The European Union aims to export its own energy model towards the Energy Community partners in order to integrate them into its Energy Market, and therefore to reduce their dependence on Russian gas. On the other hand, the neighboring countries have to fully liberalize their energy markets by implementing the EU Energy acquis. This article will analyze the Moldovan and Ukrainian drive for a pan-European energy market.
Energy security in the EU’s political field
Since the gas crises of 2006, when Russia disrupted the gas supplies transiting Ukraine, and 2009, when disagreement between Russia and Ukraine affected eighteen European countries, the European Union understood that it should address energy security at the Union level as much as it is addressed at the Members States level. Thus, the EU aims to diversify the national energy-mix following two intertwined goals: avoid the risk of a supplier failure and reduce its dependence on one big supplier.
The European Union aims at creating an entirely effective, efficient and liberalized energy market, as well as to fully integrate its Member State in an EU gas and electricity national markets. The latest piece of legislation in that sense is the so called “Third Energy Package” entered in force on September 2009. Through it, the EU wanted to contribute to the enhancement of the security of supply, reinforce consumer protection, establish truly independent Regulatory Authorities, and encourage better standards of services as well as cooperation among Transmission System Operators and collaboration between Member States in cases of gas disruptions. Last but not least, one of the purposes is to maintain the energy prices at the lowest point possible. The unbundling of the EU energy networks is at the heart of the directives. Legal and functional unbundling means that the same legal entity cannot exercise control on production and/or generation or supply undertaking and owning or have other legal rights over transmission system or transmission system operator. It was considered as the legal solution for the achievement of competitive gas and electricity markets.
As in all its external relations regarding the Neighbourhood, in the energy policy field, the EU endeavours to promote its norms. Through various political channels, the EU attempts to export its energy model, aiming to create convergence between local and EU markets and to consequently increase the level of security of supply. The EU energy policy extension to Eastern Europe has led to the creation, in 2006, of a regional international organization - the Energy Community. This community encompasses the European Union, the western Balkan, Moldova, Ukraine and Georgia. Norway, Turkey and Armenia are observers. Once established, the common European energy market will be open for accession to the Contracting Parties of the Energy Community, provided that they restructure and unbundle their energy operators, which often dates back to the former Soviet-era. This will happen through the transposition of EU legislation, enhancing energy efficiency, the creation of new interconnections infrastructures (gas and electricity) and the continuous liberalization of energy markets. Therefore, the Energy Community demonstrates the capacity of the EU to recreate its own institutions and procedures outside its borders.
The case of the Republic of Moldova
The Republic of Moldova became a contracting party of the Energy Community Treaty in 2010 and has therefore engaged to transpose EU energy legislation, develop competitive and open electricity and gas markets and to integrate its national energy markets into the European one. In order to promote development of the energy sector, the legal framework was constantly developed having a clear objective to align it to the European framework and to the relevant acquis of the Energy Community. By approving the Laws on Natural Gas and Electricity in May 2016, Moldova transposed most of the provisions of the Third Energy Package. With regard to renewables and energy efficiency developments in Moldova, it should be highlighted that they are aligned to the Third Energy Package.
For the Distribution System Operators, the Energy Community report shows that it was only legally unbundled, but not yet functionally. Moldovagaz is the main gas company in the Republic of Moldova, performing activities of transmission, distribution and supply. It also provides the transit of 17 to 19 bcm of Russian gas to the Balkans. The company’s shares are divided between the Moldovan state (36.6%), separatist authorities in Transnistria (13.4%) and Gazprom (50%). Regarding the ownership unbundling of Moldovagaz required by the Third Energy Package, the Republic of Moldova has a derogation until 01.01.2020. However it can be implemented only when Gazprom and Russia will accept to ‘give freedom’ to the gas sector of Moldova.
Owning the majority of Moldovagaz shares is the ‘ace up the sleeve’ of Russia, which is used as a weapon against Moldova when they are negotiating the territorial issue of Transnistria (since 1990 a self-proclaimed state on the internationally recognized territory of Moldova), the gas price or when Moldova firmly decides about its European path.
The new laws adopted in 2016 by the Moldavian authorities creates a legal and regulatory environment for the development of competitive electricity and gas markets. However, competition remains merely theoretical. Indeed, there is a lack of competitors on the wholesale segments, with only a few big market players in both gas and electricity markets. The Russian influence through Gazprom and through important Moldovan politicians along with the capture of the energy sector by local oligarchs are delaying the liberalization of the gas market and the ‘de facto’ implementation of the European energy acquis.
The Ukrainian case
Ukraine, as well as Moldova, engaged to transpose and implement the EU energy acquis into the national legislation, to liberalize the energy market and to interconnect national grids to the European network. To fulfil these commitments, Ukraine adopted the Second Energy Package. Moreover, the Law on the Natural Gas Market from 1st October 2015 marks the implementation of the provisions relative to gas of the Third Energy Package.
