Analysis of Central Europe s Energy Sector (The Prague report)

Transcription

1 Central Europe Energy Partners Analysis of Central Europe s Energy Sector (The Prague report) Executive Summary Prepared by: All copyright belongs to:

2 Table of contents 1 Introduction EU-11 region overview Stable economic growth Security of supply in the EU-11 region Key environmental protection requirements facing EU EU-11 energy sector challenges Estimation of cost in identified flagship investment areas in EU Acronyms, abbreviations and units Scope limitations and project context... 53

3 Introduction Page 1 of 54 1 Introduction 1.1 Formal introduction Context of the Report The Report has been prepared for Central European Partners AISBL by EY Business Advisory Poland according to an agreement dated December 21th, CEEP initiative CEEP is an international non-profit association incorporated in Brussels. Its primary mission is to support integration of the Central Europe Energy Sector within the framework of common EU energy and energy security policy. CEEP members are energy sector companies, as well as universities and other research institutions from Central Europe. The over-riding goal is to combine the capabilities and experience, and enhance co-operation between energy sector companies and research organizations in the region of Central Europe. The purpose of this is to identify and advocate common problems and their solutions strengthen the region s energy security and facilitate successful implementation of the EU energy and energy security policy. Goal of the Report The primary goal of the Report is to give an introductory overview regarding the state and challenges of the energy sector in the EU-11 countries. The secondary goal of the Report is to identify common areas and challenges of the EU-11 countries energy sectors. The Report covers EU-11 countries overview of key energy sector areas (i.e. electricity generation and transmission, oil and gas transmission) as well as key industries energy profile (i.e. transport and steel sector) with respect to goals defined above. This overview is complemented with EU-11 and EU- 15 region comparison in identified key issues. Introductory character of the Report The Report is an overview analysis of EU-11 countries energy sectors. Any conclusions drawn basing on the Report should by subject to further detailed inquiry in order to confirm and come up with detailed solutions concerning actions in area of energy policy and energy investment decisions. The Report is intended to start a detailed and practical discussion concerning fundamentals and key goals of common EU-11 policy goals as well as detailed implementation instruments especially in area of common interest infrastructure investment projects. Sources of data for the overview analysis The analysis performed in course of preparation of the Report was primarily based on publically available data as well as on proprietary data based on experience in the energy sector assignments. Report investment cost estimations Investment costs estimations given in the Report are a macro-scale rough assessment of possible investment needs and are based on both available sources as well as EY expert assumptions. Without further detailed analysis and elaboration this estimation cannot be treated in any way as a valuation and used in course of investment planning and business decision making.

4 Page 2 of 54 Introduction 1.2 Goal of the Report The primary goal of the Report is to give an introductory overview of the state and challenges of the energy sector in the EU-11 countries. The secondary goal of the Report is to identify the common features and challenges of the EU- 11 countries energy sectors in respect of adopting an integrated regional approach to energy sector development that would benefit EU-11 Member States. The following Executive Summary sums up some of the key ideas which are presented in the final Report. The Executive Summary is focused on a regional EU-11 perspective and does not go into country specific details, which are presented in the Report. The Report covers EU-11 countries overview of key energy sector areas (i.e. electricity generation and transmission, oil and gas transmission) as well as the energy profile of key industries (i.e. transport and steel sector) with respect to goals defined above. This overview is complemented with a EU-11 and EU-15 regional comparison in the identified key issue areas. Item 1: EU-11 countries Source: EY

5 Introduction Page 3 of Long-term energy sector eiciency As presented in the framework below, the conducted analysis is primarily based within three main energy policy goals which form a definition of long term energy sector eiciency. These are: 1) Stable economic growth, 2) Security of supply, 3) Environmental protection. Item 2: Long-term energy sector eiciency definition Security of supply Long-term Energy Sector Eiciency 2 3 Environment protection requirements Stable economic growth A growth rate allowing EU-11 countries to reach economic development convergence with the EU-15 countries in a quick and sustainable way. Energy sector contributes to economic growth stability by achieving competitive energy price levels which promote investment or inhibit investment outflow. Security of supply Ability of a country or a region to provide conditions for long term safe and secured supply of primary and final energy sources to customers. Environment protection requirements Fulfillment of EU regulations aimed at developing conditions for sustainable development and environment preservation in EU-27 countries 1 1 Stable economic growth 4 Long-term energy markets eiciency A state in which all 3 of the above goals are achieved or a policy mix is chosen that balances these goals if full realization of all of them at the same time is impossible. Source: EY The goals described above create an energy policy mix, where achievement of one goal can be traded o for another. For illustrative purposes, a possible trade-o between goals mentioned above may be loosening environmental protection regulation (partial resignation from the third goal) in order to increase security of supply based on indigenous fossil fuel and secure relatively low energy prices (achieving goals 1 and 2 combined). According to EU energy policy put forward in the document An Energy Policy for Europe - COM (2007) 1, all of the goals can be achieved with relatively low or no trade-o eect between them. In the mentioned document, the EU identifies Sustainability, Security of Supply, and Competitiveness as the main energy challenges which can be translated into the policy goals as identified in Item 2. One of the key issues put in the final Report and this Executive Summary is whether EU-11 economic and energy sector conditions allow for all of the three goals to be implemented in the EU-11 in the same way as it may be possible in the EU-15. The Report s initial working hypothesis is that some kind of trade-o between the goals above may be inevitable in the EU-11 region unless new financing mechanisms for the development of energy sectors in this region are introduced. Key points Long-term energy sector eiciency is important for the EU-11 region to continue economic convergence with the EU-15 average. In the long run, all of the energy policy mix goals should be achieved and sustained. Due to EU-11 economic and energy sector characteristics, in the short and mid-term a trade-o between some of the energy policy goals may be inevitable, unless new financing mechanisms for the development of energy sectors in this region are introduced. The following final version of the Report and this Executive Summary are aimed to give some introductory considerations on this issue.

6 Page 4 of 54 Introduction 1.4 Geographical scope of the Report The analysis given in the Report depicts the energy sectors of a group, which comprises the following countries: Bulgaria, Croatia, Czech Republic, Estonia, Hungary, Latvia, Lithuania, Poland, Romania, Slovakia, Slovenia. The main rationale for such grouping of ten EU Member States and Croatia (currently an acceding country with planned accession on 1 July 2013), apart from geographical proximity, is the similarity in the level of economic development as well as the common challenges for the energy sector. Both the GDP per capita level and GDP growth rates of the analysed countries are substantially dierent from the EU-15 and show a dierent starting point in terms of facing today s and future energy sector challenges, initially defined in point 1.3. Item 3: EU-11 countries and EU-11 and EU-15 GDP comparison (EUR per capita (PPP) and % (GDP growth)) EU-11 countries Poland Czech Republic Hungary Slovenia Estonia Latvia Lithuania Slovakia Romania EU-11 and EU-15 GDP comparison in (EUR per capita (PPP) and % (GDP growth)) GDP per capita average in 2010 GDP per capita CAGR in EUR, PPP % 30,000 25,000 20,000 15,000 10,000 5, Croatia 0 0 Bulgaria EU-15 EU-11 EU-15 EU-11 Source: EY

7 Introduction Page 5 of Global energy trends World energy demand According to a central IEA (International Energy Agency) scenario (New Policies Scenario) global energy demand will increase by as much as 40% till 2035 comparing to According to the scenario, fossil fuels (oil, gas, solids) will still cover the vast majority of the energy demand with a 75% share in Nuclear and renewable energy will account for the rest of the primary energy mix. Up to 90% of the increase is estimated to be attributed to non-oecd countries. EU primary energy demand is estimated to rise by ~5% over the period with a CAGR of 0.2%. Europe s energy mix will also dier from the global average with more reliance on oil & gas, renewables and less on solids (55%, 23% and 8%, respectively). International energy trade Energy sector s interconnectivity importance increases as inter-regional trade of oil and gas is estimated to rise by ~30% and ~100%, respectively, by 2035 comparing to OECD countries share of inter-regional fossil fuel trade is forecasted to decline from 42% to 29% in 2035 with strong focus on gas and oil while Asian countries share will rise substantially resulting in their leading role as an importer of all fossil fuels (oil, gas, solids). As international energy market will be getting tighter it would be vital for EU to further develop inter-connectivity capabilities, diversify sources of supply and at the same time take actions to limit its import dependency. CO 2 emissions Energy related CO 2 emissions are estimated to account for 72% of total CO 2 emissions. Global energy related CO 2 emissions are estimated to rise to 36.4 Gt in 2035 (a 20% increase comparing to 2010) with EU s share of ~8%. According to projections a 0.8 Gt (22%) decrease of CO 2 emission in EU between 2010 and 2035 will be overshadowed by a combined increase of 5.4 Gt of China, India and Middle East alone. There is a real risk that EU CO 2 policies may prove ineective in terms of changing global emissions landscape as over 90% of emissions will take place outside EU (over period cumulative EU emissions will be ~35% of China s alone). Investment needs According to estimations ~USD 38 trillion of investments in energy supply infrastructure (both transport/transmission and production) is required over the period of Over 95% can be attributed to power, oil and gas investments with estimated shares of 45%, 27% and 25% respectively. European OECD countries will account for 12% of the figure with ~ trillion USD 4.5 of investments needed over the period (2010 dollars). Source: Based on IEA World Energy Outlook 2011 New Policies Scenario

