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EU Energy Union: What can we expect?

Introduction

In February 2011, the European Council set 2014 as the deadline for achieving a single market in energy in the EU.  Despite this commitment, and some progress being made on different parts of the energy agenda, this target date was missed.  In the Strategic Agenda for the next five years adopted by EU heads of state and government in June 2014, there was a renewed commitment to what is now described as energy union.1  The new European Commission, which took office in November 2014, includes a Vice President for Energy Union, Mr Maroš Šefčovič, the first time such a role has existed, as well as a Climate Change & Energy Commissioner, Mr Miguel Arias Cañete.2

The renewed enthusiasm for this policy objective reflects major changes in the energy market, such as the development of fracking in the USA, the fall in the price of oil, the burden of high energy costs on the European economy, and the serious risks to energy security in Europe both over the last decade and in the future (brought to the fore by the Ukraine crisis and the on-going instability in the Middle East).  These factors pose common challenges to Member States, making the need for them to work together more urgent.

The European Council asked for firm proposals for energy union; the Commission tabled its proposals in February 2015 and they were considered at the March 2015 European Council.  The Commission sees its proposals as a major step towards creating a unified and more secure energy market in the EU, a view shared by some commentators.3 Its critics see these proposals as timid and little more than a restatement of existing Commission plans.4

This paper, which looks at the EU’s role in energy policy, its policy approach in recent years and what its ambition to achieve “energy union” means, was prepared for a joint seminar between the Senior European Experts group and the Institute of Contemporary European Studies, Regent’s University London, in April 2015.

 

The Role of the EU in Energy Policy

The role of the EU in energy policy has always been a complicated one as energy was at the outset divided between the European Coal & Steel Community, the European Atomic Energy Community (Euratom) and the European Economic Community.  There was thus no general competence for energy policy in the founding treaties and it was only clearly established as a shared competence (i.e. with Member States) in the 2009 Lisbon Treaty. Article 194 of that Treaty gave the EU a limited role in energy policy:

  1. In the context of the establishment and functioning of the internal market and with regard for the need to preserve and improve the environment, Union policy on energy shall aim, in a spirit of solidarity between Member States, to:
    a) ensure the functioning of the energy market;
    b) ensure security of energy supply in the Union;
    c) promote energy efficiency and energy saving and the development of new and renewable forms of energy; and
    d) promote the interconnection of energy networks.

This Treaty provision specifically reserves to Member States:

  • their development of their own energy resources;
  • their choice of energy mix; and
  • the general structure of energy supply on their own territory.

In addition, any fiscal measures concerning energy require unanimity in the Council before they can be adopted.

The marked tendency towards national thinking and protectionism in some Member States – for example, in the absence of a coherent energy policy in the UK in the later 1990s, in the sudden German decision to phase out nuclear power after the Fukushima disaster, and, in the recent past, France blocking interconnectors with Spain – has frustrated EU energy collaboration and the creation of anything resembling a Single Market in energy and by doing so reduced the EU’s influence in energy markets.5  However, some single market legislation is relevant to the energy sector (for example, electricity and gas supply) and the competition powers of the Commission have been and remain very important in breaking up national monopolies.6

The EU’s competence in environment policy is also relevant because of the close linkage between energy policy and environment policy.  This is seen most obviously in the EU’s policies on tackling climate change, including its leading role in the UN-sponsored negotiations on international measures to address the issue.7

While many Member States have expressed support for the application of the concept of “solidarity” in Article 194 to energy policy issues, primary responsibility for energy policy remains with Member States.  There are in any case markedly different views between the Member States about what “solidarity” means in the context of EU energy policy, with one study identifying 11 different interpretations of it.8  While some Member States see it as a form of distributional transfers , others judge it to be the basis for EU spending on infrastructure, and yet others see it as an exercise in pooling resources and influence to ensure security of external supply.

 

The EU Energy Market & Security of Supply

Security of supply depends on the level of a country’s national energy resources, what the mix of those resources is, their likely duration, the reliability and affordability of energy imports, the stock of investment in infrastructure and in generation and the availability of alternative supplies if there is an interruption in delivery.  The EU is vulnerable in terms of security of supply because it is a region of the world with relatively high energy demand, heavily dependent on imports and where existing energy resources have already been exploited extensively and are declining.

