Energy Integration in Eurasian Economic Union: Preliminary Study on Progress and Policy Implications

Abstract

The chapter examines the ongoing energy integration in the Eurasian Economic Union. Not being comparative in a strict sense, the chapter draws relative perspectives on the Eurasian Common Energy Markets vis-à-vis the Energy Union in the European Union. Implemented upon the theory of institutions, the analysis demonstrates the differences between the ideas, interests and institutional environments underpinning the Eurasian and European energy integrations. The chapter shows that the Eurasian common energy markets are influenced by the member states’ self-interested interpretation of traditional ideas for energy integration. The Eurasian supranational institutions are designed upon the established national contexts of limited access order. The European Energy Union is inspired by novel ideas and new institutional solutions propagating authentic energy integration. Given the importance of the Eurasian energy suppliers to the European Union, the chapter speculates about the prospective interaction between the two energy integrations and contemplates possible institutional transformations to enable such cooperation.

This research was supported by Waseda University grant-in-aid BARD00523801 and 2019R-069.

Appendix

Overview and Interpretation of Principal Legal Provisions for Common Energy Markets of Eurasian Economic Union

The legal foundations for the CEM are laid out by Chapter 20 of the EAEU Treaty. Separate protocols to the EAEU Treaty, the Annexes 21, 22 and 23, contain the principal provisions for the formation of the Common Electric Power Market (CEPM), the Common Gas Market (CGM) and the Common Market for Oil and Petroleum Products (CMOPP).

Annex 21 provides the principles and terms for access to the services of natural monopolies in electricity. Art. 3 stipulates that the CEPM interlinks the national electric grids, which are operated upon the member-states regulation. According to Art. 5 containing the references to Chapters 18 and 19, the member-states are oriented at gradual harmonisation of their legislation with a principal course being towards fair competition and liberalisation of the national electricity markets. Arts. 7, 8 and 9 explain various aspects of the interstate transmission of electric power with the key point being that the legislation of a member-state through whose territory such transmission takes place is to be applied. Art. 11 stipulates that the pricing and tariff policy are determined by the national legislation of a member-state through whose territory electricity is transmitted, but such prices and tariffs cannot be higher than those effective in the domestic electricity market of a respective member-state. The embedded Appendix contains the methodology for the interstate transmission of electricity.

The Concept for the formation of the CEPM (2015) concretises its goals and objectives (Chapters 2 and 3); characterises the forms of trade, such as trade under the bilateral interstate agreements, as well as trade among market agents, including trading at the exchanges (Chapter 5); specifies the subjects of the CEPM (Chapter 6); elucidates the price and tariff aspects in a way that the national legislation is effective only for the cases when natural monopolies are concerned (but the prices and tariffs cannot be higher than those effective for the national market), otherwise market and market actors define pricing and tariffs (Chapter 9); and sets the timeline for the market formation and stipulates that it shall become fully operational by July 2019 (Chapter 13). The Concept contains the special opinion of Belarus that the CEPM shall be operated as fully competitive only after the CGM is created. This reflects the difficulties in reaching the consensus in the process of CEPM formation.

The Program for the Formation of the CEPM (2016) elaborates the provisions of the Arts. 81 and 82 of Chapter 20, Annex 21 and the CEPM Concept. The Program confirms the timeline for the CEPM formation, defines the principles of interstate electricity trade and transmission and stipulates their forms (Chapter 3); describes the organisation of trade in electricity (Chapter 4); explains the functioning of capacity market (Chapter 5); and specifies the regulation of CEPM (Chapter 6).

The Protocol on the Amendments to the EAEU Treaty in Respect to the Formation of the CEPM (September 7, 2018) clarifies further details on the formation and functioning of the CEPM. Art. 4 of Chapter 2 emphasises that the CEPM respects the rules of fair competition and functions upon market principles. The Memorandum on Cooperation between the Eurasian Economic Commission and the Electric Power Council of the Commonwealth Independent States (October 30, 2018) envisages consultative, non-binding, nature of the interaction between the two electricity systems on a range of related issues.

