EN EUROPEAN COMMISSION Brussels, 17.11.2010 COM(2010) 677 final COMMUNICATION FROM THE COMMISSION TO THE EUROPEAN PARLIAMENT, THE COUNCIL, THE EUROPEAN ECONOMIC AND SOCIAL COMMITTEE AND THE COMMITTEE OF THE REGIONS Energy infrastructure priorities for 2020 and beyond -

A Blueprint for an integrated European energy network {SEC(2010) 1395 final}

{SEC(2010) 1396 final}

{SEC(2010) 1398 final} COMMUNICATION FROM THE COMMISSION TO THE EUROPEAN PARLIAMENT, THE COUNCIL, THE EUROPEAN ECONOMIC AND SOCIAL COMMITTEE AND THE COMMITTEE OF THE REGIONS Energy infrastructure priorities for 2020 and beyond -

A Blueprint for an integrated European energy network TABLE OF CONTENTS 1.Introduction3 2.Infrastructure challenges call for urgent action3 2.1.Electricity grids and storage3 2.2.Natural gas grids and storage3 2.3.District heating and cooling networks3 2.4.CO2 capture, transport and storage (CCS)3 2.5.Oil and olefin transport and refining infrastructure3 2.6.The market will deliver most of the investments but obstacles remain3 2.7.Investment needs and financing gap3

3.Energy infrastructure Blueprint: A new method for strategic planning3 4.European infrastructure priorities 2020 and beyond3 4.1.Priority corridors for electricity, gas and oil3 4.1.1.Making Europe’s electricity grid fit for 20203 4.1.2.Diversified gas supplies to a fully interconnected and flexible EU gas network3 4.1.3.Ensuring the security of oil supply3 4.1.4.Roll-out of smart grid technologies3 4.2.Preparing the longer term networks3 4.2.1.European Electricity Highways3 4.2.2.A European CO2 transport network3 4.3.From priorities to projects3 5.Toolbox to speed up implementation3 5.1.Regional clusters3 5.2.Faster and more transparent permitting procedures3 5.3.Better methods and information for decision makers and citizens3 5.4.Creating a stable framework for financing3 5.4.1.Leveraging private sources through improved cost allocation3 5.4.2.Optimising the leverage of public and private sources by mitigating investors risks3 6.Conclusions and way forward3 ANNEX 3

1.Introduction3 2.Evolution of energy demand and supply3 3.Priority corridors for electricity, gas and oil3 3.1.Making Europe's electricity grid fit for 20203 3.1.1.Offshore grid in the Northern Seas3 3.1.2.Interconnections in South Western Europe3 3.1.3.Connections in Central Eastern and South Eastern Europe3 3.1.4.Completion of the Baltic Energy Market Interconnection Plan in electricity3 3.2.Diversified gas supplies to a fully interconnected and flexible EU gas network3 3.2.1.Southern Corridor3 3.2.2.North-South gas interconnections in Eastern Europe3 3.2.3.Completion of the Baltic Energy Market Interconnection Plan in gas3 3.2.4.North-South Corridor in Western Europe3 3.3.Ensuring the security of oil supply3 3.4.Roll-out of smart grid technologies3 4.Preparing the longer term networks3 4.1.European electricity highways3 4.2.A European CO2 transport network3 1.Introduction Europe's energy infrastructure is the central nervous system of our economy. EU energy policy goals, as well as the Europe 2020 economic aims, will not be achievable without a major shift in the way European infrastructure is developed. Rebuilding our energy system for a low-carbon future is not just a task for the energy industry. Technological improvements, greater efficiencies, resilience to a changing climate and new flexibility will be necessary. This is not a task which a single Member State can achieve on its own. A European strategy, and funding, will be necessary.

The Energy Policy for Europe, agreed by the European Council in March 2007 , establishes the Union’s core energy policy objectives of competitiveness, sustainability and security of supply. The internal energy market has to be completed in the coming years and by 2020 renewable sources have to contribute 20% to our final energy consumption, greenhouse gas emissions have to fall by 20% and energy efficiency gains have to deliver 20% savings in energy consumption. The EU has to assure security of supply to its 500 million citizens at competitive prices against a background of increasing international competition for the world's resources. The relative importance of energy sources will change. For fossil fuels, notably gas and oil, the EU will become even more dependent on imports. For electricity, demand is set to increase significantly. The Energy 2020 Communication, adopted on 10 November 2010, called for a step change in the way we plan, construct and operate our energy infrastructures and networks. Energy infrastructures are at the forefront of the flagship initiative "Resource efficient Europe". Adequate, integrated and reliable energy networks are a crucial prerequisite not only for EU energy policy goals, but also for the EU's economic strategy. Developing our energy infrastructure will not only enable the EU to deliver a properly functioning internal energy market, it will also enhance security of supply, enable the integration of renewable energy sources, increase energy efficiency and enable consumers to benefit from new technologies and intelligent energy use. The EU pays the price for its outdated and poorly interconnected energy infrastructure. In January 2009, solutions to the gas disruptions in Eastern Europe were hindered by a lack of reverse flow options and inadequate interconnection and storage infrastructures. Rapid development of offshore wind electricity generation in the North and Baltic Sea regions is hampered by insufficient grid connections both off- and onshore. Developing the huge renewables potential in Southern Europe and North Africa will be impossible without additional interconnections within the EU and with neighbouring countries. The risk and cost of disruptions and wastage will become much higher unless the EU invests as a matter of urgency in smart, effective and competitive energy networks, and exploits its potential for energy efficiency improvements. In the longer term, these issues are compounded by the EU decarbonisation goal to reduce our greenhouse gas emissions by 80-95% by 2050, and raise the need for further developments, such as an infrastructure for large-scale electricity storage, charging of electric vehicles, CO2 and hydrogen transport and storage. The infrastructures built in the next decade will largely still be in use around 2050. It is therefore crucial to keep in mind the longer term objective. In 2011, the Commission plans to present a comprehensive roadmap towards 2050. The roadmap will present energy mix scenarios, describing ways to achieve Europe’s long-term decarbonisation goal and the implications for energy policy decisions. This Communication identifies the energy infrastructure map which will be needed to meet our 2020 energy objectives. The 2050 low carbon economy and energy roadmaps will further inform and guide EU energy infrastructure implementation by offering a long term vision. The energy infrastructures planned today must be compatible with the longer term policy choices. A new EU energy infrastructure policy is needed to coordinate and optimise network development on a continental scale. This will enable the EU to reap the full benefits of an integrated European grid, which goes well beyond the value of its single components. A European strategy for fully integrated energy infrastructures based on smart and low-carbon technologies will reduce the costs of making the low-carbon shift through economies of scale for individual Member States. A fully interconnected European market will also improve security of supply and help stabilise consumer prices by ensuring that electricity and gas goes to where it is needed. European networks including, as appropriate, with neighbouring countries, will also facilitate competition in the EU’s single energy market and build up solidarity among Member States. Above all, integrated European infrastructure will ensure that European citizens and buinesses have access to affordable energy sources. This in turn will positively contribute to Europe's 2020 policy objective of maintaining a strong, diversified and competitive industrial base in Europe. Two specific issues that need to be addressed are project authorisation and financing. Permitting and cross-border cooperation must become more efficient and transparent to increase public acceptance and speed up delivery. Financial solutions must be found to meet investment needs– estimated at about one trillion euros for the coming decade of which half will be needed for energy networks alone. Regulated tariffs and congestion charges will have to pay the bulk of these grid investments. However, under the current regulatory framework, all necessary investments will not take place or not as quickly as needed, notably due to the non-commercial positive externalities or the regional or European value-added of some projects, whose direct benefits at national or local level is limited. The slowdown in investment in infrastructure has been further compounded by the recession. Moves for a new energy strategy for the EU have the full support of Europe's heads of state and government. In March 2009, the European Council called for a thorough review of the trans-European Networks for Energy framework (TEN-E) by adapting it to both the challenges outlined above and the new responsibilities conferred to the Union by Article 194 of the Treaty of Lisbon. This Communication outlines a Blueprint which aims to provide the EU with a vision of what is needed for making our networks efficient. . It puts forward a new method of strategic planning to map out necessary infrastructures, qualify which ones are of European interest on the basis of a clear and transparent methodology, and provide a toolbox to ensure their timely implementation, including ways to speed up authorisations, improve cost allocation and target finance to leverage private investment. 2.Infrastructure challenges call for urgent action The challenge of interconnecting and adapting our energy infrastructure to the new needs is significant, urgent, and concerns all sectors . 2.1.Electricity grids and storage Electricity grids must be upgraded and modernised to meet increasing demand due to a major shift in the overall energy value chain and mix but also because of the multiplication of applications and technologies relying on electricity as an energy source (heat pumps, electric vehicles, hydrogen and fuel cells, information and communication devices etc.). The grids must also be urgently extended and upgraded to foster market integration and maintain the existing levels of system's security, but especially to transport and balance electricity generated from renewable sources, which is expected to more than double in the period 2007-2020 . A significant share of generation capacities will be concentrated in locations further away from the major centres of consumption or storage. Up to 12% of renewable generation in 2020 is expected to come from offshore installations, notably in the Northern Seas. Significant shares will also come from ground-mounted solar and wind parks in Southern Europe or biomass installations in Central and Eastern Europe, while decentralised generation will also gain ground throughout the continent. Through a well interconnected and smart grid including large-scale storage the cost of renewable deployment can be brought down, as the greatest efficiencies can be made on a pan-European scale. Beyond these short-term requirements, electricity grids will have to evolve more fundamentally to enable the shift to a decarbonised electricity system in the 2050 horizon, supported by new high-voltage long distance and new electricity storage technologies which can accommodate ever-increasing shares of renewable energy, from the EU and beyond. At the same time the grids must also become smarter. Reaching the EU's 2020 energy efficiency and renewable targets will not be possible without more innovation and intelligence in the networks at both transmission and distribution level, in particular through information and communication technologies. These will be essential in the take up of demand side management and other smart grid services. Smart electricity grids will facilitate transparency and enable consumers to control appliances at their homes to save energy, facilitate domestic generation and reduce cost. Such technologies will also help boost the competitiveness and worldwide technological leadership of EU industry, including SMEs. 2.2.Natural gas grids and storage Natural gas will continue, provided its supply is secure, to play a key role in the EU's energy mix in the coming decades and will gain importance as the back-up fuel for variable electricity generation. Although in the long run unconventional and biogas resources may contribute to reducing the EU's import dependency, in the medium term depleting indigenous conventional natural gas resources call for additional, diversified imports. Gas networks face additional flexibility requirements in the system, the need for bi-directional pipelines, enhanced storage capacities and flexible supply, including liquefied (LNG) and compressed natural gas (CNG). At the same time, markets are still fragmented and monopolistic, with various barriers to open and fair competition. Single-source dependency, compounded by a lack of infrastructure, prevails in Eastern Europe. A diversified portfolio of physical gas sources and routes and a fully interconnected and bidirectional gas network, where appropriate , within the EU are needed already by 2020. This development should be closely linked with the EU's strategy towards third countries, in particular as regards our suppliers and transit countries. 2.3District heating and cooling networks Thermal power generation often leads to conversion losses while at the same time natural resources are consumed nearby to produce heating or cooling in separate systems. This is both inefficient and costly. Similarly, natural sources, such as sea- or groundwater, are seldom used for cooling despite the cost savings involved. The development and modernisation of district heating and cooling networks should therefore be promoted as a matter of priority in all larger agglomerations where local or regional conditions can justify it in terms of, notably heating or cooling needs, existing or planned infrastructures and generation mix etc. This will be addressed in the Energy Efficiency Plan and the 'Smart Cities' innovation partnership, to be launched early 2011. 2.4.CO2 capture, transport and storage (CCS)

