NERA Economists Support Nord Stream in Its Application for Derogation from Regulation

The Situation

Directive 2009/73/EC (the “Gas Directive”) lays down the key principles for regulation of natural gas transmission system operators (TSOs) in the EU. The three core principles are 1) unbundling of network operation and production, 2) regulated network access, and 3) regulated tariffs. In April 2019, the European Parliament and the European Council adopted Directive (EU) 2019/692, which amended the Gas Directive. In light of this amendment, the Gas Directive also applies to offshore pipelines incoming from non-member states with respect to the pipeline sections crossing the territorial waters of the destination state.

The Nord Stream pipeline is a natural gas transmission system connecting Vyborg near St. Petersburg in Russia with Lubmin near Greifswald in Germany. The pipeline crosses the Baltic Sea for more than 1,200 km. The first line of the pipeline was commissioned in 2011. With its first interconnector point with a member state’s network located in Germany, Nord Stream’s section in German territory (including German territorial waters) would have become subject to regulation following the 2019 amendment to the Gas Directive.

Following article 49a of the amended Gas Directive, a member state may grant a derogation from regulation “for objective reasons such as to enable the recovery of the investment made or for reasons of security of supply, provided that the derogation would not be detrimental to competition on or the effective functioning of the internal market in natural gas, or to security of supply in the Union.”

NERA's Role

Nord Stream AG retained NERA Managing Director Tomas Haug, Senior Consultant Marco Schönborn, and Consultant Dr. Adjmal Sirak to examine whether a derogation from regulation could facilitate the amortisation of the investment.

The NERA team reviewed external and internal information on Nord Stream’s financing structure and identified potential risks to the amortisation of the project that could materialise if Nord Stream were not granted a derogation. The NERA team showed how introducing regulation on the German section of the pipeline would also affect amortisation of the unregulated section of the pipeline.

The Result

Nord Stream submitted the NERA report together with its application for derogation from regulation in December 2019. In May 2020, the German regulator Bundesnetzagentur granted a derogation for a period of 20 years with respect to the section of the Nord Stream pipeline located in German territory