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European Commission - Speech - [Check Against Delivery]

Keynote Speech by Commissioner Arias Cañete: A modern Energy Union for competitive, secure and sustainable energy for the European Industry

21 April 2015

Euro Economic Congress, Katowice, Poland


President Buzek,
State Secretary Korolec,
Minister Masiulis,
Distinguished Guests,
Ladies and Gentlemen,

First and foremost let me thank President Buzek for the invitation. Year on year this event continues to grow and is now the leading forum for economic debate in Europe.

And I am particularly delighted that this year's conference is being held on the rejuvenated site of the former Katowice coal mine. The fact that it is now home to some of the leading economic, political and industry thinkers is testament to the successful modernisation process that this region and country is undergoing.

And for me modernisation is the key theme of our debate today. Because business as usual is not an option for Europe. Let me give you three reasons why:

  • Climate change is accelerating and requires urgent action. We must chart a course towards a competitive low-carbon economy that reconciles global climate objectives with competitiveness. That is what the EU will push for in Paris later this year
  • We are still vulnerable to energy supply shortages. Too many European countries – including Poland - are still overly reliant on individual suppliers for their energy. Security of supply crises impact livelihoods, economies and prices around Europe.
  • We still suffer from chronic underinvestment in energy infrastructure and markets. That means that new technologies and innovation do not translate sufficiently quickly into a modernised energy sector.

At the heart of the solution for all three of those things is the need to modernise: Modernise our energy market, modernise our infrastructure, and modernise our investment framework.

The recently adopted Energy Union strategy and action plan is the umbrella under which we will make that happen. Its ultimate goal is to provide secure, affordable and competitive energy for Europe's citizens and industry. Achieving that will boost our competitiveness and put Europe on the road to recovery.


Today, I would like to touch on three key areas where the Energy Union will deliver the modernisation which our economy needs.

  • Firstly, the completion of the internal energy market, linked up by modern infrastructure. A market whichworks for households and businesses, drives down prices and boosts competitiveness.
  • Secondly, we need to create an investment climate which can enable us to modernise the energy system
  • And thirdly, we will focus on setting the economy on a low-carbon pathway to meet our climate objectives and create new market opportunities in our economy. This includes a an Emissions Trading Scheme which drives modernisation.

Allow me to start with the internal market.


1. Internal Market modernisation

Energy is probably the sector in which completing the Single Market will bring the most benefits to Europe’s businesses and citizens – up to 40 billion a year.

But reform efforts – including the Third Energy Package - have taken longer than expected to have an impact on the ground. As part of the Energy Union we will step up the enforcement of the Third Energy Package - in particular as regards unbundling and the independence of regulators. We will also speed up the process of adopting the common rules - the network codes - that will remove the remaining obstacles to closer market integration.

However, beyond that we need to look at new ways to modernise our internal market framework. This modernisation has to happen in the face of two key challenges:

On the one hand we are facing a situation where over the next two decades many assets in Europe will reach the end of their lifetime.

We estimate that investment in the order of 1 trillion € will be needed for the modernisation of the energy sector in Europe. We must therefore make sure that the internal market is able to send the right investment signals to unlock the necessary investment At the same time, speaking to businesses across Europe there is a lot of concern about the level of energy prices in Europe and their impact on global competition. We must make sure that the transformation of the energy sector happens as cost-efficiently as possible.

We will therefore take a comprehensive look at our market design and present our ideas on how to revise it before this summer.

Let me give you some initial ideas how we want to tackle the double challenge of high investment needs and controlling prices.

A number of Member States are currently looking at, or have already implemented, specific mechanisms to ensure sufficient generation capacity is available. But a purely national approach to that could cost us much of the 40 billion € we stand to gain from the internal market. That’s why we will push for - at the very least - a regional approach to such mechanisms. We believe this will reduce energy bills in the long run.

And in parallel to that we need to step up the integration of renewables into our energy system. We have taken the first step through our state aid guidelines which require renewables support schemes to become more market-based. I welcome that such a market-based scheme has recently been adopted in Poland.

But integrating renewables cost-efficiently also requires flexible markets, both on the supply and demand side. The business case for a more active participation of demand is clear - demand side response alone could save our economy up to 100 Billion Euro per year.