CCS technologies would reduce CO2 emissions on a large scale while allowing the use of fossil fuels, which will remain an important source for electricity generation over the next decades. The technology, its risks and benefits, are still being tested through pilot plants which will come on line in 2015CCS commercial rollout in electricity generation and industrial applications is expected to start after 2020 followed by a global rollout around 2030. Due to the fact that potential CO2 storage sites are not evenly distributed across Europe and the fact that some Member States, considering their significant levels of CO2 emissions, have only limited potential storage within their national boundaries, construction of European pipeline infrastructure spanning across State borders and in the maritime environment could become necessary. 2.5.Oil and olefin transport and refining infrastructure If climate, transport and energy efficiency policies remain as they stand today, oil would be expected to represent 30% of primary energy, and a significant part of transport fuels are likely to remain oil based in 2030. Security of supply depends on the integrity and flexibility of the entire supply chain, from the crude oil supplied to refineries to the final product distributed to consumers. At the same time, the future shape of crude oil and petroleum product transport infrastructure will also be determined by developments in the European refining sector, which is currently facing a number of challenges as outlined in the Commission Staff Working Document accompanying this Communication. 2.6.The market will deliver most of the investments but obstacles remain The policy and legislative measures the EU has adopted since 2009 have provided a powerful and sound foundation for European infrastructure planning. The third internal energy market package laid the basis for European network planning and investment by creating the requirement for Transmission System Operators (TSOs) to co-operate and elaborate regional and European 10-year network development plans (TYNDP) for electricity and gas in the framework of the European Network of TSOs (ENTSO) and by establishing rules of cooperation for national regulators on cross-border investments in the framework of the Agency for the Cooperation of Energy Regulators (ACER). The third package creates an obligation for regulators to take into account the impact of their decisions on the EU internal market as a whole. This means they should not evaluate investments solely on the basis of benefits in their Member State, but on the basis of EU-wide benefits. Still, tariff setting remains nationally focussed and key decisions on infrastructure interconnection projects are taken at national level. National regulatory authorities traditionally have aimed mainly at minimising tariffs, and thus tend not to approve the necessary rate of return for projects with higher regional benefit or difficult cost-allocation across borders, projects applying innovative technologies or projects fulfilling only security of supply purposes. In addition, with the strengthened and extended Emission Trading System (ETS) there will be a unified European carbon market. ETS carbon prices influence already and will increasingly shift the optimal electricity supply mix and location towards low carbon supply sources. The regulation on security of gas supply will enhance the EU's capacity to react to crisis situations, through increased network resilience and common standards for security of supply and additional equipments. It also identifies clear obligations for investments in networks. Long and uncertain permitting procedures were indicated by industry as well as TSOs and regulators, as one of the main reasons for delays in the implementation of infrastructure projects, notably in electricity . The time between the start of planning and final commissioning of a power line is frequently more than 10 years . Cross-border projects often face additional opposition, as they are frequently perceived as mere "transit lines" without local benefits. In electricity, the resulting delays are assumed to prevent about 50% of commercially viable projects from being realised by 2020 . This would seriously hamper the EU’s transformation into a resource efficient and low carbon economy and threaten its competitiveness. In offshore areas, lack of coordination, strategic planning and alignment of national regulatory frameworks often slow down the process and increase the risk of conflicts with other sea-uses later on. 2.7.Investment needs and financing gap Around one trillion euros must be invested in our energy system between today and 2020 in order to meet energy policy objectives and climate goals. About half of it will be required for networks, including electricity and gas distribution and transmission, storage, and smart grids. Out of these investments about 200 bn € are needed for energy transmission networks alone. However, only about 50% of the required investments for transmission networks will be taken up by the market by 2020. This leaves a gap of about 100 bn €. Part of this gap is caused by delays in obtaining the necessary environmental and construction permits, but also by difficult access to finance and lack of adequate risk mitigating instruments, especially for projects with positive externalities and wider European benefits, but no sufficientcommercial justification . Our efforts also need to focus on further developing the internal energy market, which is essential to boosting private sector investment in energy infrastructure, which in turn will help to reduce the financial gap in the coming years. The cost of not realising these investments or not doing them under EU-wide coordination would be huge, as demonstrated by offshore wind development, where national solutions could be 20% more expensive. Realising all needed investments in transmission infrastructure would create an additional 775,000 jobs during the period 2011-2020 and add 19 bn € to our GDP by 2020 , compared to growth under a business-as-usual scenario. Moreover, such investments will help promote the diffusion of EU technologies. EU industry, including SMEs, is a key producer of energy infrastructure technologies. Upgrading EU energy infrastructure provides an opportunity to boost EU competitiveness and worldwide technological leadership. 3.Energy infrastructure Blueprint: A new method for strategic planning Delivering the energy infrastructures that Europe needs in the next two decades requires a completely new infrastructure policy based on a European vision. This also means changing the current practice of the TEN-E with long predefined and inflexible projects lists. The Commission proposes a new method which includes the following steps: –Identify the energy infrastructure map leading towards a European smart supergrid interconnecting networks at continental level. –Focus on a limited number of European priorities which must be implemented by 2020 to meet the long-term objectives and where European action is most warranted. –Based on an agreed methodology, identification of concrete projects necessary to implement these priorities – declared as projects of European interest – in a flexible manner and building on regional cooperation so as to respond to changing market conditions and technology development. –Supporting the implementation of projects of European interest through new tools, such as improved regional cooperation, permitting procedures, better methods and information for decision makers and citizens and innovative financial instruments. 4.European infrastructure priorities 2020 and beyond

