more than just a gas corridor, a lighthouse for europe

driving regional cooperation forward in the energy union

South-EaStErn EuropE:

A Manifesto by 16 Members of the European Parliament – June 2016

The Energy Union Strategy, adopted on 25 February 2015, is calling for closer regional cooperation as a new mode of governance gathering neighbouring countries in a joint energy planning and market integration exercise. This approach is necessary in a fragmented South-Eastern Europe (SEE), as acknowledged by the European Commission: “Given its particular vulnerability, there is a need to improve cooperation, solidarity and trust in the Central and South-Eastern part of Europe. (...) The Commission will develop guidance on regional cooperation and engage actively in regional cooperation bodies with Member States and stakeholders”.1 This vision was confirmed by the Commission in its first State of the Energy Union address published on 18 November 20152, pointing out the progress made under the Central and South Eastern Europe Gas Connectivity (CESEC)3 High Level Group. In parallel, other dialogue structures exist for Western Balkans countries such as the so-called Berlin Process.4 Indeed, we believe that South-East Europe should reap the full benefit of this structured regional cooperation, based on other models such as the Baltic Energy Market Interconnection Plan (BEMIP) Memorandum of Understanding signed in June 2015 which is encompassing a broad range of energy issues. Such regional cooperation should not be limited to EU Member States but should also cover non-EU Western Balkans countries which already have substantial interconnection capacity of their electricity network.

Our take is that this broad regional cooperation should build upon existing structures, chiefly a further empowered Energy Community, the Berlin Process and CESEC, assuming that the mandate of the latter is broadened to cover the whole spectrum of the Energy Union dimensions and not limited to natural gas. Natural gas is an issue of regional importance and the establishment of the CESEC is a real step forward to ensure collectively the security of supply of vulnerable countries of the region and to facilitate the development of a liquid and properly functioning natural gas market. However, the process of identifying priority natural gas infrastructure projects has to be substantiated with a broader analysis of the role of this energy source in the region’s future energy demand and its role in the transition to avoid stranded investment, bearing in mind that security of gas supply should be addressed following an integrated perspective including buildings and electricity.5 Since the overall gas consumption of South-Eastern Europe is relatively low in terms of volumes and as share of the primary energy mix, regional cooperation should not be limited to this area. Our objective also goes beyond largely existing interconnections, with the ambition to promote power market coupling, joint projects or joint support mechanisms in the sectors of renewables and joint financing programmes for energy efficiency supported by appropriate technical assistance programmes. The European Parliament sent a strong message in this direction, in its report of 15 December 2015 on a 10%

1 A Framework Strategy for a Resilient Energy Union with a Forward-Looking Climate Change Policy, COM (2015) 80 of 25.02.2015. 2 State of the Energy Union 2015, COM (2015) 572 of 18.11.2015. 3 Memorandum of understanding on a Joint approach to address the natural gas diversification and security of supply challenges, 10 July 2015. 4 The Berlin Process is an initiative launched by German Chancellor Angela Merkel with the aim to revive accession talks with the Western Balkans countries. It was initiated at a conference in Berlin in August 2014. The second annual Summit took place in Vienna in August 2015, while the next one will be in Paris in July 2016.5 ECF, E3G, Cambridge Institute for Sustainable Leadership, RAP, Agora Energiewende, WWF, Energy Union Choices: A Perspective on Infrastructure and Energy Security In the Transition, 3 March 2016.

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electricity interconnection target, stressing that “Central and South-Eastern Europe is endowed with a vast – and largely untapped – potential in terms of renewables” and inviting key stakeholders to “discuss and provide political backing to joint projects designed to fully exploit the region’s electricity potential”.6 In order to reap this potential in a sustainable way, projects should follow European Union standards notably in terms of prior Environmental Impact Assessments and other evaluations. The SEE 2050 Carbon Calculators7 – hosted by the Energy Community – show a clear pathway to meeting 2050 decarbonisation goals by focusing on demand management (buildings, industry and transport) and diversified renewables (mostly solar and wind) within the same cost envelope as the current “business as usual” planning in the region. Hence we believe that this should be discussed during the next CESEC High-Level Group Meeting to be held in Budapest in September 2016 as well as during the next Western Balkans Paris Summit of July 2016.

For this reason, we call on the governments of Member States and non-Member States of the region, under the auspices of the European Commission (DG NEAR and DG ENER) to expand existing cooperation structures and create a high level political dialogue in order to make South-Eastern Europe a showcase for a truly Resilient Energy Union with a Forward-Looking Climate Change Policy.