8 Page 6 of 54 EU-11 region overview 2 EU-11 region overview 2.1 Macroeconomic characteristics The EU-11 countries are inhabited by nearly 21% of EU 28 population (EU 28 - European Union countries with Croatia). The EU-11 economies account for 6.8% of GDP and 15.6% of energy consumption in the EU 28. The economic standing of the EU-11 is still far behind the EU average average GDP per capita of k EUR 9.0 in 2010 represented only 32% of the EU-15 average (EU-11 average GDP in PPP in 2010 amounted to k EUR 14.7 which represented 54.9% of the EU-15). Item 4: EU-15, EU-27 and EU-11 key info EU-15 GDP per capita (nominal, 2010) - k EUR 28.3 GDP per capita (PPP, 2010) k EUR GDP CAGR 3.11% EU-27 GDP per capita (nominal, 2010) - k EUR 24.4 GDP per capita (PPP, 2010) k EUR GDP CAGR 3.43% EU-11 GDP per capita (nominal, 2010) - k EUR 9.0 GDP per capita (PPP, 2010) k EUR GDP CAGR 5.66% Source: Eurostat There has been a significant convergence between EU-11 and EU-15 economies in the last decade. At the beginning of the transition, EU-11 GDP declined as a result of economic restructuring, but since 2000 the EU-11/EU-15 GDP per capita ratio has been rising steadily. Item 5: GDP per capita in EU-11 and EU-15 GDP per capita in EU-11 and EU-15 (EUR, nominal) in GDP per capita in EU-11 and EU-15 (EUR, PPP) in keur % keur % 20 80% 60% 20 80% 60% 10 40% 20% 10 40% 20% 0 0% 0 0% EU -11 (left axis) EU -15 (left axis) EU -11/EU-15 ratio (right axis) EU-11 (left axis) EU-15 (left axis) EU-11/EU-15 ratio (right axis) Source: Eurostat

9 EU-11 region overview Page 7 of 54 Item 6: Comparison of economy structure, EU-11 and EU-15 Economy structure in EU-11 in % Not only the level of economic development, but also the structure of EU-11 and EU-15 economies diers substantially. Agriculture Industry 34% In the EU-11 agriculture and industry contribution to GDP is much higher than in the EU-15. The opposite is true for the services sector contribution. 62% Services As energy intensity of the industry sector is generally higher than in the services sector, it implies higher energy intensity of GDP in EU-11 than in EU-15. Economy structure in EU-15 in % 24% Agriculture Industry Services 74% It is expected that EU-11 countries will gradually converge to the structure currently present in EU- 15 countries with almost 75% of GDP created in services. It should be noted, however, that since 2000 the share of industry in value added in the EU-11 remains stable. It means that the possibility of reduction of energy demand though the transformation of the economy to the servicebased one may be lower than commonly assumed. Source: Eurostat; Data for Croatia from 2009 Item 7: Comparison of energy sector share in gross value added, EU-11 and EU-15 in Energy share in the GVA in % 3% 2% Dierences in terms of macroeconomic characteristics of EU-11 and EU-15 are also reflected in the share of the energy sector in gross value added in both regions. The importance of the energy sector for the EU-11 economies is relatively higher than it is in EU-15. 1% 0% It means that macroeconomic consequences of any disturbances in the energy sector may be stronger in the EU-11 than in the EU-15. EU-11* EU-15 Source: Eurostat; * Excluding Croatia and Romania due to lack of data.

10 Page 8 of 54 EU-11 region overview EU-15 and EU-11 dier considerably in terms of the household consumption structure. This indicates not only a gap in economic development, but also helps to predict future changes in the structure of energy demand. It may be expected that the relative importance of expenses on transport in EU-11 will increase significantly in the next decades (faster than GDP), which implies high growth of demand for certain types of energy sources from the transportation sector (e.g. oil). Item 8: Comparison of household consumption structure, EU-11 and EU-15 (average weighted by population), % 30% 20% 10% 32% 19% 17% 15% 6% 5% EU-11 11% 12% 13% 16% 10% 11% 12% EU-15 20% 0% Food and beverages, tobacco Housing, water, electricity, gas and other fuels Health and education Communications and other goods and services Clothing and household (equpiment, maintenance) Transport Recreation and culture, restaurants and hotels Source: Eurostat Key points EU-11 and EU-15 dier in terms of the level and structure of economic development. Those dierences will have an impact on future energy demand development. Higher share of the energy sector in gross value added in EU-11 in comparison with EU-15 means that energy sector stability is relatively more important for ensuring sustainable economic growth in EU-11 than in EU-15. Reduction of energy demand through the relative decrease of the industry sector share in GVA in the EU- 11 may be low, moreover, a significant shift of demand for energy in the transportation sector in the next decades is expected.

11 Stable economic growth Page 9 of 54 3 Stable economic growth From the point of view of economic development, long-term energy eiciency should not create inhibitions for stable and sustainable economic growth. In other words, realization of energy security and environmental preservation goals should not have any substantially adverse eects on GDP dynamics. The following considerations concentrate on key energy demand implications of GDP growth in EU-11 as well as on identification of possible short- and midterm inhibitions to GDP dynamics resulting from unbalanced energy policies. Item 9: Long-term energy market eiciency definition - stable economic growth Security of supply Long-term Energy Sector Eiciency 2 3 Environment protection requirements Stable economic growth A growth rate allowing EU-11 countries to reach economic development convergence with the EU-15 countries in a quick and sustainable way. Energy sector contributes to economic growth stability by achieving competitive energy price levels which promote investment or inhibit investment outflow. Security of supply Ability of a country or a region to provide conditions for long term safe and secured supply of primary and final energy sources to customers. Environment protection requirements Fulfillment of EU regulations aimed at developing conditions for sustainable development and environment preservation in EU-27 countries 1 Stable economic growth 4 Long-term energy markets eiciency A state in which all 3 of the above goals are achieved or a policy mix is chosen that balances these goals if full realization of all of them at the same time is impossible. Source: EY 3.1 EU-11 GDP projections and energy demand implications Item 10: Forecasts of EU-11 and EU-15 convergence GDP per capita in (in k EUR PPP) k EUR PPP % of EU % 80% 60% 40% 20% 0% EU-11 (lef axis) EU-15 (left axis) EU-11/EU-15 ratio (right axis) GDP per capita growth, PPP, CAGR in % 4% 3% 2% 1% 0% % 4.2% 3.9% 3.8% 3.8% 3.7% 3.6% 3.3% 3.3% 3.2% Lithuania Bulgaria Slovakia Latvia Estonia Poland Czech Rep. Hungary Romania Croatia % Slovenia 3.7% EU % EU -15 As it was shown in the previous chapter, significant economic convergence between EU-11 and EU-15 economies has been observed in the last decade. It is forecasted that it will continue in the years to come. According to IHS Global Insight analysis, in 2035 GDP per capita in EU-11 is going to reach almost 90% of EU-15 value. The pace of economic growth is predicted to dier across EU-11 countries. The slowest economic growth is forecasted for Slovenia, which currently is an outstandingly developed country within EU- 11 group. Nevertheless, median of annual growth predicted in EU-11 countries amounts to 3.7%, while GDP per capita in EU-15 is forecasted to grow 1.4% annually. Source: IHS Global Insight

12 Page 10 of 54 Stable economic growth Significant dierences between EU-11 and EU-15 in terms of the future pace of economic development, together with dierences in current characteristics of economies mean that those groups of countries will face dierent challenges for their energy sectors. Item 11: Relation between GDP and gross electricity production in the EU-27 GDP and electricity production level in (1996=100%) 140% 130% 120% 110% 100% Electricity production GDP GDP and electricity production dynamics in (y/y %) 6.0% 4.0% 2.0% 0.0% -2.0% -4.0% -6.0% Aggregated energy consumption usually rises in line with economic growth, but at a lower rate (between 0.4 and 0.7 of GDP growth) [2010, International Energy Agency, World Energy Outlook]. Historical data for EU-27 presented on the left confirms this observation. It has been especially true in the period of recent financial crisis in Europe. In 2009, GDP and electricity production in the EU-27 fell by more than 4 percent comparing to The high rate of economic development expected in the EU-11 will probably lead to systematic increases in energy demand. Taking into account the significant industry share in the EU-11 GDP, as well as the higher energy intensity of the region, projected GDP dynamics would be hard without significant energy demand increase. From that point of view, the long-term EU-11 energy policy mix should pay special attention to a competitive energy sector with long term- energy supply security. That kind of focus, may make it a lot harder for the EU-11 to adopt environmental preservation goals (often meaning radical changes in energy balances) according to the same implementation rules as EU-15. Electricity production GDP Source: Eurostat 3.2 EU-11 GDP growth potential inhibitions stemming from the energy sector As indicated above an unbalanced policy mix may lead to GDP dynamics inhibitions in the short and medium term. In case of EU-11, higher demand for energy together with strict rules related to environment protection (carbon pricing, RES targets etc.) will inevitably put a pressure on energy pricing in the EU-11. According to EU estimations in the 2050 Energy Roadmap, in most decarbonisation scenarios, electricity prices will rise up to 2030 and start falling only after that date. In the short term electricity price increase in EU-11 will be influenced by the closing gap between energy demand and supply as well as relatively high carbon intensity of energy production. In the medium term, it will be due to scale and type of investment needed in the region. For the EU-11 region this can be especially diicult in terms of economy competitiveness levels, since electricity prices in the region are already relatively high comparing with EU-15 (see Item 12).

