COMMISSION STAFF WORKING DOCUMENT Report on the findings of the Baltics and Finland Focus Group Accompanying the document COMMUNICATION FROM THE COMMISSION TO THE EUROPEAN PARLIAMENT AND THE COUNCIL on the short term resilience of the European gas system Preparedness for a possible disruption of supplies from the East during the fall and winter of 2014/2015
Date: 2014-10-16
Institutions: European Commission
Subjects: Baltic States, Finland, Russia, energy supply, energy transport, gas, security of supply, self-sufficiency in energy













EUR-Lex - 52014SC0322 - EN











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52014SC0322

COMMISSION STAFF WORKING DOCUMENT Report on the findings of the Baltics and Finland Focus Group Accompanying the document COMMUNICATION FROM THE COMMISSION TO THE EUROPEAN PARLIAMENT AND THE COUNCIL on the short term resilience of the European gas system Preparedness for a possible disruption of supplies from the East during the fall and winter of 2014/2015 /* SWD/2014/0322 final */









1. Work of the Focus Group for the Baltic region and Finland 
Given their geographical position and historical
links, the Baltic States and Finland are fully dependent on a single source of
supply, Russian gas received either directly or via Belarus. Furthermore,
connections between the three Baltic Member States notwithstanding, neither of
the four Member States is presently connected to other EU gas markets. Consequently,
measures to improve preparedness for or to mitigate the effects of a gas supply
disruption are by definition of a regional dimension in the majority of the
cases.
In view of the vulnerability of the region, the
Commission proposed to set up a particular Focus Group to work on a coordinated
stress test report for the region. Finland is not connected to the Baltic
region via a gas pipeline. The stress tests analysis, however, does not only
look at the results of a gas disruption in terms of gas shortages, but also
seeks to provide a more comprehensive assessment of the impacts and consequences
of a gas disruption for other sectors, notably the power sector. In this
regard, Finland is connected to Estonia and onwards to the other Baltic Member
States via the Estlink 1 and 2 submarine cable. The inclusion of Finland in this group is therefore important to ensure that the most complete assessment of
the impacts of a gas disruption can be made.
In recent years, the Baltic Member States and Finland have built up good experience in cross-border cooperation in the energy
sector. The four Member States have been working together in the field of
security of supply in the BEMIP Focus Group on Regional Cooperation under the
framework provided by Regulation (EU) No 994/2010. As a result of this
cooperative approach, the Baltic Member States adopted in 2012 a Joint Risk
Assessment of the risks affecting the security of gas supply in the region in
addition to their mandatory national Risks Assessments as required by
Regulation (EU) No 994/2010. These countries and Finland are moreover working
now on the development of a joint Preventive Action Plan and a joint Emergency
Plan as provided for in the above mentioned Regulation.
Building on this basis, the Commission asked these
four Member States to prepare a joint report on the stress test exercise
instead of separate national reports. Member States in this Group were not
requested to model the disruptions of the Ukrainian route as such a disruption
is unlikely to affect the gas situation in the region. Instead, they were asked
to model additional scenarios covering the disruption of Russian gas flows to
the EU for different periods, including a seven-month disruption scenario.
The Commission has closely worked with the Baltic Member States and Finland during the months of July and August to ensure the consistency
of the analysis and to encourage the further development of joint cooperative
measures. A number of physical and virtual meetings were held during these
months with the attendance of experts from the ministries and competent
national authorities, gas and electricity Transmission System Operators (TSOs),
relevant gas companies in the region as well as from the Commission.
2. Description of the system
The Baltic Member States and Finland are today fully dependent on Russian gas, arriving to Estonia, Latvia and Finland through various directly connected pipelines and to Lithuania via Belarus through the Minsk-Vilnius
gas transmission pipeline. The latter connection ensures the required capacity
for the supply of Lithuania but also of the Kaliningrad region. In December
2014, a new LNG terminal in Lithuania (Klaipeda) is expected to enter into
operation allowing for some diversification of gas supplies. Its capacity will
be limited at the beginning but it is expected to increase after the capacity
in the Klaipeda-Kursenai pipeline is enhanced.
During summer gas flows through these pipelines to the
four Member States to meet their gas demand but also to fill the storage
facility in Incukalns, Latvia. The direction of gas flows to Latvia is reversed during winter when gas is supplied from Incukalns storage to Russia and Estonia. In winter also Latvia is supplied from the Incukalns storage facility. Lithuania, Kaliningrad and Finland continue to be directly supplied by Russian gas during winter.
