas, the EU28 need to be sufficiently connected. To upgrade existing and to build new interconnectors, substantial investments are needed and it is estimated that at least €200 billion is required over the next six years. On 14 October 2013, the EU Commission presented a list of 248 energy infrastructure projects that are of common interest (Projects of Common Interest (PCIs)), which are intended to be launched between 2014 and 2020. The list of PCIs is updated every two years and the selection of PCIs is an on-going process in order to cater for new emerging projects geared to fulfil future needs. A revised list of PCIs is expected at the end of October 2015. The PCIs will benefit from accelerated permitting through streamlined national processes and may be eligible for up to €5.85 billion of EU funding in aggregate.

Since our first briefing in December 2013, the environment for PCIs has continued to evolve:

  • the current selection process will result in fewer, and thus a more manageable number of, PCIs
  • whereas there was a perceived funding gap across the board for large energy infrastructure projects last year, the liquidity for long term debt and construction risk has changed dramatically over the last six to nine months
  • the rapidly changing geo-political situation, in particular in the eastern part of the EU and the neighbouring countries, has led to an increased focus on updating the gas supply infrastructure and strengthening the security of gas supply.

Background

The world is going through a transformation in energy use. The global population is rising, living standards are improving for many and global urbanisation is accelerating. The global population is estimated to increase from 7 to 9 billion by 2050 and demand for energy could rise by up to 80 per cent by around 2050 as it powers rapid economic development.

The current energy infrastructure across the EU is outdated and inefficient and bottlenecks prevent efficient transmission of electricity and gas from one part of Europe to the other and from one country to another. The electricity networks need to be better integrated and more powerful. New gas pipelines are required so as to allow a more diverse palette of sources of gas supply. Energy islands and disconnected regions need to be brought out of isolation and Europe’s energy market needs to be better integrated. To date, there has been limited support for crossborder transmission at an EU level. Energy infrastructure has been a matter for each Member State and each country has had a domestic focus on the development and structure of its energy infrastructure. With the PCIs, energy infrastructure has been elevated to a European level.

The energy sector across Europe has evolved rapidly over recent years. The changes in the power generation mix today and in the future require a different approach to the structure of Europe’s grids that transport power and gas. Reasons for the new approach to Europe’s energy infrastructure include:

  • the move away from centralised nuclear power generation in some markets requiring new or enhanced electricity transmission lines
  • Europe seeking gas supplies from new markets to enhance security of supply and competition amongst suppliers
  • utility scale renewables being typically further away from populated areas than traditional utility power
  • taking advantage of the cost effective power generation located in markets which are not currently connected to the largest demand centres
  • the intermittent nature of renewables meaning that more focus needs to be placed on reducing balancing costs and ensuring security of supply across Europe

We believe that the debate has now moved on from just meeting climate change and emission targets to the cost and reliability of energy supply. There is a focus amongst politicians and the media on what the cost of delivering energy to the end-user is and how the European energy sector can be made more efficient. We don’t believe that Europe is going to give up its position as the leader in sustainable development, but not at any cost.

Why do we need European energy infrastructure now?

  • Renewable energy is generated without backup and not necessarily where it is most needed
  • Political uncertainty in the Member States cannot be overcome without supply certainty
  • Energy prices cannot be controlled at acceptable levels unless energy sources are used effectively
  • Energy should be sold at best price and available where required so as to keep energy prices under control
  • Security of supply, system resilience and security of system operations are required for the single market to apply also to energy
  • The geo-political situation in countries bordering the eastern parts of the EU emphasises the need for supply diversity

The fact that energy can be transported across Europe will allow peak demand to be mitigated not only where there is renewable energy in abundance, but also where that is lacking but the demand is high. Interconnectors thus allow increased diversity of supply in that they, when fully built out and optimised, will, for example, provide renewable energy generated in the North Sea and in Norway to energy intensive industry in Germany or gas from North Africa to France via Spain. This is technically feasible, politically achievable and, in many cases, commercially viable but requires significant funding, cooperation and regulatory alignment. The benefits of interconnectors apply to most of the PCIs.

The fact that the EU has come up with this continuously evolving list of 248 projects evidences the importance and the significance of these interconnectors in the wider energy mix and targets. With the current time scale of permitting, developing, financing and constructing interconnector projects, the targets are not achievable. Equally, as these projects inherently involve more than one country, there is a potential conflict between the countries’ regulators and regulatory regimes. Each Member State has now nominated one single authority to deal with all PCI related permitting issues, which should lead to lower administrative costs and, it is hoped, more transparency.

