Evaluating Security of Energy Supply in the EU Nicola Pochettino European Investment Bank European Economic Congress, Financing of investments related to energy security – Katowice 18 May 2011 1

The European Investment Bank Contents The European Investment Bank Long-term finance promoting European objectives EIB lending strategy in energy projects Financing instruments Security of Energy Supply Definition of security of energy supply Energy security in European policies Energy security externality: Identifying and quantifying externalities Limits of the existing approaches EIB is researching a methodology European Economic Congress, Financing of investments related to energy security – Katowice 18 May 2011 2

The European Investment Bank (EIB) Long-term finance promoting European objectives European Union’s long-term lending bank set up in 1958 by the Treaty of Rome Shareholders: 27 EU Member States EIB lending 2009: EUR 79.1bn 2010 (provisional): EUR 71.7bn European Economic Congress, Financing of investments related to energy security – Katowice 18 May 2011 3

EIB Lending Strategy in Energy Projects Priority lending areas supporting sustainable, competitive and secure energy EUR bn Total lending to the Energy sector amounted to 18.1 billion EUR in 2010, quadrupling in 5 years European Economic Congress, Financing of investments related to energy security – Katowice 18 May 2011 4

EIB Financing Benefits and facilities Low cost of funding by AAA-rated bank passed on to clients: Large amounts, broad range of currencies, long maturities Attractive interest rates (lending at close to the cost of borrowing) Catalytic effect on participation of other banking or financial partners Main facilities: Direct Loans (large-scale projects, more than EUR 25m) Intermediated Loans (small and medium-scale projects, particularly to SMEs, via national and regional intermediary banks) Innovative financing instruments : Structured Finance Facility (to fund projects with a higher risk profile) Investments in Equity Funds (e.g. Marguerite) Risk Sharing Finance Facility (with EC, to support technology platforms and R&D) Europe 2020 Project Bond Initiative (credit enhancement mechanism, currently under evaluation) European Economic Congress, Financing of investments related to energy security – Katowice 18 May 2011 5

Definition of Security of Energy Supply Market-centric definitions of energy security Availability – physical element Affordability – economical element Most widely used definition: the availability of a regular supply of energy at an affordable price (IEA, 2001) Whether energy insecurity stems from price or physical availability concerns depends on the nature and the effectiveness of price-volume linkages in the market (IEA, 2007) Broader definitions of energy security include: Accessibility – geopolitical element Acceptability – environmental element Multiple dimensions: time/space European Economic Congress, Financing of investments related to energy security – Katowice 18 May 2011 6

Energy Security in European Policies Energy 2020. A strategy for competitive, sustainable and secure energy COM(2010)639, 10 November 2010 Security of electricity supply 2005/89/EC Security of natural gas supply 2004/ 67/EC Proposal of Regulation COM(2009)363 / European Parliament legislative resolution of 21 September 2010 Strategic oil stocks 2006/ 67/EC 2009/119/EC Aim: more interaction with IEA crisis mechanism European Economic Congress, Financing of investments related to energy security – Katowice 18 May 2011 7

Energy Security Externality A theoretical justification for public policy on energy security Externalities refer to the spill-over effects (costs or benefits) of one person’s activities on another person’s welfare. For European policy-makers energy security is an important issue as private decisions about energy use (production, consumption, import, investments) may not fully internalise the cost of energy insecurity disruptions in supply and dramatic price increases have macroeconomic impacts that individual consumers/firms do not take into account market failure Therefore, it is important from a policy perspective to estimate the size of the external costs of energy arising from energy insecurity. European Economic Congress, Financing of investments related to energy security – Katowice 18 May 2011 8

Identifying and Quantifying Externalities Providing policy guidance External costs need to be: identified quantified translated in monetary terms (i.e. convert externality in a unit value, e.g. €/MWh) Quantifying the level of the externality is the most useful approach with respect to providing policy guidance since externality may directly be translated into the magnitude of a tax This represents a useful tool to internalize the externality and correct this market failure. European Economic Congress, Financing of investments related to energy security – Katowice 18 May 2011 9

Limits of the Existing Approaches Providing policy guidance At present, there is no definitive methodology for calculating or assessing externalities associated with energy security and for quantifying the external security cost in a robust way. Policies towards internalisation of energy security externalities are still in their infancy, since measurements of energy security externalities remain a complex and difficult exercise. Some valuation models: Macroeconomic effects of energy insecurity (Costantini, Gracceva, 2004) Interruption costs (Ajodhia, 2006) Damage vs. control costs (Owen, 2004) Willingness to pay for network reliability (Munasinghe, 1980) Value of lost load (Welle, Zwaan, 2007) Costs of energy security policy (Arnold, Hunt, Markandya, 2009) European Economic Congress, Financing of investments related to energy security – Katowice 18 May 2011 10

EIB is Researching a Methodology To quantify and monetize security of energy supply Main purpose of the EIB research with Bocconi University (Milan, Italy) is to provide a tool, easy to apply, for the assessment of the cost of security of energy supply In its mathematical formulation, the security of energy supply externality should have two elements: a physical component (related to volumes) a pricing component (related to price volatility) Properly quantifying the security of supply externality would support: the economic appraisal of energy projects (cost/benefit analysis) the establishment of energy policies European Economic Congress, Financing of investments related to energy security – Katowice 18 May 2011 11

http://www.eib.org/ info@eib.org Tel: (+352) 43 79 - 22000 For more information http://www.eib.org/ info@eib.org Tel: (+352) 43 79 - 22000 Fax: (+352) 43 79 - 62000 European Economic Congress, Financing of investments related to energy security – Katowice 18 May 2011 12