Consequently there is a certain level of mutual dependency between Russia and the Baltic  Member States as regards gas supplies.[1]
In 2013 gas demand amounted to 8,4 bcm for the whole
region. Finland had the highest consumption at 3,5 bcm, followed by Lithuania (2,7 bcm),  Latvia (1,5 bcm) and finally Estonia with a modest 0,7 bcm.
The share of natural gas in the energy mix shows
divergences in these Member States. In the case of Estonia and Finland this share remains rather low at around 10%, although such level should not reduce
the risk perception vis-a-vis a disruption of gas supply nor the
thoroughness of necessary preventive measures. Natural gas plays a higher role
in Latvia and Lithuania with shares of 30 and 36% respectively. A
characteristic common to all of them is that the use of gas for direct
consumption in the residential sector is rather limited (less than 10% in the
Baltics and just 1% in Finland) while the main gas consumption takes place in
CHPs and district heating units, where gas reaches a share of more than 80% in
Latvia and Lithuania. Structurally therefore centralised gas heating prevails, whereas
in the case of Finland there is a higher penetration of electricity for heating
purposes.
With regard to electricity, the Baltic Member States
are part of the same synchronous electricity network (UPS/IPS power system) as Russia and form the so-called "BRELL loop" connecting Russia, Belarus, Lithuania, Latvia and Estonia. Finland, by contrast, is part of the Nordic electricity system. It
has a radial connection to Russia and four strong connections to Sweden. The main difference lies in the fact that whereas the connections between Finland
and the Baltics (Estlink 1 and 2 submarine connections) allow for the power
flows to be controlled and adjusted, power flows between the Baltic Member
States also depend on the exchanges with mainland Russia, Kaliningrad region
and Belarus and therefore cannot be directly controlled.
In terms of power generation, the share of gas-based
generation as a percentage of overall generation capacity varies again within
the Member States. Figures are relatively low in Estonia and Finland at 5% and 9% respectively. In the case of Estonia, although fossil fuels represent
over 90% of its electricity generation, it is mostly domestic oil shale while
Finland's power mix is more diversified including nuclear energy (one third),
hydro power (around 20%), coal, gas, peat and wind. The ratio is higher in Lithuania with 31% and particularly in Latvia at 67%. In Lithuania and Latvia fossil fuels represent
more than half of their generation mix followed by hydro and, in the case of Lithuania, also wind.
3. Main results of the stress test exercise
According to the joint report, a severe disruption of
gas supplies from Russia can have serious negative impacts in this region. Even
in the scenario of a one-month disruption of all Russian gas flows, there would
be important gas shortages for non-protected customers in Estonia and Lithuania. In the absence of the Klaipeda LNG terminal the situation would be more
dramatic in Estonia as there would be no gas in their system, including for
protected customers, within 4-5 days[2]. Lithuania would be less
affected thanks to an agreement with Latvia for the supply of its protected
customers from Incukalns storage. Once the Klaipeda LNG terminal enters into
operation, however, the supply for the protected customers would be ensured in
the three Baltic States in all scenarios. 
In the long term disruption scenarios, all Baltic States will face gas shortages affecting non-protected customers to varying extents.
 Estonia and Lithuania would be most severely affected with more than 80% of
non-protected customers being possibly curtailed. Part of these shortages could
be nevertheless compensated by fuel switching, although this solution depends
on the availability of fuel stocks, for which obligations to hold such stocks
exist to some extent in Lithuania and Estonia. 
The previous analysis differ from the main results
observed in the scenarios modelled by ENTSOG and presented in the
Communication, where gas shortages for the Baltic States remain around 30% of
the total demand. The reasons for such difference are, on the one hand, the
consideration by ENTSOG of a cooperative scenario, and, on the other hand,
ENTSOG's assumption that gas stored in Incukalns would remain in the Baltic
region. 
As regards Finland, although it is fully dependent on
Russian gas and isolated from other EU gas markets, the relative small role of
natural gas in its energy mix together with the measures already in place
(compulsory gas stocks, compulsory stocks of alternative fuels, use of air
propane) would significantly mitigate the impact of a disruption. The supply to
the protected customers would be ensured even in the 6-month and 7-month scenarios
for almost its entire duration, a period during which the suppliers would have
to resort to the market for additional alternative fuels for the remaining
duration of the disruption. It must be borne in mind that the Finnish strategy
is based on the market as the primary method to deal with a supply disruption
and in this regard gas users other than protected consumers and other users
with a consumption of less than 15 mcm are responsible for their own
preparation plans.
