The European Energy Policy for 2020 and Beyond

European Commission

[Check Against Delivery]

Günther H. Oettinger

European Commissioner for Energy

The European Energy Policy for 2020 and beyond

Erasmus Energy Forum, Rotterdam School of Management

Rotterdam, 19 June 2014

Ladies and gentlemen

Europe is changing how it sources, transports and consumes energy.

This transformation is an endeavour that goes far beyond the technicalities of regulatory reform. Clearly, it demands innovations in engineering, science and technology. It has important implications for Europe's industrial, social and economic policies. It presents us with challenges in foreign policy and international negotiation. And an evolving energy system will require behavioural change from all of Europe's energy consumers - homes, businesses and industries.

It affects all of us.

In this context, Fora that bring together businesses, academia and policymakers are hugely important, and very welcome. It therefore really is a great pleasure to be here to open the 2014 Erasmus Forum.

By 2020, the EU has committed to reduce its GHG emissions by 20% compared to 1990, to source 20% of its energy from renewables, and to lower energy consumption by 20%. We are on track today to meeting our commitments on Emissions and renewables, and will publish a review of our progress on energy efficiency before the Summer break.

But this is just the start – the beginning of the transformation. Today I want to turn to the three broad challenges for the EU's energy systems, and some of our responses to them.

Ukraine and security of supply

To many of you, the first thing that may come to mind is the Ukraine gas crisis, and the dependence of much of the EU on Russian gas imports. Indeed - energy security is our most immediate challenge. I have been continuously involved in negotiations between the EU, Ukraine and Russia, Naftogaz and Gazprom, in recent months, and will continue to work for a favourable outcome that benefits all parties. This is not a zero-sum game. If we can't come to a package, to solve the issues of price and debt, we will all loose.

The European Commission has also worked hard, publishing an in-depth European Energy Security Strategy ahead of the European Council later this month.

The Strategy includes short-term actions that we will need to undertake before winter comes, as well as a number of medium and longer term actions to address our broader energy security concerns.

In the short term, our Strategy proposes to launch stress tests that simulate supply disruption, as a worst case scenario. On the basis of these we will detail emergency plans and backup mechanisms. These may include increased gas stocks, reverse flow pipelines, fuel switching to decrease gas demand, or other very short term measures to reduce demand.

There is not one European market. If you come to a deeper analysis, there are 4 Member States that have no Russian gas (Portugal, Spain, Ireland, UK), there are 18 Member States that import between 10 and 80% of gas from Russia, and there are 6 Member States that are 100% dependent on Russia. Some of those have direct links with Russia, and for some the relation goes via Ukraine,

In the longer term, the Commission is looking to diversify supplier countries and routes, strengthen emergency mechanisms, protect critical infrastructure, moderate energy demand, increase indigenous production, and further develop energy technology. In essence, it means we need to complete the internal energy market: building missing infrastructure links and strengthening regional cooperation, and make further progress on the third energy package.

Our second challenge is to increase Sustainability and the future role of renewables

A second key challenge for the EU's energy system is to ensure that we make it sustainable.

Improving our energy security, reducing energy costs, as well as mitigating climate change are all objectives that are clearly not possible without more efficient energy consumption and the increased use of renewable energy.

However, the old energy landscape, with the exception of hydropower and biomass for heating, is dominated by fossil and nuclear energies, which have developed in the context of an energy system with an entirely different structure.

We're moving from centralised large-scale production of energy to smarter grids and more decentralised production. This transition therefore poses significant technical challenges.

Taking stock of developments to date, more than 14% of Europe's energy is sourced from renewables, and we're in a position to manage the target of 20% in 2020, but for that we need another percentage-point each year.

This will be feasible, largely thanks to consistent Member States' policies and the reduced costs resulting from technology learning and large-scale production. This effect can be impressive; Eurostat found that the scaling up of global production volumes and technological advances have allowed producers to substantially cut costs per unit. Prices of photovoltaic modules experienced the biggest plunge, falling by 76 % between 2008 and 2012. Generations of energy consumers will benefit from this cost reduction in the future. We should be smart in our future investment.

The key questions now are: how can we promote renewables in a smarter way? How can they be even more cost-efficient? And how can we reconcile renewable support schemes with the internal market?

This Forum is an excellent opportunity to discuss and debate these questions, especially since a core theme of the programme is the financing of sustainable energy.

On this, the EU has expressed its commitment to develop innovative energy technologies by allocating €5.8 billion for energy research and innovation in the new Framework Programme for Research and Innovation, Horizon 2020.