Concerning the CGM, the Annex 22 addresses the principles and conditions for the EAEU member-states’ access to the services of natural monopolies in gas transporting sector and the principles of pricing and tariff policy. The Art. 3.1 of the Annex affirms principles for the formation of the common natural gas market, including non-application of import or export duties. Arts. 3.4 and 3.5 affirm that the member-states intend to harmonise their legal systems and ensure ecological safety. Arts. 5 and 6 of Annex 22 state that the CGM shall operate at the market, preferably equally profitable for gas sellers, prices. This provision has already created significant debates among the member-states. Art. 7 of Annex 22 addresses the commercial conditions for the third-party non-discriminatory access to the transportation of natural gas implying that such matters shall be regulated by the member-states based on the provisions of their national legislations. This implies that the EAEU has no supranational authority over the prices and tariffs of natural gas transportation.

Chapter 3 of the Concept for the Common Gas Market (2016) outlines the principles and objectives of its formation (such as enhanced energy security, improved efficacy of the national gas transportation systems, adoption of market pricing, use of national currencies in gas trade, among others). Chapter 4 defines the timeline for the launch of the CGM. The preparatory stage continues till 2020 when the legal and technical harmonisation shall be implemented, the gas balance shall be formed and the bottlenecks for the CGM functioning shall be examined and attended. By 2022, the access to the transportation systems shall be ensured to the subjects implementing shipments in the fulfilment of gas balance, gas exchanges shall become operational and investment into the gas sector, including infrastructure, shall materialise. From 2025, the CGM shall become operational upon market pricing and equally profitable prices in intra-CGM trade. Chapter 5 provides that trade in gas will be implemented under a direct bilateral contract or run through a gas exchange. According to Chapter 6, the member-states’ legislation will regulate the matters of gas transportation in a respective territory ensuring that the interests of gas consumers, producers and natural monopolies are met.

The Program for the Formation of the Common Gas Market (2018) confirms that the CGM will be effective from 2025. The Program reemphasises the importance of market pricing and non-discriminatory access to the gas transporting systems, among other things. Chapter 1 specifies various organisational forms of trade, such as supply under the bilateral agreements, long- and short-term contacts, and exchange trading. The Program presents a range of actions towards the materialisation of the CGM, such as the development of gas exchanges, adoption of rules for the access to the gas transporting systems, as well as pricing and tariff policy.

In the oil sector, Annex 23 is dedicated to the organisation, functioning, governance and development of the CMOPP. Annex 23 outlines the CMOPP’s principles, which are similar to those for the CGM. Art. 7 of Annex 23 provides that tariffs for the transportation services of oil and petroleum products are determined upon the national legislation of member-states, but these tariffs cannot be higher than those for the domestic economic entities through the territory of which such oil and petroleum products are transported. Art. 9 states that the regulation of internal markets of oil and petroleum products is implemented by the national authorities of the member-states.

The Concept for the CMOPP (2016) reiterates the importance of the principles of market pricing and non-discriminatory access to the transportation systems, but nearly cancels out these statements by the provision that natural monopolies preserve their practices on pricing, tariffs and access rules in accordance with the national legislation of a respective member-state. The Concept specifies two forms of trade: under bilateral (or multilateral) contract and at the oil and petroleum products exchange, and describes other forms of activities in the CMOPP, such as transit, extraction, transportation and processing of oil. The Concept envisions a range of measures towards the implementation of the CMOPP, such as the harmonisation of technical standards of oil and petroleum products, harmonisation of national legislation, and investment in production, transportation and processing, among others.

The Program for the Formation of the CMOPP (2018) reaffirms the establishment of the common market by 2025 presenting a set of measures scheduled into three stages: 2018–2021, 2024 and 2025. By 2021, it is expected to develop legislation for the regulation of the CMOPP (trade, in particular), access to the transportation systems, technical standards for oil and petroleum products, organisation of the system and procedures for information exchange, and harmonisation of respective national legislations of the member-states, among other things. The international treaty on CMOPP shall be coordinated among the member-states by 2024 so that it would become effective by 2025.