6 European Parliament resolution of 15 December 2015 on achieving the 10 % electricity interconnection target – Making Europe’s electricity grid fit for 2020 (2015/2108(INI)).7 https://www.energy-community.org/portal/page/portal/ENC_HOME/ENERGY_COMMUNITY/Overview/SEE2050

Signatories:Tanja Fajon (S&D, Slovenia)Maria Grapini (S&D, Romania)Benedek Javor (Greens-EFA, Hungary)Eva Kaili (S&D, Greece)Andrey Kovatchev (EPP, Bulgaria)Eduard Kukan (EPP, Slovakia)Ulrike Lunacek (Greens-EFA, Austria)

Sorin Moisa (S&D, Romania)Georgi Pirinski (S&D, Bulgaria)Alojz Peterle (EPP, Slovenia)Tonino Picula (S&D, Croatia)Miroslav Poche (S&D, Czech Republic)Davor Skrlec (Greens-EFA, Croatia)Ivo Vajgl (ALDE, Slovenia)Flavio Zanonato (S&D, Italy)

Under the coordination of Claude Turmes (Greens-EFA, Luxembourg).

This Manifesto is endorsed by above-mentioned MEPs on an individual basis and does not necessarily reflect the views of all political groups.

introduction

part 1 energy efficiency and heating and cooling: the untapped potential of south-eastern europe

• Member states benefit from high amounts of funding available (structural funds) that should be geared towards energy efficiency but lack absorption capacity due to limited technical assistance. This would help reversing the trend according to which current EU funds and investment plans are sometimes making only a limited contribution to the energy transition: “Instead of catalysing a transition to a decarbonised, renewables-based and resource-saving economy that respects the planet’s boundaries, we see an investment approach that mostly maintains the fossil fuels-based, energy-intensive economy that threatens the long-term sustainability of European societies.”13 Financing should be moved to the next stage with a proper prioritisation of energy efficiency (near-zero energy new buildings, retrofitting programmes) and renewables (notably electric vehicle infrastructure, smart grids, environmentally-friendly, decentralised, small-scale projects that would bring jobs on a longer-term).

• Non-Member States benefit from much technical assistance thanks to numerous capacity-building programmes operating in the Western Balkans but lack access to finance, especially through very small loans for small renovation projects spread over multi-apartment buildings. Energy efficiency projects should be designed in a way that they contribute to alleviate fuel poverty, especially targeting vulnerable consumers.

A recent publication from the Energy Community highlighted that energy efficiency requires an integrated approach, “including a solid legal and regulatory framework and well-trained and staffed energy efficiency implementation bodies, innovative financing and price and tariff reform”.14 This should be done at regional level to decrease overall system costs, in line with the Tirana declaration on “Energy Efficiency Policies in the Balkans: Opportunities for Regional Cooperation” adopted on 15 September 2014 by regional leaders.

In addition, large industry as well as SMEs would benefit from more energy efficient processes and products. Energy efficiency processes additionally have a huge and sustainable job creation potential. Regional programmes should be elaborated in order to help them implementing recommendations stemming from the energy audits they commission.

Institutional capacities in the region are not always very effective, hence limiting absorption capacity of funds made available by third parties. For that reason, technical assistance is of utmost importance and we believe that a common project development assistance initiative, a “one-stop-shop”, should be launched in order to gather expertise and knowledge to propose standardised solutions to these common problems in the SEE region. This recommendation was proposed to the energy ministers gathered in the informal energy Council in Luxembourg on 23 September 2015 and actively supported by the Slovenian government. We call on the Commission and countries of the region to take steps in order to make it happen. While EU Member States could do so by mobilising part of their technical assistance resources made available under the structural funds, it is clear that non-EU Member States will have significantly higher financial challenges as the resources of the pre-accession IPA instrument are much more limited. Therefore, a similar instrument aiming to contribute with grant funding to match lending facilities is urgently needed in the Western Balkans. An energy efficiency roadmap for the Western Balkans, devised via a regional meeting of governments, parliaments, EU institutions, private sector and civil society organisations would be advisable.

14 Bankwatch and Friends of the Earth, Climate’s Enfants Terribles, December 2015. 15 Energy Community, Tapping on its Energy Efficiency Potential, 1 June 2015.

8 Energy Community Secretariat, Annual Implementation Report, 1 September 2015. h and European Commission, EU Energy in figures: Statistical Pocketbook 2014. 9 Energy Community, Tapping on its Energy Efficiency Potential, 1 June 2015.10 http://www.wb-reep.org11 South-East Europe Sustainable Energy Policy, Energy Efficiency: Just to do it!, September 2015. 12 European Investment Bank, Press Release, 30 March 2015.

