Chapter 16
New Regional and International Developments to Boost the Euro-Mediterranean Energy Sector
Ernesto Bonafé Energy Charter Secretariat, Brussels, Belgium
Abstract
Compelling economic, political, social, and security energy reasons are leading Euro-Mediterranean countries to continuously rethink and redesign their strategic partnership. This chapter looks into the last institutional and policy developments to pave the way toward a Euro-Mediterranean energy sector. The need for the EU to diversify its energy supplies and the benefits that Mediterranean countries can reap from the transition to a sustainable and decarbonized energy model justify the search for appropriate institutional arrangements.
Specialized bodies dealing with regulatory and network operation and planning – such as the Association of Mediterranean Energy Regulators (MEDREG) and the Association of the Mediterranean Transmission System Operators (MED-TSO) – are developing the Euro-Mediterranean energy sectors. However, their technical work faces drawbacks as illustrated by the failure to endorse the Mediterranean Energy Master Plan at the ministerial level in December 2013. New initiatives have since then emerged to unlock the political impasse. In November 2014 a new high-level conference launched three platforms for dialog in the sectors of natural gas, electricity market, and promotion of renewable energy sources and energy efficiency, involving not only MEDREG and MED-TSO, but also the Regional Center for Renewable Energy and Energy Efficiency (RCREEE), the Mediterranean Association of National Energy Agencies (MEDENER), and the Mediterranean Observatory of Energy (OME), with coordinating tasks conferred to the Union for the Mediterranean (UfM) Secretariat.
The slow pace in building a Euro-Mediterranean energy partnership should be linked to the failure of the European Neighbourhood Policy (ENP), which in 2015 has been open to public consultation by the European Commission, and a communication is expected by autumn. The challenges of differentiation, more focused cooperation, a more flexible toolbox, and improved communication are the axes of public consultation.
Energy is identified as a priority sectoral policy of the new ENP. Moreover, governance challenges include ensuring the rule of law and enhancing legal certainty, which is important for domestic and foreign investors. This is precisely the contribution that the 2015 International Energy Charter, as a political declaration, and the Energy Charter Treaty, as a legally binding agreement, can make to enhance the Euro-Mediterranean energy sector. The 2015 International Energy Charter maps out universal market-based principles for multilateral cooperation within and between regions across the world. Additionally, it paves the way for an upgrade collaboration based on ECT rules, while respecting in all cases national sovereignty over energy resources and markets. The huge investments needed in the region would only take place when investors feel the rule of law is ensured.
Keywords
North Africa
Middle East
Union for the Mediterranean
MEDREG
MED-TSO
European Neighbourhood Policy
International Energy Charter
Energy Charter Treaty
1. Introduction
The European energy market is evolving toward a Euro-Mediterranean energy market. Middle East and North Africa (MENA) is important for the EU in terms of diversifying security of gas and oil supplies, being responsible for about 25% of today’s EU imports of gas and 6% of crude oil. As for the future, the discoveries in the east Mediterranean region have considerably increased the potential to supply gas to the EU. Closer cooperation in the region is justified by complementary assets on both sides of the Mediterranean, the global geopolitics of oil and gas, the development of renewable and carbon-free energy sources, and the prospect of an energy sector that boosts the economy, develops a regional industry, and creates jobs.
The EU transition to a competitive, low-carbon economy is based on the ambitious objective to reduce its greenhouse gases emissions by 80% by 2050 (Communication, 2011). The MENA region is well placed to reap the benefits of a low-carbon transition thanks to its rich opportunities for exploiting renewable energy sources (RES) and energy efficiency. This also requires unlocking the potential for widening the EU-Mediterranean technological partnership in the area of RES.
An integrated electricity market all around the Mediterranean would be of benefit for all countries. It would allow complementarities between national systems experiencing different load profiles, fuel mix, and backup capacity for renewable electricity production. Moreover, a south Mediterranean market tied to the EU market would improve the overall stability and security of the electricity supply. A regional electricity market is also more attractive for private capital than segmented national markets as the huge investments needed in generation and networks cannot be conceived without private capital.
Electricity demand in the south Mediterranean is expected to double by 2030. Power capacity in 2009 amounted to 122 GW, while the planned new generation capacity by 2030 would represent between 160 GW and 200 GW. Installed renewable capacity would go from 2 GW in 2009 to some 40 GW in 2030 or 82 GW in a proactive green scenario (OME, 2012). Likewise, the growth in energy demand, which could triple in the south and east Mediterranean countries (SEMCs) by 2030, calls for a significant increase in installed electricity production capacity. Whatever the energy policies in place, increasing energy production capacities in the region would require investments of between US$310 and US$350 billion by 2030 (Moncef et al., 2013).
