Source: Energy Delta Institute’s Quarterly, vol. 2, issue 1

There is a thin dividing line between private and public targets. Reaching private targets – e.g ROI, maintaining market shares, M&A – can be left to private investors that will decide based on their own criteria whether or not to move ahead. Reaching public targets, however, may or may not be realized by spontaneous private activity.

Take Security of Supply (SoS) on the gas market as example. Broadly speaking SoS can be threatened by a number of rather different factors related to:
a) exploration
b) gas contracting
c) gas trading
d) gas infrastructure investment.

In theory spontaneous private investment activity can be such that SoS is secured by the private market itself so that public authorities can relax. In practice, however, there is not at all any guarantee that it works out like that:
a) exploration may be insufficient to secure SoS, e.g. because of investors’ risk aversion
b) gas may not be available for political or other institutional reasons
c) gas traders’ behaviour may frustrate SoS
d) infrastructure investment may be insufficient to be able to get sufficient gas on the right moment on the right place.

Although all 4 factors mentioned may cause a threat to SoS, the last one may very well be the most serious one in the foreseeable future. That is because:
a) it looks like for the time being there is and is going to be plenty of gas during the next decades (especially if we include LNG and unconventionals) so that
b) the scope for strategic games is small, and
c) liberalisation will probably increasingly discipline the trading process.
This leaves us with
d) the risk of underinvestment in gas infrastructure, probably the weakest spot when it comes to the public target: SoS.

A first reason why getting to the right level of gas infrastructure investment, and interconnecting capacity in particular, is so complex, is because part of it is based on public investment (broadly domestic grids) and part on private investments (broadly interconnecting grids). In the absence of any clear and generally applicable guidance as to what needs to be done publicly and what privately, and under what conditions, one should be prepared for problems emerging. That is because you cannot have an international grid and everything that comes to it (interconnection, quality conversion, compression, balancing, etc) without a huge variety of Return On Investment (ROI) on its various segments. If left to private investors, they will only put their money in the parts promising sufficient levels of ROI, leaving the leftovers to be picked up by public investment.

Second, insofar as infrastructure investment is in the hands of public investors, such as TSOs, they generally are facing a government / regulator that on the one hand wants sufficient investment to secure SoS, but on the other hand wants to save money by not accepting ROIs anyway nearing what private players would consider fair (In the EU regulator-accepted rates typically are 6-7% only; US 9-10%!). In the absence of any clear and generally applicable guidance as to what of the two public targets mentioned will get priority, this obviously offers a breeding place for confusion, TSO-regulator conflict and potentially underinvestment in infrastructure.

Third, a new potential problem in the EU: if public authorities are engaged in gas infra investment, is this going to be national or European authorities? So far, national authorities were the prime ones deciding on infra investment. Recently, however, the European Commission decided to throw in some 2.3 billion euro to enhance energy infra investment, identifying 43 projects (31 gas-related) it would be willing to support. Although the intentions will undoubtedly be good (primarily SoS concerns), one may wonder if such an initiative does not – once again – raise a new problem; i.e. lack of clarity of what is taken care of by resources from Brussels, and what by national authorities. In the absence of any clear and generally applicable guidance as to what will be ‘covered’ by Brussels, and what otherwise, one runs the risk of strategic ‘wait-and-see’ behavior and gaming as to who is going to pick up the bill.

So, if we do not want to run the risk of insecurity of supply because of a lack of infrastructure, maybe we simply need more clarity, transparency and predictability as to how the various public targets and responsibilities will be framed, interpreted and implemented.