"European Energy Policy and the Baltic Region"

Prime Ministers, Ministers,

Excellencies, Ladies and Gentlemen,

I am very honored to address this distinguished audience.

May I start by emphasizing how much I welcome your initiative to organise this Forum.

The Green Paper on a European Strategy for Sustainable, Competitive and Secure Energy, issued by the European Commission in March 2006, referred to the Baltic States as an "energy island". I am happy that since then, there have been developments which have opened the way for the connection of the Baltic States into the wider EU internal energy market. I am referring to Estlink, and I will return to this issue later.

I see today's Energy Forum as a step along the way towards forging a common energy agenda for the Baltic States at the crucial moment when the EU is shaping its new energy policy.

The energy challenges

I would like to begin by considering the underlying causes of the energy challenges facing Europe and, indeed, the whole world, over the next decades. These are at the heart of the efforts to develop a new Energy policy for Europe. We are facing challenging times, both for the world's energy sector and for mankind. Demand for energy is set to increase by more than 50% by 2030, global population is expected to grow from 6,6 billion to more than 9 billion people. Such dramatic increases pose a threat to the global economy and to the climate, as energy consumption will be accompanied by a related rise in CO2 emissions. By 2030, this would mean an increase of CO2 emissions by 110%.

Evidence about the reality of climate change is overwhelming, and the scientific community is unanimous. Greenhouse gas emissions have increased by more than 70% since 1970 and the largest growth during this period came from the energy sector, where emissions have increased by 145%. It is becoming increasingly clear that without real and effective action, the impact on our environment, on our economy, and our way of life will be tremendous. Climate change has already reached the top of the political agenda in most developed countries, yet it will affect first of all the poorest countries of the world.

If the world waits a decade or more, it will be too late. We will have left our children and grandchildren the legacy of climate change.

A positive example of a global response

Of course, the difficulties in reaching an effective international agreement to deal with global warming are enormous. But I believe that we are turning a corner, and that the world will act together to rise to this challenge. We must only hope that the action is not too little and too late. But I believe that we will succeed, for a reason perhaps best expressed by Jeffrey Sachs, the Director of the Earth Institute of the Colombia University in a recent series of lectures.

He points out that the world has already dealt with a similar problem through international cooperation in the 1990's, that of chlorofluorocarbons - or CFC's - which were destroying the earth's ozone layer. As Sachs observes, getting action to deal with this involved a five stage process.

Firstly, science identified the problem. Secondly, the vested interests - the makers of CFC's and aerosols in this case - publicly and actively doubted the science. But nature, the laws of physics, has a way of overcoming vested interests. In the case of CFC's it was the photo taken by NASA of the hole in the ozone layer. So thirdly, came public acceptance - the realisation that the problem was a personal one that would affect the lives of our own children and grandchildren. And so the call to act. Then came the scientists, searching for solutions. And finally, the crucial stage, when the previously sceptical companies whisper in the ears of politicians "its OK, you can reach an agreement, we can handle this". And from this point on an international agreement was quickly reached. The climate change debate is following the same path. Although global warming was first identified in 1896, it has only recently become widely accepted. And it is now beginning to be widely understood that climate change is personal: it will affect us, our children and grandchildren. So, after the initial scepticism on the science, fuelled by vested interests, we now have increasing public acceptance about the need to act, right across the globe. Science has followed and I believe that we are entering a final phase when companies are indeed beginning to whisper in the ears of politicians "its OK, you can reach an agreement, we can handle this".

Energy security

Let me now turn to security of energy supplies, the second great energy challenge. The International Energy Agency predicts that oil demand will increase over the coming years by 1.9% per annum. These consumption patterns mean that within a decade the capacity to increase oil production will be in the hands of just a few predominately OPEC countries. As the IEA observes "the ability and willingness of major oil and gas producers to step up investment in order to meet rising global demand are particularly uncertain."

The potential effects of these trends on Europe are significant. If, for example, the oil price rose to 100 $/barrel in 2030, the EU-27 energy total import bill would increase by around € 170 billion, an annual increase of €350 for every EU citizen.

The simple conclusion must be that, even if climate change was not an issue, we should in any event be moving away from over-reliance on imported fossil fuels towards indigenous energy which is largely low-carbon in nature. This is nothing more than a sensible policy on the part of the EU to deal with the mounting risks which result from constantly increasing demand for hydrocarbons.

