Explanatory Memorandum to COM(2002)488-3 - Measures to safeguard security of natural gas supply

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dossier COM(2002)488-3 - Measures to safeguard security of natural gas supply.
source COM(2002)488 EN
date 11-09-2002
1. Background

Contents

1.

1.1. Completion of the internal market for energy


The European Union is making steady progress towards the completion of the internal market for gas and electricity. In fact, the EU is in the process of creating the largest, integrated and most open regional electricity and gas market in the world. As demonstrated by the Green Paper 'Towards a European strategy for security of energy supply' (COM(2000) 769), this market integration will contribute to security of supply, provided, however, that markets are truly integrated. The European Council at Barcelona on 15-16 March 2002 therefore stressed the importance of powerful and integrated energy networks as the backbone of the internal market and an important precondition for connecting the European economies.

However, market opening and sufficient physical interconnection of markets are not in itself a guarantee of a liquid market based on secure gas supplies from both indigenous and external sources. It is therefore important that the current profound changes in the market and the transition towards a fully open internal energy market are supplemented by transparent and unambiguous new policies defining the overall framework as well as clear roles and responsibilities of the different market players with regard to security of supply within the new market context.

In order to ensure the continued well-functioning of the internal market for gas, it is equally important to ensure that appropriate measures are implemented to deal with extraordinary supply situation.

1.2. Increasing importance of gas and expected rising import dependence.

Natural gas is becoming an increasingly important source of energy in the EU's fuel mix. In 2000, natural gas accounted for approximately 24% of total EU primary energy supply compared to 16% in 1985 and less than 2% in 1960. The steady growth trend continues, even in times of low economic growth. In 2001, Western European gas consumption increased by 2.5% notably as a result of significant increase in the number of household customers and in gas consumption in power generation.

Natural gas has sustained its position as the fuel of choice in EU power generation. Since 1995, gas-fired power generation has every year represented 50-60% of new investments in EU power generation. The most remarkable development over the last decade has been the increasing share of combined-cycle gas turbines (CCGTs) due to a combination of a change in the EC stance on gas-fired power generation at the start of the 1990s, technological progress, relatively competitive gas and environmental considerations.

EU demand for gas and electricity is expected to increase considerably over the coming twenty years. Both EU gas and electricity demand is expected to increase by more than 40% before 2020 and a market share of gas in EU energy supply of up to around 30% is realistic. The key driver in gas demand growth is power generation. Two-thirds of the increase in gas demand is forecast to come from gas-fired power generation and co-generation. The increasing dependence on gas in power generation raises a number of issues with regard to the increasing interdependence between the two sectors notably with regard to security of supply.

Europe, however, is in a relatively favourable gas supply situation with significant own gas reserves and 70-80% of global gas reserves within economic reach of the European market. When implementing the EU Gas Directive later this year, Norway will become a fully integrated part of the internal gas market. Combined EU/EEA gas production is expected to increase over the coming decade based on proven and additional discovered gas reserve potential. By 2010, the internal EU/EEA gas market is expected to depend on imports for up to 25-30%. An enlarged internal market including the 10 Central and Eastern European candidate countries is expected to depend on imports for 35-40% by 2010.

Further EU/EEA gas reserves may well be mobilised before 2010, which could help further sustain EU/EEA gas production levels and hence delay a significant increase in EU/EEA gas import dependency. However, as a function of the expected rapid increase in gas demand combined with an expected gradual levelling off and decline in domestic EU/EEA gas production at some point in time, the EU/EEA is expected in the longer-term to become increasingly dependent on imported gas. Based on the current demand forecast by Eurogas and the Commission and production forecast by the International Association of Oil and Gas Producers (OGP) for EU and Norway, the level of import dependency of EU15/EEA could reach nearly 60% by 2020. For EU25/EEA, the level could reach 65% by 2020. According to recent analysis made by the OGP, these levels could, however, be lower if allowance is made for developing possible upside resource potential including 'undiscovered potential' and given the right economic conditions.