Consequently, despite the fact that the impact of a
disruption in this region will be serious, it must be put in perspective given
the level of preparedness in some cases and the relatively limited role that
natural gas plays in some Member States, as mentioned above.
The Baltic States and Finland have also carried out a
detailed analysis of the spill-over effects of a gas disruption into the
electricity sector. This analysis shows that in the case of Estonia and Finland, gas-based generation will be most likely replaced by other fuels. Impacts in
the electricity sector are consequently rather unlikely, particularly in Estonia where the share of gas-based generation is low. Power generator users in Finland have mandatory backup fuel stocks for an average of 3 months. Both countries will
have a technical surplus, although this margin could be reduced during periods
of very cold temperatures in winter.
The situation would be different for Latvia and Lithuania under the most demanding gas shortfall conditions due to the larger weight of
natural gas in their generation mix. In the case of Latvia, severe gas
shortages could reduce the available gas-based generation capacity as these
power plants cannot switch fuel. Lithuania would also be in need of electricity
imports during peak hours, although contrary to Latvia, thanks to fuel
switching possibilities, such imports would only be needed to cover peak demand
and not base-load power generation capacity. It must be borne in mind that these deficits have been
calculated for very extreme conditions and their likelihood is consequently
limited.
The joint assessment concludes that the technical
surplus in Finland and Estonia should be enough to cover the estimated deficits
in Latvia and Lithuania and, during short periods of time, electricity could be
transmitted via the existing connections to cover the observed deficits.
However, transmission capacities will most likely be insufficient to cover long
period demands (beyond a week). These conclusions apply to both short and long
term gas disruption scenarios although additional challenges may arise in the
latter ones depending on the ability to transport alternative fuel stocks to
the gas-based power plants in need of refuelling.
4. Assessment of the main results and envisaged
measures
The ability of the Member States concerned, at least
the three Baltics States, to face a severe disruption relies to a large extent
on the possibility to use two key infrastructures: the Incukalns gas storage in
 Latvia and the Klaipeda LNG terminal in Lithuania[3].
In this context, a clear framework for third party access rules to the
Incukalns storage as well as to the gas transport system that connects it with
the demand areas is a precondition for the full exploitation of potential
regional solutions that the Incukalns storage can provide. Such access is
necessary to ensure that gas from the Klaipeda LNG terminal can be stored in
Incukalns and transported, through the Latvian gas system, to Estonia. The contribution of those two infrastructures to the security of supply in the region
will also benefit from the ongoing work to overcome remaining internal
bottlenecks in the transport system, notably the upgrade of the Klaipeda-Kursenai
pipeline in Lithuania which will allow more gas to flow northward out of Lithuania. 
The Commission has afforded the ending of energy
isolation in the Baltics the highest priority and has therefore considered a
regional LNG terminal in the Gulf of Finland as part of an appropriate solution
together with the Balticconnector (Estonia-Finland interconnector). Such
project is featured in the list of key infrastructure projects for the EU
(Projects of Common Interest, PCIs)[4], which was adopted by the
Commission in October 2013. However, unfortunately, so far no agreement on a
cost-efficient solution has been found among the Member States concerned so the
project is experiencing delays.
The overall assessment of the joint report and the
measures it contains demonstrate a heavy reliance on non-market based measures,
with the exception of Finland, which are moreover triggered almost immediately
after the disruption of gas supplies takes place. Although the seriousness of
the impacts of a severe disruption may require a fast recourse to such
measures, including forced curtailments, the Commission notes that the lack of
market-based measures in some of the cases leads to a situation in which the
use of potentially common tools is foregone even if they could mitigate some of
the effects of a severe disruption at the early stages in an efficient manner.
This is the case, for example, for the use of interruptible commercial contracts.
In this sense, other Member States have conducted sensitivity analyses showing
a market-driven reduction in consumption of around 10% as a result of price
variations. The immediate recourse to non-market based measures may be dictated
by the lack of market signals for gas in parts of the region. In this regard,
the development of a functioning wholesale gas market remains a priority
alongside the construction of new interconnectors. This will however take some
time and not alleviate the situation in the next winter season.
