IEEJ：March 2015

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Special Bulletin

A Japanese Perspective on the International Energy Landscape (208)

February 27, 2015

European Commission Releases Energy Union Strategic Framework
Ken Koyama, PhD
Chief Economist, Managing Director
The Institute of Energy Economics, JapanOn February 25, the European Commission released a strategic framework of the Energy Union.
This is to address energy policy challenges that EU has to face now, namely challenges for energy
security, sustainability and climate change measures, market efficiency and enhanced
competitiveness. The Energy Union was adopted as one of the EU's long-term strategies at a meetingof the European Council in June 2014. When the new European Commission was inaugurated inNovember 2014, new Commission President Jean-Claude Juncker positioned the Energy Union as
one of the 10 top priorities.

The Union does not mean any new organization but systems and policies for enhancing
extensive EU initiatives to address the abovementioned challenges through cooperation between EU
member countries. While the EU has traditionally aimed to form a single market, the EU member
countries have tried to collectively address energy and environment problems, as symbolized by thegreenhouse gas emission reduction target for the whole of the EU. In fact, however, individual EU
countries have developed their respective measures and strategies for energy security while
promoting initiatives for the whole of the EU.

But new developments surrounding the EU have prompted the EU to develop a new strategy.
First, energy security enhancement has emerged as a very important challenge as the Russia-Ukraine
dispute has grown more serious. In addition, European energy supply costs have remained relatively
high due to various background factors, making it important for the industry and consumers in EU tosecure energy supply at more competitive prices. As my 190th special bulletin on “A Japanese
Perspective on the International Energy Landscape” noted, Europe has been urgently required to not
only enhance climate change measures but also secure quantitative and qualitative energy security.

In this way, it has become indispensable for the whole of the EU to redouble its efforts toaddress energy and environmental problems. This situation is a background for the Energy Union
initiative. The EU has chosen to enhance union-wide cooperation to simultaneously achieve the threeE’s -- economic efficiency, energy security and environmental protection.
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The Energy Union strategic framework consists of five major components: (1) energy security,(2) a fully-integrated internal energy market, (3) energy efficiency, (4) decarbonization of theeconomy, and (5) research and innovation. We must pay attention to the fact that energy security is
put first, with priority given to the diversification of energy supply (supply sources, suppliers andsupply routes) in the context of energy security. This symbolizes the EU’s present situation.

The supply diversification focuses on gas. The framework concludes that it is important toenhance the Southern Gas Corridor plan to transport gas from Central Asia to Europe, and that
northern Europe should form a highly liquid gas hub accessed by a diversity of suppliers. Taking up
liquefied natural gas as one of the key factors for the diversification of gas supply, the framework
clarifies the EU’s attitude of pursuing various LNG potentials including the importance of LNG asan additional gas supply source in the event of a tight supply-demand relationship and the expansionof LNG trade to eliminate global gas price gaps by region. It also specifies the European
Commission’s plan to work out a comprehensive LNG strategy. This is an attention-attracting point.

As a matter of fact, the Ukraine problem has been a key factor behind the growing need toenhance energy initiatives. The problem has made it politically important for Europe to reduce andhold down its dependence on Russia. The strategic framework, though falling short of naming
Russia, apparently indicates that the gas supply diversification as a top priority aims to counter EU’sgas dependence on Russia. The supply diversification strategy cannot be implemented immediately.
And it may require massive initial investment. Russia for its part is expected to approach individual
EU member countries, Turkey and other relevant countries to maintain its presence in the Europeanmarket. We must watch how plans given in the strategic framework would make progress to achieve
its targets.

The strategic framework clarifies not only the gas supply diversification but also othercomprehensive policies and measures. Regarding the fully-integrated internal energy market, theframework indicates the necessary measures to achieve the specific minimum interconnection target
for electricity at 10% of the installed electricity production capacity of each member states by 2020and gives a plan to report next year on the necessary measures to reach the 15% target by 2030. It
also provides various targets and measures for enhancing energy conservation and introducing
renewable energy to achieve climate change targets. Based on the strategic framework, the EU willpromote discussions at top leader, ministerial and working levels on how to implement the specificpolicies in the framework. Europe as well as Japan is struggling to achieve the three E’s. We will
have to closely watch how Europe will develop such discussions and implement specific initiatives.

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