a power station near Moscow
Soviet legacy: a power station near Moscow. New facilities in central and eastern Europe should reduce the influence of the region’s eastern neighbour © Bloomberg News

Much of central and eastern Europe’s energy and transport infrastructure is a leftover from the communist era: outdated, inadequate and, especially in energy, orientated more towards Russia than western Europe. But with 10 countries in the region joining the EU since 2004, and economies recovering over the past decade – though interrupted by the 2008 financial crisis – sweeping modernisation is under way.

Not only is domestic infrastructure being updated and extended to 21st-century standards, but new cross-border and transcontinental “highways” are being built in road and rail, energy and communications, linking east and west.

In energy, new networks will help deliver the EU’s policy goals of diversifying supply, strengthening energy security, building a single market to drive prices down, increasing the share of renewable energy and harnessing new sources such as shale gas.

Such ambitions do not come cheap. The European Commission in 2011 estimated gas and electricity infrastructure improvements across the EU over the next decade would cost €200bn.

But they are also crucial. European leaders know they must enhance industrial competitiveness in both western and eastern Europe, particularly with the fall in US energy prices thanks to the country’s shale gas boom. Soaring fuel prices have become a political issue in countries such as Bulgaria and Hungary (and in some west European countries, including the UK).

A priority for the EU, especially the central and eastern European countries, is reducing its reliance on Russia for energy – six of the 10 new EU members import more than 80 per cent of their natural gas from Russia. Gazprom, the Russian energy company, badly damaged its reputation after twice cutting off gas to neighbouring Ukraine amid price disputes in 2006 and 2009, affecting supplies further west through the huge Soviet-era pipelines that transit Ukraine.

Gazprom insists the cut-offs were commercially justified, and it remains a reliable supplier. But the Russian company’s actions have prompted many eastern European countries, within and outside the EU, to move to protect themselves against possible future supply interruptions – shifting the energy balance of power.

“For the first time since the fall of the Soviet Union we are beginning to see things that are really undermining Russia’s capacity to influence the region,” says Alan Riley, an energy law specialist at the City Law School in London.

The centrepiece of the EU strategy is the so-called Third Energy Package of 2011. This forces countries to “unbundle” companies in the gas sector, separating production and supply from transmission networks, and aims to create a single market with competitive energy trading across the continent.

It is intended to unify Europe’s segmented and somewhat dysfunctional market – especially in central and eastern Europe.

Some countries in the region are using the Third Energy Package as a lever to loosen Russia’s hold; Lithuania, for example, is forcing Gazprom to sell its stake in the Baltic republic’s pipeline network. The European Commission has opened a high-profile antitrust probe into whether the Russian gas exporter is abusing its dominance of central and eastern European markets.

Another part of ensuring supply is building new import routes from other suppliers. Here, progress has been mixed. This summer brought an advance in plans to bring Caspian Sea gas to Europe via the so-called “southern corridor” route through the Caucasus. A BP-led Caspian consortium chose the planned Trans Adriatic Pipeline to transport gas from Turkey to Greece and under the Adriatic to Italy.

The decision killed a rival project, Nabucco, to carry Caspian gas through the Balkans to central Europe. Gazprom, meanwhile, is pressing ahead with its own South Stream pipeline to transport Russian gas via a similar route to Nabucco. In 2011, the Nord Stream pipeline, in which Gazprom is a majority shareholder, was opened to deliver gas directly from Russia under the Baltic to Germany, bypassing traditional transit countries such as Ukraine, Belarus and Poland.

With the development of an international market in ship-borne liquefied natural gas, pipelines are not the only way to carry gas. Much greater volumes of LNG than previously forecast are flowing to Europe from suppliers such as Qatar, as the shale gas boom has sharply reduced the import needs of the US.

Lithuania, Poland and Ukraine are working on LNG import terminals, with those in Poland and Lithuania set to open next year.

Diversification of supply has led to the construction of interconnectors and the adaptation of existing pipelines to allow gas flows between countries to be reversed when needed. Baltic and central and eastern European countries have led the way, with reverse flows possible between Latvia and Lithuania, and Slovakia and Austria. The Baltics are making similar efforts to expand electricity interconnectors with the rest of Europe.

“The list of interconnectors being planned and built has speeded up since 2009-10,” says Agata Loskot-Strachota, energy policy research fellow at Warsaw’s Centre for Eastern Studies. “But probably the access to financing and the speed of project selection and development are not sufficient,” she adds. The region is getting “gradually more connected to western European markets” but is not “sufficiently integrated”.

When it comes to exploiting new internal energy sources, shale and other forms of “unconventional” gas hold considerable promise – and could be a further way for central and eastern European countries to reduce their reliance on Russia. But progress has been limited, partly because of the controversy over the hydraulic fracturing (fracking) technology used to extract shale gas.

Several central and eastern European countries, including Bulgaria, have followed France in banning or limiting fracking. Poland is determined to exploit its shale gas resources, while Ukraine this year signed a significant shale gas contract with Royal Dutch Shell.

Renewable energy is another potential internal source, and the EU aims to increase renewables’ share of final energy consumption to 20 per cent. That will require substantial infrastructure investment, to carry wind power from northern Europe and solar power from the south. North-south interconnectors for both electricity and gas across central and eastern Europe are among nine “priority corridor” projects established by the EU.

In transport, the EU has similarly bold plans, and aims to build a multimodal network that ties together western and eastern Europe.

EU structural funds have helped push the modernisation of transport infrastructure in new central and eastern European member countries. The final sections of the first modern highway linking Warsaw to the rest of Europe opened in time for Poland’s co-hosting of the Euro 2012 football championship.

Infrastructure projects were hit by the 2009-10 financial crisis, but Werner Weihs-Raabl, head of infrastructure finance at Austria’s Erste Bank, says the bank had seen “a good start in 2013 and that will continue throughout 2014”. Romania and Croatia stand out, he adds, with various airport and highways planned.

“In several markets, local and regional governments are more active than national governments. They demonstrate a more pragmatic approach and focus on building realistic, smaller-scale projects.”

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Showdown: Brussels pursues Gazprom over market dominance

A clash is brewing between Europe and Russia over energy supplies as the European Commission carries out a competition probe that could force the Russian company to change how it operates in eastern Europe.

The EU’s executive has previously taken action against powerful west European energy groups for abuse of market dominance. It shifted attention to Gazprom in 2011 with raids on its offices in Europe.

Joaquin Almunia, the EU’s competition commissioner
Joaquín Almunia, the EU’s competition commissioner © AFP

Brussels’ regulators opened a formal investigation a year ago into whether the Russian gas export monopoly was abusing its dominant position in central and eastern European markets. Joaquín Almunia, the EU’s competition commissioner, recently said, three times in a month, that his staff was preparing a “statement of objections” – a charge sheet – against Gazprom.

Professor Alan Riley, an energy law expert at the City Law School in London, says Brussels may be trying to push Gazprom “one last time to make a deal” to change its practices.

The probe could potentially force Gazprom to alter elements of how it sells gas to European countries. This it does by using long-term contracts linking the gas price to oil prices, with “take-or-pay” clauses that force customers to pay for contracted gas, even if they do not need it, and restrict their ability to resell surplus gas.

Gazprom says it needs guaranteed and predictable future cash flows to finance massive investments in developing new fields. Critics say its practices have kept European gas prices higher than they would be in an open market.

The Russian monopoly said Mr Almunia’s statements were “nothing new” and that it was not in talks with the EU on a settlement.

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