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CEE Gas Markets: a decade of untold successes ahead of new challenges

Gas markets in Central and Eastern Europe (Estonia, Latvia, Lithuania, Poland, Czech Republic, Slovakia, Hungary, Romania, Bulgaria, Slovenia, Croatia) witnessed a truly eventful decade: with gas consumption being consistently high (around 60 billion cubic metres in 2018), the positive side of the balance shows that market integration and interconnectivity have significantly strengthened, a handful of important new infrastructure projects have been developed to facilitate access to alternative sources and to diversify routes and the liquidity of markets has also improved.

These significant achievements have come very close to fulfilling some of the most important objectives that CEE gas market players were identifying as key priorities a decade ago. Many of these projects could only be implemented based on regional cooperation. Thus today, those of us working in this field for the last two decades legitimately can and should feel contented with our common successes.

Yet, most of these great achievements remain generally unrecognised and overshadowed by the challenges, especially those posed by alternative solutions coming from the new, attractive, but so far technologically unproven hydrogen hype. In this article, I will argue that the CEE region – even amidst the new waves of fundamentally changing energy markets – has made significant progress by improving the previously fragmented, divided and outdated market conditions. But market integration is not finished yet, some key pieces of infrastructure are still missing (for example, an enhanced North-South corridor for the CEE region). While we are committed to always searching for new technologies, our priorities have to be accomplished: to build a fully integrated gas market in this part of Europe as well, before deciding about stepping into any new phase.

So, let us stop for a minute to fully understand what the situation is, where we are. In the last one and a half years, we have finally started to see the results of the decade-long hard work invested in the CEE region and particularly in Hungary. This region, which has been historically dependent on one single gas supplier, has managed to advance both source and route diversification, as well as to slowly decouple from oil-indexed gas prices. In Hungary, gas transmission volumes reached a record level of 24 bcm in 2019 – significantly exceeding the domestic consumption of around 10 bcma – as a result of growing regional trade and liquidity, as well as increased stockpiling. This amount was handled through six cross-border interconnectors, half of which – the Croatian, the Romanian and the Slovak – were built and introduced in the last ten years, while the Ukrainian flow direction was also physically enabled.

Despite the great challenges prompted by the COVID-19 pandemic this year, gas volumes transmitted by FGSZ (the sole Transmission System Operator/TSO of Hungary) remained stable in the first six months of 2020 and even slightly increased compared to the transmission volumes registered in the record year of 2019. Though last year’s numbers were supported by increased stockpiling and the 2020 results have been hurt by the pandemic situation, the natural gas export deliveries of FGSZ still grew by 14.9 per cent (totalling a 3.82 bcm transported volume) in the first six months of 2020.

This significant growth in export volumes would not have been possible without recent infrastructural and commercial developments, such as the introduction of the virtual interconnection point at the Ukrainian-Hungarian border (VIP Bereg) in May. Following the introduction of VIP Bereg, export towards Ukraine has increased significantly: by 40.1 per cent in May and 42.9 per cent in June, compared to the same period last year. Several factors contributed to these good results, such as the Europe-wide oversupply of gas, the increase in gas transmission towards Ukraine and heavy stockpiling – but these could not have led to this increase without the prior successful development of the regional gas market.

What about the future of CEE gas markets? We can remain optimistic for the immediate future, as the long-held objective of enhanced diversification of gas sources will be achieved in the next 12 to 18 months: the Croatian LNG terminal will start operation, opening up this region for the world LNG market. Romanian capacities towards Hungary up to 1.75 bcma will become at least available and a new southern entry point from Serbia will also be developed. However, the 2020 July auctions showed that market participants have currently no confidence in the Romanian offshore production coming online in the upcoming five years, despite prior positive expectations.

Amid these developments, the strategy of FGSZ has been to work on those projects that are able to offer capacities at all existing border points in all flow directions. In July, besides the capacity auctions for existing capacity, FGSZ ran the first incremental capacity auctions where market participants had the chance to book capacities for the Austrian and Slovak interconnection points from Hungary to Austria and Slovakia, respectively. In parallel, the construction works on the 6 bcma capacity development of the new Serbian-Hungarian cross-border point had been approved and commenced, while the Open Season registration for the potential extension of this pipeline has also begun. This new southern supply direction – in addition to a consistently open Ukrainian entry, which promises to be reliable over an extended period of time in both flow directions – will further enhance the CEE region’s energy security.