The mobilization of huge amounts of local and foreign investment requires a stable and predictable political, legal, and regulatory framework. International energy cooperation of this nature must be based on a sound regulatory framework in order to increase stability and transparency in the investment environment.
In 2011, the European Commission (EC) referred to a EU–Southern Mediterranean Energy Community starting with the Maghreb countries and possibly expanding progressively to the Mashreq (Joint European Commission, 2011). However, the situation in Mediterranean countries differs from the one that led to the Energy Community Treaty, which was conceived to reunify an energy system, which had disintegrated during the conflicts of the 1990s. In contrast to energy integration in the western Balkans, regulatory convergence with Mediterranean countries may have to follow a different policy and regulatory approach.
EU–Mediterranean integration is to be based on a differentiated and gradual approach to be implemented within the framework of a renewed European Neighbourhood Policy (ENP). In the energy sector, regional cooperation is needed to ensure a secure, affordable, and sustainable energy supply as a key factor for underpinning stability and shared prosperity in the Mediterranean area. This cooperation is to be invigorated by three thematic platforms for high-level dialog in the sectors of natural gas, the electricity market, and the promotion of RES and energy efficiency. At the same time, Mediterranean countries have the opportunity to embrace universal market-based principles and rules by adopting the new International Energy Charter and the Energy Charter Treaty.
This chapter starts with a general review of structural reforms in MENA countries, which is followed by a study on new Euro-Mediterranean platforms. The new ENP is then examined, and this section is followed by an overview of the Energy Charter. Finally, some conclusions and policy implications are provided.
2. Energy legal reforms in MENA countries
All Mediterranean countries are engaged in defining and implementing national energy policies and legislation. Among the common objectives across the region, there are the promotion of RES and the development of electricity and gas regional markets allowing all countries to improve energy security, sustainability, and affordability. National market reforms in terms of industrial restructuring and incipient regulation of interconnections show the basic ground upon which to build, as a next step, a regional energy sector.
In Algeria, from 1947 until 2002, the electricity generation, transmission, and distribution was monopolized by Sonelgaz, the state-owned power company. In 2002, new legal reforms of the power market revoked the Sonelgaz monopoly and partially privatized the company despite the government remaining the main shareholder of Sonelgaz (Waqar, 2013). The reform also created the national regulatory authority, CREG, to supervise the power market and to ensure nondiscriminatory access to the networks. Moreover, Algeria has electrical interconnections with Morocco and Tunisia. According to Samborsky (2013), rules on interconnections are provided under Law 02-01 of 2002 on electricity and gas distribution. International electricity transactions have to be confirmed by CREG, which can refuse export activities if they have strongly negative impacts on the Algeria’s national electricity supply (i.e., if demand cannot be satisfied). Power plants that have been constructed exclusively for export of electricity are exempt from this reservation.
In Egypt, the power market was controlled by the state-owned Egyptian Electricity Authority (EEA). In July 2000, seeking liberalization in the power sector, EEA was converted to a holding company called the Egyptian Electricity Holding Company (EEHC). Since July 2001, a series of restructuring steps took place for the affiliated companies, starting by unbundling generation, transmission, and distribution activities. Today EEHC has 16 affiliated companies: 6 generation, 9 distribution, and 1 transmission. Furthermore, Egypt has electrical interconnections with Jordan, Libya, and Syria (via Libya). However, access to interconnections by private operators needs further regulatory development. The main text governing the power sector is still a draft of 2008 that has not yet been approved by parliament. The objective of Egyptian market reform is to establish a fully competitive electricity market, where electricity generation, transmission, and distribution activities are fully unbundled (Bardolet, 2014a). The proposed market will adopt bilateral contracts with a balancing and settlement system. Under this reform, eligible customers will have the right to conclude bilateral contracts with present and future generation companies. Law 102/1986 established the New and Renewable Energy Authority (NREA), and the Presidential Decree No. 326/1997 established the Electric Utility and Consumer Protection Regulatory Agency (EgyptERA), which was reorganized by Presidential Decree No. 339/2000.
In Israel, the state-owned Israel Electric Corporation generates, transmits, distributes, and supplies most of the electricity used in the national market according to licenses granted under the Electricity Sector Law of 5756-1996 (Ministry of National Infrastructures, 2014). The law regulates production, system management, transmission, distribution, and supply or trade in electricity. The Public Services Authority and the Minister of Energy and Infrastructure are in charge of the national electricity policy, as well as connecting the electricity networks to those of neighboring countries. Licenses granted by the Authority come into force after approval by the minister. Details of the transmission license application process are in Electricity Market Regulations 5758-1997. Moreover, Israel is part of the EuroAsia interconnector, which is planning an interconnection between Greece, Cyprus, and Israel (EuroAsia Interconnector, 2015).