The Commission proposes the following short term and longer term priorities to make our energy infrastructure suitable for the 21st century. 4.1.Priority corridors for electricity, gas and oil 4.1.1.Making Europe’s electricity grid fit for 2020 The first 10-year network development plan (TYNDP) forms a solid basis to identify priorities in the electricity infrastructure sector. However, the plan does not take full account of infrastructure investment triggered by important new offshore generation capacities, mainly wind in the Northern Seas and does not ensure timely implementation, notably for cross-border interconnections. To ensure timely integration of renewables generation capacities in Northern and Southern Europe and further market integration, the European Commission proposes to focus attention on the following priority corridors, which will make Europe’s electricity grids fit for 2020: 1.Offshore grid in the Northern Seas and connection to Northern as well as Central Europe – to integrate and connect energy production capacities in the Northern Seas with consumption centres in Northern and Central Europe and hydro storage facilities in the Alpine region and in Nordic countries. 2.Interconnections in South Western Europe to accommodate wind, hydro and solar, in particular between the Iberian Peninsula and France, and further connecting with Central Europe, to make best use of Northern African renewable energy sources and the existing infrastructure between North Africa and Europe. 3.Connections in Central Eastern and South Eastern Europe – strengthening of the regional network in North-South and East-West power flow directions, in order to assist market and renewables integration, including connections to storage capacities and integration of energy islands. 4.Completion of the BEMIP (Baltic Energy Market Interconnection Plan) – integration of the Baltic States into the European market through reinforcement of their internal networks and strengthening of interconnections with Finland, Sweden and Poland and through reinforcement of the Polish internal grid and interconnections east and westward. 4.1.2.Diversified gas supplies to a fully interconnected and flexible EU gas network The aim of this priority area is to build the infrastructure needed to allow gas from any source to be bought and sold anywhere in the EU, regardless of national boundaries. This would also ensure security of demand by providing for more choice and a bigger market for gas producers to sell their products. A number of positive examples in Member States demonstrate that diversification is key to increased competition and enhanced security of supply. Whilst on an EU level, supplies are diversified along three corridors - Northern Corridor from Norway, Eastern corridor from Russia, Mediterranean Corridor from Africa – and through LNG, single source dependency still prevails in some regions. Every European region should implement infrastructure allowing physical access to at least two different sources. At the same time, the balancing role of gas for variable electricity generation and the infrastructure standards introduced in the Security of Gas Supply Regulation impose additional flexibility requirements and increase the need for bi-directional pipelines, enhanced storage capacities and flexible supply, such as LNG/CNG. In order to achieve these objectives, the following priority corridors have been identified: 1.Southern Corridor to further diversify sources at the EU level and to bring gas from the Caspian Basin, Central Asia and the Middle East to the EU. 2.Linking the Baltic, Black, Adriatic and Aegean Seas through in particular: –the implementation of BEMIP and –the North-South Corridor in Central Eastern and South-East Europe. 3.North-South Corridor in Western Europe to remove internal bottlenecks and increase short-term deliverability, thus making full use of possible alternative external supplies, including from Africa, and optimising the existing infrastructure, notably existing LNG plants and storage facilities. . 4.1.3.Ensuring the security of oil supply The aim of this priority is to ensure uninterrupted crude-oil supplies to land-locked EU countries in Central-Eastern Europe, currently dependent on limited supply routes, in case of lasting supply disruptions in the conventional routes. Diversification of oil supplies and interconnected pipeline networks would also help not to increase further oil transport by vessels, thus reducing the risk of environmental hazards in the particularly sensitive and busy Baltic Sea and Turkish Straits. This can be largely achieved within the existing infrastructure by reinforcing the interoperability of the Central-Eastern European pipeline network by means of interconnecting the different systems and removing capacity bottlenecks and/or enabling reverse flows. 4.1.4.Roll-out of smart grid technologies The aim of this priority is to provide the necessary framework and initial incentives for rapid investments in a new “intelligent” network infrastructure to support i) a competitive retail market, ii) a well-functioning energy services market which gives real choices for energy savings and efficiency and iii) the integration of renewable and distributed generation, as well as iv) to accommodate new types of demand, such as from electric vehicles. The Commission will also assess the need for further legislation to keep smart grid implementation on track. In particular, promoting investment in smart grids and smart meters will require a thorough assessment of what aspects of smart grids and meters need to be regulated or standardised and what can be left to the market. The Commission will also consider further measures to ensure that smart grids and meters bring the desired benefits for consumers, producers, operators and in terms of energy efficiency. The results of this assessment and possible further measures will be published in the course of 2011.

In addition, the Commission will set up a smart grids transparency and information platform to enable dissemination of the most up-to-date experiences and good practice concerning deployment across Europe, create synergies between the different approaches and facilitate the development of an appropriate regulatory framework. The timely establishment of technical standards and adequate data protection will be key to this process. To that end, focus on smart grid technologies under the SET-Plan should be intensified. 4.2.Preparing the longer term networks In the context of the longer term perspective due to be presented in the 2050 Roadmap, the EU must start today designing, planning and building the energy networks of the future, which will be necessary to allow the EU to further reduce greenhouse gas emissions. There is only a limited window of opportunity. It is only through a coordinated approach towards an optimised European infrastructure that costly approaches at Member State or project level and sub-optimal solutions in the longer run can be avoided. 4.2.1.European Electricity Highways Future ‘Electricity Highways’ must be capable of: i) accommodating ever-increasing wind surplus generation in and around the Northern and Baltic Seas and increasing renewable generation in the East and South of Europe and also North Africa; ii) connecting these new generation hubs with major storage capacities in Nordic countries and the Alps and with the major consumption centres in Central Europe and iii) coping with an increasingly flexible and decentralised electricity demand and supply . The European Commission therefore proposes to immediately launch work to establish a modular development plan which would allow the commissioning of first Highways by 2020. The plan would also prepare for their extension with the aim of facilitating the development of large-scale renewable generation capacities, including beyond EU borders and with a view to potential developments in new generation technologies, such as wave, wind and tidal energy. The work would be best carried out in the framework of the Florence Forum, organised by the European Commission and ENTSO-E, and building on the SET-Plan European Electricity Grid Initiative (EEGI) and European Industrial Wind Initiative. 4.2.2.European CO2 transport infrastructure This priority area includes the examination and agreement on the technical and practical modalities of a future CO2 transport infrastructure. Further research, coordinated by the European Industrial Initiative for carbon capture and storage launched under the SET-Plan, will allow a timely start of infrastructure planning and development at European level, in line with the foreseen commercial roll-out of the technology after 2020. Regional cooperation will also be supported in order to stimulate the development of focal points for future European infrastructure. 4.3.From priorities to projects The above mentioned priorities should translate into concrete projects and lead to the establishment of a rolling programme. First project lists should be ready in the course of 2012 and be subsequently updated every two years, so as to provide input to the regular updating of the TYNDPs. Projects should be identified and ranked according to agreed and transparent criteria leading to a limited number of projects. The Commission proposes to base the work on the following criteria, which should be refined and agreed upon with all relevant stakeholders, notably ACER: –Electricity: contribution to security of electricity supply; capacity to connect renewable generation and transmit it to major consumption/storage centres; increase of market integration and competition; contribution to energy efficiency and smart electricity use. –Gas: diversification, giving priority to diversification of sources, diversification of supplying counterparts and diversification of routes; as well as increase in competition through increase in interconnection level, increase of market integration and reduction of market concentration. The projects identified would be examined at EU level to ensure consistency across the priorities and regions and ranked in terms of their urgency with regard to their contribution to the achievement of the priorities and Treaty objectives. Projects meeting the criteria would be awarded a ‘Project of European Interest’ label. This label would form the basis for further assessment and consideration under the actions described in the following chapters. The label would confer political priority to the respective projects. 5.Toolbox to speed up implementation 5.1.Regional clusters Regional cooperation as developed for the Baltic Energy Market Interconnection Plan (BEMIP) or for the North Seas Countries’ Offshore Grid Initiative (NSCOGI) has been instrumental in reaching agreement on regional priorities and their implementation. The mandatory regional cooperation set up under the internal energy market will help to speed up market integration, while the regional approach has been beneficial for the first electricity TYNDP. The Commission considers that such dedicated regional platforms would be useful to facilitate the planning, implementation and monitoring of the identified priorities and the drawing up of investment plans and concrete projects. The role of the existing Regional Initiatives, established in the context of the internal energy market, should be reinforced, where relevant, with tasks related to infrastructure planning, whilst ad hoc regional structures could also be proposed where needed. In this regard, the EU strategies for so called macro-regions (such as the Baltic Sea or the Danube Region) can be used as cooperation platforms to agree on transnational projects across sectors. In this context, to kick start the new regional planning method in the short term, the Commission intends to set up a High Level Group based on cooperation of the countries in Central Eastern Europe, e.g. in the Visegrad group , with the mandate to devise an action plan, in the course of 2011, for North-South and East-West connections in gas and oil as well as electricity. 5.2.Faster and more transparent permit granting procedures