Fuel switching appears the most commonly envisaged
crisis-response measure. In some cases power plants have been tested to check
their ability to actually switch fuel in the case of limited or no availability
of gas. The reduction in their performance, as a consequence of the use of
alternative fuels, has been taken into account in the analysis of the
spill-over effects of a gas crisis in the electricity system. In addition,
there are obligations in place for operators to hold reserves of alternatives
fuels to different extents. In Finland obligations cover several months,
allowing operators time to arrange additional deliveries in case of need. These
mandatory reserves are substantially inferior in Lithuania, 10 days, and even
lower in the case of Estonia at 72 hours. Holding sufficient reserves is of
particular importance for district heating which is a key source of heat supply
to households.
The joint report submitted by the four Member States
concerned also contains a wider overview of the joint measures that could be
put in practice to address a disruption. It refers in general terms to the use
of the above mentioned infrastructures, but does not define concretely when and
under which terms and conditions they could be implemented. Some of these
measures involve the simultaneous declaration of emergency levels as well as
some rough grounds for key agreements – on the basis of
the principle of solidarity – to cover the
demand of protected customers and non-protected customers in the same
proportion in all Baltic States. The conclusion of such agreements in a speedy
manner will notably improve the preparedness for a potential crisis in an
efficient manner, but it will require clear political agreements on sensitive
issues such as the amounts of gas to be supplied and its price and how such gas
can be supplied. An example of such initiatives can be found in the discussions
between Estonia and Lithuania that will allow for the protected customers of
both countries to be served ahead of the non-protected customers. This type of
agreement implies the need for an adequate allocation of costs. The latter
point is necessary as in the absence of market signals ex ante agreement on prices
and compensation mechanisms will be required. Furthermore, it triggers a much
needed discussion on a homogeneous level of protected customers in the Member
States concerned.
The spill-over effects of a gas disruption for the
electricity sector in this region have been jointly assessed and may serve as
an example for other regions. Nevertheless, the assumptions regarding estimated
electricity demand increases as a result of a gas supply disruption should be
further refined to allow for a more complete assessment. Concretely, given the
fact that the supply of gas is likely to be ensured for all protected customers
in all scenarios, further consideration could be given to the likely demand
increases resulting from the use of electricity to replace gas uses in sectors
other than households. Also its impact on electricity spot prices should be
assessed. Finally, the potential for a holistic approach whereby fuel switch
for power generation could be envisaged in order to free up gas volumes to be
used in other sectors or Member States should be explored.
5.
Recommendations
While the
general recommendations made in the Communication are also to be applied for
the Member States in this region, the Commission considers, in the light of the
previously discussed results and assessments, the following specific
recommendations particularly relevant for the concerned Member States:
Common recommendations to all
Member States in this focus Group
1.      Ensure the necessary and urgent political support for the
further development of joint emergency actions for this winter. Although the work on joint measures has started, it has
reached a stage where key decisions must be made on sensitive issues such as
the volumes of gas to be shared and its market destination, prices and possible
additional costs incurred by some or all of the Member States involved. The
nature and impact of these decisions is such that the work at technical level
will not succeed unless it is supported by a clear political will at
Governmental level to agree on common solutions. 
2.     
Develop urgently a roadmap for the swift
adoption of the joint Emergency Plan and the joint Preventive Action Plan.
The joint stress test report should provide the necessary momentum to conclude
as a matter of urgency the work on the joint Plans. These Plans should be
detailed and further develop the political agreements for this winter. The
joint Emergency Plan should contain clear procedures for the necessary decision
making and for the concrete measures to apply, including its appropriate timing
and sequencing, in the case of an emergency. Such detailed protocols should
cover the sensitive questions mentioned in the previous recommendation and
should furthermore avoid or at least minimize the need for ad-hoc decisions
during a crisis situation, which usually result in inefficient outcomes.
Estonia
1.     
Finalize before December an agreement
with Lithuania for the supply of the protected customers in Estonia in case of an emergency with gas from the LNG terminal in Klaipeda (Lithuania). The limited role of natural gas in the energy mix
in Estonia should not reduce the perception of the risks of a gas supply
disruption. Well-designed measures should be established to ensure, as a
minimum, the supply of gas to protected customers.
2.     
Ensure the feasibility of fuel switching
during emergencies. In the light of the
role of fuel switching in an emergency, authorities should consider an increase
of alternative fuel stocks or fuel stocks obligations. These stocks should be
set at a level that allows installations using such alternative stocks to
continue operating during the time necessary for the deliveries of extra stocks
to be arranged. In this regard, attention should be paid to logistic obstacles
affecting the timely delivery of additional alternative fuels. Beyond holding
larger stocks, all preparations and risks assessment should be carried out to
ensure that the procurement of additional stocks in a possible crisis situation
is not inhibited for whatever reason.