In Jordan, the Jordan Electricity Authority (JEA) was established in 1976. Twenty years later, in 1996, JEA was converted into the National Electric Power Company (NEPCO). In 1999, another restructuring transformed NEPCO into three companies: the National Electric Power Company (NEPCO) responsible for power transmission, which operates as a single buyer; the Central Electricity Generation Company (CEGCO), responsible for power generation, partly privatized, generating electricity along with Samra Electric Power distribution and independent power producers; and the privatized Electricity Distribution Company (EDCO), responsible for power distribution. In addition, Jordan has electrical interconnections with Egypt and Syria. The General Electricity Law 64-2003 gives the Ministry of Energy and Mineral Resources the power to cooperate with other countries for the purpose of electrical interconnection and trade in electric power. International transmission coordination is performed by NEPCO.
In Lebanon, the 2010 Policy Paper for the Electricity Sector (Bassil, 2010) pointed out that the legal framework for privatization, liberalization, and unbundling of the sector, Law 462-10, had not yet been applied. Instead, the law implemented by Decrees 16878/1964 and 4517/1972 giving Electricité du Liban (EDL) exclusive authority in the generation, transmission, and distribution areas was still being applied. However, Article 5 of Law 462-10 establishes that the transmission of electrical energy remains the property of the transmission company and it is possible by a decree of the council of ministers to ratify contracts for the management, operation, and development of transmission activities to the private sector, including any privatized or any company owned by the private sector.
In Morocco, the Office National de l’Electricité et de l’Eau (ONEE) has been in charge of the monopoly of electricity transport since 1963. ONEE is the grid operator and as such the grid expansion and reinforcement is under its sole responsibility. Morocco is synchronously connected with Algeria and Spain. Moreover, power transmission is organized and conducted by ONEE under a transmission contract. ONEE is the owner of 50% of the Spain–Morocco interconnection, and it holds the monopoly on the Moroccan side (Bardolet, 2014b). Law 13-09, on renewable energy, indicates that power produced from renewable sources is for national and international markets. In that sense, supply is guaranteed through access to high, medium, and lower tension national networks, under agreed terms and conditions between the operator and the manager of the national electricity grid transportation. Moreover, to achieve its ambitious renewable energy targets, the government created two dedicated agencies: the Moroccan Agency for Solar Energy (MASEN), in charge of implementing the Moroccan Solar Plan, and the National Agency for the Development of Renewable Energy and Energy Efficiency (ADEREE). Morocco is preparing a new national independent regulator authority, in charge of defining tariffs and conditions for transportation and interconnection access.
In Palestine, Law 13 of 2009 authorizes the creation of a national electric transmission company in charge of exporting and importing electricity from and to Palestine through connecting the grid, after signing the relevant agreements with the Palestinian Energy and Natural Resources Authority (PENRA); all relevant agreements are submitted for the approval of the Minister’s Cabinet (Palestinian Electricity Regulatory Council, 2011).
In Syria, the Public Establishment for Electricity Generation and Transmission is responsible for electricity exchanges with neighboring countries. Before the conflict, the electrical systems were operated in parallel with Syria, Jordan, Egypt, and Libya synchronously as one electrical system, and electrical power exchange contracts were concluded with those countries. The interconnection between Syria and Turkey on a 400 kV level is ready; however, it is not yet operational.
The power market in Tunisia is controlled and operated by the state-owned company Société Tunisienne de l’Electricité et du Gaz (STEG). Law 96-27 withdrew STEG’s monopoly for power generation to allow private investment in the generation sector. STEG is responsible for transmission and distribution, along with control of existing power generation plants. Moreover, Tunisia is connected to Europe through Morocco (Bardolet, 2014c). Tunisia has interconnections with Algeria and Libya, and is planning another with Italy. New network infrastructure is based on an authorization procedure handled by STEG, the different relevant ministries, and the Prime Minister.
The foregoing overview of regulatory milestones in MENA countries, from unbundling to private generation and interconnections to neighboring countries, reveals the general common ground of the power sector. This common vision is being reinforced by national strategies to promote RES. Technical solutions to cope with intermittency and ensure reliable system operation will put the region on track for further cooperation among neighboring countries.
3. The new Euro-Mediterranean energy platforms
The UfM was created in 2008 to revamp the Barcelona Process of 1995 and to give a new political impulse to economic and social cooperation between the EU and the Mediterranean. All 28 EU member states and 15 Mediterranean countries are part of the UfM.1 Energy is one of the priority sectors. The UfM was launched at the same time as the Mediterranean Solar Plan (MSP) and announcement of the political target to develop 20 GW of new installed renewable capacity in the south Mediterranean by 2020. Since then a number of regional institutions have been active in contributing to develop RES and electricity exchanges between the EU and Mediterranean countries.2 In fact, the UfM and the MSP have favored the establishment of political, economic, regulatory, and industrial regional institutions in the energy sector (Moncef et al., 2013).