On the other hand, however, the import dependency of the EU as such (i.e. without Norway) would be significantly higher and possibly as high as three-quarters by 2020 for EU15.

Import dependency varies significantly between Member States. A number of EU Member States are already completely dependent on imports while others will see their dependence rise close to 100%.

On this background, security of supply and Europe's continued ability to attract sufficient gas supply naturally becomes a priority. Security and continuity of supply is particularly crucial in the power-generating sector. Cost of failing security of supply can be very substantial to modern society as the California electricity supply crisis has borne evidence to. The cost to society of the rolling black-outs in California in January 2001 has been estimated at 42 billion USD or some 3.4% of California's GDP.

Continuity of gas supply is also essential to other consumer categories notably small customers without switching capabilities to alternative fuel such as many large industrial customer have notably with the possibility to interrupt gas supply and switch to back-up oil supply.

The Green Paper 'Towards a European strategy for the security of energy supply' (COM (2000) 769) therefore suggested that in order to widen and renew policy of fuel stocks, the European Union "could consider extending the [oil] stocks mechanism to natural gas...The Union needs to guard itself against excessive vulnerability, resulting from too great a degree of dependence".

In its Communication on 'Security of EU Gas Supply' (COM(1999) 571 final), the Commission announced that it would report on a regular basis to the Council and the European Parliament on EU gas security issues and if and when appropriate, the Commission would 'make proposals to strengthen security of EU gas supply and further develop the common framework for security of gas supply'.

2.

1.3. The internal market for natural gas of the EU and security of supply


The completion of the internal market for natural gas in the European Union and ensuring security of supply are compatible objectives. It is obvious that a well functioning single market for gas relies on a sufficient level of secure gas supplies from a diversified range of supply sources. For this reason, an integral part of the creation of the EU internal gas market are measures ensuring security of gas supplies in the new market environment.

Directive 98/30/EC of the European Parliament and of the Council of 22 June 1998 concerning common rules for the internal market in natural gas i has made very important contributions towards the creation of the internal market for gas. The directive already acknowledged the importance of security of supply for the internal market. Consequently, it allows Member States the possibility of imposing public service obligations on natural gas undertakings in relation to security of supply.

The creation and development of an internal market for natural gas inevitably renders Member States increasingly interdependent regarding security of supply issues. As a result, failure to adopt adequate measures in one Member State can have serious consequences regarding the operation of the internal market throughout the European Union. It is therefore essential, in order to ensure the proper functioning of the internal market, to provide for a minimum level of harmonisation regarding security of gas supply policies in each Member State, in order to avoid market distortions and ensure the well functioning of the internal market for gas on a level playing field.

Liquidity forms an indispensable ingredient of a proper functioning EU internal gas market. Measures aimed at enhancing liquidity, such as spot markets, incentives for new gas supplies from internal and external sources and non-discriminatory authorisation procedures for building storage and LNG facilities, should, among other things, be fully taken into account by security of supply policies in a competitive market environment.

2. The European gas market in transition - clear security of supply rules are important as an integral part of the internal market.

The European gas industry has managed security of supply in a steadily growing European gas market over the last four decades very successfully. However, the European gas market is undergoing rapid change these years and the role of traditional market actors is also changing.

Hitherto, the task of planning and developing the gas network to fulfil gas security targets (as often defined by the gas industry itself) was relatively straightforward as the dominant suppliers controlled all the infrastructure requirements, gas supply and demand side portfolio, information and other necessary instruments to conduct this planning. In addition, direct state involvement was less necessary as the national gas companies responsible for security of supply in many cases were partly or fully publicly owned. Until now, few Member States have therefore been directly involved in setting security of supply policies for natural gas.