13 Stable economic growth Page 11 of 54 Item 12: Electrical energy prices in EU-11 countries and other Member States in 2011 (EUR/kWh, PPP, electricity prices for yearly consumption between 2.5 and 5 MWh) EUR/kWh, PPP France Finland Denmark Estonia Norway Sweden Greece Netherlands Luxembourg Portugal Austria Slovenia Croatia Germany Italy United Kingdom Belgium Ireland Latvia Bulgaria Romania Czech Republic Lithuania Spain Poland Cyprus Slovakia Hungary Malta EU-11 EU-15 EU-27 Source: Eurostat; Values for EU-11 and EU-15 have been calculated as weighted averages of the respective countries Moreover, ensuring energy security while meeting environmental requirements may require such capital expenditures (radical energy balance change) in various areas (e.g. fiscal policy, crowding out of other investments eect, etc.), that will be hard to achieve for national economies of EU-11 countries, which may lead to slower pace and lower sustainability of economic growth. Adding to that, it should be stressed that due to lack of own technologies in EU-11, significant amount of capital investments in the energy sector will flow outside the region. That wouldn t change even with substantial EU financing for EU-11 energy projects. Recent EY research shows only ~25% 1 of CAPEX in the wind energy sector stays in the country where investment is realized. Therefore, in order not to impair GDP dynamics of the EU-11 by investment aiming at radical energy balance change, adequate EU funding may have to be complemented by new energy technologies know-how inflow that would prohibit the majority of CAPEX flowing out of the region. Key points In the next decades, EU-11 countries will continue to catch-up in terms of economic development to the EU-15. It will put significant and relatively higher than in EU-15 pressure for EU-11 s energy sectors in terms of growing demand as well as environmental issues. In the short and medium term, this in turn may have a negative impact on the stability of economic growth in the EU-11. In order not to impair GDP dynamics of the EU-11 by investment aiming at radical energy balance change, adequate EU funding may have to be complemented by new energy technologies know-how inflow that would prohibit majority of the CAPEX flowing out of the region. Otherwise it may be hard to implement EU policies in the EU-11 on the same basis as EU-15 without adverse eects on the region s economies in the short- and mid-term. 1 Based on a study for Poland

14 Page 12 of 54 Security of supply in the EU-11 region 4 Security of supply in the EU-11 region The Commission of the European Communities states that despite the fact that each Member State is responsible for its own security, solidarity between Member States is a basic feature of EU membership. For these reasons, energy security of the EU and EU-11 alone should be an issue of common EU concern. As indicated earlier, for the purpose of the Report, security of supply is defined as in Item 13 below. Item 13: Long-term energy market eiciency definition - security of supply Security of supply Long-term Energy Sector Eiciency 2 3 Environment protection requirements Stable economic growth A growth rate allowing EU-11 countries to reach economic development convergence with the EU-15 countries in a quick and sustainable way. Energy sector contributes to economic growth stability by achieving competitive energy price levels which promote investment or inhibit investment outflow. Security of supply Ability of a country or a region to provide conditions for long term safe and secured supply of primary and final energy sources to customers. Environment protection requirements Fulfillment of EU regulations aimed at developing conditions for sustainable development and environment preservation in EU-27 countries 1 Stable economic growth 4 Long-term energy markets eiciency A state in which all 3 of the above goals are achieved or a policy mix is chosen that balances these goals if full realization of all of them at the same time is impossible. Source: EY In line with EU energy security priorities stated in the Second Strategic Review: An EU Energy Security and Solidarity Action Plan - COM (2008) 781, one can distinguish 3 key areas of consideration in terms of security of supply as presented and described in Item 14 below. Despite a clear need for common energy policy for the EU, substantial dierences in EU-11 and EU-15 economic conditions can by distinguished, that call for adopting elasticity in implementing common energy policy goals and instruments in the field of energy security. Item 14: Key security of supply considerations Energy demand satisfaction A This consideration will be crucial especially in the EU-11 where primary energy demand is estimated to rise by a range of between 10% and 17% by 2025, whereas in the EU-15 a stable or declining primary energy demand is projected. Security of supply policy for the EU-11 region should be capable to guarantee long-term energy availability. According to EU energy security policy it should be addressed by i.e. by external relations management, energy eiciency measures, preparing oil and gas crisis response as well as optimizing utilization of EU s indigenous energy resources. For EU-11 countries which have lower energy consumption per capita levels and often are highly import dependant with little diversification possibilities (oil and gas), optimizing indigenous energy resources and common international stance on energy issues may be pivotal.

15 Security of supply in the EU-11 region Page 13 of 54 Import limitation and diversification B EU is a substantially energy imports dependent region. As indicated above significant import dependency may prove dangerous to both EU and EU-11 energy security. It may be especially serious for the EU-11 region with its lack of suicient oil and gas infrastructure that would allow diversification of directions of energy supply. As oil and gas are to retain a strong presence in the EU s primary energy balance, addressing import dependency will probably remain an issue in EU s energy strategy in the long term. Taking actions to reduce growth of the import dependency and diversify both energy sources and directions of energy supply are crucial to long term EU-11 security as well as EU as a whole. As a response to these challenges EU plans to become a technological leader in RES and intends to increase RES share in the primary energy mix even up to 60% by Apart from the RES initiative, EU-11 countries energy import dependency tackling may be feasible also by allowing maintaining a substantial share of energy from indigenous solids even at the expense of not meeting interim decarbonisation targets. Secondly, nuclear energy must remain a real alternative for the EU, especially from the point of view of short-term operational security of energy networks with solid s share diminishing and no other indigenous fuels to be used for a base load generation. Infrastructure in place C In case of EU s systemic long-term import dependency (oil and gas) infrastructure development allowing import diversification is crucial. Both EC and Member States are addressing this issue on multiregional and national levels respectively. According to the Conclusions of EC meeting in February 2011 no European country after 2015 should see its energy security jeopardized by lack of the appropriate connections. In the same time it has been confirmed that an important financing costs for infrastructure investments will have to be delivered by the market. Furthermore, according to the conclusions some projects that would be justified from a security of supply/ solidarity perspective, but are unable to attract enough marketbased finance, may require some limited public finance to leverage private funding. However, in light of recent huge uncertainty on the financial market regarding especially EU economic conditions, rising suicient private financing in order to provide needed infrastructure may prove diicult and a stronger financial direct aid from the EU budget may be needed. It may especially be an issue in the EU-11 countries where overall investment risks are perceived as greater than in the EU-15.

16 Page 14 of 54 Security of supply in the EU-11 region 4.1 EU-11 current energy demand characteristics Most of the EU-11 countries are characterized by lower gross inland consumption of energy per capita than the EU-15 average. In 2010, average gross inland consumption per capita in EU-11 accounted for only 70% of the EU-15 value. Item 15: Gross Inland Consumption per capita, toe in 2010 toe per capita Romania Croatia Latvia Lithuania Bulgaria Hungary Poland Slovakia Slovenia Czech Rep. Estonia 2.60 EU EU-15 Source: Eurostat Item 16: Comparison of gross inland consumption structure in EU-11 and EU-15 Gross Inland Consumption mix in EU-11 in % 20.4% 8.5% Solids Petroleum products Gas RES Nuclear 25.4% Total: 277 Mtoe 35.9% Gross Inland Consumption mix in EU-15 in % 14.4% 10.0% Petroleum products Gas Nuclear Solids RES 26.2% Total: 1,486 Mtoe 37.1% Gross inland consumption in the energy structure in EU- 11 countries diers significantly from the EU-15 structure. Three main dierences in 2010 were: significantly higher share of solids in EU-11 than in EU-15 (almost 36% compare to only 12.3%, respectively) lower share of nuclear in EU-11 than in EU-15 (8.5% vs. 14.4%) considerably lower share of petroleum products in EU-11 than in EU-15 (25.4% compare to over 37%). Both the higher share of solids and the lower share of nuclear in EU-11 gross inland consumption of energy are major grounds for higher carbon intensity of the economy (emissions of CO 2 in relation to energy consumption). As the gross inland consumption of energy structures in EU-11 as well as EU-15 are expected to follow the desirable energy-mix structure presented in European Commission analysis ( A Roadmap for moving to a competitive low carbon economy in 2050 ), significant changes are required. This prognosis shows that renewable sources may be responsible over half of the energy consumption in 2050 (approximately 52% share in total energy-mix). Another significant assumption is the small share of solids (2.7% share) and nuclear (3.3% share).

17 Security of supply in the EU-11 region Page 15 of 54 Average energy consumption mix in EU-27 in decarbonisation scenarios - Roadmap to % Petroleum products Gas Nuclear Solids RES 18.0% 3.3% 2.7% 23.8% Achieving Roadmap 2050 targets will be more diicult for the EU-11 group than for EU-15, mainly due to the currently higher share of solids (almost threefold). Moreover, over 50% share of renewable sources may be achieved through significant investment programmes, which can be harder to finance for EU-11 countries than for EU-15. Alternatively, as the major aim of the Roadmap 2050 is building a low-carbon economy, it may be easier to achieve this target for EU-11 by using clean coal technologies. This would also require spending on new technology, still it may require less capital investments than significant change of the energy-mix. Source: Eurostat, Impact Assessment to Roadmap for moving to a competitive low carbon economy in 2050 When taking into consideration final energy consumption, all EU-11 countries record lower consumption per capita than average value for EU-15. Discrepancies between average value of final energy consumption in EU-11 and EU-15 countries are higher than dierences in gross inland consumption. Due to this, average final energy consumption to gross inland consumption ratio in EU-11 is lower than in EU-15, which indicates smaller energy eiciency of EU-11. Item 17: Final energy consumption, toe per capita, 2010 toe per capita Romania Bulgaria Croatia Lithuania Hungary Poland Latvia Slovakia Estonia Slovenia Czech Republic EU-11 EU-15 Source:Eurostat Item 18: Comparison of final energy consumption structure in EU-11 and EU-15 Final Energy Consumption mix in EU-11 in 2010 The final energy consumption structure in 2010 showed similar dierences between EU-11 and EU-15 averages as the structure of gross inland consumption 9.4% of energy: 9.9% 11.8% 17.4% Total: 174 Mtoe 21.2% 30.3% Petroleum products Gas Electricity Solids RES Heat likewise gross inland consumption of energy structure, EU-11 structure of final energy consumption is characterized by higher share of solid fuels (11.8% vs. only 3%) and lower share of petroleum products (30.3% vs. 41.2%) than EU-15 as a result of dierent determinants of energy policy in the past decades, EU-11 group has higher share of heat in final energy consumption than EU-15 average (9.4% compare to almost 4%).

