The EU has decided to digitize the joint gas trade. How the new energy union will work

President of the European Commission Ursula von der Leyen, EU Diplomacy Chief Josep Borrell and 15 European Commissioners are in Kyiv today to discuss Ukraine's fulfilment of the conditions for accession to the EU and the post-war reconstruction of the Ukrainian economy. Energy security is among the issues on the agenda. It takes a special place in the discussions.

The energy shortage caused by the kremlin's aggressive policy against Ukraine and the West remains the most pressing challenge for the international community. And the logical consequence of the energy crisis has been the overall strengthening of the role of state leaders and governments in resolving its results for consumers. It is at the highest state level that the main anti-crisis decisions are made. And private businesses can also benefit from this if it is about constructive cooperation and interaction with the authorities under challenging situations. The latest decision of the European Commission related to the creation of natural gas reserves for the next winter can serve as proof of this statement. European officials are already taking care of this.

Mind has analysed how this applies to Ukraine and what the participants of the domestic energy market will have to take into account.

At the end of January, the results of the European Commission's tender for organizing and managing joint gas purchases for the needs of European companies were announced. The winner has become Prisma, a German company headquartered in Leipzig that operates the EU's largest digital platform for reserving gas transportation capacity.

"We are proud to have been able to offer the European Union a compelling digital solution... in these turbulent times, to contribute to the security of Europe's future energy supply," said Götz Lincke, Managing Director of Prisma.

What is Prisma? Prisma is the leading platform for gas transportation in the EU. It uses and manages its own cloud-based software to connect around 20 EU markets and provide digital access to the European gas infrastructure to more than 3,000 players.

The German company will provide its services to the European Commission as a part of the EU's energy platform being established in April 2022. The main goal is to optimize market pricing and overcome the negative consequences of dependence on russian gas for consumers. The platform also supports the REPowerEU plan to reduce fossil fuel consumption and strengthen the role of renewable energy sources in the European economy.

How did the EU decide to digitize the gas trade? The deepening of technological cooperation between the European bureaucracy and private business was preceded by hard work at the political level, which was accelerated by russian aggression against Ukraine and the West. In May last year, the EU countries agreed on their intention to create gas reserves at the beginning of the 2023/24 heating season of at least 90% of the total capacity of underground storage facilities to strengthen energy security.

On December 9, EU energy ministers agreed to create a digital platform to manage joint purchases of natural gas. According to Ursula von der Leyen, it will allow "to use the EU's economic and political weight to provide citizens and industry with the necessary volumes of gas".

How will it work? The idea is that the pooling of demand will provide better influence on global traders when signing gas purchase contracts, achieve better commercial terms, and make competitive price wars between EU countries impossible.

Monopsony can also be used to counteract monopoly, where the dominant seller sets the terms and conditions and buyers are forced to accept because they have no alternative.

Why has Europe come to this conclusion only now? It is the efforts of a united Europe as a single buyer that can put an end to russia's energy hegemony. In April 2014, when Ukraine was caught in a whirlwind of dramatic revolutionary and geopolitical events, a well-known politician Donald Tusk wrote about this in an article for the Financial Times. He was then the Prime Minister of Poland, and a few months later was elected President of the European Council.

"Regardless of how the stand-off over Ukraine develops, one lesson is clear: excessive dependence on russian energy makes Europe weak. A dominant supplier has the power to raise prices and reduce supply. The way to correct this market distortion is simple. Europe should confront russia’s monopolistic position with a single European body charged with buying its gas. Once this has been achieved, Europe should undertake the lengthier task of breaking up the russian gas monopoly and restoring free market competition," Donald Tusk stated.

What did Tusk offer? In short, the essence of his initiative was to create an energy union based on solidarity and common economic interests, to strengthen security and establish fair rules where the free market was lacking. Clearly, it is a difficult task to get EU governments to take a unified position (and the situation with the approval of tougher anti-russian sanctions proves it). However, the EU has achieved such feats of coordination before. In particular, for the joint procurement of uranium for nuclear power plants through the European Atomic Energy Agency, Euratom.

Among other measures to strengthen European energy security, Donald Tusk mentioned the development of infrastructure (gas storage facilities, liquefied natural gas terminals, gas networks), the use of domestically produced fossil fuels by EU countries ("no nation should be forced to extract minerals, but none should be prevented from doing so – as long as it is done in a sustainable way"), and the expansion of the European gas market to the east ("we need to boost the energy security not only of the EU but of Europe as a whole").

Will all the plans be realized? It is now clear that almost a decade after the publication of Tusk's initiative to strengthen energy security, Brussels has recognized its feasibility and is putting it into practice. It is evidenced, in particular, by the European Commission's agreement with the digital platform Prisma, which will manage joint gas purchases and transportation to customers.

How will Ukraine benefit from this? The case of the partnership between the European Commission and Prisma can play an important role in the further integration of the Ukrainian and European gas markets. It already proves that digital technologies are coming to the fore in the modern gas business, as they are able to provide high-quality metering and services to consumers without human intervention.

The role of the state in the economy and the extent of its intervention in the market also remains a pressing issue. For Ukraine, it is one of the most painful problems, the solution of which will determine the effectiveness of the country's post-war reconstruction and investment attraction.

During the great war and crisis, it seems logical that the highest government bodies concentrate key functions in coordinating all processes. A similar trend is now being observed even in the United States of America, a country known for its commitment to free enterprise with very limited government impact. However, the Ukrainian authorities will likely have to make significant efforts not only to completely defeat russia but also to restore the confidence of private investors who have focused on the Ukrainian gas sector.