In the new liberalised gas market, however, no single player will necessarily maintain the overall responsibility for short- and longer-term security of gas supply at national level as industry restructures, national markets integrate, new entrants emerge and competition develops. While security of gas supply forms an integral part of the internal market for gas, security of supply policies and procedures need to be reviewed and formalised in this new context, which represents different circumstances. In a competitive market, it is not evident that strategic priority will be given by gas suppliers to security of supply. The primary objective and role of gas companies is changing towards being competitive. Organising security of supply can therefore not be left to industry alone and Member States have an obligation to ensure that all market players take minimum measures with regard to security of supply. Moreover, security measures can be costly and it is perfectly feasible that certain operators could neglect these measures to reduce costs if no agreed minimum standards apply.

The adoption by Member States of measures requiring industry to meet minimum standards is therefore an important integral part of market opening. The creation of an internal market is not simply freeing customers to choice, but also ensuring that the market provides high levels of public service, foremost amongst which is security of supply. The existing Gas Directive (98/30/EC) therefore acknowledges the right of Member States to consider security of supply as a public service obligation. Security provisions are not a consequence of the creation of the internal market, but a central part of it. Without a common framework establishing harmonised minimum standards with respect to security of supply obligations, a real risk of market distortion exists.

Security of supply and competition are compatible objectives and gas security can be enhanced in the single EU gas market when properly planned for by companies in liaison with the responsible authorities. A sufficient and appropriate level of security of supply will contribute to a proper functioning of the internal market. The transition to the new market regime is obviously particularly important with regard to clearly defining the new rules and ensuring in operational terms a continued high level of security of gas supply.

Article 24 of Directive 98/30/EC concerning common rules for the internal market in natural gas allows Member States to take necessary safeguard measures in the event of a sudden crisis in the energy market. Such measures shall, however, cause the least possible disturbance to the functioning of the internal market and shall be least restrictive to competition. Measures taken shall be notified to other Member States and the Commission, which may decide that the Member State concerned must amend or abolish such measures if they distort competition or trade in a manner which is not in the common interest. It is necessary to complement these measures by establishing minimum levels of action by each Member State, which need to be compatible with the requirements of the internal market.

A clear need exists therefore to have such emergency measures defined and agreed in advance rather than Member States developing these if and when a sudden crisis arises.

The European gas industry including both GTE (the European association of transmission system operators) and Eurogas have stressed the need for the definition of clear roles and responsibilities of the individual market players with regard to security of supply i. In a rapidly changing market, it is extremely important that any uncertainty with regard to security of supply responsibilities is avoided. Lack of clarity with regard to security of supply will in itself increase the risk of a supply crisis.

The primary responsibility for an overall definition of such clear roles and responsibilities within the new legislative, regulatory and market framework of the internal market lies with Member States.

While the operational responsibility must remain with the gas industry, Member State governments as well as the Community have therefore an important co-ordinating and supporting role to play in this respect. The role of government will be to ensure that the market is working efficiently and giving true signals to guide the participants in interpreting and managing change while maintaining the appropriate level of security of supply. The role of the Community will be to monitor implementation of the new security of supply policies and ensure their compatibility with the requirements of a well functioning internal market.

The fifth meeting held in February 2002 of the European Gas Regulatory Forum, which brings together the Commission, national regulatory authorities, Member States and all relevant gas market stakeholders agreed on a set of recommendations on 'Guidelines for Good Practice' in relation to third party access services. The guidelines include some initial elements aimed at clarifying the roles and responsibilities of the main parties in gas transportation notably the transmission system operators (TSOs) and network users. In addition, the Forum agreed that i:

"Within the new regulatory and market environment of the internal market for gas characterised by a multitude of market players and unbundling of integrated gas companies, security of supply can no longer be assumed to be the responsibility of one single party.

A new chain of responsibilities with regard to security of supply and infrastructure planning between public authorities and the different market players including shippers and TSOs therefore needs to be enshrined in order to ensure certainty in this respect. Obligations must be allocated clearly to different players and appropriate to their role.

In this respect Member States will have a role in defining security of supply output standards within a public policy framework. Within this framework it may be left to the market and industry to develop the most efficient solutions to meet the agreed outputs."

However, security of gas supply is not merely a question of balancing demand and supply in a competitive market every day. It also has a long-term strategic aspect.