3.     
Explore the potential of market-based
solutions to deal with or alleviate the gas needs in case of a disruption.
The possibilities to introduce market-based instruments such as interruptible
contracts should be duly considered. This will also require raising awareness
among consumers about demand side measures.
4.     
Ensure clear third party access rules to
the gas system. Given the predominant role that
key infrastructures will play in ensuring the availability of gas resources for
the whole region, it is of outmost importance that the access to the gas
transport system is clearly established in a non-discriminatory manner allowing
for undertakings to meet their obligations in ensuring supply to its consumers.
  Estonia should consider the introduction of third party access rules even if
it benefits from a derogation under the Third Energy Package.
5.     
Continue efforts to develop new regional
infrastructure. Estonia, as well as Finland, should demonstrate clear political will to accelerate the necessary investments. This applies in particular to the
construction of the Balticconnector (Estonia-Finland interconnector) and the
Regional Baltic LNG terminal.
Latvia
1.     
Ensure clear third party access rules to
the storage facility in Incukalns and to the gas transport system.
It is crucial that such access is swiftly established to ensure that gas from
Klaipeda LNG terminal can be stored in Incukalns and transported to other areas
in the region in the case of a crisis. On a more general basis, third party
access to the storage will allow for all interested market players to use the
Incukalns facility as a safety buffer for the coming winter. Latvia should introduce third party access rules even if it benefits from a derogation
under the third energy package.
2.     
Explore the potential of market-based
solutions to deal with or alleviate the gas needs in case of a disruption.
Incukalns' large capacity has historically ensured the supply of gas to cover
domestic demand in Latvia. However, Latvia remains dependent on a single source
of supply to fill its storage and therefore such large capacity should not
hinder the development of demand side measures. Such measures should include
market-based instruments to cope in the first instance with an emergency
situation, such as interruptible contracts, and actions aimed at raising
awareness in consumers about the potential of demand side measures.
3.     
Revise the definition of protected
customers. In order to facilitate a cooperative
approach and an agreement on joint emergency measures, the definition of
protected customers should be aligned with the criteria set in Regulation (EU)
No 994/2010 to ensure a more homogeneous approach among all Member States
involved in this group.
Lithuania
1.     
Ensure the feasibility of fuel switching
during emergencies. As indicated in the
case of Estonia, authorities should consider whether to increase the
alternative fuel stocks or fuel stocks obligations to ensure installations can
continue operating while the new deliveries of alternative stocks arrive.
Furthermore, due consideration should be given in risk assessments and
preparations to possible obstacles affecting the procurement of additional
stocks in a possible crisis situation to ensure its removal.
2.     
Continue the work on the upgrade of the
Klaipeda-Kursenai pipeline. This project will
allow an increase in the capacity of the LNG terminal in Klaipeda. Such
enhancement will further contribute to the diversification of supplies in the
region and thus reduce the estimated gas shortfalls in cases of severe
disruptions of Russian flows.
Finland
1.     
Ensure the feasibility of fuel switching
during emergencies. Although the stocks
obligations for alternative fuels are amongst the highest in Finland, appropriate consideration should be given in national strategies to obstacles
affecting the replacement of such stocks during a crisis, notably as regards
logistics.
2.     
Continue efforts to develop new regional
infrastructure. Finland, as well as Estonia, should demonstrate clear political will to accelerate the necessary investments. This applies in particular to the
construction of the Balticonnector (Estonia-Finland interconnector) and the
Regional Baltic LNG terminal.
3.     
Continue the work on the development of
the local LNG terminals (Turku, Pori. Tornio).
Such LNG terminals will provide LNG to off grid market.
[1] Russia has been very outspoken about plans of lowering its
dependency as regards the Kaliningrad exclave and has in September 2013
commissioned the first phase of an underground storage and is also looking to
build an LNG regasification terminal. 
[2] Gas commercially stored in Incukalns by Gazprom for the supply of Estonia as well as other consumers in Russia during winter time has not been considered in the
scenarios described here according to the joint report prepared by the four
Member States. 
[3] It will be
operational as of December 2014 although some test cargos could be used earlier
should it be necessary
[4] Established in accordance with Regulation (EU) No 347/2013 of the
European Parliament and of the Council of 17 April 2013 on guidelines for
trans-European energy infrastructure.