Can Europe finance secure and clean energy in the future?European Commission - 26/05/2009
Keynote speech of Energy Commissioner Andris Piebalgs at the Eurelectric – Eurogas Conference
I am pleased to be speaking at today's conference which is very much welcome for two reasons:
First, this joint event is illustrative of the new energy era: it is no longer possible to consider energy sectors in isolation. A global approach is necessary. Each sector has its specificities but each of them is part of a whole system and impacts on the other. This is particularly true for gas and electricity.
Second, your initiative shows that Europe is entering into the implementation phase of its new energy policy. The legal framework for the energy sector has been revised and improved with the adoption of the Energy and climate package and the 3 rd Internal Market package, which should as such help to improve investment conditions. The Second Strategic Energy Review launched by the Commission last November, sets the scene for new investment in energy infrastructure, better exploitation of indigenous energy resources and for new relations with supplier and transit countries.
And now, it is time to act, although against the backdrop of a financial and economic crisis. The EU as a whole has now to pass the test as to whether we succeed in tackling our challenges and meeting our objectives successfully. It is necessary to decide and implement investment projects required to ensure the functioning of the internal market, the transition towards a low carbon economy and greater energy security for the EU. It is of utmost importance to achieve the targets that we have set ourselves. We cannot speak credibly to our partners if we are not implementing what has been decided. And we need to demonstrate our credibility at the Copenhagen conference on climate change at the end of the year.
I am pleased to see that the industry is collectively reflecting on the topic, with the participation of banks and financial institutions.
The European Commission is aware of the amount of efforts and investment required to meet the unprecedented commitments of the 20-20-20 framework. All energy sectors and infrastructure are concerned. Between now and 2030, it is estimated that up to €1 trillion will have to be spent on the EU's electricity network and generation capacity, and €150 billion on gas networks - and this excludes import pipelines from third countries.
Investment needs are not limited to the EU. They also concern our neighbours and suppliers. The IEA has made it clear in their reference scenario published at the end of 2008: the need for cumulative investment in the upstream oil and gas sector amounts to around $8.4 trillion over 2007-2030, or $ 350 billion per year on average.
STRESSED INVESTMENT CONDITIONS
The task is not easy and your question is pertinent: can Europe finance secure and clean Energy in the future? In particular since the investment climate has been undermined by several big shocks:
All these developments have obviously affected investment in the energy sector.
The volatility of oil prices and falling demand were the reason for some of our major suppliers to review their investment plans.
Taking the EU energy sector as a whole, the level of announced investment seems relatively stable up to now. Major investment projects have been proactively funded. Outside the EU, major international oil companies have generally confirmed their strategies where investment conditions are favourable.
However, the situation has changed. Confidence has been destroyed with the financial crisis and the investment climate is directly undermined by volatile/low energy and carbon prices and low demand.
In the EU, it seems that the costly and risky projects have been delayed or withdrawn, in some cases. Conventional projects are likely to gain preference over RES. The most visible impact of the current crisis is indeed on renewable energy. Lower oil prices, sagging demand for energy and hard-to-get credit have caused many firms to cut back on renewables.
Companies are also led to reconsider their financing policies and explore new approaches to risk mitigation. Financial deals are likely to take more time and implementation of projects risks being delayed. The economic crisis and the fall of energy markets also risk reinforcing a short-term focus.
WORST CASE SCENARIO
Will companies be tempted to reduce or delay investment?
I am concerned that delays or withdrawal of investment projects could result in a capacity crunch when the economy recovers and when demand is back again. These risks cannot be underestimated and it would be the worst case scenario had an energy crisis to be added to a financial and economic crisis.
Are there reasons for hope and for confidence? Yes.
Firstly, the recent rebound of the oil price improves the financial situation of the energy companies and seems to be sustained by a more positive development of the EU economy. Moreover, the energy sector is strong and resilient. Energy companies can still raise debt and equity and sector fundamentals remain attractive for investors.