And some of the big energy users, companies like the ones represented here today, are already using this opportunity. But we believe that there is much wider potential for demand response. To activate it we need to remove remaining obstacles in our market rules; we need active consumers with real choice; and we need prices that are market-based and unregulated.

Lastly, a revised internal market framework will also have to look at strengthening our institutional framework and cross-border cooperation. That means that we need closer cross-border cooperation between network operators. It might also mean that we need to revisit the role of ACER and strengthen its role on cross-border issues.

Taken together, these elements of a new market design should help give investors the confidence they need to invest in the modernisation of the sector.

But cost-efficient modernisation of our energy system and real market integration also – perhaps most importantly - means building the necessary energy infrastructures and cross-border interconnections of energy networks

Let me be clear: the EU must overcome the physical fragmentation of national energy markets. It is one of the root causes for high final energy prices. Put simply, we need to modernise our pipelines, terminals, and infrastructure.

That is why the first deliverable of the Energy Union was to lay down a plan how to achieve the 10% electricity interconnection target.

Currently, 12 Member States, including Poland, are below that target.

By 2020 this situation needs to be redressed. Including in Poland, which has one of the lowest interconnection rates in Europe. The good news is that we are already making progress and more will follow. For example, the completion of LitPol, the interconnection between Lithuania and Poland will double Poland's interconnection rate to 4% by the end of 2015. And the interconnection with Germany can bring Poland's interconnectivity to above 10% by 2020.

Making those interconnector projects reality is crucial,. And not only because interconnection is the cheapest way to create flexible and well-integrated markets. But also because it physically builds the mutual trust and solidarity that the Energy Union is built on.

I would therefore like to thank both Ministers on the panel today for their continued work on the LitPol project which we hope to see finalised later this year. We will make sure that the 246 PCIs, including those connecting Poland with its neighbours, get accelerated granting of licences and permits. We are now creating one-stop-shop procedures for PCIs and have also established clear rules on cross-border cooperation and cost sharing in our regulatory framework.

But the modernisation of the internal energy market - whether it be interconnectors or wholesale markets - will not be possible without triggering enough investment to make it happen.

 

 

2. Investment framework modernisation

Many of you will have been here yesterday to hear my colleague Vice-President Katainen talk about the need for an innovative investment framework to get our economy moving. And that is especially the case in energy. Despite a projected annual investment of 200 billion in the next three years we are still a long way off the 1 trillion we need.

The fact is that investment in Europe is still some 15% below the pre-crisis peak in real terms. In some countries that figure is even as high as 60%. The investment gap comes from a lack of risk bearing capacity in Europe. This is hampering both the demand and supply side of our economy – and we need action on both.

So how do we challenge it?

First we have to recognise that public money alone will not make up the shortfall. Economies around Europe are striving to drive down debt while looking for growth at the same time. So we need to use what we have at our disposal to trigger investments in the public and private sector. For example, the Connecting Europe Facility (CEF) has earmarked 5.85 billion to help finance key trans-European energy infrastructure projects and complete the internal market. The funds will act as a catalyst for securing additional financing for PCIs like LitPol and the GIPL gas interconnector between Poland and Lithuania.

 So the model is there but we are still talking about modest amounts compared to what is needed.

The Investment Plan that Vice-President Katainen presented yesterday is the game changer which can make it happen.

It is about mobilising additional public money to generate new private investment, without creating new debt. It will modernise the investment framework by minimising regulatory risks and cutting red tape.

This is particularly relevant for the energy sector as energy assets are particularly capital intensive and require long term financing. The European Fund for Structural Investments provides a guarantee instrument to make sure projects like LitPol can access the long term financing it needs.

The 16bn EFSI guarantee will provide the confidence needed for private investors. And every euro put in the guarantee fund will generate about €30 of investment into the real economy.

We have already seen that using public funds to leverage further private and public investment works. A great example of that is the Katowice Clean Coal Technologies Centre which I will visit later this afternoon.

It was a joint investment venture which used 45 million of EU structural funds to unlock further investment regionally and nationally. The centre is now a leading hub for research and innovation looking into the commercialisation of innovative Clean Coal Technologies.