Measuring future demand for energy in the EU is technically challenging as Member States are at different states of economic development and have different levels of energy consumption.  A complicating factor is the impact of the energy efficiency measures that the EU has promoted for many years, which are intended to reduce energy demand as part of the EU meeting its 2020 greenhouse gas emission reduction targets.

Long-term studies for the EU suggest that some Member States with advanced economies, such as Denmark, France and the UK, will see a fall in energy demand by 2020, while other less-developed economies, such as those of Greece, Lithuania, and Slovakia, will see an increase.9

The energy resources of Member States are already being heavily exploited (e.g. the UK’s North Sea oil and gas fields) but some Member States have little, if any, energy resources they can exploit.  In some cases they are likely to run out (the UK is now a net importer of oil and gas) or there are major policy questions about how they wish to develop those resources available to them (e.g. fracking, nuclear power and renewable energy).  In making their national policy decisions, Member States have to take into account the EU’s climate change policies, which seek to reduce the dependence on fossil fuels, and particularly coal, for the generation of electricity, because they are a major generator of greenhouse gas emissions, although the Member States themselves determine the mix of renewable energy sources that they use.

EU Member States import 53 per cent of their energy at a cost of €400 billion a year, making the EU the largest energy importer in the world.10  The dependence on imports, both as a share of energy consumption and in terms of the small number of countries who are suppliers, is a source of vulnerability.  Russia is the EU’s largest supplier of crude oil, natural gas and coal with shares of total imports at 31.72 per cent for oil, 39 per cent for natural gas and 26 per cent for solid fuels (including coal).11  Six Member States are entirely reliant on Russia for their natural gas supply.12

The two interruptions to gas supplies from Russia in 2006 and 2009, the price dispute between Russia and Ukraine in June 2014, and more recent suggestions that Russia could withhold gas supplies to Ukraine have raised concerns about security of supply to a higher level.13  This is not entirely new – there were concerns during the Cold War about the dependence of Western European countries on gas from the Soviet Union – but the use of energy as a foreign policy tool is a particular challenge when conventional sources are dwindling and imports come from a few, mostly unstable regions.14  The Energy Charter Treaty was agreed by a large number of European countries at the end of the Cold War and many other countries have observer status (including the USA and Canada).  Russia signed the Treaty but never ratified it.15

It is important to note however, that Russia is heavily dependent on energy being bought by EU Member States to ensure the solvency of its economy.  For example, if Member States were not prepared to pay the current average price of approximately $300 per thousand cubic metres for gas from the Russian state-owned supplier, Gazprom, the company would no longer be able to subsidise gas supplies in Russia (it sells there at $107 per thousand cubic metre) or to former Soviet states, such as Belarus (at $224).16  And the revenues needed to fund Russia’s public expenditure would be adversely affected.

The dependence on imports and fragmentation of the market has kept energy prices high in the EU.  On average, household electricity prices in the EU rose by four per cent a year between 2008 and 2012 and industrial electricity prices went up by about 3.5 per cent per year over the same period.17  These averages disguise higher increases in some Member States and, conversely, reductions in others.  For gas prices, increases have been lower – an average of over three per cent a year between 2008 and 2012, with industry paying about one per cent more per year but with some far higher rises in several Member States, notably in those dependent on imports of gas from Russia, such as Estonia and Lithuania.18  Overall, wholesale gas prices in the EU are more than twice as high as they are in the United States.19

Dependence on imports has been magnified by other factors, including: the decline of existing generating capacity (particularly nuclear power in the UK), the decision to close all nuclear power stations in Germany in the 2020s and the switch from coal as part of climate change policies (see below).  To some extent these developments have been offset by the growth in renewables (see also below).

In the face of these security of supply problems, the EU has developed an Energy Security Strategy.20  Adopted in June 2014, it led to stress tests for 38 European countries, including all Member States, to judge how they would cope if Russian gas supplies were disrupted.  These tests showed that the EU Member States could in theory cope with the loss of Russian gas, either temporarily or more long-term, provided they used the various tools at their disposal, including free trading in natural gas across borders and the development of storage and interconnectors.21  But the impact on some Member States (and indeed non-EU countries) could be significant. For example, on a scenario of a six-week disruption to gas supplies from Russia and a two-week cold snap in February, Bulgaria and Finland would lose 100 per cent of their gas supply, Estonia 73 per cent, Latvia 59 per cent and Hungary 35 per cent.22  Other arrangements would have to be made (for example, reverse flows from other Member States) to overcome these shortfalls.

