Frontier Economics has analysed the impact of infrastructure investment in the energy sector on security of supply and competition, at a general level and also specifically in relation to the Nord Stream 2 pipeline, which travels from Russia through the Baltic Sea to Germany.
The key results of the analysis, prepared in cooperation with the Institute of Energy Economics at the University of Cologne (EWI), were published today in a short report for Nord Stream 2 AG. This document is based on an expert report prepared by Frontier and EWI in the context of Nord Stream 2 AG's application for derogation from the European Energy Regulation to the German Federal Network Agency (BNetzA).
The short report shows that investment in infrastructure in the energy sector generally leads to positive outcomes for the security of energy supply, for the following reasons:
- Investment increases the capacity of current infrastructure and thereby improves the resilience of the supply system, e.g. in the event of technical failures of alternative infrastructure; and
- Investment in pipelines leads to the possibility of transporting additional energy volumes.
Investment in infrastructure generally also results in a positive effect on competition because:
- It tends to increase the excess of supply capacity over demand and thus intensifies competition.
- This is true even if the investment does not lead to the entry of new competitors, but even more so if it provides market access to new players.
Negative effects of investment in infrastructure on security of supply or competition are likely to occur only in exceptional cases and under very specific individual circumstances, which must be examined on a case-by-case basis.
With regards to the Nord Stream 2 pipeline, our analysis shows that the pipeline will have positive effects on security of supply and competition in the European gas market for the reasons outlined above.
In terms of the political implications, these positive effects are occasionally called into question. In particular, some fear that the commissioning of Nord Stream 2 will cause complications for gas supplies or increase gas prices in individual EU countries, especially in Central and Eastern Europe. However, when critically examined, it becomes clear that this fear is unfounded on the following grounds:
- The use of Nord Stream 2 will reduce the costs and prices of gas supply in Europe as a whole and, thanks to the advanced European market integration, also in the individual member states including Central and Eastern Europe.
- Once the Nord Stream 2 pipeline comes on stream, the Russian transit routes through Belarus and Ukraine are expected to continue to be used. Even in the hypothetical case that the Nord Stream 2 pipeline would lead to a crowding out of existing Russian transit pipelines, the individual countries in Central and Eastern Europe that could be affected have diversified import options from other pipelines and liquefied natural gas (LNG).
Against this backdrop, it is important to note that the Nord Stream 2 Pipeline will have a positive impact on the security of energy supply throughout Europe and will not harm competition, but will benefit the European economy and society through lower supply costs.
Frontier regularly advises clients on a wide range of energy and regulatory topics.
For further information please contact email@example.com or call +44 (0) 20 7031 7000.