Speaking with one voice

Also in view of these risks, the EU needs to speak with one voice on energy matters. External dimensions of each Member State's energy policy have implications on energy sectors in others. What I want to see, though, is a more coordinated external dimension to the EU's energy policy. The EU would gain in strength if a European negotiator would have a clear mandate to represent the EU's common energy interests. In regular contact with major energy suppliers, this European negotiator would engage in an on-going dialogue on demand forecasts, infrastructure development and investment needs, taking into account the overall context of the EU energy mix and internal market development. President Ilves has recently called for more power to be given to the European Commission on external energy matters. This is one possible option and this issue should be further reflected. I can only invite all Baltic States' authorities to express their views on this aspect during the forthcoming debate on the new EU Treaty, as it needs to be properly reflected in the Treaty.

Regional Integration Initiatives

Within Europe, Member Sates can gain a lot from consolidating regional energy markets. Baltic States have engaged in co-operation on energy by holding consultations on a political level, as well as by developing common projects, since the mid-nineties. The Baltic Electricity Market Mini-Forum is now being held twice a year. A common Baltic energy strategy is being elaborated. In that respect I would like to recommend a look at another framework of energy cooperation established since 2005 between France, Germany, and the three Benelux countries. These five Member State have created what is called the "Pentalateral Energy Forum" gathering Governments, regulatory authorities, Transmission System Operators, power exchanges and market participants. The goal is to ensure the better integration of the energy markets between these countries, which – by virtue of their proximity – are natural energy trading partners. Better integration of energy markets, through "flow-based market coupling", serves to enhance reliability, security of supply, and economic efficiency. Resources are pooled for forecasting and capacity planning. Some ideas could possibly be interesting also for the Baltic States.

New industrial revolution and winners of tomorrow

As you know, in response to the challenge of climate change, the EU has recommended a cut in greenhouse gas emissions for the developed world in the order of 30% by 2020. In the meantime, the EU will unilaterally commit itself to a 20% target. But in reality, we know that this is just the beginning. We will need cuts of 50% and more by 2050.

To achieve this requires a massive shift to energy-efficiency, to low carbon and renewable energy and to carbon sequestration. Truly, this amounts to a new industrial revolution.

But the most important point here is that the parts of the world that take real action today to invest in change, in research and development and early implementation of the new generation of low and zero-carbon technologies, will gain massively in terms of security of supply and competitiveness tomorrow. It is these regions that will be better able to deal with future price shocks, having invested in indigenous low-carbon energy with stable prices.

I would like to see the Baltic States at the heart of this transformation. This would also fit well with the acute need for greater security of energy supply in these States, which have for too long been an energy island and which is still dependent upon one major supplier of gas. Diversification and interconnection are the key energy objectives. We need to make a rapid progress on the Power bridge linking Lithuania and Poland and Poland and Germany. I welcome the intention to build a second line for Estlink. Another connection could be built with Sweden. The project of the gas link between Finland and Estonia was already put on the table. An LNG option should be analysed in a broader Baltic Sea Region context. However difficult, given the willingness to pay, everything is possible – especially when national security is at stake.

Renewables

For my part, before the end of this year, I will table a new Directive on renewable energy. This will give concrete effect to the European Council's acceptance of legally binding national renewable energy targets. These will in turn ensure that we meet the target agreed by the Council of a 20% share of the EU's energy mix from renewable sources by 2020. I know that the Baltic region has considerable potential to increase the share of renewable energy, especially with regard to the use of biomass, wind energy and biogas. Renewable energy also has the advantage of being indigenous, as well as clean. It creates jobs. Some argue that renewable energy is too expensive. My view, by contrast, is that it's too expensive not to take this step.

With oil prices at 70$ and a carbon price of around 20 Euro, the target to supply 20% from renewable energy more or less pays for itself. Not only, therefore, is this policy a sensible measure to enable Europe to manage its security of energy supply, it also represents an enormous commercial opportunity for Europe.

Energy-efficiency

From next year onwards, the Commission will start rolling-out a series of initiatives on energy-efficiency; from minimum product standards, to better labelling, to improved building standards, to more efficient transport systems in Europe's cities. The potential here is huge, not just in terms of reducing emissions, but equally in improving Europe's competitiveness. The potential for improving energy-efficiency in all phases of energy use, from production to final consumption, is very large. This is especially so in the new Member-states, and particularly in the Baltic States, where energy-intensity per Unit of GDP is significantly higher than the EU average. One must not forget that a 20% improvement in energy-efficiency by the Baltic States is comparable to the capacity of a possible new gas pipeline to the region. Energy-efficiency reduces dependence on external suppliers. Seen in these terms, it makes even more sense to invest to improve energy-efficiency.