18 Page 16 of 54 Security of supply in the EU-11 region Final Energy Consumption mix in EU-15 in % 3.0% 3.8% 6.3% 23.8% Total: 980 Mtoe 41.2% Petroleum products Gas Electricity RES Heat Solids The projected trend of potential change in final energy consumption in upcoming years involves: further change of EU-11 final energy consumption - it is expected that share of petroleum products will rise (as the development of the transport sector will follow) and solids share will fall (as the EU strategy documents suggest decrease in solids use) as European Commission support expansion of cogeneration in order to save energy and combat climate change, the heat share in both EU-11 and EU-15 is expected to increase. Source: Eurostat Due to significant share of solid fuels in energy mix, EU-11 countries are characterized by high carbon intensity of energy consumption. However, EU-15 countries have more significant impact on the environment, by emitting more CO 2 per capita than EU-11 countries. It is a result of higher consumption of energy in EU-15 countries when compared to EU-11 countries. Item 19: Comparison of economy carbonization, EU-11 and EU-15 Carbon intensity of Gross Inland Consumption in (t of CO 2 in energy sector / toe of GIC) t of CO 2 /toe Greenhouse Gas Emissions per capita in (t of CO 2 ) t of CO EU-11 EU-15 EU-11 EU-15 Source: Eurostat Key points Achieving desirable structure of energy-mix in 2050 will be more diicult for EU-11 group than for EU-15, due to the presently higher share of solids, which importance should be significantly decreased. Import dependency analysis shows that indigenous fuels usage supports reducing import dependency. EU-11 countries are characterized by significant solid fuels resources that may satisfy energy demand increase, fostering its security of supply. Current gross inland consumption of energy and final energy consumption per capita in EU-11 are considerably lower than EU-15 levels. It is expected that EU-11 ratios levels will increase, following the convergence of the economy with the EU-15 average.

19 Security of supply in the EU-11 region Page 17 of Forecasts of energy demand Item 20: Forecasts of Gross Inland Consumption in EU-11 A) PRIMES Baseline scenario 2009, Mtoe Mtoe /2010 = 13% B) PRIMES Reference scenario 2009, Mtoe Mtoe /2010 = 10% C) Ernst &Young forecasts of EU-11 Gross Inland Consumption till 2035, Mtoe Mtoe /2010 = 17% In this section, three forecasts of energy demand in the EU-11 are presented: European Commission s PRIMES model Baseline scenario, assuming continuation of contemporary energy policies (existing until April 2009). European Commission s PRIMES model Reference scenario assuming implementation of some additional measures adopted between April and December 2009 in the EU. EY s forecast from simplified panel-data model based on recent data and current macroeconomic prognoses. PRIMES model expect that in years Gross Inland Consumption of EU-11 will increase by 10-13%. According to the EY s model, the growth will be higher (17% till the 2030 and 18% till the 2035). EY s estimates are in line with current IEA forecasts. According to IEA s World Energy Outlook 2011 medium scenario (New Policies Scenario), European OECD countries (as an aggregate) will increase their energy demand by 8% by 2035, while in non-oecd East Europe countries energy consumption will increase by 30% (six countries out of EU-11 are part of the Europe OECD aggregate, rest of them were included in the analysis for non-oecd East Europe). While EY s GIC growth forecasts are relatively high, they imply that in the analyzed period energy intensity of GDP in EU-11 will drop by ca. 48%, but still will be higher than the current EU-15 ratio /2010 = 18% Dierences in forecasts show the scale of uncertainty in predicting future GIC growth path. Nevertheless, the growth of energy demand in the next decades in EU-11 seems to be inevitable. Source: EU energy trends to 2030, European Commission, 2010, Own elaboration, based on Eurostat data and Global Insight forecast, Key points *Croatia is not included in above analysis Gross Inland Consumption in EU-11 countries will grow by 10-17% till Forecasted growth of energy demand will require significant investments in new capacities and/or will lead to higher import dependency of the region.

20 Page 18 of 54 Security of supply in the EU-11 region Item 21: Comparison of EU-11 and EU-27 energy consumption forecasts A) Baseline scenario 2009 (2010=100%) 115% 110% 105% 100% 95% 90% EU-11 EU-27 B) Reference scenario 2009 (2010=100%) 115% 110% 105% 100% 95% According to PRIMES model, energy consumption path will dier in EU-11 and EU-27. While the growth of GIC in EU-11 will reach 10-13% in , in case of EU-27, the GIC change will be negligible (baseline scenario) or even negative (reference scenario). It means that in case of EU-15 countries no increase, or decrease, of GIC in the next decades is forecasted. The main factor lying behind those dierences is the forecasted pace of economic development in EU-11 and EU-15 (see Chapter 3.1) as well as future changes of urbanization rate (which currently is relatively low in EU-11). Other factors determining GIC behaviour, such as demographic developments or changes in the structure of the economy will restrain rather than accelerate the pace of GIC growth in the EU-11 (for example, it is forecasted that the population in EU- 11 will shrink by ca. 5% till the 2035). 90% EU-11 EU-27 Source: EU energy trends to 2030, European Commission, 2010 Key points According to this analysis, energy prospects for EU-11 dier significantly from the forecasts for the whole EU-27. It is predicted that EU-27 countries will increase their Gross Inland Consumption by roughly 3% (baseline scenario) or even that energy consumption will slightly decrease (reference scenario) within the horizon of It means that EU-11 countries will have to face investment costs of new capacities as well as the risk of growing import dependency, while this will not be the case in EU-15. Alternatively, to satisfy growing energy consumption, EU-11 countries may invest in clean coal technologies, which comprises reducing import dependency (by using indigenous solids reserves) and potentially lower expenses than considerable change of the energy-mix structure (as proposed in key EU strategy documents).

21 Security of supply in the EU-11 region Page 19 of Import dependency In general, energy import dependency of EU-11 is lower than of EU-15 and EU-27 (37%, 57% and 54%, respectively). But this situation may change in the next decades: While import dependency in Estonia, Romania and the Czech Republic is below 30%, other countries suer considerably high dependence on import - e.g. Lithuania, after closing its nuclear power plant in Ignalina is forced to cover its energy needs in 84% by import. Low import dependency of some of EU-11 countries is a result of large own resources and export of solid fuels. But the implementation of EU environmental protection regulations will result in lowering of the importance of solids in the energy mix, thus leading to an increase of total import dependency in the region. Currently both EU-11 and EU-15 face significant dependency on imports of petroleum (approximately 90%), and gas products (more than 60%). Item 22: EU-11 energy dependency in each country in comparison with EU-15 and EU-27 averages in 2010 EU-11 countries import dependency levels in comparison to EU-15 and EU-27, 2010 EU-11 and EU-15 import dependency of selected fuels, % 80% 84% 100% 90% 89.2% 90.7% 70% 60% 50% 40% 30% 20% 10% 0% 58% 63% 52% 49% 41% 44% 32% 22% 26% 13% Estonia Romania Czech Republic Poland Bulgaria Latvia Slovenia Croatia Hungary Slovakia Lithuania 37% EU-11 57% 54% EU-15 EU-27 80% 70% 60% 50% 40% 30% 20% 10% 0% 2.3% 60.0% 66.5% 61.5% EU-11 EU-15 EU-11 EU-15 EU-11 EU-15 Solids Petroleum products Gas Source: Eurostat Item 23: Petroleum products dependency in EU-11 in 2010 EU-11 petroleum products import dependency, 2010* Structure of EU-11 oil and NGL import, 2010 Mtoe Primary energy production Net import Others Gross Inland Consumption 5% 2%1% 6% Russia Kazakhstan Azerbaijan Norway Others 86% Source: Eurostat; *Others include: recovered products, stock changes, bunkers

22 Page 20 of 54 Security of supply in the EU-11 region EU-11 region is highly dependent on import of petroleum products (mainly crude oil): Primary energy production of petroleum products covers only 10.5% of the EU-11 energy needs almost all of the remaining is imported from other countries. Russia is the main provider of crude oil and NGL with over 86% share of the EU-11 imports. Other countries provide less than 15% of total import of this energy source. For Lithuania and Slovakia, Russia is the only exporter of petroleum products. The country with the lowest dependency on the supply from Russia is Romania, although still 46% of Romania s total imports comes from this country. The security of supply for EU-11 countries will require further investments aimed at the diversification of its petroleum product supply sources. Item 24: Gas import dependency in EU-11 in 2010 EU-11 gas import dependency, 2010* Structure of EU-11 gas import, 2010 Mtoe % 7% 3% Russia Germany Norway Other 0 Primary energy production Net import Others Gross Inland Consumption 88% Source: Eurostat; *Others include: recovered products, stock changes, bunkers Gas import dependency in the EU-11 is lower than in the case of petroleum products, but still it is significant: Primary energy production of gas products covers ca. 30% of the EU-11 energy needs. Although dependency of EU-11 region on gas is lower than on petroleum products, diversification structure is quite similar: Russia is the main provider of gas it satisfies over 88% of the EU-11 external gas needs. Similar as in the case of petroleum products, EU-11 countries will need further investments aimed at diversifying its external gas supply sources. Key points EU-11 group is characterized by relatively low import dependency of solids, but due to EU regulations its importance in the energy consumption will be diminishing. Import dependency on petroleum and gas products is significant in the EU-11, moreover it heavily depends on one direction of supply. New investments aimed at the diversification of supply directions are crucial to provide security of supply for EU-11.