Despite noticeable progress in the renovation of buildings in parts of the region (notably Bulgaria and Romania), SEE countries are still displaying a highly inefficient buildings stock and show very high energy intensity in their economy. Energy Intensity goes as high as 780 toe/M€GDP in Bosnia, 670 in Bulgaria, 649 in Serbia, more than eight times higher than the best performers, Ireland and Denmark (83).8 High energy intensity is a significant disadvantage for citizens as it amplifies energy poverty phenomenon. In the private sector, high energy intensity affects companies’ competitiveness. Progress on energy issues would also be beneficial to EU Member States of the SEE region as it would help them overachieve their greenhouse gas emission reduction targets and possibly sell this overachievement to Western EU Member States thanks to flexibility mechanisms such as statistical transfers.

Most of the residential buildings are old (a number of them not fully legal, structurally sound or not even fully completed), relying on wood and coal in rural areas with severe health impacts and on district heating systems in some urban areas. Opportunities to renovate these buildings are tremendous. However, as the usually regulated energy prices are relatively low compared to Western Europe, payback periods tend to be longer and such projects are not attractive to owners. Energy efficiency is also the best way to tackle fuel poverty, in a region where at least 50% of the population spends more than 10% of their net income on energy.9 Firstly, the removal of fossil fuel subsidies would release resources which can be used to fight energy poverty. Secondly, this requires the large-scale roll-out of grants and loans or the development of innovative business models in combination with existing EU funds. The region receives significant support for its energy efficiency activities from multilateral and bilateral organisations: for example the EIB and the EBRD are deploying targeted instruments, such as respectively the Green for Growth Fund and the Regional Energy Efficiency Programme (REEP).10 These take the shape of capacity building, technical assistance, and financial assistance aiming at reducing the cost of capital for these projects.11 As an example, the city of Bucharest already benefitted from nearly 350 M€ of loans from the European Investment Bank to refurbish multi-family housing in several sectors of the municipality,12 in combination with grants from the structural funds. Another example is Bulgaria who embarked on a multibillion long term programme for energy retrofit of residential buildings. It is essential that these experiences are studied in more detail and lessons learned are shared across the region.

While EU Member States and non-Member States of the region often face similar challenges in the sector of buildings (obsolete building envelopes, inefficient district heating systems, fragmented individual ownership), the situation is drastically different when referring to access to finance:

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part 2 a regional power market

15 2016 Projects of Energy Community Interest.16 http://www.energetika.net/eu/novice/trading/seepex-plan-to-couple-serbian-power-market-with-4mmc-in-h2-2?utm_source=en.news

SEE is a region where physical interconnections of the power grid is already in place and reaches a satisfactory level, most countries already exceeding the 10% target. Some investment is however locally required to modernise transmission lines and increase their efficiency. This is a challenge as such most-needed investment is sometimes delayed by large utilities still owning networks and reluctant to invest in order to allow electricity generated abroad to freely flow beyond borders. Power infrastructure and smart grids should be developed in order to ensure the proper functioning of the SEE regional market and enable the full integration with minimum losses of the growing renewables. Such planning would be more adequately done at regional rather than at national level and in compliance with the need to reach net-zero emissions in the second half of the century, resulting from COP21 agreement. The principle of good neighbourly relations needs to be valid also in the context of energy supply. This is a point justifying the necessity to swiftly complete the electricity Project of Common Interest (PCIs) and Projects of Energy Community Interest (PECIs) allowing to fully integrating Member States and non-Member States into a common grid rather than focusing efforts on gas projects based on an old vision.15 The third PCI list expected in 2017 should reflect the need of a targeted development of the power grid in SEE for a better flow of renewables-based electricity.