In view of the above and in view of the transition towards a fully operational and integrated single gas market, Member States should therefore, in function of their gas market features and structures, monitor and ensure that security of gas supply policies are adapted to the new market environment and properly translated into clear roles, operational responsibilities, security criteria and emergency procedures for all participants involved in the gas business within the new legislative framework. This is also important in order to avoid that different approaches to security of supply become a barrier to entry and cross-border trade and so impede the completion and well functioning of the internal gas market. It is equally important, however, to ensure that the new framework and procedures are implemented in a way which does not create significant difficulties for companies with small market shares or new market entrants.

3.

3. The importance of storage


Gas production and long-distance transportation is capital-intensive. Due to much lower energy density for gas than, for example, for oil, the cost of gas transportation per unit of energy is much higher for gas than for oil and represents a very significant part of the total end-consumer price for gas. In practice therefore, most production from far away fields and long-distance gas transportation pipelines are operated at high utilisation rates with a relatively constant flow. As, however, demand for gas fluctuates considerably during the year, a significant difference exists between supply and demand profiles.

For optimum results, gas storage facilities (either in underground depleted fields, aquifers or salt cavities or in above-ground LNG peak shaving installations) are therefore used, preferably close to demand centres, to help balance the inevitable mismatch between supply and demand thereby reducing unit costs of gas supply. If there were no gas storage at all, both production and transportation capacity would have had to be designed to meet the peak day demand and therefore most of the time have significant over-capacity.

Underground gas storage therefore plays a key role in EU gas supply both under normal operational circumstances as well as in case of supply emergencies and there are economic and strategic reasons why gas storage should be located close to the market. Gas companies therefore seek, as far as geology and economy allows, to spread storage facilities as well as possible and to locate them as near to large demand centres as possible i.e. preferably not too far from large cities.

Underground storage therefore serves several functions including:

* strategic reserve for security of supply in case of disruption (particularly used in Member States with high dependence on non-EU gas imports);

* seasonal load balancing to match peak demand (gas is pumped into the storage during the spring and summer and typically withdrawn from October/November to February/March);

* achieving daily balance;

* arbitrage of gas prices i.e. commercial optimisation of variations in gas prices e.g. around periods of recalculation of gas prices (e.g. beginning of quarters) and more generally as a commercial tool in liberalised markets (notably in the UK). As gas prices in a competitive gas market is expected to increasingly reflect demand and supply for gas, new patterns of price variations and volatility may be expected. Under such circumstances, it should be expected that gas from storage would be released in case of high prices hence limiting volatility.

* overall system optimisation including facilitating swaps;

* transmission support such as mitigating localised capacity constraints or critical pressure thresholds.

While there may be short-term adjustments with regard to requirements for storage and the wish of market players to carry the costs of gas storage, it is generally expected that availability of storage facilities will become increasingly important over time due to growing EU gas demand and import dependency and thus the need for additional storage for security of supply reasons. Furthermore, additional need for storage will exist for load balancing and

>REFERENCE TO A GRAPHIC>


due to increasing import dependency and relative declining flexibility from domestic production.

The availability of storage and equivalent alternative flexibility mechanisms as an integrated part of the overall gas supply system is crucial for an efficient operation of the gas system. Providing for non-discriminatory third party access to storage is therefore essential both for the functioning of the internal market and for security of supply reasons. In addition, based on experience from other regions of the world, it may be expected that the development of the internal market will offer new commercial opportunities to owners of storage facilities. It is therefore important that the European Union is prepared to meet the challenges, which this represents in terms of ensuring sufficient development and availability of storage.

The Community should therefore also give high priority to support the development of gas storage as appropriate under the TEN-Energy programme.

The development of a fully operational and liquid internal market for gas with spot markets gradually developing will contribute to security of supply. Security schemes and gas stock requirements at national level should be compatible with and not hamper but support the development of a competitive internal market for gas. In this respect, non-discriminatory access to storage is particularly important.

4.

Mixed picture regarding storage requirements at Member State level


The graph below shows the storage volume in percentage of annual gas consumption.