23 Security of supply in the EU-11 region Page 21 of 54 Item 25: Major importers of oil and gas in 2010 Norway EU-27: 71.6 Mt EU-27 EU-27: Mt* Commonwealth of Independent States EU-11: 1.23 Mt EU-15: 70.4 Mt EU-11: 83.4 Mt* EU-15: Mt* EU-27: 92.7 Mtoe EU-27: Mtoe Oil reserves (Gt) Gas reserves (Gtoe) 1, Oil reserves (Gt) Gas reserves (Gtoe) 0.82 EU-11: 1 Mtoe EU-15: 91.7 Mtoe 64.9 EU-11: 31.4 Mtoe EU-15: 68 Mtoe Africa Middle East EU-27: Mt EU-27: 90 Mt EU-15 countries EU-11: 0.2 Mt EU-15: Mt EU-11 countries Oil reserves (Gt) 0.69 EU-11: 0.3 Mt EU-15: 89.8 Mt Oil reserves (Gt) Gas reserves (Gtoe) EU-27: 72.6 Mtoe EU-11: 0 Mtoe EU-15: 72.3 Mtoe Gas reserves (Gtoe) 74.7 Total crude oil imports (Mt) Total gas imports (Mtoe) EU-27: 29.1 Mtoe EU-11: 0 Mtoe EU-15: 29.1 Mtoe Oil reserves (Gt) Gas reserves 2, (Gtoe) Gas imports Crude oil imports Source: Eurostat, BP Statistical Review of World Energy 2011; *imports from Russia only

24 Page 22 of 54 Key environmental protection requirements facing EU-11 5 Key environmental protection requirements facing EU-11 The main elements of environmental protection legislation in the EU are specific environmental measures to be achieved by covered entities (mainly provisions regarding industrial emissions) as well as the climate and energy package (by and large, jurisdiction regarding Emission Trading Scheme). Item 26: Long-term energy market eiciency definition - environmental protection requirements Security of supply Long-term Energy Sector Eiciency 2 3 Environment protection requirements Stable economic growth A growth rate allowing EU-11 countries to reach economic development convergence with the EU-15 countries in a quick and sustainable way. Energy sector contributes to economic growth stability by achieving competitive energy price levels which promote investment or inhibit investment outflow. Security of supply Ability of a country or a region to provide conditions for long term safe and secured supply of primary and final energy sources to customers. Environment protection requirements Fulfillment of EU regulations aimed at developing conditions for sustainable development and environment preservation in EU-27 countries 1 Stable economic growth 4 Long-term energy markets eiciency A state in which all 3 of the above goals are achieved or a policy mix is chosen that balances these goals if full realization of all of them at the same time is impossible. Source: EY 5.1 Key EU regulations determining EU-11 region environment protection By adopting regulations concerning the key objectives defined above, the European Commission put significant obligations on Member States, although due to the dierent technologies used in particular countries and individual determinants, the burden associated with EU environmental protection is considerably higher in EU-11 than in EU-15 countries (especially in case of Emission Trading Scheme which will put a special pressure on electricity prices in EU-11). Item 27: Major legislations and policies regarding environment protection - climate and energy package and IED provisions Climate and energy package Targets of the regulation: reduce global warming to no more than 2ºC increase compared to the temperature in pre-industrial times Tools to achieve established target by 2020: 20% reduction in EU greenhouse gas emissions below 1990 levels, 20% share of renewable resources in EU energy consumption, 20% reduction in primary energy use in EU compared with projected level by improving energy eiciency Further proposed targets to achieve by 2050: 80-95% CO 2 emission reduce below 1990 levels through combination of higher energy eiciency, diversified supply technologies (i.e. clean coal technologies, nuclear energy) and increasing RES share in energy-mix structure Source: EY based on European Commission regulations Industrial emissions (IED) Targets of the regulation: reduce releases of pollutants to air, water and land and o-site transfers of waste provided by industrial facilities to indicated limit values Tool to achieve established target: obligation for complying with stricter values of selected pollutants (with a particular focus on SO2, NOx and dust) Timeframe of IED major provisions: 2014 in respect of installations already in existence before (except large combustion plants), 2015 in respect of industrial activities not subject to the current integrated pollution prevention and control Directive, 2016 in respect of large combustion plants (already in existence before 2013)

25 Key environmental protection requirements facing EU-11 Page 23 of 54 Item 28: Emission Trading Scheme characteristics in EU-11 and EU-15 Greenhouse emission allowances allocated in the EU in (M EUA) M EUA % Number of greenhouse emission allowances issued at the EU level will be significantly decreased after each year the number of allowances will drop by 37.4 M. As a result, the ETS will force companies to realize investments aimed at reducing CO 2 emissions, or purchase increasingly expensive CO 2 emission allowances. In general, there is an assumption, that all Member States will face the same treatment, regardless of the specific determinants of each country (i.e. economy structure, purchasing power). Optional derogation for electricity generators in EU-11 group Country Right for derogation Did country apply for derogation? Bulgaria Yes Yes Croatia No No Czech Republic Yes Yes Estonia Yes Yes Hungary Yes Yes Latvia Yes No Lithuania Yes Yes Poland Yes Yes Romania Yes Yes Slovakia No No Slovenia No No To support the modernization of electricity generation in selected Member States, 10 countries were allowed to apply for free emission allowances allocation for its electricity generators. In EU-11 group 8 countries could apply for derogation and 7 of them decided to submit an application. That proves that majority of the EU-11 countries assessed that complete implementation of ETS provisions will be harmful to their economies and due to this applied for short-term exemption. Even with the derogation, due to higher carbonization of the economy and dierent electricity generation structure, economies of the EU-11 countries will be more burdened by the ETS than the EU-15. Source: European Commission legislation, BP Statistical Review of World Energy 2010, EU Energy Portal

26 Page 24 of 54 Key environmental protection requirements facing EU-11 Item 29: CO 2 emissions in EU-11 and EU-15 Surplus of the CO 2 emission reduction above the Kyoto Protocol commitment at each of EU-11* and EU-15 country in 2008 (Mt CO 2 and %) Estonia Latvia Lithuania Romania Bulgaria Hungary Poland Slovakia Czech Republic Sweden Greece France United Kingdom Germany Belgium Finland Portugal The Netherlands Ireland Italy Slovenia Denmark Spain Austria Luxemburg -1 2% 2% 1% 7% 7% -7-3% -4-7% % -3-15% -9-16% % % -3-37% 49% 49% 45% 44% 42% 36% 28% 27% 22% 15% 11 9% % Mt CO Historical data referring to additional CO 2 reduction (above the Kyoto Protocol) achieved by the members of the EU-11 group shows that in general, EU-11 countries were leaders in reducing CO 2 (as a modernization of the industry and economy structure change followed) emissions when compare to targets established by the Kyoto Protocol. Item 30 presents CO 2 emission changes between 1990 and 2009 in EU and Croatia. It shows that most of EU-11 members (except Slovenia) decreased their CO 2 emissions during the analyzed period. Owing to greater eorts in reducing CO 2 emissions in the previous years, EU-11 countries need further support (i.e. derogation for electricity generators) to comply with stricter EU environmental regulations. Average CO 2 emissions per capita in EU-11, EU-15 and EU-27 averages in 2009 (t per capita)** t percapita Source: European Commission legislation, BP Statistical Review of World Energy 2010, EU Energy Portal; *Croatia not included; ** For Croatia data for Currently, CO 2 emissions per capita in EU-11 are lower than in EU-15 and EU-27, which is mainly a result of the lower level of economic development in the EU-11. Assuming convergence with the EU-15 economies, the CO 2 emissions per capita ratio in EU-11 countries is expected to increase. As climate policy will put a special burden (higher costs associated with CO 2 emissions), catching up with more economically developed countries will be relatively more expensive for EU-11 than without such provisions.

27 Key environmental protection requirements facing EU-11 Page 25 of 54 Item 30: CO 2 emissions in EU and Croatia in 1990 and 2009 Country Mt CO 2 emission in 1990 Mt CO 2 emission in 2009 % change Estonia % Latvia % Lithuania % Romania % Bulgaria % Slovakia % Czech Republic % Hungary % United Kingdom % Germany % Poland % Sweden % Belgium % Denmark % France % Finland % The Netherlands % Italy % Croatia % Austria % Slovenia % Ireland % Greece % Portugal % Spain % EU-11 countries that decreased emissions EU countries that decreased emissions Countries that increased emissions Source: CEEP based on Eurostat

28 Page 26 of 54 Key environmental protection requirements facing EU-11 Item 31: EU environmental protection impact on EU-11 security of supply Main coal and lignite deposits in EU-11 countries (Mt) Hard coal deposits Lignite deposits Coal and lignite reserves (Mt) Environmental regulations in the EU make fossil extraction and usage economically less profitable. As indicated earlier, the fuel mix of the EU-11 region is characterized by a significantly higher share of solids, which makes it more vulnerable to restrictive EU policies of environmental protection regarding CO 2 emissions. As EU environmental protection regulations make fossil extraction more expensive, the potential import dependency reduction using indigenous reserves of solid fuels will not be achieved. In some economies that rely on coal as a primary fuel, electricity prices after 2012 may increase significantly. Source: EY based on European Association for Coal and Lignite (EURACOAL), 2011 Due to the significant share of solids in the EU-11 energy-mix as well as used technology, it is expected that IED regulations will be especially burdensome for this group of countries. Item 32: Industrial emissions determinants in EU-11 countries Key characteristics of selected EU-11 countries, averages in period Country Bulgaria Poland Romania Number of installations at the top 10 list of emitters of SO % of EU total SO2 emissions % of EU total NOx emissions n/a 12.3 n/a % of EU total dust emissions The list of top ten SO2 emitters consist of seven installations located in the EU-11 countries. Bulgaria, Poland and Romania have also a significant share in total EU emissions of pollutants covered by IED. Owing to this, to comply with IED regulations, EU- 11 countries will be forced to implement investment programmes aimed at lowering emissions of identified pollutants. Source: A push for cleaner industrial production, A discussion of the issues surrounding the Commission s proposal for a Directive on Industrial Emissions, European Environmental Bureau Key points The burden from environmental policy will be greater for EU-11 countries than for the developed Member States. The IED legislation will put considerable burden on EU-11 countries, which will be faced with large investments in order to adopt its main provisions.