Measures to tackle security of supply problems include: building more new pipelines and interconnectors; increasing gas storage capacity; and building more liquefied natural gas (LNG) terminals so that it can be imported.  The EU has made some progress in developing all of these but although these measures mitigate the risks for individual Member States, they have not yet increased the overall supply of energy from more reliable sources.

The exploitation of alternative sources of energy is happening in some Member States, for example through the construction of new nuclear power stations, the development of fracking, and the further development of renewables.

 

Climate Change & Renewables

The EU has been a leader in global policy to tackle climate change.  Its energy and climate policies seek to prevent damaging climate change as well as to mitigate its consequences.  In particular, the EU has committed to reducing Europe’s contribution to greenhouse gas emissions (GHG) through energy policies that are intended to reduce the use of fossil fuels and energy inefficiency and increase the share of energy produced from renewables.

In October 2014, EU leaders reached agreement on a new set of targets for reducing GHGs by 2030.  First agreed for 2020, these progressively higher targets cover the same three priorities as the previous 2020 targets and are more demanding.  The new targets are: for the overall reduction in GHG in the EU (now to be at least 40 per cent below 1990 levels); a target (not legally binding) for energy efficiency (27 per cent, to be reviewed in 2020 with the intention of moving it up to 30 per cent then); and a target for the share of energy from renewable sources (27 per cent but with no binding targets at national level).

The adoption of the 2030 targets was important for setting the EU’s position ahead of UN climate talks in Paris in December this year.  Each Member State will present their own individual target for reducing GHG emissions to below 1990 levels and some may be more ambitious than the 40 per cent target adopted for the EU as a whole.  To obtain a global agreement at the Paris talks will, however, require fundamental shifts in the positions of a wide range of countries, including the two biggest of those, the US and China.

The agreement between the US and China on their own plans to reduce carbon emissions announced in November 2014 was an important step forward.  The US committed to reducing carbon emissions by 26-28 per cent from their 2005 levels by 2025.  China said that it would try to ensure that its carbon emissions peaked by 2030, that it would try to reach the peak earlier than that and that it would aim to have 20 per cent of its primary energy consumption from non-fossil fuels by 2030.23  This is a helpful development in advance of the Paris talks and a demonstration of how the EU’s leadership on climate change policy has influenced positively the positions of other countries.

Promoting greater energy efficiency in order to reduce demand has been EU policy for several years.  As mentioned above, setting a tougher target for energy efficiency forms part of the EU’s 2030 strategy but there have been disagreements within the EU about whether such targets should be binding on each Member State.  When the European Council reached agreement in October 2014 on their new 2030 targets, they adopted a non-binding target for energy efficiency, reflecting the range of views on the issue.  Nonetheless, the EU Member States have already achieved significant reforms so that new buildings must have higher insulation standards; insulating older properties is heavily promoted by energy companies (and often subsidised by them); and property purchasers must be told a building’s energy rating.  But much more needs to be done: 75 per cent of Europe’s housing stock is energy inefficient.24  Working to reduce the consumption of energy by domestic appliances is also underway, which has the additional benefit of reducing consumers’ bills.

The share of renewables in electricity generation in the EU has now reached 24 per cent and is on a rising trend.25  Overall, low carbon generation, including generation from nuclear power, has produced the majority of new electricity supplies in the last two years.  But the nuclear generation sector continues to be in decline because of the German decision to close down its nuclear power stations and the delays in replacement nuclear power stations in the UK coming on stream.  In addition, the Commission has recently rejected a Hungarian proposal for the exclusive supply of nuclear fuel from Russia to an enlarged power station in Hungary.26  The renewables sector now employs a million people in the EU and turns over €129 billion a year.27

 

A Single Market in Energy

There is so far no single energy market in the EU, as a result of a legacy of state-owned national power generators, the absence of interconnectors between Member States and because former Warsaw Pact countries were expected to buy all of their oil and gas from the Soviet Union.  In addition, several Member States have few or no energy resources themselves and so must purchase energy supplies from overseas (e.g. France and Spain import all their gas).  For many years protectionist national policies prevented competition in energy supply, both within Member States and between Member States.  Many Member States provide subsidies, whether directly or indirectly, to their energy producers; these amount to €120 billion a year and are often unjustified and economically distorting.28