In March 2007, the European Council invited the Commission "to table proposals aiming at streamlining approval procedures" as a response to the frequent calls of the industry for EU measures to facilitate permitting procedures. Responding to this necessity, the Commission will propose, in line with the principle of subsidiarity, to introduce permitting measures applying to projects of "European interest" to streamline, better coordinate and improve the current process while respecting safety and security standards and ensuring full compliance with the EU environmental legislation. The streamlined and improved procedures should ensure the timely implementation of the identified infrastructure projects, without which the EU would fail to meet its energy and climate objectives. Moreover, they should provide for transparency for all stakeholders involved and facilitate participation of the public in the decision-making process by ensuring open and transparent debates at local, regional and national level to enhance public trust and acceptance of the installations. Improved decision-making could be addressed through the following: 1.The establishment of a contact authority ("one-stop shop") per project of European interest, serving as a single interface between project developers and the competent authorities involved at national, regional, and/or local level, without prejudice to their competence. This authority would be in charge of coordinating the entire permitting process for a given project and of disseminating the necessary information about administrative procedures and the decision-making process to stakeholders. Within this framework, Member States would have full competence to allocate decision-making power to the various parts of the administration and levels of government. For cross-border projects, the possibility of coordinated or joint procedures should be explored in order to improve project design and expedite their final authorisation. 2.The introduction of a time limit for a final positive or negative decision to be taken by the competent authority will be explored. Given the fact that delays often occur due to poor administrative practice, it should be ensured that each of the necessary steps in the process is completed within a specific time limit, while fully respecting Member States' applicable legal regimes and EU law. The proposed schedule should provide for an early and effective involvement of the public in the decision-making process, and citizens' rights to appeal the authorities' decision should be clarified and strengthened, while being clearly integrated in the overall timeframe. It will further be explored whether, in case a decision has still not been taken after the expiry of the fixed time limit, special powers to adopt a final positive or negative decision within a set timeframe could be given to an authority designated by the concerned Member States. 3.The development of guidelines to increase the transparency and predictability of the process for all parties involved (ministries, local and regional authorities, project developers and affected populations). They would aim at improving communication with citizens to ensure that the environmental, security of supply, social and economic costs and benefits of a project are correctly understood, and to engage all stakeholders in a transparent and open debate at an early stage of the process. Minimum requirements regarding the compensation of affected populations could be included. More specifically, for offshore cross-border energy installations maritime spatial planning should be applied to ensure a straight-forward, coherent but also a more informed planning process. 4.In order to enhance the conditions for timely construction of necessary infrastructure, the possibility of providing rewards and incentives, including of a financial nature, to regions or Member States that facilitate timely authorisation of projects of European interest should be explored. Other mechanisms for benefit sharing inspired by best practice in the renewable energy field could also be considered. 5.3.Better methods and information for decision makers and citizens In order to assist the regions and the stakeholders in identifying and implementing projects of European interest, the Commission will develop a dedicated policy and project support tool to accompany infrastructure planning and project development activities at EU or regional level. Such a tool would inter alia elaborate energy-system wide and joint electricity-gas modelling and forecasting and a common method for project assessment appropriate to reflect short and long term challenges, covering notably climate proofing, to facilitate prioritisation of projects. The Commission will also encourage Member States to better coordinate existing EU environmental assessment procedures already at an early stage. Moreover, tools will be developed to better explain the benefits of a specific project to the wider public and associate them with the process. These tools should be complemented by communication on the benefits of infrastructure development and smart grids for consumers and citizens, in terms of security of supply, decarbonisation of the energy sector and energy efficiency. 5.4.Creating a stable framework for financing Even if all permitting issues are resolved, an investment gap estimated at about 60 bn € is likely to remain by 2020, mainly due to the non-commercial positive externalities of projects with a regional or European interest and the risks inherent to new technologies. Filling this gap is a significant challenge, but a prerequisite if infrastructure priorities are to be built on time. Therefore, further internal energy market integration is needed to boost infrastructure development and EU coordinated action is required to alleviate investment constraints and mitigate project risks. The Commission proposes to work on two fronts; further improving the cost allocation rules and optimising the European Union's leverage of public and private funding. 5.4.1.Leveraging private sources through improved cost allocation Electricity and gas infrastructure in Europe are regulated sectors, whose business model is based on regulated tariffs collected from the users, which allow recovering the investments made (“user pays principle”). This should remain the main principle also in the future. The third package asks regulators to provide appropriate tariff incentives, both short and long term, for network operators to increase efficiencies, foster market integration and security of supply and support the related research activities . However, while this new rule could cover some innovative aspects in new infrastructure projects, it is not designed to address the major technological changes, notably in the electricity sector, concerning offshore or smart grids. Moreover, tariff setting remains national and hence not always conducive to advance European priorities. Regulation should recognise that sometimes the most efficient approach for a TSO to address customer needs is to invest in a network outside its territory. Establishing such principles for cost-allocation across borders is key for fully integrating European energy networks. In the absence of agreed principles on European level, this will be difficult to do, particularly as long term consistency is required. The Commission envisages to put forward, in 2011, guidelines or a legislative proposal to address cost allocation of major technologically complex or cross-border projects, through tariff and investment rules. Regulators have to agree on common principles in relation to cost-allocation of interconnection investments and related tariffs. In electricity, the need for the development of long term forward markets for cross-border transmission capacity should be explored, whereas in the gas sector, investment costs could be allocated to TSOs in neighbouring countries, both for normal (based on market-demand) investments, as well as those motivated by security of supply reasons. 5.4.2.Optimising the leverage of public and private sources by mitigating investors risks In the Budget Review, the Commission emphasised the need to maximise the impact of European financial intervention by playing a catalytic role in mobilising, pooling and leveraging public and private financial resources for infrastructures of European interest. It requires maximising societal returns in view of scarce resources, alleviating constraints faced by investors, mitigating project risks, reducing cost of financing and increasing access to capital. A “two-front” approach is proposed:

Firstly, the Commission will continue strengthening EU’s partnerships with International Financial Institutions (IFI) and build on existing joint financial and technical assistance's initiatives . The Commission will pay particular attention at developing synergies with these instruments and for some of them, will examine the possibility to adjust their concepts to the energy infrastructure sector. Secondly, without prejudice to the Commission’s proposal for the next multi-annual financial framework post 2013, due in June 2011, and taking into account the results of the Budget Review, as regards the mainstreaming of energy priorities into different programmes, the Commission intends to propose a new set of tools. These tools should combine existing and innovative financial mechanisms that are different, flexible and tailored towards the specific financial risks and needs faced by projects at the various stages of their development. Beyond the traditional support forms (grants, interest rate subsidies), innovative market-based solutions addressing the shortfall in equity and debt financing may be proposed. The following options will notably be examined: equity participation and support to infrastructure funds, targeted facilities for project bonds, test option for advanced network related capacity payments mechanism, risk sharing facilities (notably for new technological risks) and public private partnerships loan guarantees. Particular attention will be paid to foster investments in projects which contribute to meeting the 2020 targets or cross EU borders, in projects enabling the roll-out of new technologies such as smart grids, and in other projects where EU-wide benefits cannot be achieved by the market alone. 6.Conclusions and way forward The constraints on public and private funding possibilities over the coming years should not be an excuse to postpone building of the identified infrastructure and making the corresponding investments. Indeed, today's investments are a necessary condition for future savings, thereby reducing the overall cost of achieving our policy goals. Based on the views expressed by the institutions and stakeholders on this blueprint, the Commission intends to prepare, in 2011, as part of its proposals for the next multiannual financial framework, appropriate initiatives. These proposals will address the regulatory and financial aspects identified in the Communication, notably through an Energy Security and Infrastructure Instrument and mainstreaming of energy priorities in different programmes.

ANNEX Proposed energy infrastructure priorities for 2020 and beyond 1.Introduction This annex provides technical information on the European infrastructures priorities, put forward in chapter 4 of the Communication, on progress of their implementation and the next steps needed. The priorities chosen grow out of the major changes and challenges, which Europe's energy sector will face in the coming decades, independently of the uncertainties surrounding supply and demand of certain energy sources. Section 2 presents the expected evolutions of supply and demand for each energy sector covered under this communication. The scenarios are based on the "Energy Trends for 2030 – update 2009" , which rely on the PRIMES modelling framework, but do also take into account scenario exercises done by other stakeholders. While the PRIMES Reference scenario for 2020 is based on a set of agreed EU policies, notably two legally binding targets (20% renewables share in final energy consumption and 20% greenhouse gas emission reductions compared to 1990 in 2020, PRIMES baseline is based only on the continuation of already implemented policies, whereby these targets are not achieved. For the period between 2020 and 2030, PRIMES assumes that no new policy measures are taken. These evolutions allow identifying major trends, which will drive infrastructure development over the coming decades. In sections 3 and 4, the infrastructure priorities ( Map ) identified in the Communication are presented by looking at the situation and challenges faced in each case and by providing, as relevant, technical explanations on the recommendations made in the Communication. It is understood that the presentations of the priorities vary in terms of: –nature and maturity: Certain priorities concern very specific infrastructure projects, which can be, for some, very advanced in terms of project preparation and development. Others cover broader and often also newer concepts, which will need considerable additional work before being translated into concrete projects. –scope: Most priorities focus on a certain geographic region, both electricity highways and CO2 networks covering potentially many if not all EU Member States. Smart grids however are a thematic, EU -wide priority. –level of engagement proposed in the recommendations: Depending on the nature and maturity of the priorities, the recommendations concentrate on concrete developments or address a broader range of issues, including aspects of regional cooperation, planning and regulation, standardisation and market design or research and development. 2.Evolution of energy demand and supply The latest update of the "Energy Trends for 2030 – update 2009" based on the PRIMES modelling framework foresees slight growth of primary energy consumption between today and 2030 according to the so-called Baseline scenario (Figure 1), while growth is set to remain largely stable according to the Reference scenario (Figure 2). It should be noted that these projections do not include energy efficiency policies to be implemented from 2010 onwards, a possible step-up of the emission reduction target to -30% by 2020 or additional transport policies beyond CO2 and cars emissions regulation. They should therefore rather be seen as upper limits for the expected energy demand.