Despite important developments since the establishment of the UfM, some difficulties and challenges persist in developing a Euro-Mediterranean energy sector, as was evident at the Energy Ministerial Meeting in December 2013 which failed to endorse the Master Plan for the MSP that the UfM Secretariat had developed in collaboration with all stakeholders. One of the problems undermining an effective regional strategy is the lack of common understanding and acceptance regarding the consumption patterns and generating capacities on the south and north shores of the Mediterranean. Stakeholders and countries alike might be pursuing specific goals that respond to different industrial interests and national solutions that undermine the benefits of a sensible regional approach.
Two specialized bodies gathering technical expertise have a direct impact on market conditions: namely, the Association of Mediterranean Energy Regulators (MEDREG) (OME and Medgrid, 2013) and the Association of the Mediterranean Transmission Operators for Electricity (Med-TSO). Aware of their specific and complementary mission, the two associations signed a cooperation protocol in Algiers in September 2013 (MEDREG, 2013). Their envisaged mandate is to play, in the Euro-Mediterranean region, a similar role that the Cooperation of European Energy Regulators (CEER)3 and the European Network of Transmission System Operators (ENTSO) effectively play in the EU internal energy market.
MEDREG aims to improve the transparency, attractiveness, and investment climate by forging a regulatory framework in the fields of electricity and gas. It has demonstrated the need for a EU–MENA backbone grid using high-voltage direct current (HVDC) power transmission to accommodate increasing electricity generation from renewable sources, it designed a scenario to verify the effectiveness of cooperation mechanisms under Article 9 of Directive 2009/28/EC, and it prepared two studies on external dependence and security of supply and the improvement of national data transparency in the gas sector (Mediterranean Energy Regulators, 2012). At the beginning of 2015, MEDREG held a consultation on the document “ Interconnection Infrastructure in the Mediterranean: A Challenging Environment for Investments” (MEDREG, 2015). It focused on existing and projected interconnection infrastructure for electricity and gas in the Mediterranean Basin with a view to pointing out the main barriers impeding use of efficient existing infrastructures and impeding the financing of new projects.
Med-TSO was established in April 2012 as the Association of the Mediterranean Transmission Networks for Electricity. It should benefit from the work undertaken by the European Network of Transmission System Operators for Electricity (ENTSO-E) and, where necessary, adapt to the specific needs of the south Mediterranean. Med-TSO tasks include developing a Mediterranean transport and dispatching system, analyzing and proposing common technical rules for the interoperability of interconnected systems, providing technical assistance, promoting research and development, facilitating the transfer of know-how, exchanging relevant information between transmission system operators, enhancing transparency, promoting public acceptability by addressing environmental concerns regarding transmission infrastructure, consulting stakeholders, and sharing experiences and solutions regarding grid operation.
In November 2014, during the high-level conference “Building a Euro-Mediterranean Energy Bridge: The Strategic Importance of Euromed Gas and Electricity Networks in the Context of Energy Security,” a Memorandum of Understanding was signed between the Directorate General for Energy of the European Commission, MEDREG, and Med-TSO with the aim of establishing a Euro-Mediterranean platform on regional electricity markets (European Commission, 2014). The high-level conference launched three Mediterranean energy platforms.
• Platform on regional electricity market. This will center on removing technical, regulatory, and infrastructure barriers to the free trade of electricity across international borders. This will boost energy security by diversifying supply and increasing competition between power generators. It is proposed that this platform be supported by the UfM Secretariat, with the assistance of MEDREG, MED-TSO, and other key stakeholders.
• Platform on renewable energy sources and efficiency. It will analyze how to promote regulatory frameworks and markets to enable investments in renewables and energy-efficient practices. The platform will also exchange best practices in areas including measuring energy efficiency and developing national energy efficiency plans: namely, via relevant policies and subsidies enforcing codes for buildings and defining minimum energy performance standards for appliances. It is proposed that this platform be supported by the UfM Secretariat and involve stakeholders such as the Regional Center for Renewable Energy and Energy Efficiency (RCREEE) and the Association Méditerranéenne des Agences Nationales de Maîtrise de l’Énergie (MEDENER).
• Mediterranean gas hub. It will discuss how to develop gas production in MENA countries for their domestic markets and for export to the EU. The platform will also debate regulatory, financing, and infrastructure issues, such as new pipelines and liquefied natural gas facilities in order to create a Mediterranean gas hub. The platform should promote the environmentally sustainable exploration and exploitation of hydrocarbon resources in line with common offshore safety and security rules. It is proposed that this platform be supported by the OME.