This is a template to follow – a joint investment in a project which can boost the region's competitiveness and help Poland with its transition to a lower carbon economy.

 

3. Decarbonisation and ETS Reform

Ladies and Gentlemen,

Clean coal technologies such as those being developed in Katowice are crucial in case of future use of coal in Poland and in Europe.

If we get technological development right, combustion would not need to result in harmful emissions of carbon dioxide. Coal needs to be processed more efficiently, to a wider range of finished products, including gas and liquid fuels.

I have never bought into the argument that fossil fuel industries and countries using fossil fuels cannot contribute to the solution on climate change. Or that historic trends are irreversible. Think of the speed with which many traditional industries have been transformed in recent years: the first iPhone came out in 2007, and today there are 2 billion smartphones.

Couldn’t the same transformation happen with low-carbon technologies?

My point is that there is a way to ensure that coal investments are not incompatible with the EU's pathway to a low-emission economy. Examples like Katowice are living proof of that and that's why we have already doubled research funding on energy to 6 billion in Horizon 2020.

And we have made research and innovation in these new technologies a key part of the Energy Union.

To make sure that we sharpen the focus of our research and innovation efforts, we will propose an upgraded Strategic Energy Technology Plan. This will place a greater emphasis on a limited number of priorities and on ensuring better co-ordination between all involved to make sure that we can bring new, low-carbon technologies to the market. That's important not only because we are pushing for a 40% reduction of emissions by 2030.

But also because it is an industrial policy imperative for Europe to decarbonise its economy.

A modernised, reformed EU ETS – together with a market stability reserve – is central to us getting there.

Let me be clear – there is no alternative to the ETS. Putting a price on carbon is the best way to cut emissions in a cost-efficient manner, incentivise businesses to further reduce their emissions, and boost innovation by helping to bring new technologies to the market.

So what needs to change?

In the short term it is clear that there is currently an enormous surplus of allowances. That is why we are now pushing for a Market Stability Reserve to address the surplus and make ETS more flexible.

The MSR will provide more stability and prevent price volatility. For me this is a priority - the earlier it is adopted the better for the investment climate. We still have some way to go but I am confident we can reach an agreement soon and can get on with the long term reform to ETS.

I thank many of you for your comments and feedback in the public consultation for the new scheme. We are now going through all of them and they will help us refine our vision for the review of the ETS.

ETS turns ten this year and has already delivered substantial emissions reductions in the EU. But it is time to be more ambitious

The modernised ETS will focus on the aspects pinpointed by European leaders:

  • continued free allocation to industry subject to international competition;
  • optional free allocation of allowances to modernise electricity generation in Poland and elsewhere; and
  • the creation of modernisation and innovation funds.

Allow me to expand on the Modernisation Fund since it fits with my theme for today.

The fund is particularly important for Poland and other countries to modernise their energy systems, with a focus on the power sector and demand side efficiency. It will further incentivise investments to modernise the energy system and ultimately will give citizens and industry access to secure, affordable and competitive energy. Together with the optional free allocations this gives Member States an important set of tools to steer the modernisation of their energy sector. This should be used strategically and we are ready to discuss with Poland and other countries how to do so best.

 

Conclusion

Ladies and Gentlemen,

The bottom line is that the Energy Union is there to ensure that we can get energy where it's needed at an affordable price without impacting our climate.

I spoke earlier about the need to modernise our energy sector by attracting investors and foster competitiveness.

The Energy Union will seek to complete a virtuous circle where a fully integrated internal market drives down costs, boosts competitiveness and incentivises investment.

To complete that circle my priorities are very simple:

  • 1) Completing the internal energy market so that it works for business and household consumers by focusing on market design and infrastructure modernisation.
  • 2) Creating an investment friendly climate by using as little public funds as needed to trigger as much private investment as possible.
  • And 3) Bringing forward investment in low carbon technologies through a reformed ETS which will work for industry and the climate.

In a nutshell that is why I believe a modern Energy Union is the key to Europe's competitiveness.

Thank you for your attention.

SPEECH/15/4825

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