Here in Riga, for example, the Intelligent Energy Europe-sponsored project called "Bottom up to Kyoto" is demonstrating how to save energy by significantly reducing energy use for public lighting. The new Intelligent Energy Agency in Riga will also help organisations and individuals across the Baltic States to learn about and exploit opportunities for energy-efficiency and energy savings. Structural and cohesion funds can also be used also to finance the energy efficiency and renewable energy projects. However, according to the available data, only 2,2% of Regional funds are expected to be allocated to energy sector in Estonia, 2,9% in Latvia and 6,5% in Lithuania.

Investment in technology

By the end of this year the Commission will also answer the call of the European Council for a "European Strategic Energy Technology Initiative".

This is a fundamental plank in Europe's new Energy Policy and in my view the key to turning the challenge of climate change and energy security into a competitive advantage for Europe. Like all industrial revolutions, success in combating climate change will be technology driven. This means a new generation of energy-efficient equipment, carbon sequestration technologies and new materials that bring down the cost of wind and photovoltaic, to name but a few. A wise public procurement policy can significantly boost demand for new energy technologies, also in the Baltic States.

Internal market

Turning now to the Internal Energy Market: When the first Electricity Directive was adopted some 9 years ago, the Community was aware that creating a truly competitive Europe-wide electricity and then gas market would be a process, not a single event. How true this was. It is undeniable that great progress has been made. There are regulators in each Member State, the legal unbundling of transmission and, from July onwards, the right of practically every electricity and gas customer across the whole EU to choose their supplier. However, it is equally undeniable that many of our basic objectives have not yet been achieved. Markets remain stubbornly national in scope, cross-border trade is difficult and limited, and far too many customers have little or no real competitive choice of supplier.

I therefore intend to propose a third internal electricity market package in the autumn. There's no doubt in my mind that the internal electricity market can work better, also across the Baltic region. Liberalisation of the energy markets also needs to see more rapid progress.

Here, several questions need to be very carefully addressed.

For example,

(i) how the "post-Kyoto" arrangements will impact the energy landscape of the Baltic States from 2013;

(ii) what will be Estonia’s energy strategy for post-2016 when the Large Combustion Plants Directive comes into force and oil shale will be phased-out;

(iii) what is the future of nuclear energy in the Baltic states after closure of the Ignalina nuclear power plant, what could be other options possible?

These are mid- and long-term energy strategy issues that call for a prompt and considered response.

In my meetings with the authorities of the Baltic States, questions have arisen as to the possibilities to join the UCTE power system. In my view, it is not a political issue. This is a complicated technical undertaking which, if realised, would require maintaining important balancing and reserve power capacities. If market operators are interested in this, a first step would be to proceed with a feasibility study which could be supported under the Trans-European Energy Networks annual programme.

The European Council's decision to nominate a European project coordinator for the Lithuania-Poland-Germany power link is a major step forward. Today, the Baltic States electricity markets are still too fragmented and remain closed. However, to attract investment in necessary new capacity and infrastructure, foreign investors need to be convinced that it is in their financial interest to invest here. This will only happen when existing hurdles to market opening are overcome. This is precisely where the EU rules and framework can help.

Solidarity

There is one other thing that I would like to mention. I would like to enhance solidarity within the EU – also for energy. This issue as well could be addressed by a new Treaty change. In the case of disruption of energy supplies in any individual Member State, that Member State should be able to count upon the solidarity of the others, which should be willing to assist in whatever way they can. Taking into account the available and potential underground gas storage capacity, Latvia plays – and could increase – its role as a stabilising factor in the region. It may take several years to put formal solidarity mechanisms in place in the EU – but a Treaty provision would send an important signal that reliable energy underpins the well-being of European citizens, wherever they live, and that energy-solidarity should be enhanced.

Ladies and Gentlemen,

With every challenge comes an opportunity. The real challenge for the EU, and for the Baltic States in particular, is to translate its energy needs into more sustainable energy security for its citizens.

I would like to end by quoting John F. Kennedy. It is a quote from his Commencement address in June 1963, when he changed the course of the Cuban missile crisis. He is dealing with peace, but the sentiment applies equally to the most important challenges of our generation.

"Our problems are man-made, therefore they can be solved by man, and man can be as big as he wants. No problem of human destiny is beyond human beings. Man's reason and spirit have often solved the seemingly unsolvable, and we believe that he can do it again."

I finish on this note, asking not just for your support, but for your active engagement to make it happen.

Thank you for your attention.