Joint EU Natural Gas Procurement May Counter Energy Price Spikes

Research

Since the start of the Russian-Ukrainian war, EU countries have recognised the urgency of reducing their energy dependence on Russia while protecting European households and businesses from rising energy costs. Joint procurement of natural gas would address this dual problem. EU-wide procurement would be an efficient means of preventing energy price spikes, as a recent ZEW policy brief shows.

The natural gas supply situation in Europe continues to worsen as costs are rising and supplies are cut. Efforts by many European countries to reduce their dependence on Russian gas following the invasion of Ukraine are immense, and a joint approach would improve the situation for all countries. “We anticipate that centralised procurement is much more effective in the case of natural gas than it was for COVID-19 vaccines. This makes it a valuable policy tool for shielding EU businesses and citizens from rising energy prices,” says ZEW economist Leonardo Giuffrida, head of the ZEW Junior Research Group “Public Procurement” and co-author of the policy brief.

EU-wide procurement always involves trade-offs, even for a commodity like natural gas, but it can be worth it: after all, not all products and services that are purchased centrally come with the same trade-offs. One of the main advantages of procurement centralisation is lower prices, by virtue of greater purchasing power, which increases the purchaser’s leverage while tapping economies of scale. Other benefits include lower administrative costs, as fewer tenders and contracts are required, or improved management, due to the need for fewer procurement officers. Costs include, for example, the need to set up a coordination unit or central procurement office, or difficulties in adapting to specific local needs.

“When it comes to centralisation of gas purchasing, the benefits tend to outweigh the associated costs. In fact, the cost-benefit analysis is significantly more favourable for natural gas than for other products and services. This is primarily because natural gas is a relatively straight-forward, standardised commodity,” says Leonardo Giuffrida. Another factor is the structure of the market, which features just a few incumbent suppliers, due to resource monopolies.

This is not the first time that centralised procurement has been applied in the EU. The procurement of COVID-19 vaccines has been challenging for many reasons. These include the underlying research and development process, the pressure for rapid development, the high upfront costs for manufacturers, and the high failure rate in clinical trials. However, for a standardised product such as natural gas, policy coordination and delegation of authority to a central procurement unit seems easier to achieve. EU-wide procurement would therefore be much more effective for this commodity, even given rigid procurement rules.