The involvement of industry and SMEs is even more important in Horizon 2020 than it was before as, for the first time, the EU Research and Innovation Programme spans the whole development process, from research to the market, with the objective to promote innovation and the market rollout of low-carbon energy technologies.

But our research funding is just a drop on a glowing plate – if I can literally translate a Dutch expression… It is the creation of a market framework where such investments are stimulated and can flourish that will make the difference.

Clearly, there is little use in either reliable or sustainable supplies of energy if we cannot afford them. We must pay close attention to the competitiveness of our energy system. Competitiveness, energy prices and costs: This our third key challenge.

Consumers' electricity and gas prices have risen considerably in recent years and are still rising. During the period 2008-2012 we saw on average across the EU each year:

An additional increase of 4% in household electricity prices
An additional increase of 3% in gas household prices
An additional increase of 3.5% in retail electricity prices for industry
And an increase of less than 1% in gas prices for industry

We have seen a considerable and welcome decline in wholesale electricity prices. But this clearly has not resulted in lower retail prices. The reason is the growing share of non-market elements in retail prices, mainly taxation and levies.

These increases in cost have placed a significant burden on European homes, business. If you compare the US industry and the European industry, in a global competition, we have to be 3 times as much for our gas, and 2 times as much for electricity. If we want to keep our aliminium industry, our cement industry, etcetera, we need to reduce the price difference, because for these industries energy costs are more important than labour costs.

Energy is also at the heart of the supply chain of many of Europe’s most important industries and underpins our economies. EU, Member States and European households and industry all need to work together to confront the energy cost challenge of the energy transformation.

The challenge will be to square our objectives for the reduction of greenhouse gases with our objective to strengthen Europe's competitive position in the world.

We need above all competitive markets, flexible energy systems, responsive consumers and cost effective government instruments if we want to contain price rises, pay for investment and minimise cost increases.

The 2030 Package is our vision to address these challenges in the years beyond 2020. Adopted in January, we are proposing a 40% reduction in greenhouse gas emissions by 2030 - with ETS reform at centre stage - to have at least 27% of our energy to come from renewable sources, and a strong contribution on energy efficiency to be tabled in July this year.

I now want to turn to Smart Grids, a key research area for the Erasmus Centre for Future Energy Business. It is already clear that smart grids will be an important feature of Europe's future energy landscape.

As many of you will know, smart grids allow us to modulate consumption according to changing situations and market signals. By doing so, they offer us better control over our electricity and gas grids.

This is of particular relevance to electricity grids receiving large inputs from renewable sources. The responsiveness and flexibility that smart grids afford us will be key to cost-effectively integrate the variable generation and storage we need in such a system.

Smart Grids will bring direct benefits to energy consumers. By taking advantage of new technologies and demand response schemes, consumers will have more power to control their consumption, to consume in a more cost-efficient manner and at the end of the day to save money.

It has been shown that adjusting electricity consumption in response to dynamic market prices can significantly reduce energy costs. In this context, flexible retail price schemes will be needed in order to reveal the true value of demand-response and help to its uptake in the retail market.

The Commission recognizes the importance of demand side participation, but also the fact that the potential of demand side is currently underutilised.

In order to take advantage of the full potential of demand side flexibility, we need wholesale markets that treat demand on an equal footing with supply, and retail markets which encourage new business models and market participants.

The good news is that smart grid solutions are already available, and are already being rolled out.

But so far, over 6 billion Euros have been invested in the EU on smart grid related projects ranging from R&D and pilots to full-fledged deployments. This is only the start.

To give you some perspective, we know that some 1 trillion euro of investments in energy infrastructure will be needed in the EU by 2030. This includes some 200bn in electricity generation, 140bn in electricity transmission and several hundred billion in electricity distribution. It also includes the investments we need to upgrade the system towards smart grids.

A smart energy system will help to us develop a more competitive and flexible energy system that is both sustainable and more resilient to supply shocks. They are therefore an important tool to help us achieve all three of the broad challenges I mentioned previously.

Europe benefits from a wealth of expertise in institutions like the Erasmus Centre for Future Energy Business, which conducts pioneering research into Europe's future energy networks.

Stakeholders in the energy sector must make use of your expertise, building upon and investing in innovation and putting to good use the substantial and diverse research on energy that is taking place. I am sure this Forum offers an excellent opportunity for us all to do so.

Thank you for your attention!