In these scenarios, the share of coal and oil in the overall energy mix declines between today and 2030, while gas demand remains largely stable until 2030. The share of renewables is set to increase significantly, both in primary and final energy consumption, while the contribution of nuclear, at about 14% of primary energy consumption, is set to remain stable. The EU's dependency on imported fossil fuels will continue to be high for oil and coal and will increase for gas, as shown in Figure 3. As regards gas, the dependency on imports is already high and will be growing further, to reach about 73-79% of consumption by 2020 and 81-89% by 2030, mainly due to the depletion of indigenous resources. Based on the different scenarios, the additional import need ranges from 44 Mtoe to 148 Mtoe by 2020 and from 61 to 221 Mtoe by 2030 (compared to 2005). Increased flexibility will be required due to the increasing role of gas as primary back-up for variable electricity generation. This means a more flexible use of the pipeline systems, need for additional storage capacities, both in terms of working volumes, as also withdrawal and injection capacities and need for flexible supplies, such as LNG/CNG. The recently adopted regulation on security of supply requires investing in infrastructures to increase the resilience and robustness of the gas system in the event of a supply disruption. Member States should fulfil two infrastructure standards: N-1 and reverse flow. The N-1 formula describes the ability of the technical capacity of the gas infrastructure to satisfy total gas demand in the event of disruption of the single largest gas supply infrastructure, during a day of exceptionally high gas demand occurring with a statistical probability of once every 20 years. The N-1 can be fulfilled at national or regional level and a Member State may use also production and demand-side measures. The Regulation also requires that permanent physical bi-directional capacity is available on all cross-border interconnection between Member States (except for connections to LNG, production or distribution). Currently five countries do not meet the N-1 criterion (Bulgaria, Slovenia, Lithuania, Ireland and Finland), taking into account the projects underway under the European Energy Programme for Recovery but excluding demand side measures . Regarding investments on reverse flow, according to Gas Transmission Europe's study on reverse flow (July 2009), 45 projects have been identified in Europe as vital for enhancing reverse flows within and between Member States and providing a greater flexibility in transporting gas where it is needed. The main challenge is to finance projects to fulfil the infrastructure obligations, notably when the infrastructures are not required by the market. Oil demand is expected to see two different developments in parallel: decline in the EU-15 countries and constant growth in new Member States, where demand is expected to grow by 7.8% between 2010 and 2020. The main challenges for electricity infrastructure is growing demand and increasing shares of generation from renewable sources, in addition to additional needs for market integration and security of supply. EU-27 gross electricity generation is projected to grow by at least 20% from about 3,362 TWh in 2007 to 4,073 TWh in 2030 under the PRIMES reference scenario and to 4,192 TWh under PRIMES baseline, even without taking into account the possible effects of strong electro-mobility development. The share of renewables in gross electricity generation is expected to be around 33% in 2020 according to the Reference scenario, out of which variable sources (wind and solar) could represent around 16% . Figure 4 shows the evolution of gross electricity generation by source according to the PRIMES Reference scenario for the 2010-2030 period: More detailed information for the horizon up to 2020 is provided by the national renewable energy action plans (NREAP) that Member States have to notify to the Commission according to article 4 of directive 2009/28/EC. Based on the first 23 national renewable energy action plans and largely in line with PRIMES reference scenario results for 2020, there will be about 460 GW of renewable electricity installed capacity that year in the 23 Member States covered , against only about 244 GW today . Approximately 63% out of this total would be related to the variable energy sources wind (200 GW, or 43%) and solar (90 GW, out of which about 7 GW concentrated solar power, or 20%) (Table 1). RES type Installed capacity 2010 (GW) Installed capacity 2020 (GW) Share 2020 (%) Variation 2010-2020 (%) Hydro 116.9 134.2 29% 15% Wind 82.6 201 43% 143% Solar 25.8 90 19% 249% Biomass 21.2 37.7 8% 78% Other 1 3.6 1% 260% TOTAL 247.5 466.5 100% 88% Renewables in the 23 Member States are projected to account for over 1150 TWh of electricity generation, with about 50% of it from variable sources (Table 2). RES type Generation 2010 (TWh) Generation 2020 (TWh) Share 2020 (%) Variation 2010-2020 (%) Hydro 342.1 364.7 32% 7% Wind 160.2 465.8 40% 191% Biomass 103.1 203 18% 97% Solar 21 102 9% 386% Other 6.5 16.4 1% 152% TOTAL 632.9 1151.9 100% 82% Most of the growth in wind capacities and generation will be concentrated in Germany, the United Kingdom, Spain, France, Italy and the Netherlands, while solar capacities and generation growth will be even more concentrated in Germany and Spain and to a lesser extent Italy and France. Alongside renewables, fossil fuels will continue to play a role in the electricity sector. Ensuring compatibility with climate change mitigation requirements of fossil fuel use in the electricity and industrial sectors may therefore require the application of CO2 capture and storage (CCS) on a large and trans-European scale. PRIMES scenarios envisage the transport of about 36 million tons (Mt) of CO2 by 2020, on the basis existing policies, and 50-272 Mt by 2030 as CCS becomes more widely deployed. According to the analysis carried out by KEMA and Imperial College London based on the PRIMES reference scenario, electricity generation capacity in 2020 should be sufficient to meet peak demand in virtually all Member States, despite the development of variable generation from renewable energies (Map 2 and Map 3 ). However, while imports should therefore not be necessary for Member States to ensure their security of supply, more integration of the 27 European electricity systems could significantly reduce prices and increase overall efficiency by lowering the cost of balancing supply and demand at any given moment in time.

The evolution of electricity trade across borders is shown on Map 4 and Map 5 . Under the PRIMES Reference scenario, today's general pattern of electricity exports and imports is likely to remain as such until 2020 for most Member States. This would result in the following interconnection capacity requirements between Member States, based on the optimisation of the existing European electricity grid as described in ENTSO-E's pilot Ten-Year Network Development Plan (Map 6). It should however be noted that these requirements have been calculated on the basis of simplifying assumptions and should be seen as indicative only. Results could also be significantly different, if the European energy system was optimised on the basis of a newly designed, fully integrated European grid, instead of existing nationally centred electricity networks. 3.Priority corridors for electricity, gas and oil 3.1.Making Europe's electricity grid fit for 2020 3.1.1.Offshore grid in the Northern Seas The 2008 Second Strategic Energy Review identified the need for a coordinated strategy concerning the offshore grid development: "(…) a Blueprint for a North Sea offshore grid should be developed to interconnect national electricity grids in North-West Europe together and plug-in the numerous planned offshore wind project" . In December 2009, nine EU Member States and Norway signed a political declaration on the North Seas Countries Offshore Grid Initiative (NSCOGI) with the objective to coordinate the offshore wind and infrastructure developments in the North Seas. The nine EU members will concentrate about 90% of all EU offshore wind development. According to the information contained in their NREAPs, installed capacity is projected at 38.2 GW (1.7 GW other marine renewable energies) and production at 132 TWh in 2020 . Offshore wind could represent 18% of the renewable electricity generation in these nine countries. Applied research shows that planning and development of offshore grid infrastructure in the North Seas can only be optimised through a strong regional approach. Clustering of wind farms in hubs could become an attractive solution compared to individual radial connections, when distance from the shore increases and installations are concentrated in the same area . For countries where these conditions are met, such as Germany, the connection costs of offshore wind farms could thereby be reduced by up to 30%. For the North Sea area as a whole, cost reduction could reach almost 20% by 2030 . In order to realise such cost reductions, a more coordinated, planned and geographically more concentrated offshore wind development with cross-border coordination is absolutely necessary. This would also allow reaping the combined benefits of wind farm connection and cross-border interconnections , if the connection capacity is well dimensioned and hence results in a positive net benefit. Offshore development will strongly influence the need for reinforcements and expansion of onshore networks, notably in Central Eastern Europe, as highlighted in the priority 3. Map 7 is an illustration of a possible offshore grid concept as developed by the OffshoreGrid study . Existing offshore development plans in certain Member States show that significant development in the North Seas will take place along or even across the borders of territorial waters of several Member States, raising planning and regulatory issues of European dimension . Onshore reinforcements of the European network will be needed to transmit electricity to the major consumption centres further inland. However, ENTSO-E's pilot Ten Year Network Development Plan (TYNDP) does not include an adequate assessment of the infrastructure needed to connect upcoming new offshore wind capacities. ENTSO-E has committed to addressing this urgent issue more in detail in the second edition of it's TYNDP to be published in 2012. Member States have adopted or are planning to adopt different approaches concerning offshore grid development. Most Member States (Germany, Denmark, France, Sweden, Ireland) have assigned the offshore extension of their onshore grid to national TSOs. The UK has so far chosen to tender the connection of each new offshore wind farm separately . In Belgium and the Netherlands, grid development is currently the responsibility of the wind farm developer. In addition, current national regulatory frameworks encourage exclusively point-to-point solutions connecting wind farms with an onshore connection point, with the aim to minimise the connection cost for each project. Connection of wind farm clusters via a hub, with the associated advanced capacity provision and technology risk, is not covered under current national regulation. Finally, optimisation across borders, in order to facilitate electricity trade between two or several Member States, does not take place. As a consequence, the opportunities offered by a regional approach for integrated offshore and onshore infrastructure development as well as the synergies with international electricity trade are missed. This might lead to suboptimal and more expensive solutions in the longer term. Other challenges for the development of an offshore grid are related to permitting and market design. As for other infrastructure projects, authorisation procedures are frequently fragmented even in the same country. When a project crosses the territory of different Member States, this can considerably complicate the overall process, resulting in very long lead times. Furthermore, the insufficient integration of electricity markets, the insufficient adaptation of connection regimes and national support schemes to offshore renewable energy generation and the absence of market rules adapted to electricity systems based on more variable renewable energy sources can impede the development of offshore projects and of a truly European offshore grid. Planning offshore wind development and the necessary offshore and onshore grid infrastructure requires coordination between Member States, national regulatory authorities, transmission system operators and the European Commission. Maritime spatial planning and definition of offshore wind and ocean energy development zones can enhance development and ease investment decisions in this sector. Recommendations