The consequence of this lack of a single market in energy is that businesses and consumers pay more for their energy prices in the EU than (for example) their counterparts in the United States.  This is damaging both to industry and to ordinary consumers as it inflates prices, undermines economic growth and contributes to over-reliance on energy imports.  A factor in energy costs in the US is the level of subsidies provided by the US Government; these amounted to $19.7 billion in 2013.29

However, the 2009 Third Energy Package, founded on the principle of “unbundling” the ownership and control of energy supply from that of energy transmission, was designed to complete the single energy market upon full implementation in 2014.  Regrettably, not all Member States have met the deadline and the Commission has signalled that as its first priority to establish the Energy Union it will, “use all instruments to ensure that Member States fully implement energy legislation, in particular the Third Internal Energy Market Package, and it will strictly enforce the Treaty’s competition rules”.30

Whilst a fully functioning single market provides the best framework to encourage private sector investment in energy infrastructure, there is a role for public intervention too.  Some new energy infrastructure projects are under way – there have been 59 EU-funded projects so far, including 44 that concern gas or electricity infrastructure, nine offshore wind generation projects and six that concern carbon capture and storage (the latter is designed to make future coal-based energy products less damaging to the environment).31

The creation of the European Fund for Strategic Investments in 2014 as part of Commission President Juncker’s strategy for creating growth and jobs has provided a new opportunity to deliver some of the key infrastructure improvements necessary for a genuine single energy market.  But despite the large number of projects put forward for the new fund, only eight per cent include energy efficiency and the Member States most dependent on Russian gas have proposed the least investments in energy projects.32  It may be that the release of further funds through the European Central Bank, as part of its quantitative easing programme, will improve the situation.

 

The Commission’s Proposals for Energy Union

The concept of energy union means bringing together the EU’s energy and climate change policies to form a coherent and comprehensive policy framework for all 28 Member States.  The Commission summed up the aim of its proposals for energy union thus:

Our vision is of an integrated continent-wide energy system where energy flows freely across borders, based on competition and the best possible use of resources, and with effective regulation of energy markets at EU level where necessary.33

It also argued that Member States needed to trust one another more on the issue of energy supply, the EU needed to create a low carbon economy, and citizens needed to be active players in the market.  Setting out 15 separate actions to create energy union, the Commission included:

  • full implementation of energy legislation, including the third energy market package, and strict enforcement of competition rules;
  • a comprehensive strategy for liquefied natural gas and its storage, so that EU Member States can import it more easily;
  • new infrastructure projects to ensure sufficient interconnectors, gas storage and other facilities, financed with the support of the various EU investment funds;
  • the new infrastructure to be particularly aimed at improving the position of South East Europe which is particularly dependent on energy supplies from or via Russia;
  • a “seamless internal energy market that benefits citizens, securing security of supply”, which will mean new legislation to create a more integrated electricity market in the EU and, in addition, on the security of supply of electricity;
  • a review of the energy regulatory framework, including the role of the pan-EU bodies concerned;
  • reviewing all energy efficiency legislation with the aim of achieving 27 per cent energy savings by 2030, including fresh legislation on renewables;
  • speeding up energy efficiency and decarbonisation in the transport sector;
  • implementing the climate and energy framework policy agreed at the October 2014 European Council, including further reform of the emissions trading system; and
  • a more co-ordinated approach to external policy on energy and climate change so that “a strong, united EU engages constructively with its partners and speaks with one voice on energy and climate”.34

When the Vice President for Energy Union was questioned by the European Parliament before his appointment was confirmed, he suggested that the EU should consider becoming a common purchaser of gas.35  This comment, reflecting a view shared by the President of the European Council (Donald Tusk, who supported the idea when he was Polish Prime Minister), raises questions about what an energy union should not seek to include. It is often suggested that the following areas should be excluded:

  • interference in commercial decisions on energy supply, i.e. the single purchaser/negotiator idea Mr Tusk has advocated;
  • regulation of energy prices – an issue for national regulators; and
  • national choices of energy mix, i.e. some will have nuclear, others not; some will encourage fracking, others will forbid it.