Of the estimated €200 billion required to upgrade existing and build new interconnectors, €140 billion would be required for the electricity transmission networks and €40 billion for the gas pipelines. As a consequence of the financial crisis, however, there has been a shortage of funding across Europe, which has hit new investment in energy infrastructure particularly hard over the last few years. The Connecting Europe Facility (CEF) will assist in leveraging any funding shortfall but it will require significant amounts to be provided by the market. The nature of the investments, i.e. regulated assets providing long term steady cash flow, suits financial investors such as insurance companies, pension funds and infrastructure funds. These investors can team up with Transmission System Operators (TSOs), other network operators and promoters to fund these projects. The recent upsurge in readily available long term liquidity from these debt providers in particular, but also increasingly from traditional banks, will mean that the viable, primarily western European PCIs will not necessarily suffer from lack of funding. The PCIs that have positive externalities, are required for socio-economic reasons and are required for dealing with security of supply, but that are not economically viable, will most likely still suffer from limited funding.

The PCI initiative is a step in the right direction from the European Commission. The CEF should be deployed to assist the more financially challenged PCIs where these funds are needed rather than being applied to all PCIs. It can be queried whether any EU funding at all should be used to support the most viable projects.

In order to achieve the goals of a more connected Europe we will also need an aligned and transparent regulatory framework. Regulatory uncertainty is one of the main deterrents to investment in energy infrastructure and an ambiguous or changing regulatory environment will not attract investors’ funds which will instead be deployed elsewhere in a globally competitive environment. Whilst the available funds are more abundant than only six months ago, they are still finite and it is important that Europe retains the momentum of the current interest from the global investors.

What are the Projects of Common Interest?

On 14 October 2013, the European Commission adopted a list of 248 key energy infrastructure projects, labelled “Projects of Common Interest” or PCIs, in electricity and gas transmission, storage and liquefied natural gas (LNG), as well as in smart grids and in oil. These PCIs have been selected by 12 regional groups established by the Guidelines for Trans-European Energy Infrastructures (TEN-E Guidelines) and the CEF replaces the funding available under the TEN-E programme during the period 2007-2013. The list of PCI is undergoing regular updates and we are expecting to see a more limited number of PCIs proposed before year-end.

In order for a project to become a PCI, it needs to be necessary for at least one of the priority corridors (see below) and the overall benefits of the project shall outweigh its costs on a costbenefit basis and it needs to:

  • involve and have a significant impact on at least two EU Member States or be located in one Member State but have significant cross-border impact
  • enhance market integration and contribute to the integration of Member States’ networks
  • increase competition on the energy markets by offering alternatives to consumers
  • enhance security of supply
  • contribute to the EU energy and climate goals
  • be listed in the most recent Ten-Year-Network Development Plan and have Member State support

Once the PCIs are identified they benefit from:

  • accelerated planning and permit granting procedures
  • a single national competent authority which will act as a one-stop-shop for permit granting procedures
  • fewer administrative costs for the project promoters and authorities due to a more streamlined environmental assessment procedure, whilst respecting the requirements of EU law
  • increased transparency and improved public participation
  • increased visibility and attractiveness for investors thanks to an enhanced regulatory framework where costs are allocated to the countries that benefit most from a completed project
  • possibility to receive financial support under the €5.85 billion CEF

PCIs also carries obligations, in particular the obligation to re-apply to remain a PCI every two years and substantial reporting obligations. In fact, one of the reasons the list of PCIs is expected to be smaller going forward is that a number of project promoters and sponsors have decided to discontinue their PCI status because whilst there are benefits, the obligations are too cumbersome.

PCIs are considered on a project by project basis, but some are not realisable without others. Some PCIs form part of clusters because of their interdependent, potentially competing or competing nature. Clusters of interdependent projects have been formed to identify those projects which are all needed to address the same bottlenecks across country borders and which provide synergies if realised together. The degree of interdependence varies:

  • standalone projects – projects that are selfsufficient
  • mirror projects – clusters of individual projects that have an impact when considered together
  • synergy projects – clusters of projects that can be assessed individually, but that have synergies when considered together