Structured regional cooperation has been set up by the Member States in the NSCOGI . While the commitment of the Member States to develop the grid in a coordinated way is very important, it should now be turned into concrete actions for it to become the major driving force for the development of a North Seas offshore grid. The initiative should, in line with the strategy presented in the Communication, establish a working structure with adequate stakeholder participation and set a work plan with concrete timeframe and objectives concerning grid configuration and integration, market and regulatory issues and planning and authorisation procedures. Under the guidance of the NSCOGI, different options should be prepared on grid configuration by national TSOs and ENTSO-E in its next TYNDP. The design options should consider planning, construction and operational aspects, the costs associated to the infrastructure and the benefits or constraints of the different design options. TSOs should in particular review planned wind farm development in order to identify possibilities for hub connections and interconnections for electricity trade, also taking into account possible future wind development. Regulators should consider overall development strategies and regional and longer-term benefits when approving new offshore transmission lines. Options to revise the regulatory framework and make it compatible should be examined, covering inter alia operation of offshore transmission assets, access to and charging of transmission, balancing rules and ancillary services. 3.1.2.Interconnections in South Western Europe France, Italy, Portugal and Spain will host significant future developments of variable renewable electricity generations capacities over the coming decade. At the same time, the Iberian Peninsula is almost an electric island. Interconnections between France and Spain suffer already today from insufficient capacity, with only four tie-lines (2 of 220 kV and 2 of 400 kV) between the countries, the last one having been built in 1982. All face continuous congestions . A new 400 kV line in the Eastern Pyrenees should be ready by 2014, increasing the current interconnection capacity from 1,400 MW to about 2,800 MW, but some congestion might remain even afterwards . Moreover, these countries play a key role in connecting to Northern Africa, which could become increasingly important because of its huge potential for solar energy. By 2020, about 10 GW of new renewables generation could be built in the countries East and South of the Mediterranean, out of which almost 60% solar and 40% wind capacities . However, as of today, there is only one interconnection between the African and the European continent (Morocco-Spain) with about 1,400 MW capacity, which could be increased to 2,100 MW in the coming years. A direct current submarine 1,000 MW power line is being planned between Tunisia and Italy, to be operational by 2017. The use of these existing and new interconnections will create new challenges in the medium term (after 2020) with regard to their consistency with the evolutions of the European and North African network, both as regards their capacity and the corresponding regulatory framework. Any further interconnection must be accompanied by safeguards to prevent risks of carbon leakage through power imports to increase. Recommendations To ensure the adequate integration of new capacities, mainly from renewables, in South Western Europe and their transmission to other parts of the continent, the following key actions are necessary up to 2020: –the adequate development of the interconnections in the region and the accommodation of the existing national networks to those new projects. An interconnection capacity of at least 4,000 MW between the Iberian Peninsula and France will be needed by 2020. Corresponding projects will have to be developed with the utmost attention to public acceptance and consultation of all relevant stakeholders. –concerning connections with third countries, the development of Italy's connections with countries of the Energy Community (notably Montenegro, but also Albania and Croatia), the realisation of the Tunisia-Italy interconnection, the expansion of the Spain-Morocco interconnector, the reinforcement, where necessary, of South-South interconnections in North African neighbour countries (including as regards the efficient management of these infrastructures)and preparatory studies for additional North-South interconnections to be developed after 2020. 3.1.3.Connections in Central Eastern and South Eastern Europe The connection of new generation is a major challenge in Central and Eastern Europe. For example, in Poland alone about 3.5 GW are foreseen until 2015 and up to 8 GW until 2020 . At the same time, power flow patterns have recently changed significantly in Germany. Onshore wind power capacities, summing up to about 25 GW at the end of 2009, and offshore development, together with new conventional power plants, concentrate in the Northern and North-Eastern parts of the country; demand however rises mostly in the Southern part, increasing distances between generation and load centres or balancing equipment (e.g. pump storage). Huge North-South transit capacities are therefore needed, taking fully into account the grid development in and around the Northern Seas under priority 3.1.1. Given the impact of the current interconnection insufficiencies on the neighbouring grids especially in Eastern Europe, a coordinated regional approach is vital to solve this issue. In South Eastern Europe, the transmission grid is rather sparse compared to the grid of the rest of the continent. At the same time, the whole region (including the countries of the Energy Community) has a lot of potential for further hydro generation. There is a need for additional generation connection and interconnection capacities in order to increase power flows between South East European countries and with Central Europe. The extension of the synchronous zone from Greece (and later Bulgaria) to Turkey will create additional needs for reinforcement of the grids in these countries. Ukraine and the Republic of Moldova having expressed their interest to join the European continental interconnected electricity networks, further extensions will have to be examined in the longer term. Recommendations To ensure adequate connection and transmission of generation, notably in Northern Germany and better integration of South-Eastern European electricity networks, the following key actions are necessary up to 2020 and should notably be supported by the countries of Central Eastern Europe, by extending the already existing cooperation in the gas sector: –the development of adequate interconnections, notably within Germany and Poland, to connect new, including renewable, generation capacities in or close to the North Sea, to the demand centres in Southern Germany and to pumped storage power plants to be developed in Austria and Switzerland, while also accommodating new generation in Eastern countries. New tie-lines between Germany and Poland will become important, once new interconnections are developed with the Baltic States (in particular the Poland-Lithuania interconnection, see below). Due to increasing North-to-South parallel flows, cross-border capacity expansion will be necessary between Slovakia, Hungary and Austria in the medium term (after 2020). Internal relief of congestion through investments is needed to increase cross-border capacity in Central Europe. –the increase of transfer capacities between South East European countries, including those of the Energy Community Treaty, in view of their further integration with Central European electricity markets. This cooperation should be covered under the Central Eastern European cooperation already existing in the gas sector. 3.1.4.Completion of the Baltic Energy Market Interconnection Plan in electricity