In comparison with the Republic of Moldova, Ukraine had already adopted beforehand most of the secondary legislation which allow the new gas law to be functional. Nevertheless, the reform will only be completed after Ukraine will amend several previous laws. For Ukraine, the gas market reform represents ‘the mother of all reforms’ and its implementation is crucial for the further integration and enhancement of energy security. In this regard, the launch in July 20126 of an action plan on unbundling Naftogaz of Ukraine represents an important step forward. However, Ukraine is delaying the implementation of some of its very important provisions. Still, the unbundling reform of the system operators was done; thus 42 licensed distribution system operators are legally unbundled.
According to the Gas Law, the market is fully opened with deregulated prices. However, upon analyzing the implementation of the Law, according to Dixi Group, only 30% of the market has been liberalized and is functioning on well running price competition. The alignment of the Ukrainian legislation to the European one would lead to a diminution of the corruption in the energy sector and will exclude the ‘middlemen’ from the energy market scheme. The term “middlemen” refers to the local oligarchs that were purchasing the gas from Russia at a lower price than the market one and selling to the Ukrainian state at a competitive price, thus creating an artificial win-win situation.
Gas consumption in Ukraine and the share of imported gas in total consumption 1991-2015.
In the electricity sector, things are quite similar. The new Electricity Law was adopted in April 2017 after intense pressures from the EU. According to the Dixi Group report, Ukraine transposed only 29 % of the Third Energy Package. In 2013, the Energy Community initiated a case in the matter of admission to the transmission capacity of inter-state electricity grids that will soon be lifted, as the electricity law was adopted. Moreover, the government created a Managing Committee for preparation of the Energy Strategy of Ukraine until 2035.
Upon analyzing the National Energy and Utilities Regulatory Commission of Ukraine, as in the case of Moldova, one may observe that its organization fails to abide most criteria regarding the independence and transparency of National regulatory Authorities from Directives 2009/72/EU and 2009/73/EU. However, the Ukrainian Regulatory Body has its unique characteristics in the Energy Community since it is not based only on legislation. It was established and has the possibility to be liquidated by presidential decree. The national authorities supported by the Energy Community Secretariat initiated a revision of the Law on the Regulator in 2015, however the draft law was not adopted by the Ukrainian Parliament and no progress has been made since 2015. The Secretariat of the Energy Community in Vienna warned the Ukrainian government that if the law is not adopted soon, an infringement procedure will be initiated.
From transposition to implementation: the dilemma of exporting norms in the neighborhood
To conclude, we would like to highlight that the transposition of the Third Energy Package into the national legislation of Moldova and Ukraine is made through two main tools which have complementary norms: The Energy Community and Associations Agreements. Association Agreements are treaties between the European Union, its Member States and a non-EU country that creates a framework for co-operation. Provision on energy policies are usually central in Association Agreements, because it is one of the three prominent ‘soft security’ issues along with justice and home affairs and environmental issues.
Even though Moldova adopted the Third Energy Package (except for the provisions concerning the independence of the National Regulator), the new laws are, to a great extent, not implemented. Provisions that are the cornerstone of the European energy acquis, such as unbundling both electricity and gas sectors, market rules and tariffs and, to some extent third-party access to the market, are still in the early stages of implementation. Currently, the Energy Community did not open any infringement procedures against Moldova.
The Ukrainian energy sector is in the process of implementation of the Third Energy Package. The gas reform, which is considered the biggest achievement of Ukraine, is transposed in the state’s domestic legislation; however, it is only partially implemented. Overall, Ukraine showed positive signs and political will to develop the energy sector and to destroy the existing monopolies which is why energy issues are placed on a high-level position on the political agenda of Ukraine.
The EU is supporting both ENP countries to develop an open energy market where there will be more transparency, efficiency, non-discrimination and competition. Such changes would lead to the regional energy market integration, more interconnections and enhancement of the security of supply on a long-term prospect. However, successful transposition will always be conditioned to real implementation, which remain the sole responsibility of the Moldavian and Ukrainian leaders toward there citizens.
Figure 1. Energy Community Membership. Source: Energy Community Secretariat
Figure 2. Moldova’s Gas Market Scheme Source: Energy Community Secretariat
Figure 3. Gas consumption in Ukraine and the share of imported gas in total consumption 1991-2015. Source: Naftogaz
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Alexandrina Robu is policy and events officer at the European Alliance of companies for Energy Efficiency in Buildings (EuroACE) and board member of the Young Entrepreneurs Organisation of the European Union. Alexandrina is a graduate both from the College of Europe were she studied European affairs and State University of Moldova where she studied international law.