Beyond infrastructure, we need strong commitment to energy market reforms to be made by SEE governments. On the one hand, the gas market should be made more liquid and functional. On the other hand, the electricity market is still in need of improvements. Physical interconnectivity is not in itself a guarantee for energy security. Infrastructure creates a larger market area, but not yet a truly integrated and competitive market with liquid exchanges. New physical routes unless accompanied by an efficient market framework (market coupling) will not add to security of electricity supply. At this stage, a well-organised, transparent, regional power market is still missing. Electricity markets in SEE are only slowly opening to competition (large domination of state-owned utilities with regulated generation) and many administrative barriers remain, marked by regulatory uncertainties, unsolved property issues, cumbersome permitting processes. Independence and transparency of decision-making procedures of National Regulatory Authorities is key to carrying through the required reforms. Here scrutiny be national parliaments and via investigative media is required and should be strengthened. At the same time, some progress is to be noticed, such as the plan to couple Serbian market with the markets of Hungary, the Czech Republic, Slovakia and Romania (known as 4MMC) in the second half of 2017,16 and the signature of a Memorandum of Understanding between the 6 Western Balkans countries on regional electricity market development on 27 April 2016. The European Commission could speed up this process by conditioning the financial support to the Western Balkans countries’ compliance with the Energy Community obligations, particularly when it comes to legislation relevant to market integration, as well as renewable energy and energy efficiency.

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SEE shows big potential in terms of renewable energy sources. A lot of forest leads to abundant sustainable biomass. However, energy poverty also leads many to burn wood resources. Therefore the focus should also be on upgrading existing boilers rather than increasing pressure on forests. Sun irradiation conditions are optimal. Running hours for wind turbines on the coast of the Black Sea are way higher than in other parts of Europe. For example, Romania is already hosting the largest European on-shore wind farm in the Danube delta, with 240 turbines and 600 MW installed; Bulgaria installed 843 MW of photovoltaic in 2012 and ranked sixth out of EU28 with 140 W/capita in 2013. There is also high available potential for electricity pump storage development, notably thanks to the optimal use of hydro infrastructure. Biomass is the leading renewable technology in the region with 34% of heating in Bulgaria and 60% in Serbia. Biomass however is used very inefficiently (at around 30%) which creates pressure on the forests and have negative impact on air quality. SEE countries could follow the examples of the Scandinavian countries in the sustainable exploitation of the biomass resource. The International Renewable Energy Agency (IRENA) has recently launched a project to assess a technical potential for cost-effective and sustainable renewable energy generation in SEE by 2020 and beyond. In parallel, the Commission has “agreed to help prepare a regional hydro-power master-plan”, as put forward by commissioner Hahn on 30 March 2016.17 While this support is most needed, the EU should pay attention to the sustainability aspect of small-scale and large-scale hydro and the compatibility of such project with environmental standards. Only with this condition could South-East Europe deploy pump storage.

Nevertheless, it is worrying to notice that most of the countries face a significant risk of missing the renewable energy targets by more than 5%18 while coal is still occupying a large share of the mix in SEE and some 6 GW of new coal power capacity is planned to be built in the Balkans by 2030.19 Renewables are indispensable to reverse these trends and phase coal out of electricity and heat markets. In line with recent studies, we trust that “the majority of countries could fully cover their electricity demand with their technical RES-E potential”.20 Some scenarios already anticipate the penetration of high shares of renewables in the electricity mix and highlight the benefits for the region of a fully decarbonised energy system.21 This is notably the case of the SEE 2050 energy roadmap for 2050.22 We trust that investments in renewables should take place in countries which have already exceeded or are about to exceed their national targets set by the directive on renewable energy sources of the Energy Community, in order to value them under cooperation mechanisms such as statistical transfers to Member States from Western Europe that are under-achieving theirs (e.g. Luxembourg, Netherlands, United Kingdom).

part 3 renewable energy sources for electricity: make the best use of wind, solar and sustainable hydro and biomass resources

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Both solar PV and wind turbine costs have fallen dramatically during past five years. Yet, high capital costs remain the key barriers to the development of renewable energy sources. . It has been reinforced by the fact that due to limited uptake of renewable energy in the region, the economy of scale and learning effect have not had a full impact to the technology costs in domestic markets. For example, although Greece benefits from much higher sun radiation conditions than Germany, it remains cheaper to install photovoltaic panels in Germany than in Greece.23 A de-risking strategy should be elaborated for SEE, assessing the possibility to expand the European Fund for Strategic Investment (EFSI) to support renewable projects in the region.

17 Commissioner Johannes Hahn, Opening Remarks of Commissioner Hahn at the WB6 Ministerial (Foreign Affairs) in DURRËS on 30-31 March 2016.18 Energy Community Secretariat, Annual Implementation Report, 1 September 2015. 19 CAN-E, Beyond Borders: How Energy Union can turn the tide against coal in the Western Balkans, August 2015. 20 André Ortner, Gustav Resch, Andreas Tuerk, Christoph Zehetner, Policy brief Indigenous energy resources of South East Europe – Feasibility of enhanced RES-E deployment, TÜ Wien, EEG, November 2014.21 Dominkovic´ DF et al. Zero carbon energy system of South East Europe in 2050. Appl Energy (2016), 22 SEE Change Network, South East Europe: The EU Road or the Road to Nowhere? An energy roadmap for 2050: A guide to the future, June 2016.