29 EU-11 energy sector challenges Page 27 of 54 6 EU-11 energy sector challenges The specific situation of the EU-11 countries comparing to EU-15 countries and the challenges they are facing result in identification of common flagship investment areas, which are considered to be the key ones for the EU-11 region development. In the following section key common areas for EU-11 energy policy have been identified in the fields of: electricity generation, electricity transmission, gas transmission and storage and oil transmission and storage. 6.1 Electricity generation The electricity generation sector in EU-11 is facing three key challenges which are similar in all the countries of the region: Change of the generation mix. A switch from fossil fuel based energy generation to more environment friendly technologies is required by the EU regulations. EU-11 countries are characterized by relatively high share of coal and lignite in the generation mix. As these technologies are sources of the largest greenhouse gas emission, therefore to cope with the goals of EU, the countries will have to switch to other sources. The current fuel mix for EU-11, EU-15 and EU-27 are presented in Item 33. Item 33: Electricity production and fuel mix Net electricity production in EU-11 in Fuel mix, 2010 Mtoe 40,000 35,000 30,000 25,000 20,000 15,000 10,000 5,000 0 CAGR: +0.99% 37,089 37,173 32,087 33, % 0.8% 0.7% 8.2% 1.4% 25.0% 22.6% 55.3% 20.9% 25.7% 15.7% 19.3% 2.5% 22.1% 21.0% 28.7% 27.4% 2.6% EU-11 EU-15 EU-27 Nuclear RES Solids Oil Gas Other Source: Eurostat Increase of generation capacity. The forecasted grow of the EU-11 countries economy will be closely followed by an increase of the energy demand. To satisfy it, the countries will have to invest in construction of new units able both to deliver base load power as well as peak load. As presented in Item 34 the electricity generation capacity per capita in EU-11 countries is lower than the values in the leading EU countries. Even if the EU-11 countries would only aim the mean value of electricity generation capacity per capita, the scale of the investment needs would be vast.

30 Page 28 of 54 EU-11 energy sector challenges Item 34: Electricity generation capacity per capita in EU countries in 2009, kw per capita kw per capita EU-11 EU-15,Malta, Cyprus Source: EY analysis based on Eurostat and EIA; 2011 Basing on PRIMES dataset on forecasted capacities 26.1 GW of new power capacity will be needed in order to cover for the increase in power demand by the year GW additional capacity will be required in the period of In total, according to PRIMES forecasts 41.8 GW of new power capacity is needed by It should be stressed that sums quoted above do not take into account costs of decommissioning and replacement, which in EU-11 can amount even to bn EUR till Item 35: Forecasts of additional power capacity in EU-11 countries in , GW GW Source: EU energy trends to 2030, European Commission, 2010; Energy Strategy of the Republic of Croatia, 2009 Replacement of the oldest and obsolete generation facilities. Most of EU-11 countries energy generation facilities have been built some years ago, mainly before the fall of the Berlin Wall. After that, due to transformation of the economies, the demand for electricity dropped significantly which allowed those countries to stop large investments in energy generation sector. Currently the demand is increasing and the units under operation are becoming obsolete. Based on the publicly available information regarding the age of generation units in EU presented in Item 36, over 38% of generation capacity 2 in EU-27 countries is over 30 years old. In the country with the largest power capacity, i.e. Poland, 58% of capacity is over 30 years old, and the respective average share for EU-11 countries is estimated to 62%. Therefore the need for replacement of large quantity of megawatts in relatively short period is substantially higher in EU-11 region and it will require consecutive funds to be invested. It means also that in the years to come, EU-11 will face much higher decommissioning and replacement costs than EU-15 or EU-27 on average. 2 Thermal Power capacity only

31 EU-11 energy sector challenges Page 29 of 54 Item 36: Capacity of thermal power plants and their age (GW) EU-27 Cumulative capacity GW Poland Cumulative capacity GW Unit age (years) Percentage of capacity over 30 years: 58% Unit age (years) Percentage of assets over 30 years old 80% 70% 60% 50% 40% 30% 20% 10% 0% 38% EU-27 62% EU-11 Source: EY calculations based on RWE and Polish The Energy Market Agency (ARE) data. As it can be seen from the above, there is a huge need for new generation capacity, but these potential investments have to be carried out under several important limiting conditions. The key ones are: Reduction of greenhouse gas emission. The new units probably will not have the right to free CO 2 emission and they will have to buy the required allowances on the market. It will increase the cost of generated energy and by this mean will restrain the choice of the technologies. Support for renewable energy sources. The RES are strongly promoted by the EU and ambitious goals have been set for all EU countries. The support systems installed in the countries give several advantages to the green energy and therefore could be a concurrence for other fuels.

32 Page 30 of 54 EU-11 energy sector challenges Security of supply issue. The need for increase of security of supply in energy sector should give the priority to the indigenous energy resources. But as these resources are mainly fossil ones, their use is diicult due to higher greenhouse gas emissions. The volatility of the financial markets. The investments in long term projects as the energy generation ones may be considered risky the investors may be not willing to invest in it. Under the current limitation regarding the state support for companies, it could be diicult to assure the suicient amount of financing for the projects. Based on the above mentioned key challenges and limiting conditions and assessment of the energy sectors and economies in EU-11 countries a map of common interest area has been prepared. Appropriate importance of each area for each country has been evaluated and based on that an order of importance has been suggested as presented in Item 37. Item 37: Common interest area of EU-11 countries in power generation sector Bulgaria Croatia Czech Republic Estonia Hungary Latvia Lithuania Poland Romania Slovakia Slovenia Rating Need for new capacity 32 Excessive costs of CO 2 emission allowances post 2012 / need for development of low emissive generation capacities Fulfillment of EU obligations regarding renewable electricity sources (RES) Low level of power reserve margin posing risk of potential black-outs in close future Undiversified fuel generation mix 19 Importance for the sector / economy Very high 4 High 3 Medium 2 Low 1 Very low 0 Source: EY analysis Considering the above, the following flagship investment areas could be considered as fitting the current situation: Coal fired power plants with CCS installations. The coal is an indigenous fuel for many EU-11 countries therefore its use should be supported as reducing the dependence on foreign energy imports. But without proper CCS installations which would reduce the emission of greenhouse gases their realization is questionable. As the CCS technology is not fully mastered at the moment further research and development is required. Therefore EU-11 countries should support actively the research and development projects in this field and should also take action to realize appropriate pilot or demonstration projects. The appropriate support at the EU level should be also granted to provide funds and support for the development of CCS. It is important to highlight that without the CCS technologies (or other technology allowing reducing greenhouse gas emission) the development of fossil fuel fired power plants and further use of coal as a fuel is uncertain. As the EU-11 countries have significant coal resources, having no access to the CCS technology will undermine heavily the security of energy supply of these countries.

33 EU-11 energy sector challenges Page 31 of 54 The increase of eiciency of coal fired installations could be also a temporary measure before the CCS technology is fully mastered. The increase of energy eiciency leads to a considerable decrease of greenhouse gas emissions, but requires the replacement of obsolete facilities by new ones. Therefore a transitional support schema for new coal fired power plant with eiciency higher than for example 45% should be considered. It can have the form of full or partial derogation from ETS schema for a defined period of time (for example 20 years). The ETS could be replaced by some form of contribution of the new coal fired facilities to a dedicated fund. This period could be shortened if the implementation of CCS occurs earlier. It would allow the countries with high share of solid fuels in their fuel mix (the EU-11 ones) a smooth transition from a coal based generation to low carbon generation with large development of CCS. The nuclear technologies. The current state of the art nuclear technologies (i.e. generation III/III+) are safer and more eicient that the previously built generation II. It is at the moment the only energy generation technology which is able to provide large amount of energy at reasonable prices without emitting greenhouse gases. Furthermore, due to small quantities of fuel needed for the production of large quantities of energy, a stockpiling of it for many years is possible. Therefore, even if the country does not have its own fuel production industry, it can more easily increase its security of supply by making large stocks of it. Also the nuclear fuel market is less controlled by large single players and supply from dierent origins is possible. The drawbacks of the nuclear technology are mainly large investment cost and concerns about safety of the installation and management of spend fuel. The last two have to be mainly addressed at the national level by implementation of appropriate regulatory framework which assures the highest level of nuclear safety and proper management of radioactive wastes. In country which already uses nuclear technology such frame already exists, and unlike any other industry, the nuclear power industry takes care and pays for the management of waste produced during its exploitation. The high level of investment cost is very often an important obstacle in development of nuclear technology and therefore this issue should be addressed at the EU level. If the importance of nuclear technology in the realization of European energy policy is recognized by EU, therefore an appropriate support should be granted. Renewable energy sources. The development of RES is currently heavily supported by EU. Except from an adjustment of goals to the potential of the countries, the current policy should be continued and further support for this technology in the next financial perspective should be supported by EU. At the same time it has to be remembered that the renewable energy sources are not fitted to provide base load energy. Wind and solar technologies should be supported where needed but at the current level of its development they should not be considered as the base of any power system. The real potential of biomass and hydro power plants (including pump power plants) should be also properly assessed. At the current stage of their development RES cannot be the basis of an electric system, but their potential should be used as far as it is economically, ecologically and technically possible. Adding to that, it should be stressed that due to lack of own technologies in EU-11, significant amount of capital investments in RES in the energy sector will flow outside the region. That wouldn t change even with substantial EU financing for EU-11 energy projects. Recent EY research shows only ~25% 3 of CAPEX in the wind energy sector stays in the country where investment is realized. Therefore, in order not to impair GDP dynamics of the EU-11 by investment aiming at radical energy balance change, adequate EU funding may have to be complemented by new energy technologies know-how inflow that would prohibit the majority of CAPEX flowing out of the region. 3 Based on a study for Poland