Other stakeholders have already joined the debate, as Eurelectric’s proposal to secure energy investments in an “8-step Action Plan”: (1) make regulatory agencies fit for purpose to boost investor confidence in generation and infrastructure projects; (2) enable cost-reflective energy prices and the phasing out of domestic electricity subsidies; (3) formulate sound and transparent energy policies; (4) facilitate technical and political coordination and cooperation on grid investments to urgently develop and enhance new and existing interconnections; (5) open market structures, in particular for renewable energy generation projects to allow free entry, new players, and competition among providers; (6) design and implement the right financing mechanisms to simulate exploring the renewable energy potential and to profit from technology transfers; (7) improve education and technological transfer; and (8) enhance EU–MENA energy cooperation and extend the energy community concept toward the south (Zvolikevich, 2015).
4. Toward a new European Neighbourhood Policy
The ENP was designed in 2003 (European Commission, 2003) to develop progressive integration between the EU and its neighboring countries by implementing political, economic, and institutional reforms, and committing to common values. The plan was to achieve closer economic integration and the prospect of increased access to the EU internal market.
At that time the objective was to avoid the emergence of new dividing borders between the enlarged EU and its neighbors on the basis of common values: democracy, the rule of law, respect for human rights, and social cohesion. The ENP is currently proposed to 10 southern Mediterranean neighbors: Algeria, Egypt, Israel, Jordan, Lebanon, Libya, Morocco, Palestine, Syria, and Tunisia.4 The ENP was reviewed in 2011 to give a response to the events in the Arab world by strengthening reforms toward democracy and the rule of law.
The Treaty on European Union, Article 8(1), provides the legal basis for a stronger Europe when it comes to foreign policy. It states that “the Union shall develop a special relationship with neighbouring countries, aiming to establish an area of prosperity and good neighbourliness, founded on the values of the Union and characterised by close and peaceful relations based on cooperation.”
Over the past 10 years, the Mediterranean has become politically less stable: a civil war in Syria, a conflict in Libya, difficult changes in Egypt, and hostilities in the Middle East. The ENP has failed due to a lack of adequate responses to those major challenges and, on the other hand, to the changing aspirations of Mediterranean countries in different policy sectors. Moreover, the reform agenda has stalled because of competing interests and as not all partners are equally interested in the same model of partnership with the EU. The EU itself has experienced a major economic crisis that has had an impact on its neighbors.
The European Commission’s new President Jean-Claude Juncker instructed that the ENP be reviewed within the first year of its mandate. It has appeared necessary to undertake a review of the principles on which the policy is based as well as its scope and how instruments should be used. To frame the debate, a consultation paper was adopted on March 4, 2015 setting out key questions for discussion with Mediterranean partners and stakeholders. A Commission Communication will follow in the autumn 2015 setting out proposals for the future direction of the ENP.
According to the ENP “more for more” principle, partners that are embarking on more ambitious democratic reforms are offered increased market access (e.g., Deep and Comprehensive Free Trade Agreements, DCFTA), people crossborder mobility partnerships, and further financial support. In its consultation document, the European Commission acknowledges that the “more for more” approach underlines the EU’s commitment to its core values. However, it has not always been successful in providing incentives for further reforms and, more generally, it may not contribute to an atmosphere of equal partnership.
Therefore, the European Commission has decided to explore how a new policy can reflect better the interests and aspirations of the EU and its Mediterranean partners. The Commission’s consultation is based on four priorities.
• A new ENP should face the challenges of differentiation, which means being aware and respecting increasing divergence in the aspirations of Mediterranean partner countries. While for some countries the Arab Spring in 2011 has led to positive political developments, others are undergoing complex transitions and instability arising from armed conflicts.
• Cooperation between EU and ENP partners is to be more focused. Action Plans set out very broad cooperation programs. As a result the agenda of the EU and its partners is not truly shared. Areas of focus must be ensuring the rule of law, protecting human rights, and deepening democratic principles.
• A differentiated and focused approach to a new ENP is to be supported with a more flexible toolbox; currently, the ENP is based on association agreements, action plans, reporting requirements, bilateral dialogs, and financial support.
• There is a need to improve communication of the objectives and results of the ENP, which should also lead to improving the ownership of the ENP by partner countries.
As for sectoral policies, there is a shared interest in increasing energy security and efficiency, as well as energy safety. As for governance challenges, the areas of focus are ensuring the rule of law, protecting human rights, and promoting democracy. By enhancing legal certainty, they also address issues that are important for domestic and foreign investors, such as fighting corruption and fraud and strengthening public finance management.
In 2014 the EU signed a Memorandum of Understanding with Jordan, Lebanon, and Morocco for the period 2014–2017, with an emphasis on promotion of the rule of law, employment and private sector development, and renewable energy and energy efficiency enhancement.5
In the energy sector, efforts have focused on energy security, market reform, and regional integration. The priorities have been to develop infrastructure, improve energy efficiency, and use more RES. In June 2013, the EU and Algeria launched a political dialog in the field of energy (EC-MEMO, 2013). In May 2015, the dialog was relaunched to boost investments in Algerian gas, thus improving Europe’s energy security. Similarly, the EU has agreed to share its expertise in support of Algeria’s renewable energy and efficiency goals.