23 Fraunhofer ISI and Ecofys, The impact of risks in renewable energy investments and the role of smart policies, DIACORE project, February 2016.

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recommendations

24 CEPS, Regional Energy Policy Cooperation Initiatives to achieve EU energy policy objectives: Focus on South East Europe, First Meeting, 20 January 2015.

25 European Commission, Options for future European Electricity System Operation, December 2015. 26 BETTER intends to address RES cooperation between the EU and third countries in several dimensions. The starting point is given through the cooperation mechanisms provided by the RES Directive, allowing Member States to achieve their 2020 RES targets in a more cost efficient way, and thereby including the possibility to cooperate with third countries. 27 CEPS Special Report No. 134 / April 2016, A Roadmap to Enhanced Regional Energy Policy Cooperation in South East Europe.

The Commission, Member States and Western Balkans countries should broaden the mandate of the CESEC in order to cover all energy aspects. As “many regional energy policy coordination initiatives exist; one shortcoming of their effectiveness is the lack of governance framework”,24 it is not necessary to add up a new governance structure but CESEC would benefit by extending its work to energy efficiency, electricity and heating and cooling earlier that initially envisioned by the CESEC Memorandum of Understanding, with the Commission kept in the driving seat.

The Parliamentary dimension should be actively strengthened in the overall task of generating a high-level political dialogue in favour of developing comprehensive cooperation on a broad range of energy issues in South-Eastern Europe within the context of the Energy Union. To this end, the European Parliament should foster and expand exchanges with the Parliamentary Assembly of the SEE Cooperation Process, which includes both Member and non-Member States of the EU. In particular direct contacts leading to shared opinions on the main issues of common interest in the energy field ought to be promoted between the Industry, Research and Energy Committee of the EP and the General Committee on Economy, Infrastructure and Energy of the SEECP PA. The European Parliament should also take full part in the Parliamentary Plenum of the Energy Community.

In line with the principle of “efficiency first”, the Commission, Member States, Western Balkans countries, the EIB, the EBRD and national promotional banks should establish of a new hub for energy efficiency project development assistance (PDA) and technical assistance (TA) in SEE, composed of experts from the EIB, from the EBRD, from the Energy Efficiency Coordination Group (EECG) of the Energy Community and from EU Member States using their technical assistance envelope established by the structural funds (Member States) and the pre-accession instrument (non-EU Member States).

All countries of the region, including non EU Member States, should realise a National Energy and Climate Plan in compliance with the methodology agreed on by the Energy Union governance legislation. Non-EU Member States should also be involved in the process of coordinating and discussing the regional implications of their Plans with neighbouring states.

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Partnerships could be set-up between EBRD, EIB and other national promotional banks to establish special purpose vehicles for renewables and energy efficiency in SEE in order to combine grants with loans such as the ones granted under the EFSI and hence help drive the cost of capital for these projects down. This would foster job creation and growth in the region, in line with achieving COP 21 goals and the necessary reduction of carbon emissions. Functioning Rule of Law and reducing risk for investment is necessary.

All stakeholders should intensify their efforts towards a single power market. Commission should gather all TSOs from the region into a regional operation center (ROC) in charge of managing the transmission network through a centralised authority over larger geographic areas,25 as part of a strategy to strengthen cooperation at all levels (TSOs, NRAs, industry, civil society, all stakeholders). This should follow some projects such as BETTER, financed by the European Union, bridging Member States and non-Member States in SEE26 and the recommendations of the Roadmap to Enhanced Regional Energy Policy.27

The Commission should coordinate with IRENA the assessment of a cost-effective and sustainable renewable energy development based on a joint mapping of the renewable energy potential of the region (for electricity, heating & cooling and transport) and enhance the benefits for non EU Member States overachieving their Energy Community target of selling their renewable electricity surplus to member states underachieving their target under the directive on renewable energy sources. The Commission should also assess the feasibility of joint support schemes and joint projects within SEE region.

The EU should condition financial assistance to Western Balkan countries to their Energy Community Treaty compliance most notably with energy efficiency, renewable energy and environmental acquis. We recommend using Energy Community as a tool to ensure there is a level playing field inside an integrated SEE electricity market, between the Member States and non EU Member States of the region (CO2 price, equal environmental standards etc.)

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