34 Page 32 of 54 EU-11 energy sector challenges Gas fired generation. Gas is still a relatively expensive fuel but there are some key areas where such type of units can be diicult to replace peak generation and as backup for wind farms. Thanks to the possibility of fast start up gas fired units should be developed to support the development of RES and improve the security of grid operation. Other uses, especially in base load generation should be avoided due to high prices of fuel and lack of indigenous resources which increase the reliance on import and decrease the security of supply. As stated in Report the confirmation of significant and economically viable shale gas resources can significantly influence its price and change the role of gas as an energy carrier. In that case extensive use of gas as a base load fuel could be possible. None of the above cited energy generation technologies can satisfy all electricity demand and a mix of it has two created. Under the current energy policies the EU-11 countries should develop the renewable energy sources as far as it is reasonably possible (both technically and economically) and the gas fired generation to support the operation of the wind farms. But that will only satisfy part of the needs. The core of the generation assets of a country has to be based on technologies which are able to guarantee uninterrupted supply of large amount of energy. Under the current regulations only one technology can met the goals the nuclear technology, as use of coal is related with significant greenhouse gas emissions. In near future CCS could allow the development of clear coal power plants, if the development of this technologies success. Therefore the EU-11 region has to make a common choice to which extend support nuclear and CCS, as those are the two technologies which can provide the needed generation capacity under current regulations. Key points The EU-11 countries needs large investments in generation of electricity due to the need to replace the existing obsolete units, forecasted increase of demand and the need to change the generation structure. For base load generation nuclear and coal fired power plants with CCS could be considered as the two possible solutions in the current situation. Both should be supported and the share of support for each of it should depend on strategic decision of EU-11 countries. Renewable energy source should be further developed, but the level of its penetration should be each time assessed to the potential of the country. This potential varies significantly from country to country. The gas fired units development should be closely related to the development of RES generation units with unpredictable production patterns, such as wind farms. It should be used to balance rapid change in generation from the wind farms. Use of gas as fuel for base load generation should be avoided due to lack of large gas resources in Europe. On principle base load generation should rely on indigenous resources. Nowadays gas consumption in Europe is predominantly import based. Therefore its use for base load generation can reduce the security of supply and energy independence of Europe. The role of gas can change significantly if significant shale gas resources are confirmed in EU-11 countries. It may allow the use of gas as a fuel for base load generation of electricity and enhance continent s energy of supply.

35 EU-11 energy sector challenges Page 33 of Electricity transmission The electricity transmission systems developed up to date in the EU-11 countries have been developed mainly to satisfy to national energy needs. Further development of interconnections has been observed aiming at increasing the security of national network operations. Currently the development of energy transport infrastructure in the EU-11 is foreseen as a mean to increase the security of supply of countries and support the development of common European energy market. This has been stated by the European Commission in Communication from the Commission to the European Parliament, the Council, The European Economic and Social Committee of the regions Energy A strategy for competitive, sustainable and secure energy - COM (2010) 639, in which the development of free energy market by 2020 is presented as a key issue. Based on an assessment of the energy sectors and economies in EU-11 countries the development of interconnection between the EU-11 countries has been identified as a key area of common interest. A rank has been calculated for this area, as to compare it with other identified areas of common interest in dierent subsector of the energy sector. The data are presented in Item 38. Item 38: Common interest area of EU-11 countries in power transmission sector Bulgaria Croatia Czech Republic Estonia Hungary Latvia Lithuania Poland Romania Slovakia Slovenia Rating Insuicient interconnection capability to secure system stability 23 Importance for the sector / economy Very high 4 High 3 Medium 2 Low 1 Very low 0 Source: EY analysis Despite only one identified common interest area it has to be understood as composed of development of interconnection with development of power grids in the countries to remove bottlenecks which limit the full utilisation of interconnections capacity. The following flagship investment areas have been identified: Connection of remote EU regions to the energy grid of EU member states. It would enable the transfer of energy from those countries and to those countries. The best example in this field is the case of Baltic states. Lithuania, Latvia and Estonia are not connected to the EU electric grid and their systems operate in another synchronous area that the rest of European Union. The construction of interconnection between Poland and Lithuania, as well as underwater cable connections to Sweden and Finland will allow the country to increase its security of supply and will support the development of the energy market. Connection between EU-11 and EU-15 countries. The current level of interconnections between the EU-11 and EU-15 countries remain limited. Further integration is necessary to meet the needs for adequate energy transmission capacity required for the development of European energy market. The reinforcement of energy transmission system in EU countries. As until now most of electric transmission system have been built without taking into consideration export and import of large quantities of energy. Therefore an eort is necessary to identify and remove the bottlenecks which limit the development of energy market. These investments logically come with the interconnection projects, as the enable the use of full potential of international electricity transfer.

36 Page 34 of 54 EU-11 energy sector challenges In Item 39 the flagship investments area in EU-11 region are presented on maps. The identified investments consist mainly at elimination of bottlenecks in the network and development of further interregional and international connections to allow the flow of electricity. The current EU funds already provide support for the development of these projects, but the level of this support should be considered insuicient to meet the foreseen demand. Also the available funds were defined in the financial perspective which ends soon, it is crucial to support the extension of funds supporting the development of electricity grids in the new financial perspective of EU and increase of its amount and scope to be more adapted to the need of EU security of supply as a whole. This is considered to be the key area of potential coordination of EU-11 countries. A bilateral or even multilateral coordination is also required at the level of planning new investments. The exchange of information about plans aiming at identifying the common interest projects and joined development can contribute to full use of the potential benefits the project can provide to the EU-11 region. Item 39: Mid term and long term interconnections investments in EU-11 region , Mid term investments Long term investments Source: Data provided by ENTSO-E Further coordination should be expected at the stage of preparation and realization of projects. The coordination of actions by all partners in each country which is engaged in the projects is required to make the project realization as smooth as possible. All the above suggested actions could be summarize in a general conclusion of reinforcing the integration of EU member states. The final goal of it in a long perspective should be that a European energy policy should slowly and smoothly replace of the national energy policies of EU member states. The new policy should approach the energy sector on the European level. The plans and goals should be developed for the whole EU rather and later transpose at the national level with due care and consideration to the national specific situation.

37 EU-11 energy sector challenges Page 35 of 54 Key points The development of the European energy market with free flow of energy and the increase of security of supply are the key reasons for power grid investments. The development of interconnection is foreseen as the main investments area. The flagship investments consist mainly at elimination of bottlenecks in the network and development of further interregional and international connections. Coordination at the planning and execution level of interconnection project is necessary. Common coordinated political and regulatory actions at the EU level should be organized aiming at achieving the common interest of EU-11 countries.

38 Page 36 of 54 EU-11 energy sector challenges 6.3 Gas transmission and storage The EU-11 countries do not have any significant gas resources which could satisfy its needs. Most of the gas is imported from foreign countries. The level of import dependency is comparable to the one in EU-15 countries but in contrast to the EU-15, the import of gas to EU-11 region is dominated at 88% by one supplier Russia, as presented in Item 40. This situation limits the possibilities of gas market development and influence negatively the security of supply of the region. Item 40: EU-11 dependence on gas import EU-11 gas dependency 2010 Structure of EU-11 Gas import, 2010 Mtoe Import dependency: 66% 2% 7% 3% Russia Germany Norway Other Energy Production Net Imports Gas Gross Inland Consumption 88% Source: Own calculation based on Eurostat Based on an assessment of the energy sectors and economies in EU-11 countries the following common interest areas have been identified. A rank at EU-11 region has been calculated for each of them, as to compare it with other identified areas of common interest in dierent subsector of the energy sector. The data are presented in Item 41. Item 41: Common interest area of EU-11 countries in gas transmission sector Bulgaria Croatia Czech Republic Estonia Hungary Latvia Lithuania Poland Romania Slovakia Slovenia Rating Overdependence on supplies from Russia Insuicient interconnection capacity and isolation from pan-european pipelines / other transport facilities Insuicient storage capacity 26 *In case of the implementation of the Article 10a of the European Parliament and the Council Directive No 2003/87/EC into national law, the impact of the CO 2 legislation for the refinery industry is assessed as very high. Importance for the sector / economy Very high High Medium Low Very low Source: EY analysis

39 EU-11 energy sector challenges Page 37 of 54 Based on the common interest areas flagship investments areas for EU-11 region can be identified, which are the best to fit to the need of all the countries of the region. The following ones have been selected: Southern gas corridor. It will give possibility to import to Europe gas from the Caspian Sea and Middle East region which is considered to be one of the largest sources of gas known at the moment (about 90 tcm). It includes projects like Nabucco, TAP (Trans Adriatic Pipeline), Poseidon, ITB, ITGI and White Stream. The development of this corridor would increase also the possibility of gas supply from LNG terminals located on the Mediterranean Sea border. LNG Terminals. Several LNG terminals projects are currently under development in EU-11 countries. It will allow an independent supply of gas from third suppliers and it will give the possibility to increase the security of supply and improve market development in the EU-11 countries. North South gas interconnections. This group of projects aims at tackling the lack of adequate gas transfer capacities in EU-11 from the North to the South of it. The concept is to connect the Baltic Sea with Adriatic and Aegean Seas, and further to the Black Sea. This would provide the better flexibility for the Central East European region. It will improve the functioning of internal gas market and promote competition. In the longer term, these integrations will also allow better use of LNG terminals in Swinoujscie and in the Balkans regions, as well as it may enable the supply of gas to CEE from the Southern corridor. All these will make the CEE region less vulnerable to a supply cut through the East corridor. This group of project has been based on the initiative of the North-South-East gas supply system, which has been set up in order to ensure energy security in a region poor in its own resources as well as to help diversify supply sources and routes. The so-called gas supply triangle was outlined by: the Nabucco natural gas pipeline and Black Sea coast, which will create the eastern corner of the triangle; the liquefied natural gas (LNG) terminal in Croatia (southern corner); and the LNG terminal in Poland (northern corner). As a result of the above initiative a Memorandum of Understanding on North-South Interconnections in Central-Eastern Europe has been signed in Brussels on November 23rd, 2011 by EU-11 countries and the European Commission. BEMIP. Baltic Energy Market Interconnection Plan is aiming at connecting the Baltic states to the European gas system. At the moment the two solutions are the construction of a gas pipeline connection with the Polish gas transmission system and the construction of LNG terminals on the Baltic Sea border. The above described flagship investment areas are presented in Item 42.

