1. 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

2. 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

3. 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

4. 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

5. 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

6. 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

7. Energy Security in European Policies
Energy 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

8. 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

9. 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

10. 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

11. 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

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