The new European Neighbourhood Instrument (ENI) has set aside a budget of €15 billion for the period 2014–2020. It represents the bulk of funding to the 16 ENP partner countries. An incentive-based approach provides for flexibility in modulating financial assistance taking account of progress of individual countries toward democracy and respect of human rights. A midterm review is scheduled for 2017 in order to adjust the allocation and implementation of funding from the ENI to rapidly changing developments in the region.
In May 2015, the European Commission signed a €43 million financing agreement for one of the world’s largest solar energy projects in Morocco. It is a project backed by the European Investment Bank and it is part of the Ouarzazate Solar Complex that will see the installation of a 100–150 MW concentrated solar power (CSP) plant. The overall objective is to reach 560 MW of solar power capacity by 2016. This aims to scale up the production of renewable energy, and thus will contribute to the country’s energy security, diversify energy sources, cut carbon emissions, and create jobs.
On the other hand, there is the question of extending the ENP beyond the current framework of 16 neighboring countries. Many challenges, including those related to the energy sector, cannot be adequately addressed without taking into account and cooperating with the neighbors of EU neighbors. A new approach to a broader geographical area should allow more flexibility to work and interact with new neighboring countries that have been excluded from the ENP. Furthermore, a new ENP requires greater involvement of member states in addition to EU action.
5. The Energy Charter Treaty and the new International Energy Charter
In 1991, after the fall of the Berlin Wall, the European Energy Charter was signed as a political foundation for east–west energy cooperation. It was based on common objectives and principles such as the development of open and efficient energy markets, the stimulus of private investments, nondiscrimination among participants, respect for state sovereignty over natural resources, and recognition of the importance of environmentally and energy-efficient policies.
The European Energy Charter was a political document that also emphasized the need for the establishment of an appropriate international legal framework for energy relations, leading to the signing, in 1994, of the Energy Charter Treaty (ECT), which entered into force in 1998 (Cambini and Rubino, 2014). Moreover, the new International Energy Charter of 2015 is a political declaration that updates the 1991 European Energy Charter and reflects today’s global energy challenges.
5.1. The Energy Charter Treaty
The ECT’s original purpose was to facilitate energy collaboration in transition economies. Nevertheless, the ECT offers a legal framework and policy forum that is open to all countries along the energy chain: producers, consumers, and transit states, as well as industrialized, transition, and developing economies. The ECT process expanded beyond its west–east traditional borders and gained a global dimension, including countries from Asia and Central Asia. To date, the ECT has 53 members, including the EU as a whole, whereas another 25 countries have observer status.
In an increasingly global and interconnected energy sector, the ECT sets an international level playing field in the energy sector. Its principles provide for a long-term global model of energy cooperation within the framework of a market economy based on mutual assistance and the principle of nondiscrimination. By joining the ECT, countries across the world will set the legal and policy standards for international energy relations on a global basis. In 2011, the European Commission stated, as part of the EU External Energy Policy, that “the Energy Charter Treaty should seek to extend membership towards North Africa and the Far East” (European Commission, 2003).
Pursuant to the Road Map for the Modernization of the Energy Charter Process, in 2012 the Energy Charter Conference adopted a policy of consolidation, expansion, and outreach aiming to promote the accession of new countries across the world and of course of MENA countries. The policy objective is to enhance the rule of law in the areas of investment, trade, and transit. Accession to the ECT would send out clear and strong signals indicating political willingness to attract foreign investments. With regard to the current ECT membership status in the south Mediterranean, Jordan in 2007 and Morocco in 2012 have signed the European Energy Charter, which is the first step toward accession to the ECT.
In MENA, energy consumption has risen by 5.2% each year since 2000, and energy demand in the region is expected to continue to rise above the world’s average, by around 3% each year from 2010 to 2030 – electricity demand is forecast to rise by 6% each year over the same period. This is the result of rapid economic expansion, the energy-intensive nature of the region’s extractive industries, and a rapidly growing population. As analyzed and recommended by the OECD, well-targeted government regulatory and financial mechanisms can support private investment in renewable energy (OECD, 2013).
However, simply providing development assistance will not be enough to bring about the necessary changes. Private investment flows remain insufficient compared with the energy needs of the region. More finance is needed to develop infrastructure, and the role of the private sector in mobilizing investments is crucial. The ECT is well equipped to attract private investments. For an open and private sector, confidence, predictability, and a stable energy framework are fundamental. This is the important added value that the ECT can bring to south Mediterranean countries.