40 Page 38 of 54 EU-11 energy sector challenges Item 42: Flagship investments in the gas transmission sector Existing interconnections North-South gas interconnections Existing pipelines 1 Pipeline projects 12 LNG Terminals projects 9 LNG Terminals possible locations Integration of transit and transmission network Pipeline and interconnection projects Other projects Source: ENSTOG; The numbers on the map refers to items in table presented in the full report

41 EU-11 energy sector challenges Page 39 of 54 The development of gas storage capacity is particularly important for security of supply. Availability of adequate capacity allowing coping with unexpected supply interruption is also considered as crucial by the EU. The level of gas storage capacity in EU-11 countries is lower than the one in the EU-15 region and the gas storage capacity in separated EU-11 countries is also lower, as presented in Item 43. Therefore to increase the security of supply and attain a similar level of storage capacities extensive investments are required in EU-11. It should be treated as flagship investment for EU-11 region. Item 43: Gas storage capacity in selected EU countries 100 bcm Source: EY, 2011 In contrast to the electricity transmission, the gas transmission can be subdivided into gas transit and transmission. The LNG terminal also included in the above item of evaluation is considered to be the third group of investments. Therefore the possible coordination of actions should be described separately for each group. Gas transit The gas transit is mainly connected with gas transmission from the producers to the countries of users. These are large pipeline with several thousand kilometres in length which makes them expensive. The realization of that type of projects is aimed at enable the supply of gas to the countries and at the diversification of source of supply. At the same time this pipelines fulfil additional role in the field of security of supply by giving the possibility to supply the country with gas in case of distortion on the other supply pipelines. Actually large share of the funds foreseen for gas transmission and storage investments are connected with construction of transit pipelines. The transit pipeline projects are usually foreseen to supply gas to several countries. Therefore coordination at the EU-11 region is crucial. The countries should first discuss the project inside the group and evaluate dierent alternatives. After choosing the best solution for all the member states, the group should speak together and support the same solutions in front of the supplier of gas and the third parties engaged in the project. Only acting together the EU-11 countries could have the power to conduct negotiation with large gas suppliers. Each country on their own cannot do that eiciently. Coordination at the EU level should be also foreseen as necessary. Finally in perspective of full European integration, the ultimate solution could be the full swift of energy issues at the European level. All the aspects of that problem should be analysed on that level and appropriate decision should be made there, as the EU is only large enough entity to be a partner for discussion with large state control gas suppliers and other countries regarding issues of energy policy. Sooner or later the EU countries will have to solve the security of gas supply issue and all other energy related issues at the European level. It is crucial to avoid the situation in which one member states act to improve its security of supply by reducing the security of supply of another member state.

42 Page 40 of 54 EU-11 energy sector challenges Gas transmission The gas transmission is mainly connected with gas transport on the territory of the country, in most of the cases, from the transit pipelines to the distribution network and the biggest gas users. These networks were very often developed to satisfy the internal gas market and therefore the number of interconnections is limited. Furthermore the integration of transmission systems can require significant investment in remove of bottleneck in the gas transmission systems. In case of the development of transmission pipelines a coordination of EU-11 countries at the planning level should be setup. This coordination should be extended to the realization phase to facilitate the completion of the projects. Due to European interest in developing gas market the development of gas projects aiming at construction of interconnection and elimination of bottlenecks limiting the international gas transmission should be supported by EU. LNG terminals The construction of LNG terminals is one of the solutions to increase security of supply of the country by allowing the supply of gas from dierent suppliers. It is logical that only countries with sea cost can build such installations and the inland countries can have direct access to it. But at the other side the LNG terminals are not built as a primary source of gas. It is more a facility to be used at full capacity only in case of distortion of the supply. Therefore the following coordinated action maybe suggested: Coordination of construction plans to avoid building several facilities in close locations. The best example is the case of Baltic states. From the EU-11 and the EU perspective the construction of one LNG terminal in the region seems justified, but the construction of three separated facilities can be only justified by national interest of the countries. Coordination of planning and construction of LNG terminals with the development of transit and transmission pipelines. As the LNG terminals located in sites which were not a source of gas in the gas grid, therefore problems can occur with the possibility of gas transfer from the terminal. Therefore coordination is required. Furthermore to fully exploit the potential of a terminal, common use of one terminal by dierent countries should be supported. Common action to secure EU funds for development of LNG projects in the next financial perspective of EU should be taken. The EU-11 countries should highlight the need for development of gas infrastructure in view of EU dierent goals and defend together the need for appropriate funds. The ultimate solution would be the treatment of LNG terminals in similar ways as the transit pipelines, due to their similar role supply of gas to the whole EU. Therefore this project should be supported by all EU countries and any competition within this field between EU member states on international market should be avoided. As pointed previously in the Report, the confirmation of existence of important shale gas resources in EU-11 region, which exploitation could be economically justified, would have tremendous implications on the level and form of support needed from the EU. The investment needs could also be dierent in such case.

43 EU-11 energy sector challenges Page 41 of 54 Key points EU-11 gas supplies are dominated by one supplier what is not in line with the goal of security of supply increase. The development of the European gas market, the increase of security of supply and diversification of supply are the key reasons for gas grid investments. The development of new large transit pipelines supplying gas to EU is foreseen to tackle the security of supply and its diversification issues. The EU-11 countries should closely collaborate and coordinate their actions in preparation and realization of such projects. The development of gas transit and transmission network at the regional scale is necessary for the construction of European gas market and increase of security of supply. Coordination at the planning and realization level is necessary between EU-11 countries. LNG terminals are foreseen to allow a diversification of supply of gas and to increase the security of supply. Common EU-11 projects should be considered and construction of several facilities in close proximity avoided. Development of storage facilities is also important for the security of supply, but its development depend on the local conditions of the country possibilities to build storage facilities and the level of national gas production. A common approach to the gas supply problem and coordination of political action at the EU level to support the flagship investments area of EU-11 is crucial for the improvement of the situation of the region in the gas sector.

44 Page 42 of 54 EU-11 energy sector challenges 6.4 Oil transport and storage The situation of EU-11 countries in the oil sector is similar as the one of EU-15 in terms of import dependency. In contrast the import structure of EU-11 is completely dierent with an absolute domination of one supplier Russia, as presented in Item 44. Item 44: EU-11 dependence on oil import EU-11 oil dependency, 2010 Structure of EU-11 Crude Oil import, 2010 Import dependency: 89% Mtoe Energy Production Net Imports Oil Gross Inland Consumption 5% 2%1% 6% Russia Kazakhstan Azerbaijan Norway Others 86% Source: Eurostat From the above mentioned situation, based on an assessment of EU-11 countries economies and energy sectors a list of key common interest area has been identified. The interest areas have been ranked based on their importance for each country and summarized in table in Item 45. Item 45: Common interest area of EU-11 countries in oil transmission sector Bulgaria Croatia Czech Republic Estonia Hungary Latvia Lithuania Poland Romania Slovakia Slovenia Rating Concerns on security and diversification of supplies Overdependence on supplies of crude from Russia Possible need to increase storage capacity for compulsory stocks Adverse eect of CO 2 legislation on the industry* *In case of the implementation of the Article 10a of the European Parliament and the Council Directive No 2003/87/EC into national law, the impact of the CO 2 legislation for the refinery industry is assessed as very high. Importance for the sector / economy Very high High Medium Low Very low Source: EY analysis

45 EU-11 energy sector challenges Page 43 of 54 The analyses which results have been presented above, was the based for the identification of flagship investments area in the oil transmission and storage sector. The following ones have been identified: Projects allowing the transport of oil from South to North and back of the EU-11 region. At the moment the northern part of the region is supplied by the pipelines from Russia. The southern region is supplied with oil from tanks (very often supplying also Russian oil). There are no possibilities to transport oil by pipelines from the Black Sea or from the Mediterranean Sea to the North. Projects aiming at allowing the supply of oil from the Caspian Sea region. This region has significant resources of oil and enabling the supply from that region to EU-11 country would allow a diversification of supply routes and increase the security of supply. Project supposed to reduce ship traic in Bosphorus strait. With the development of the Caspian Sea region as producer of oil, the traic of tankers in the Bosphorus strait is becoming hazardous. To prevent an ecological catastrophe, there are plans to build pipelines allowing the supply of oil to the Mediterranean sea ports and then transport further. In Item 46 the potential flagship projects are presented on the European map. Item 46: Potential flagship projects in oil&fuel sector in EU-11 Legend Oil infrastructure 1. Albania, Macedonia, Bulgaria oil pipeline (AMBO) 2. Burgas Alexandroupolis pipeline (Trans- Balkan Pipeline) 3. Pan European Oil Pipeline (PEOP) 4. Litvinov Spergau pipeline 5. Adria pipeline upgrade 6. Underground oil storage 7. Brody Plock pipeline 8. Bratislava Schwechat pipeline Source: EIA, European Commission, EY analysis As it can be seen from the above, the projects in the oil industry aim mostly at diversifying the source of supply to increase security of supply. In contrast to the gas sector, oil can be easily and at reasonable cost transported by sea tankers and the pipelines are not as important as in case of gas. It has been also highlighted that oil is not the same product from dierent sources. The dierences are big enough to make impossible fast switch from one direction of supply to another. For example, the Polish refineries use the Russian Ural oil only. The adaptation of the refineries to use the Brent oil or the oil from the Caspian sea region would required important investments and would require a transition period of several months. This specific situation makes the diversification of supply more complex than in case of gas.