The Commission proposals do not include any of these ideas but it has called for more transparency in the gas market and for the Commission to be involved at an earlier stage in inter-governmental negotiations on energy supply because of the implications for the whole EU of such agreements.  Collective purchasing of gas during an energy crisis has not been ruled out.

It is welcome that the Commission has brought together in a more coherent way than hitherto the EU’s policies in this field and is promoting improved co-operation between Member States but the hopes for early progress may well prove over-optimistic.  Some Member States are unlikely to agree easily to greater regulation at the EU level of national energy markets.  A number of Member States have spent the six years since the adoption of the last energy market package resisting its implementation; it is unlikely that they would favour going even further in the central regulation of markets than the 2009 legislation.

The failure to quantify the benefits to businesses and to domestic consumers of a more integrated and secure European energy market is a serious missed opportunity for an organisation that urgently needs to show that it benefits citizens and businesses.  Others have tried to quantify the benefits.  The electricity industry trade body Eurlectric has estimated that creating a more competitive EU electricity market, for example, could reduce household bills by €100 a year.36  Producing this sort of accessible data on consumer and business benefits is invaluable in generating public support.

It is arguable that the energy union proposals lack ambition and overall coherence and still leave too much scope for national fragmentation.

The European Council broadly endorsed the Commission’s framework at its March 2015 meeting.  It placed particular emphasis on the need for infrastructure projects to make the single energy market effective, on the need for enforcement of existing legislation, the need for greater openness in gas supply negotiations, on making the energy market more flexible in the EU, particularly so it can work more effectively with neighbouring countries, and on the link between energy and climate change policies in the EU.  The European Council’s approach reflects the urgency of the energy security question, in the light of developments in Ukraine and in the Middle East, the importance of making a reality of the energy single market and the difficulties posed by Russia being such a large supplier of energy at a time of poor relations between the EU and Russia.

 

Next Steps

The publication of the Commission’s proposals was the beginning of a process that is likely to take some time.  As their proposals encompass a number of different items, there will be several pieces of legislation over the next two years intended to implement the policy changes needed.  These proposals will be subject to the usual legislative processes of the EU.  The timetable is, however, constrained by the need for the EU to be ready to enter into binding international commitments in time for the UN climate change conference in November and December 2015.

The whole EU energy policy process takes place against a regional and global backdrop that continues to be challenging.  The Russian decision in January 2015 to announce the cancellation of the proposed South Stream gas pipeline (which would have brought Russian gas into southern Europe without passing through Ukraine) and then to reverse its position a month later is an example of how an already complex situation can quickly change.37  There are many uncertainties too over what will happen to the oil price; the sharp fall in the oil price in 2014 is unlikely to affect the economics of renewable energy in the EU in the short-term (because so little generation in the EU is oil-fired) but the longer-term position is less certain.  There could also be an impact on the development of fracking.38

The new President of the European Council, Donald Tusk, has a personal commitment to the concept of energy union.  His support, and that of the Commissioners responsible, will be vital as there are substantial divisions among the Member States.  The difficulties over the South Stream project demonstrated these divisions as has earlier French reluctance to support the construction of inter-connectors with the Iberian Peninsula.  The task of persuading Member States to co-operate with one another in this very sensitive policy area will continue to be far from easy.