>REFERENCE TO A GRAPHIC>


The graph clearly illustrates the different relative importance of underground gas storage in the different Member States and the absence in some Member States of storage. On average, EU gas storage capacity is equivalent to approximately 50 days of gas consumption (or 14 % of total consumption). Austria holds storage equivalent to 115 days of average gas demand, France for 95 days, Germany and Italy for around 80 days and Denmark for around 65 days. The UK, Greece, Belgium, Spain and The Netherlands have storage equivalent to in the order of 10-20 days of average gas consumption while the remaining Member States have no storage capacity. In some Member States, the geological sites available for construction of new underground gas storage facilities are limited or non-existent. Some Member States therefore rely on storage or back-up services from other Member States. Normally it would not be optimal - but it can be necessary - to cover a storage need in a specific area through remote storage facilities. With a view to both strengthen the internal EU solidarity and co-operation with external suppliers, there may be certain projects of common interest with regard to storage development in Europe which merit further analysis.

5.

4. The importance of long-term contracts and liquid gas markets


Long-term Take-or-Pay contracts have played a very important role for the build-up and development of the European gas market. In particular, in the past, investment in the gas supply industry has usually been underpinned by the conclusion of long-term contracts by European gas companies. Long-term contracts provide an important element of stability for external suppliers and enhance their ability to continue the development of large-scale capital-intensive gas supply projects. Long-term contracts may also facilitate the diversification in the medium term of EU's gas supply and help bring new sources of gas to the market hence enhance supply-side competition.

The Commission considers that the conditions established by the internal energy market will ensure that such contracts will continue to exist, and will continue to underpin security of supply in the internal gas market in an appropriate manner. Indeed, it is clear that EU gas undertakings, as part of their overall contract portfolio, will continue to meet gas needs through such contracts for supply in a competitive market.

Nonetheless, given the importance of long-term contracts for the security of supply of the EU gas market - such contracts are likely to remain necessary to underpin the financing of major new gas supply projects such as the Stockman field - it is appropriate to provide for a safety net, in the unlikely and unforeseeable event that insufficient long-term contracts develop. It is equally important, however, that the existence of long-term contracts does not frustrate competition either via the explicit inclusion of restrictive conditions, or by significantly foreclosing markets. Furthermore, it is important that long-term Take-or-Pay contracts evolve and adapt to the new gas market environment.

On the other hand, it is important to ensure that sufficient liquid gas supplies develop to enable the internal gas market to function properly and competitively, and also to provide the necessary conditions for gas companies to adopt a balanced contract portfolio.

This implies not only the development of gas spot markets throughout the EU - which can provide certainty that producers, suppliers or customers having sold or bought gas on a long-term basis can sell the gas, at the prevailing spot price, if they are unable to find direct outlet for the gas in the market - but equally concerns the adoption, where necessary, of gas release programmes by Member States.

Considerable progress on the development of liquid gas supplies has been made in recent years, notably in the UK and North-Western Europe where trading hubs are operating or emerging. In certain countries, gas release programmes have been implemented and have contributed to new market entry. Furthermore, action taken by the Commission under competition law in the gas sector, such as the GFU case, have further contributed to increased liquidity. The Commission is convinced that this process will, and indeed needs to, continue. Nonetheless, again a safety net needs to be provided in the event that such development do not take place.


6.

5. Existing security of supply policies at Member State level


It is important to notice that the gas supply situation varies considerably between Member States as natural resource, geological and market circumstances differ. The supply situations of Member States vary significantly both in terms of availability of domestic gas production, the importance of gas in the overall energy balance, dependence on external gas supplies, availability of underground storage, the level of interconnection etc.

Member States and their gas industries therefore also deal with security of supply in different ways depending on their individual circumstances, market characteristics and technical options available and their relative costs.

Given these different situations, the European gas industry employs different combinations of supply-side and demand-side tools and procedures to respond to short-term security of supply difficulties. These include system and supply-side flexibility; storage and interruptible customers. The range of facilities available to gas companies allow them to ensure that gas demand and supply are matched at any given time i.e. seasonally and within-day, and that emergency situations can be dealt with.