All in all, the balance of the first results of this year’s July auctions is rather mixed. At some border points, market interest has been extensive: bookings for the Ukrainian entry point were remarkable, while the Austrian-Hungarian and the Hungarian-Romanian directions even resulted in oversubscription. However, incremental capacity auctions taking place at the Hungarian-Austrian and the Hungarian-Slovak interconnection points were unsuccessful due to non-existent market interest for these capacities, lacking new gas sources. The enhancement of the Hungarian-Slovak interconnection would have been a key element of the envisioned North-South corridor (designed to reduce dependencies in CEE), so we will have to work further on this. The relevant European regulation (CAM NC) enables launching incremental capacity booking procedures at least in every two years, thus market participants will be able to signal their changing interest at a later stage.

As a conclusion, it is important to note, for the record, the successes: Hungary, as well as the broader CEE region, has achieved great results in the last decade in increasing diversification, as well as upgrading gas infrastructures and gas markets. This has not been an easy path, but dedication and hard work finally have borne fruit and today CEE gas markets resemble normal market conditions in terms of market integration and interconnectivity, more than any time before. While much remains to be done, these investments clearly show that the CEE region has not been sitting idle waiting for miracles to happen, but the region has worked intensively in achieving necessary changes.

Yet, instead of appreciating these achievements and further completing the CEE market integration, some new EU regulatory targets and new prioritisation of alternative gases risk leaving the road half-built, jumping half-way to new challenges risks ruining the previous efforts.

On the other hand, when compared to Western European gas markets, the fact of the matter is that the maturity of our CEE markets remains somewhere at the level of the Western markets of 10-15 years ago. More advanced Western markets have already started introducing and promoting new technologies, which are yet to be considered in our region. As we are still at an earlier stage of market integration and interconnectivity, our natural aim is to concentrate on building upon our fresh achievements and completing our efforts to be able to fully exploit the benefits of an integrated and diversified gas market.

It is in the interest of CEE to develop and introduce new technologies to advance the sustainability agenda of a planned new low-carbon EU energy system. In the CEE region, however, by far the most effective CO2 reduction method – with the biggest impact at the lowest cost – would be the switching from coal and lignite power plants to gas-based operation, utilising gas as a transition fuel. CEE countries and the Balkans thus require a more balanced approach with mid-term gas-based solutions for a robust CO2 reduction, which means further diversification and market integration to complement new longer-term green energy strategies.

Obviously, we will evaluate all possibilities, work on pilot projects and examine the future use of the gas infrastructure in case of introducing alternative gases. Meanwhile, we cannot lose sight of the potential pitfalls of fragmented and parallel markets, competing for national standards, or market protectionism. The real danger of creating different national standards with protectionist purposes might affect us all.

For example, various national standards could be introduced for mixing hydrogen at different levels, effectively resulting in the dismantling of the integrated gas market – which we have been fighting for so long – under the pretext of protecting the environment. ENTSOG (the European Network of Transmission System Operators for Gas), where I have been a Board Member since July, addresses these topics routinely while advocating for the adequate role of gas, the gas industry and the gas infrastructure in a steady transition process towards a low-carbon economy in harmony with preserving the results of the European market integration. Such transition also requires enormous financial investments and strong commitment from all market participants.

Alternatives and new technologies are coming: the European Commission’s newly introduced Hydrogen Strategy is the first sign, the forerunner of truly revolutionary changes. Many of these new technologies will bring benefits to the energy future of our continent. But even the most ambitious scenarios have to take into account key factors, such as that landlocked countries (like Hungary, without sea or strong wind power, with limited water supply capacity) have reduced abilities in terms of electrolysis capacities, when compared to coastal counties.

Questions in our region regarding the new regulatory wave of Brussels have a solid basis: the benefits of the Hydrogen Strategy might only come long-term, while costs, the lack of financing opportunities for still missing infrastructure and risks (like market fragmentation) appear already short-term, as well as the possibility of new import dependencies in landlocked countries. Therefore, bold new and costly strategies cannot be attractive for CEE countries, when the potential danger of creating a new but fragmented green energy market in the EU is quite real. The Hungarian energy market wants to remain competitive under the new circumstances as well.

Heated debates about how to finance such a costly and so far technologically immature transition to hydrogen are on the agenda in Brussels. Before engaging in these, let us complete the creation of a fully functioning natural gas market in the CEE, on par with the Western part of the continent. And let us keep our realities and special conditions a strong part of designing the innovative new energy scenarios we want to build for Europe. Both of these have one common denominator: constructive cooperation and coordination between the decision-makers and stakeholders of CEE and Brussels. Industry arguments and CEE particularities will have to be well-integrated in the fine-tuning of any new successful common European energy strategy.

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