In particular regulated infrastructure remains an asset class with strong defensive characteristics. The expected future demand and the need for new grids and new capacities make investment in energy a safe heaven compared to other sectors these days.
However, the challenges at stake cannot be met by the market alone. The EU, together with Member States, has played its role. It will continue to restore macro-economic confidence and promote investment for a secure and sustainable energy future.
Internationally, the EU has pushed for a better regulation of financial markets in the context of the G 20 and the de Larosière recommendations pave the way for some reforms in the internal market.
Within the EU energy markets, the framework for investment is now in place. There is certainty and predictability for investment. The revised emissions trading scheme should foster carbon prices, in the long term at least. The RES targets are ambitious, but clear and credible.
The EU is also developing its activities for a greater transparency of energy markets and monitoring of investment projects. This will contribute to a better investment climate.
PUBLIC FUNDING FOR A SECURE AND SUSTAINABLE ENERGY FUTURE FOR THE EU
With recovery plans, both national and European, stimulus funding or encouragement to invest through utilities’ balance sheet will contribute to keep the investment level up and accelerate the implementation of key infrastructure and technology projects, both for gas and electricity.
In the EU recovery plan, the Commission has proposed the following amounts to energy projects:
These are not huge amounts relative to the size of the EU, but it is a hitherto unprecedented measure at EU level.
After 2013, a new EU infrastructure instrument could replace the TEN-E instrument with its currently very limited resources. This could lead to a new role for public authorities in the investment policy area, provided that public funding will then still be needed and will not distort the normal market design.
On the RTD front, the EU is boosting its financing to ensure that in the longer term technologies such as CCS enable us to reach our energy policy goals in a cost effective way. A new Sustainable Energy Financing Initiative is being prepared jointly with European Investment Bank and other financial organisations, to mobilise large-scale funding from capital markets for investments in renewable energies and clean use of fossil fuels.
FUNDING OUTSIDE THE EU
With producer countries outside Europe, notably Russia and the Caspian countries, we are engaged in a dialogue and try to develop a new generation of “energy interdependence" provisions in our broad-based agreements. Cooperation with Industry will reinforce our position. As long as industry is on board I am confident that we can make progress in this area.
The recent international conference on financing the modernisation of the Ukraine energy infrastructure is an example of how the EU can catalyse lending by International Financial Institutions (EBRD, WB, EIB) if the required regulatory conditions are met by the UA side. On the other hand, it needs to be kept in mind that you cannot invest in unprepared ground. The EU Neighbourhood Investment Facility could also be used for these projects. The Caspian Development Corporation proposals, promoted by the Commission and international financing institutions, are aiming at production and infrastructure development though coordinated gas purchasing by European players. They are an example for our quest for a new interdependence area.
MAINTAIN TECHNOLOGICAL LEADERSHIP
The EU will continue to promote investment into energy efficiency. This will contribute to our energy security and to mitigating global warming. It will help create wealth at home and redirect financial flows to our economy and industry.
Concerning the nuclear cycle, it will be important that European companies benefit from the nuclear expansion which is predicted to happen around the world. Not only to make profits, but to contribute to safety and non-proliferation. Within the EU, plans for about 20 new reactors have been publicly announced. Euratom and EIB loans could help to fund these projects. Outside the EU, Russia has confirmed it would need 26 reactors units by 2030 and Japan, China and the US are also stepping up their investment in nuclear. Given their technological leadership, EU companies are well placed to take part in this nuclear re-launch.
OUTLOOK FOR THE CONFERENCE
Energy security and climate change mitigation are tremendous challenges. We knew that when we proposed the rules for the third industrial revolution. They are a test for the EU. There is no other choice: this is the only long term policy option although the road to the future may be bumpy and the current economic situation may leave some potholes behind.
I hope that this conference will help seizing the problems and identifying solutions. The very best of success for this innovative conference format!