In order to meet customer demand, the gas supply system necessarily needs to be designed to meet the combined, aggregated peak demand. Gas supply systems are often designed to meet the peak demand of the coldest day, which statistically occurs, for example, once every 20 year and the coldest winter, which statistically occurs once every 50 year.

A number of Member States and large gas companies have in some way specified conditions which need to be fulfilled in relation to security of supply or availability of storage for existing and new entrants into the market:

- In Italy, for example, new entrants importing non-EU gas into the Italian market are required to hold gas stocks equivalent to 10% of the annual supply.

- In Spain, overall gas supply dependency upon any single external supply source must not exceed 60% and there is an obligation on gas suppliers to keep gas reserves for at least 35 days of supply.

- In the UK, security of supply standards are defined to meet '1 in 20 years' peak day demand and '1 in 50 years' winter duration. Similar standards are applied in The Netherlands and France and other Member States.

- The French gas system has also been designed in order to be able to withstand (notably through strategic gas stocks) disruption of the largest source of supply for up to one year.

- In Denmark, the integrated gas company, has designed its back-up and storage capacity to be able to continue gas supplies to the non-interruptible market with no alternative fuel switching capacity in case of a disruption of one of the two offshore gas pipelines supplying gas to Denmark.

7.

6. Effective mechanisms essential for dealing with extraordinary supply situations


While it appears that a number of Member States base their security of gas supply on a combination of extreme weather conditions and an 'n-1' availability of gas supply sources i.e. that one of the range of supply sources available is disrupted, there appears to be a lack of transparency in the security of supply policies applied at national level which in many cases appear not to be sufficiently well-defined and formalised and not reflecting the market changes taking place. Improving co-ordination at both national and EU level and improving transparency in this respect must therefore be a first priority.

Despite the diversity in the supply situations in Member States and due to the structure of the gas supply to the EU, the main supply risks of individual Member States is often a common risk shared with other countries. The risk of disruption in gas supplies to Europe from any of the principle suppliers, for example, would have serious implications in a number of Member States. In such a situation, only co-ordinated efforts to remedy a disruption will be sufficient. This gives a common EU dimension to measures aimed at preventing or managing a major gas supply crisis and it requires solidarity at EU level to minimise any negative impact.

In view of the increased market integration within the internal gas market and the European inter-dependence (the 'weakest link' in security terms could have an impact on security elsewhere in the internal gas market) and in order to ensure a balanced, transparent and coherent system of risk sharing, it is necessary to ensure that adequate and effective European mechanisms for safeguarding security of supply and co-ordination and intervention at EU level in case of extraordinary supply situations are adopted with a view to ensuring proper functioning of the internal market.

It is important that in pursuing this, proper account is taken of the diversity of supply situations in Member States and that the European gas industry maintains the operational responsibility for implementing the necessary measures.

With regard to gas, the proposed new Community framework pursues the same aims regarding security of supply as the proposal regarding oil stocks. Thus, it introduces strict and quantitative requirements with regard to security of supply standards, and defines the manner in which these standards must be met. In particular, it requires Member States to define and publish the manner in which they guarantee that non-interruptible customers, i.e. customers who cannot immediately switch to alternative back up fuels, are ensured continued supplies during sixty days in the event of a disruption of the largest supply source to the market in question. Similar provisions exist regarding extreme weather conditions and thus extraordinarily high demand, which require supplies to such customers to be guaranteed throughout the entire period of exceptional demand in question.

Given the considerable differences between the gas and oil markets, these measures are de facto equivalent to the obligation to maintain minimum oil stocks. However, the new framework does not envisage at this stage, as for oil stocks, the definition of minimum gas stock levels that Member States should hold in order to guarantee security of supply. This is because not all Member States have equal geological conditions for underground storage and indeed in some countries no suitable storage sites exist. Thus, each country needs to rely on a different mix of instruments to achieve the 60 day obligations and the high demand coverage requirements, based on storage (within or outside the country in question), production flexibility arrangements, linepack and other available measures.