The perceived degree of political risks in the host country considerably affects the decision of foreign companies regarding whether to make an investment or not and what level of return it would imply. The lower the perceived risk, the more capital is likely to be invested and the more potential revenue the host country will attract. By reducing political risks, the ECT seeks to improve investor confidence and contribute to an increase in international investment flows.
The Treaty provides a legal framework for energy relations as well as dispute settlement mechanisms. Beyond the resolution of particular disputes, ECT provisions have the effect of strengthening the rule of law and transparency, thereby contributing to an improvement in the general investment and business climate. At the same time, the ECT explicitly recognizes national sovereign rights over energy resources.
The ECT aims to promote long-term cooperation in the energy field, based on complementarities and mutual benefits and it imposes the obligation to promote access to international markets on commercial terms, and generally to develop an open and competitive market in the energy sector. The ECT contains a set of rights and obligations of “hard law” nature in the areas of investment protection, trade, and transit, which are enforceable in legally binding arbitration mechanisms. The ECT is supplemented with a Protocol on Energy Efficiency and Related Environmental Aspects that entered into force simultaneously with the ECT in 1998.
The ECT also contains “soft law” provisions related to competition, technology transfer, and access to capital. However, confirmation of the principle of national sovereignty over energy resources means that the ECT does not prescribe the structure of the domestic energy sector, the ownership of energy companies, or oblige member countries to open up their energy sector to foreign investors.
The investment chapter is a cornerstone of the ECT. Its provisions aim to promote and protect foreign investments. To this end, the treaty grants a number of rights to foreign investors with regard to their investment in the host country. Foreign investors are protected against the most important political risks, such as discrimination, expropriation and nationalization, breach of individual investment contracts, damages due to war and similar events, and unjustified restrictions on the transfer of funds. Investor rights are further protected by the dispute settlement provisions of the ECT, covering both interstate arbitration and investor–state dispute settlement.
A distinctive feature of the ECT is that it provides a set of rules that covers the entire energy chain, including not only investments in gas production and electricity generation but also the terms under which energy can be traded and transported across various national jurisdictions to international markets. ECT provisions on trade and transit are based on those of the World Trade Organization (WTO). WTO trade rules are thus extended to ECT contracting parties that are not yet members of the WTO.
The ECT addresses in more detail than the WTO the strategic issue of energy transit. In accordance with the principle of freedom of transit, ECT contracting parties undertake to facilitate the transit of energy through their territory. This includes the prohibition of discrimination in terms of origin, destination, and ownership of energy as well as equal treatment of transit and transport facilities in terms of governmental measures. A general obligation to secure established flows of energy implies that transit countries must not interrupt or reduce existing transit flows, even if they have disputes with any other country concerning this transit, nor must they place obstacles in the way of new capacity being established.
ECT market-based rules do not mean that a particular model of energy market structure is imposed on national governments at the international level. The ECT fully respects the sovereign right of each of its signatory states to determine the system of property ownership of its national energy resources. Moreover, each state continues to hold the right to decide inter alia the geographical areas to be made available for exploration and development of its energy resources and to determine the rate at which such energy resources may be depleted or exploited. The explicit recognition of national sovereign rights over energy resources by the ECT means that, at all times, the balance between protection of investors and sovereignty of host states needs to be maintained.
Furthermore, if countries are to integrate large amounts of electricity from RES into the network, they need to share not only interconnections but also common principles and rules. The creation of a Euro-Mediterranean energy market will result from initiatives such as the UfM (political), MEDREG (regulatory), Med-TSO (operational), and OME (industrial).
However, today those institutions provide policy guidance, coordinated action, guidelines, studies, and recommendations for best practices for an investment framework and crossborder energy exchanges. The regulatory outcomes are to be approved and implemented on a voluntary basis. A consensus-based approach to energy regulation is suitable to reach compromises among countries with different energy sectors. However, those incipient practices need to be endorsed by a series of legally binding provisions. The ECT contains a minimum set of rules that may contribute to enhance the rule of law in the Mediterranean energy market according to international legal standards. The importance of the ECT and the rule of law in the energy sector is emphasized by a new political declaration, the International Energy Charter (IEC).
5.2. The International Energy Charter
The IEC is a political declaration aimed at strengthening energy cooperation between its signatories and does not bear any legally binding obligation. The IEC is an updated version of the European Energy Charter. As a result of the increasingly global and interconnected energy sector, the IEC is intended to expand beyond traditional borders to reach out to new countries, regions, and international organizations with the aim of enhancing international cooperation to address today’s global energy challenges. The IEC was adopted at a Ministerial Conference in The Hague, Netherlands, on May 20, 2015 by 75 countries including Israel, Jordan, Lebanon, Morocco, and Palestine from all continents.
The objectives of the IEC are development of a sustainable energy sector, improvement of energy security, and maximizing economic efficiency, while recognizing the sovereignty of countries over their energy resources and their rights to regulatory energy transmission and transportation. To achieve these objectives, the signatories are determined to create a climate favorable to the operation of enterprises and to the flow of investments and technologies.