In October 2008, following the agreement of the Member States of the Baltic Sea Region, a High Level Group (HLG) chaired by the Commission was set up on Baltic Interconnections. Participating countries are Denmark, Estonia, Finland, Germany, Latvia, Lithuania, Poland, Sweden and, as an observer, Norway. The HLG delivered the Baltic Energy Market Interconnection Plan (BEMIP), a comprehensive Action Plan on energy interconnections and market improvement in the Baltic Sea Region, both for electricity and gas, in June 2009. The main objective is to end the relative "energy isolation" of the Baltic States and integrate them into the wider EU energy market. The BEMIP provides an important example of successful regional cooperation. The lessons learnt from this initiative will be taken into account for other regional cooperation structures. Internal market barriers had to be cleared in order to make investments viable and attractive. This involved aligning regulatory frameworks to lay the foundation for the calculation of fair allocation of costs and benefits, thus moving towards the "beneficiaries pay" principle. The European Energy Programme for Recovery (EEPR) was a clear driver for timely implementation of infrastructure projects. It provided an incentive to quickly agree on outstanding issues. The EU's Strategy for the Baltic Sea Region has also provided a bigger framework for the energy infrastructure priority. The strategy already proposed a framework to focus existing financing from structural and other funds into the areas identified by the strategy as priority areas. Several factors have led to this initiative being seen by stakeholders around the Baltic Sea as a success: (1) the political support towards the initiative, its projects and actions; (2) the high-level involvement of the Commission as a facilitator and even driving force; (3) the involvement of all relevant stakeholders in the region from inception to implementation (ministries, regulators and TSOs) to implement the defined infrastructure priorities. Despite the progress achieved so far, further efforts are still necessary to fully implement the BEMIP: continuous monitoring of the Plan's implementation by the Commission and the High Level Group will be necessary in order keep to the agreed actions and timeline. In particular support is necessary for the key but also more complex cross-border projects, namely the LitPolLink between Poland and Lithuania, which is essential for integration of the Baltic market into the EU, and for which an EU coordinator was assigned. 3.2.Diversified gas supplies to a fully interconnected and flexible EU gas network 3.2.1.Southern Corridor Europe's growing dependence on imported fuels is evident in the gas sector. The Southern Corridor would be – after the Northern Corridor from Norway, the Eastern corridor from Russia, the Mediterranean Corridor from Africa and besides LNG – the fourth big axis for diversification of gas supplies in Europe. Diversification of sources generally improves competition and thus contributes to market development. At the same time, it enhances security of supply: as seen also in the January 2009 gas crisis, the most severely affected countries were those relying on one single import sources. However, often the defensive attitude of gas producers and incumbent players in monopolistic markets hampers diversification. The implementation of the Southern Corridor requires close co-operation between several Member States and at European level, as no country individually requires the incremental gas volumes (new gas) sufficient to underpin the investment in pipeline infrastructure. Therefore, the European Union must act to promote diversification and provide for the public good of security of supply by bringing Member States and companies together in order to reach a critical mass. This is the underlying principle for the EU Southern Gas Corridor strategy. Its importance was underlined in the Commission’s Second Strategic Energy Review of November 2008, which was endorsed by the European Council of March 2009. The aim of the Southern Corridor is to directly link the EU gas market to the largest deposit of gas in the world (the Caspian / Middle East basin) estimated at 90.6 trillion cubic meters (for comparison, Russian proven reserves amount to 44.2 tcm ). Furthermore, the gas fields are geographically even closer than the main Russian deposits (Map 8). The key potential individual supplier states are Azerbaijan, Turkmenistan and Iraq; yet, if political conditions permit, supplies from other countries in the region could represent a further significant supply source for the EU. The key transit state is Turkey, with other transit routes being through the Black Sea and the Eastern Mediterranean. The strategic objective of the corridor is to achieve a supply route to the EU of roughly 10-20% of EU gas demand by 2020, equivalent roughly to 45-90 billion cubic meters of gas per year (bcma). The operational objective for the development of the Southern Corridor strategy is that the Commission and Member States work with gas producing countries, as well as those countries which are key for transporting hydrocarbons to the EU, with the joint objective of rapidly securing firm commitments for the supply of gas and the construction of gas transportation infrastructures (pipelines, Liquefied/Compressed Natural Gas shipping) necessary at all stages of its development. The major challenge for the success of the Southern Corridor is to ensure that all elements of the corridor (gas resources, infrastructure for transport and underlying agreements) are available both at the right time and with significant scope. To date, substantial progress has been made to this end. With the financial support from the Commission (EEPR and/or TEN-E programmes) and great effort of pipeline companies, concrete transportation projects, namely Nabucco, ITGI, TAP and White Stream, are already in development stage and other possibly options are being studied. Nabucco as well as Poseidon, the Italy-Greece subsea interconnector which is part of ITGI, have received partial exemption from Third Party Access (so called "Article 22 exemption"). Moreover, the Nabucco Intergovernmental Agreement, signed in July 2009, has provided Nabucco with legal certainty and terms for transporting gas through Turkey and created a precedent for further extension of transportation regimes. The key challenge for the future is to ensure that gas producing countries become ready to open towards exporting gas directly to Europe, which for them may often imply accepting high political risk linked to their geopolitical situation. The Commission, in cooperation with the Member States involved in the Southern Corridor, needs to further emphasize its engagement to build long term relations with gas producing countries in this region and provide them with a stronger link to the EU. The Southern Gas Corridor pipeline components are also reinforced by preparation of options for delivering substantial additional quantities of Liquefied Natural Gas (LNG) to Europe in particular from the Middle East (Persian Gulf and Egypt). In the first phase it encompasses the development of LNG reception points in Europe (and connecting them to the wider network). Furthermore, cooperation with producer countries on developing energy policies and long-term investment plans which are conducive to LNG, is expected to be gradually built. 3.2.2.North-South gas interconnections in Eastern Europe The strategic concept of the North-South natural gas interconnection is to link the Baltic Sea area (including Poland) to the Adriatic and Aegean Seas and further to the Black Sea, covering the following EU Member States (Poland, the Czech Republic, Slovakia, Hungary, Romania, and possibly Austria) and Croatia. This would provide the overall flexibility for the entire Central East European (CEE) region to create a robust, well-functioning internal market and promote competition. In the longer term, this integration process will have to be extended to the non EU member countries of the Energy Community Treaty. An integrated market would provide the necessary security of demand and attract suppliers to make the best use of existing and new import infrastructures, such as new LNG regasification plants and projects of the Southern Corridor. The CEE region thus would become less vulnerable to a supply cut through the Russia/Ukraine/Belarus route. There is one main supplier in the CEE region; the current linear (from East to West) and isolated networks are the heritage of the past. While the proportion of gas imported from Russia constitutes 18% of the EU-15 consumption, in the new Member States this indicator is 60% (2008). Gazprom deliveries are the overwhelming bulk of gas imports in the region (Poland: 70%, Slovakia: 100%, Hungary: 80%, certain Western Balkan countries: 100%). Due inter alia to monopolistic, isolated and small markets, long-term supply contracts and regulatory failures, the region is not attractive for investors or producers. The lack of regulatory coordination and of a common approach towards missing interconnections jeopardises new investments and hinders the entrance of new competitors on the market. Moreover, security of supply constitutes a concern and the investments needed to comply with the infrastructure standards imposed by the Security of Gas Supply Regulation are concentrated in this region. Finally, a considerable share of the population spends a relatively high share of their income on energy, leading to energy poverty.

The declaration of the extended Visegrad group expresses already a clear commitment within the region to tackle these challenges. Based on the BEMIP experience and work already concluded by the signatories of the declaration, the High Level Group (HLG) proposed in the Communication should provide a comprehensive action plan to build interconnections and to complete market integration. The HLG should be assisted by working groups focusing on concrete projects, network access and tariffs. The work should include the experiences gained through the New Europe Transmission System (NETS) initiative . 3.2.3.Completion of the Baltic Energy Market Interconnection Plan in gas While implementation of electricity projects within the BEMIP is well underway, little progress has been achieved in gas since the Action Plan was endorsed by the eight EU Member State Heads of State and President Barroso in June 2009. The HLG managed only to define a long list of projects with overall investment costs too high compared to the size of the gas markets in the region. Internal market actions were not agreed at all. The gas sector now enjoys the strong focus of the BEMIP work on two fronts: East-Baltic and West-Baltic areas. The Eastern Baltic Sea region (Lithuania, Latvia, Estonia and Finland) requires urgent action to ensure security of supply through connection to the rest of the EU. At the same time Finland, Estonian and Latvia enjoy derogations from market opening under the third internal market package as long as their markets are isolated. The derogation will end once their infrastructure is integrated with the rest of the EU, for example through the Lithuania-Poland gas interconnection. Even though the annual gas consumption of the three Baltic States and Finland together is only about 10 bcm, all the gas they consume comes from Russia. As a share of total primary energy supply, Russian gas amounts to 13% for Finland, 15% for Estonia and to about 30% for Latvia and Lithuania, while the EU average is around 6.5%. The main supplier also has decisive stakes in the TSOs of all four countries. Moreover, also Poland is very reliant on Russian gas. Therefore there is little market interest to invest in new infrastructure. The minimum necessary infrastructure has been agreed and a major breakthrough in this area is the now ongoing dialogue – politically supported by both sides – between the companies on the Polish-Lithuanian gas link. Discussions on a regional LNG terminal are also ongoing within an LNG task force. In the West Baltic, the task force's objective are to find ways to replace supply from depleting Danish gas fields expected from 2015 onwards, as well as to enhance security of supply in Denmark, Sweden and Poland. An action plan will be delivered at the end of 2010. Both task forces also focus on regulatory obstacles and the identification of common principles that would allow regional investments to take place. As a key action, regional cooperation needs to be kept strong to establish the following projects: PL-LT, regional LNG terminal and a pipeline connecting Norway and Denmark and possibly Sweden and Poland. The objectives of market opening and improved security of gas supply can be achieved more cost-effectively on a regional level than a national scale. Commission's support is also continuously requested by the Member States in order to steer the BEMIP process. Finally, solutions must be found to break the vicious circle of "If there's no market, there is no incentive to invest in infrastructure; and without infrastructure, market will not develop". 3.2.4.North-South Corridor in Western Europe The strategic concept of the North-South natural gas interconnections in Western Europe, that is from the Iberian peninsula and Italy to North-west Europe is to better interconnect the Mediterranean area and thus supplies from Africa and the Northern supply Corridor with supplies from Norway and Russia. There are still infrastructure bottlenecks in the internal market which prevent free gas flows in this region, such as for example the low interconnection level to the Iberian peninsula, preventing the use of the well-developed Iberian gas import infrastructure to its best. The Spain-France axis has been a priority for over a decade, but is still not completed. However, progress has been achieved in recent years, thanks to the better co-ordination of the national regulatory frameworks – taken up also as a priority by the South-West Gas Regional Initiative – and the active involvement of the European Commission. Another indication for imperfect market functioning and the lack of interconnectors are the systematically higher prices on the Italian wholesale market compared to other neighbouring markets. At the same time, as the development of electricity from variable sources is expected to be particularly prominent in this corridor, the general short-term deliverability of the gas system needs to be enhanced to respond to the additional flexibility challenges to balance electricity supply. The main infrastructure bottlenecks preventing the correct functioning of the internal market and competition need to be identified in this corridor and stakeholders, Member States, NRAs and TSOs, shall work together to facilitate their implementation. Secondly, an integrated analysis between the electricity and gas system – taking into account both generation and transmission aspects – should lead to the assessment of the gas flexibility needs and the identification of projects with the objective to back-up variable electricity generation. 3.3.Ensuring the security of oil supply Contrary to gas and electricity, oil transport is not regulated. This means that there are no rules, e.g. on rates of return or third party access for new infrastructure investments. Oil companies are primarily responsible for ensuring continuous supply. Nonetheless, there are certain aspects, mainly concerning the free access to pipelines supplying the EU, but lying in countries outside the EU (in Belarus, Croatia and Ukraine in particular), which cannot be addressed through commercial arrangements only and need political attention. The Eastern European crude oil pipeline network (an extension of the Druzhba pipeline) was conceived and built during the Cold War period and had, at that time, no pipeline link with the Western network. As a result, insufficient connections between the Western European pipeline network and Eastern infrastructures exist. Hence alternative pipeline supply possibilities of crude oil or petroleum products from Western Member States to CEE countries are limited. In case of an enduring supply disruption in the Druzhba system (currently used capacity: 64 million tons/year), these limitations would lead to a big increase in tanker traffic in the environmentally sensitive Baltic area , in the Black Sea and in the extremely busy Turkish Straits , increasing the risks of accidents and oil spills. In case of the Lithuanian Mažeikiai refinery the alternative supply requires shipping approximately 5.5 to 9.5 million tons/year through the Baltic Sea to the Lithuanian Butinge oil terminal. According to a recent study , the potential responses to supply disruptions include: (1) the creation of the Schwechat-Bratislava pipeline between Austria and Slovakia; (2) the upgrade of the Adria pipeline (linking the Omisalj oil terminal in on the Croatian Adriatic coast to Hungary and Slovakia); and (3) the upgrade of the Odessa-Brody pipeline in Ukraine (connecting the Black Sea oil terminal to the Southern branch of Druzhba at Brody) and its planned extension to Poland (Brody-Adamowo). These routes represent an alternative supply capacity of at least 3.5, 13.5, and 33 million tons/year respectively. An additional improvement would be the creation of the Pan-European Oil Pipeline to link the Black Sea supply with the Transalpine Pipeline with an envisaged capacity between 1.2 million and 1.8 million barrels per day. For the above reasons, political support for mobilising private investment in possible alternative infrastructures is a priority, in order to ensure the security of oil supply of land-locked EU countries, but also to reduce oil transport by sea, thereby reducing environmental risks. This does not necessarily require the building of new pipeline infrastructure. Removing capacity bottlenecks and/or enabling reverse flows can also contribute to security of supply. 3.4.Roll-out of smart grid technologies Smart grids are energy networks that can cost efficiently integrate the behaviour and actions of all users connected to it. They are changing the way, in which the electricity grid is operated in terms of transmission and distribution and re-structuring the present generation and consumption pathways. Through integration of digital technology and a two-way communication system, smart grids establish direct interaction between the consumers, other grid users and energy suppliers. They enable consumers to directly control and manage their individual consumption patterns, notably if combined with time differentiated tariffs, providing, in turn, strong incentives for efficient energy use. They allow companies to improve and target the management of their grid, increasing grid security and reducing costs. Smart grid technologies are needed to allow for a cost-effective evolution towards a decarbonised power system, allowing for the management of vast amounts of renewable on-shore and off-shore energy, while maintaining availability for conventional power generation and power system adequacy. Finally, smart grid technologies, including smart metering, enhance the functioning of retail markets, which gives a real choice to consumers, as energy companies as well as information and communication technology companies can develop new, innovative energy services. Many countries have developed smart grid projects, including smart meter deployment, namely Austria, Belgium, France, Denmark, Germany, Finland, Italy, Netherlands, Portugal, Sweden, Spain and UK . In Italy and Sweden almost all customers already have smart meters. The Bio Intelligence 2008 Study concludes that smart grids could reduce the EU annual primary energy consumption of the energy sector in 2020 by almost 9%, which equals to 148 TWh of electricity or savings reaching almost 7.5 billion euros/year (based on average 2010 prices). Industry estimates for individual consumption argue that an average household could save 9% of its electricity and 14% of its gas consumption, corresponding to savings of ca. 200 euros/year . The Commission promotes the development and deployment of smart grids through financial support for research and development (R&D). The SET Plan European Electricity Grids Initiative (EEGI), launched in June 2010, has been developed by a team of network operators in electricity distribution and transmission supported by the Commission and aims at developing the technological issues of smart grids further. It will consolidate smart grids experiments so far through large size demonstrations and promote R&D and innovation in smart grid technologies. It will also stimulate wider deployment by addressing challenges stemming from technology integration at system level, user acceptance, economic constraints and regulation.