Furthermore, whilst the different geological conditions and the significant advantages of having storage close to demand (and thus avoiding the additional costs of relying on distant storage) mean that a legally binding minimum storage requirement on a Member-State by Member-State basis would not at this stage be appropriate, storage will and must play an important role in Member States' security policies. The proposal therefore requires all Member States to publish indicative quantitative targets for the future contribution of storage in meeting their security of supply standards.

Finally, it is important to underline that, in view of the different degree of availability of storage in Member States and hence the importance of ensuring Community solidarity and co-operation across borders, non-discriminatory access to available underground storage capacity, as emphasised in the Commissions proposal of March 2001 for a Directive amending Directives 96/92/EC and 98/30/EC concerning common rules for the internal markets in electricity and natural gas, is essential.

More generally, it is absolutely indispensable that the security of supply policies to be defined and implemented by Member States are compatible with and contribute to the completion of a fully operational internal market for gas. It is particularly important that the security of supply policies are implemented in a non-discriminatory manner and in no way hamper the entrance of new market participants.

8.

7. Technical expertise supporting the implementation of the measures


The creation of the internal market for energy is gradual and very complex in particular in relation to the implementation of technical rules. It is therefore important to ensure that the new legislative framework is applied in an effective, efficient, non-discriminatory and homogeneous manner by all market participants under conditions, which will guarantee the competitiveness of the companies.

The various phases of the development of the internal market for gas and electricity should therefore be accompanied by measures which would allow notably to convene national regulatory authorities, Member States, market operators and the Commission in the context of technical working groups. These working group meetings should examine the most appropriate measures to be taken in order to implement the opening of the gas and electricity markets, and should regularly make technical recommendations to the Commission.

Similarly, the new Community framework, which will be created in order to enhance security of gas supply, within the context of the internal energy market, will require complex and technical tasks to be undertaken and accomplished. These will notably relate to monitoring the development of international markets and assessing their impact on safety and security of supply. The effectiveness of the measures in place will have to be continuously evaluated. In this respect, the measures aimed at guaranteeing security of gas supply including the level of gas stocks held by Member States will have to be monitored. In order to be able to carry out these tasks, objective, reliable and comparable data will be necessary.

In the event of an energy crisis, the European Commission may issue recommendations on appropriate measures to be taken by Member States or may, by decision, require Member States to take specified measures. The effects of these measures will need to be evaluated.

It therefore appears essential to create, within the Services of the Commission, a European Observation System for supply of hydrocarbons, which will gather the necessary expertise in order to respond to the highly technical issues involved in these tasks. It will provide, under the aegis of the Commission, the technical and scientific assistance and a high level of expertise to assist in the correct application of Community legislation in the field of gas supply.

The European Observation System shall be run by the Commission, which should invite to the meetings representatives of the Member States as well as representatives of the sectors concerned.

9.

8. Conclusions


On the basis of the foregoing, it may be concluded that security of gas supply will not diminish in strategic importance to the European Union. On the contrary. In view of the demand and supply outlook for gas for the EU and in view of the rapid ongoing change with the completion of the internal market for gas, there is a need to undertake co-ordinated action to ensure that security of gas supply is safeguarded and by this will complement other actions taken to achieve the completion of the EU internal energy market. Security of supply policies in a competitive market have to be based on clearly defined and non-discriminatory policies and operational responsibilities. Appropriate monitoring and safeguard mechanism as well as adequate emergency response measures will have to be implemented and kept under review at national and Community level.

The Commission therefore presents the following proposal for a Directive concerning measures to safeguard security of EU gas supply. These measures will ensure the proper functioning of the EU internal gas market by safeguarding security of gas supplies in a competitive market framework. In the event of a crisis, they will ensure the solidarity and the joint Community action necessary in order to respond effectively to uncertainties in the energy market and to promote in this context the proper functioning of the internal market. Article 95 of the Treaty therefore represents the appropriate legal basis for the proposal for a Directive.