IEC signatories underline the need to define energy policies and have regular exchanges of views on action taken, taking full advantage of the experience of existing international organizations and institutions. They also decide to foster private initiatives to make full use of the potential of enterprises, institutions, and all available financial sources as well as technical cooperation.
The IEC objectives are pursued by strengthening regional energy markets and enhancing the efficient functioning of the global energy market by joint or coordinated action in the following fields.
1. Access to and development of energy sources. Signatories will formulate relevant rules for the development of energy resources in economic and environmentally sound conditions, and will coordinate their actions in this area. They will ensure they are publicly available and transparent in consistence with domestic legislation and international obligations. Operators should not be discriminated in terms of ownership of resources, internal operation of companies, and taxation.
2. Access to national, regional, and international markets for energy products, taking into account the need to facilitate the operation of market forces and promote competition.
3. Liberalization of trade in energy by removing barriers to trade in energy products, equipment, and services in a manner consistent with the provision of WTO rules. IEC signatories should develop market-oriented energy prices. They recognize the importance of transit for the liberalization of trade in energy products, which should take place under economic and environmentally sound conditions. They should also cooperate in the development of international energy transmission networks and their interconnections, including crossborder oil, gas, and electricity.
4. Promotion and protection of investments. IEC signatories will remove all barriers to investment and provide a national level for a stable and transparent legal framework for foreign investments. They aim to stress the importance of bilateral and/or multilateral agreements on promotion and protection of investments as well as of full access to adequate dispute settlement mechanisms, including national mechanisms and international arbitration according to national laws and relevant international agreements. Moreover, signatories recognize the right to repatriate profits relating to an investment and recognize the importance of avoiding double taxation.
5. Safety principles and guidelines and the protection of health and the environment. Signatories will cooperate in the implementation, development, and mutual recognition of safety principles and guidelines.
6. Research, technological development, technology transfer, innovation, and dissemination in the fields of energy production, conversion, transport, distribution, and the efficient and clean use of energy.
7. Energy efficiency, environmental protection, and sustainable and clean energy. This includes consistency between relevant energy policies and environmental agreements, ensuring market-oriented price formation reflecting environmental costs and benefits, the exchange of know-how regarding RES, efficient use of energy, and framework conditions for profitable investment in energy efficiency.
8. Access to sustainable energy. The signatories underline the importance of access to sustainable, modern, affordable, and cleaner energy, in particular in developing countries, which may contribute to energy poverty alleviation. To this end, they will strengthen their cooperation, and support initiatives and partnerships at international levels.
9. Education and training. Signatories recognize industry’s role in promoting vocational education and training in the energy field, and decide to cooperate in such activities.
10. Diversification of energy sources and supply routes in order to enhance energy security.
By signing the IEC, countries confirm and enhance established principles of energy cooperation, participate in a governmental platform to address contemporary energy challenges, and contribute to global energy governance by facilitating new accessions to the ECT, without containing any obligations in this respect.
6. Conclusions
The opportunities for economic, industrial, and social development in the Mediterranean countries will materialize in the realization of a Euro-Mediterranean regional energy market. The objective of secure, sustainable, and competitive energy in the region needs continuous progress and adaptations in terms of new policies, legislation, and institutions. Structural market reforms undertaken at the national level provide the common ground and starting point to build a regional vision shared by all countries. The recent establishment of new Euro-Mediterranean energy platforms that are to play an essential role in the framework of a renewed ENP, which will consider energy as a priority sectoral policy.
From the good governance perspective, the ENP aims to promote the rule of law in a way that accommodates the challenges of differentiation, a focused approach, a more flexible toolbox, and better communication. Moreover, the new policy does not only target its neighbors but it will also consider the neighbors of neighbors. Precisely, the first-ever attempt to build the rule of law at the international level has been the ECT, of which the EU and its eastern neighbors are members. Therefore, the ECT can enhance a level playing field in the Euro-Mediterranean region and make it a more friendly environment for investors.
Committing to legally binding international rules and standards of good governance may be a demanding exercise for some countries, including Mediterranean ones. Therefore, as a preparatory step, a new IEC was adopted on May 20, 2015 in The Hague as a political (nonbinding) declaration for intergovernmental cooperation. The IEC is an opportunity for all countries to express clear political willingness to share market principles and therefore contribute to a level playing field. It has been adopted by 75 countries, including the EU and its member states and, in the south Mediterranean, Israel, Jordan, Lebanon, Morocco, and Palestine. The IEC provides an umbrella for intergovernmental energy cooperation between the EU, MENA, Africa, and countries from all continents in an increasingly global energy sector.
Disclaimer
The views expressed by the author may not reflect those of the Energy Charter.
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