In addition to this technology push, market pull for the Europe-wide implementation of smart grids has been created with the adoption of the third internal energy market package in 2009, which foresees the obligation for Member States to ensure wide implementation of intelligent metering systems by 2020 . Moreover, the Directive on energy end-use efficiency and energy services has identified smart meters as one of the main contributors to energy efficiency improvement. The Renewables Directive , finally, views smart grids as an enabler for integration of increasing renewable energy into the grid and obliges Member States to develop transmission and grid infrastructure towards this aim. Jointly, these directives constitute the main policy and legal framework on which further action to stimulate the development of and deployment of smart grids will be built. To ensure that smart grids and smart meters are developed in a way that enhances retail competition, integration of large-scale generation from renewable energy sources, and energy efficiency through the creation of an open market for energy services, the Commission has established a Task Force on smart grids in November 2009. It consists of about 25 European associations representing all relevant stakeholders. Its mandate is to advise the Commission on the EU level policy and regulatory actions and to coordinate the first steps towards the implementation of smart grids under the provisions of the third package. Initial work of the Task Force has been led by three Expert Groups , each focusing on (1) functionalities of smart grid and smart meters, (2) regulatory recommendations for data safety, data handling and data protection, and (3) roles and responsibilities of actors involved in the smart grids deployment. Despite the expected benefits of smart grids and the aforementioned policy measures in place, the transition towards smart grids and meters is not progressing as fast as needed to reach the EU's energy and climate objectives. The success of Smart Grids will not just depend on new technology and the willingness of networks to introduce them, but also on best practice regulatory frameworks to support their introduction, addressing market issues, including impacts on competition, and changes in the industry (i.e. to industry codes or regulation) and the way, in which consumers use energy. Creating the right regulatory framework for a well-functioning energy services market is the main challenge. It will require enabling the cooperation of a wide range of different market actors (generators, network operators, energy retailers, energy service companies, information and communication technology companies, consumers, appliance manufacturers). This regulatory framework will also have to ensure the adequate open access and sharing of operational information between actors and might also have to address tariff setting issues in order to provide proper incentives for grid operators to invest in smart technologies. National regulatory authorities also have a very important role as they approve tariffs that set the basis for investments in smart grids, and possibly meters. Unless a fair cost sharing model is developed and the right balance between short-term investment costs and longer term profits found, the willingness of grid operators to undertake any substantial future investments will be limited. Unambiguous (open) standards for smart grids and meters are needed to ensure interoperability, addressing key technological challenges and enabling successful integration of all grid users, while providing high system reliability and quality of electricity supply. Given competing efforts to develop worldwide standards, relying and investing in one specific (European) technical solution today might tomorrow translate into stranded costs. This is why the Commission launched a smart meters standardisation mandate for relevant European standardisation bodies in 2009. A new mandate to review related standards and develop new standards for smart grids will be launched by the Commission to the same standard bodies at the beginning of 2011. International collaboration is therefore essential to ensure the compatibility of solutions. Persuading and winning the trust of consumers as regards the benefits of smart grids constitutes another challenge. As long as price elasticity of electricity remains low, the overall benefits of smart grids unverified and the risk of data abuse unaddressed , it may be difficult to overcome consumer reluctance, given the time and behavioural changes required to reap the benefits of smart technologies. Last but not least, the possible lack of skilled workforce that would be ready to operate the complex smart grid system is another, non-negligible challenge. The transition towards smart grids is a complex issue and a single leap from existing network to smart grids is not realistic. A successful transition will require fine-tuned cooperation between all stakeholders in order to find the right cost-effective solutions, avoid duplication of work and exploit existing synergies. To gain public awareness and acceptance and customer support, the benefits and costs of smart grids implementation will have to be objectively discussed and carefully explained, through active participation of consumers, small and medium enterprises and public authorities. Recommendations To ensure such approach and to overcome identified challenges the following key actions are recommended: ·Specific legislation: As outlined in the Communication, the Commission will assess whether any further legislative initiatives for smart grid implementation are necessary under the rules of third internal energy market package. The assessment will take into account the following objectives: i) ensuring the adequate open access and sharing of operational information between actors and their physical interfaces; ii) creating a well-functioning energy services market; and iii) providing proper incentives for grid operators to invest in smart technologies for smart grids. Based on this analysis, the final decision concerning specific legislation for smart grids will be taken during the first half of 2011. ·Standardisation and Interoperability: The Task Force has defined a set of six expected services and about 30 functionalities of smart grids. The Task Force and the CEN/CENELEC/ETSI Joint Working Group on Standards for the Smart Grid will produce by end 2010 a joint analysis on the status of European standardization for smart grid technologies and identify further work needed in this area. By beginning of 2011 the Commission will set up a standardisation mandate for the relevant European standardisation bodies to develop smart grid standards and ensure interoperability and compatibility with standards being elaborated worldwide. ·Data protection: Based on the work of the Task Force, the Commission, in close cooperation with the European Data Protection Supervisor, will assess the need for additional data protection measures, the roles and responsibilities of different actors concerning access, possession and handling of data (ownership, possession and access, read and change rights, etc.), and propose, if necessary, adequate regulatory proposals and/or guidelines. ·Infrastructure investments: Large parts of the necessary investments for the deployment of smart grids can be expected to come from network operators, notably at distribution level, and private companies, under the guidance of national regulatory authorities. Where funds are missing, public-private alliances could provide solutions. Where the rate of return for an investment is too low and the public interest evident, public finances must have the opportunity to step in. The Commission will encourage Member States to set up funds for the support of the Smart Grid deployment. The Commission will also examine particular support for smart technologies under the policy and project support programme mentioned in the Communication, as well as innovative funding instruments targeted at a rapid roll-out of smart grid technologies in transmission and distribution networks. ·Demonstration, R&D and innovation projects: In line with the above infrastructure investment policy, a clear European R&D and demonstration policy is necessary to boost innovation and accelerate the evolution towards smart networks, based on the EEGI and the smart grids activities of the European Energy Research Alliance, which focuses on longer-term research. Particular attention should be paid to electricity system innovations combined with R&D on power technologies (cables, transformers, etc.) with R&D on information and communication technologies (control systems, communications, etc.). Proposed measures should also address consumer behaviour, acceptance and real-life barriers to deployment.