  1. European Council, Conclusions – 26/27 June 2014, 27 June 2014, p. 14 et seq.
  2. Jean-Claude Juncker, Mission Letter to Maroš Šefčovič, Vice President for Energy Union, European Commission, 1 November 2014
  3. For example, ‘Power Up’, Charlemagne, The Economist, 7 March 2015
  4. For example, Stephen Tindale, ‘The Commission’s energy union ‘strategy’: A rebranded work programme’, Centre for European Reform, 27 February 2015
  5.  France, Portugal and Spain have now reached agreement on interconnectors, with the help of the European Commission: European Commission, President Juncker and the leaders of France, Spain and Portugal agree on the way forward to better connect the Iberian Peninsula with the rest of the EU energy market, IP/15/4551, 4 March 2015
  6. The effects of EU competition policy on the electricity supply market are discussed in Babatunde O. Adekoya, ‘What Has Been The Role Of EC Competition Law In The Liberalisation Of The European Electricity Sector?’, CEPMLP Annual Review, 6(2) (2003)
  7.  The EU’s competence is set out in Article 191 of the Treaty on the Functioning of the European Union, with specific reference made to the EU’s competence in international climate change negotiations
  8. Sami Andoura, Energy Solidarity in Europe: From Independence to Interdependence, Notre Europe – Jacques Delors Institute, 30 July 2013, p. 31
  9. European Climate Foundation, Energy Demand in the EU: A Comparison of Forecasts & Ambitions, 28 January 2011
  10. European Commission, Energy Union Package: A Framework Strategy for a Resilient Energy Union with a Forward-Looking Climate Change Policy, COM (2015) 80 final, 25 February 2015, p. 2
  11. European Parliament, The EU’s energy dependence: facts and figures, 24 July 2014
  12. Bulgaria, Estonia, Finland, Latvia, Lithuania and Sweden: see Paul Belkin, Jim Nichol, Michael Ratner & Steven Woehrel, Europe’s Energy Security: Options and Challenges to Natural Gas Supply Diversification, Congressional Research Service, 20 August 2013, p. 10
  13. ‘Ukraine crisis: Putin will cut gas to Europe unless Russia is paid by the end of the week’, Zachary Davies Boren, The Independent, 26 February 2015
  14. See Ralf Dickel et al., Reducing European Dependence on Russian Gas: distinguishing natural gas security from geopolitics, Oxford Institute for Energy Studies, 1 October 2014
  15. For more information, see Energy Charter Secretariat, The Energy Charter Treaty and Related Documents: A Legal Framework for International Energy Cooperation, 3 November 2004; reductions in government subsidies in renewables in a number of Member States are being challenged under the Treaty.
  16.  ‘Stress tests conclude that Europe can call Putin’s bluff and win’, Paul Roderick Gregory, Forbes, 22 October 2014
  17. European Council, Commission Staff Working Document Energy prices and costs report: Energy prices and costs report (Part 1/4), SWD (2014) 20 final/2, 17 March 2014, p. 9
  18. European Council, Commission Staff Working Document Energy prices and costs report: Energy prices and costs report (Part 2/4), SWD (2014) 20 final/2, 17 March 2014, p. 71
  19. European Commission, supra n. 10, p. 3
  20.  European Commission, European Energy Security Strategy, COM (2014) 330 final, 28 May 2014
  21. Paul Roderick Gregory, supra n. 16
  22. European Commission, Preparedness for a possible disruption of supplies from the East during the fall and winter of 2014/2015, COM (2014) 654 final, 16 October 2014, p. 5, Table 1
  23. White House Press Release, ‘U.S.-China Joint Announcement on Climate Change’, 11 November 2014
  24. European Commission, supra n. 10, p. 2
  25. Eurlectric, A Sector in Transition: Electricity Industry Trends and Figures, 28 January 2015, p. 12
  26. Described in ‘Be Glad About Russia’s Nuclear Setback’, Leonid Bershidsky, Bloomberg, 16 March 2015
  27. European Commission, supra n. 10, p. 3
  28. Ibid.
  29. Congressional Budget Office, Testimony: Federal Financial Support for Fuels and Energy Technologies: Terry M. Dinan before the Subcommittee on Energy Committee on Science, Space, and Technology, U.S. House of Representatives, 13 March 2013
  30. European Commission, supra n. 10, p. 19
  31. European Commission, EU energy projects funded under the European Economic Recovery Programme, 22 February 2010, p. 1
  32. Luca Bergamaschi, Louisa Casson & Jonathan Gaventa, Europe’s Choice: Low Carbon Growth or High Carbon Risks? Analysis of Member State proposals for the European Investment Plan, 28 January 2015
  33. European Commission, supra n. 10, p. 2
  34. European Commission, supra n. 10, pp. 19-21
  35. ‘Brussels gives first glimpse of what it means by “Energy Union”’, Sonja van Renssen, Energy Post¸ 21 October 2014
  36.  Eurelectric, Forging a joint commitment to sustainable and cost-efficient energy transition in Europe, 2 June 2014, p. 1
  37.  ‘Russia drops South Stream gas pipeline plan’, BBC News, 1 December 2014
  38. ‘What falling oil prices may mean for the future of renewable energy investment’, Mat Hope & Rosamund Pearce, Carbon Brief, 6 January 2015
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