In the energy sector, we have been doing much the same for decades. We have invested too much of our wealth in risky technologies with low capital cost and high and unpredictable fuel and operating cost. Energy policy decisions have been backed up by economic models from the International Energy Agency, the European Commission and national governments that assume that fuel price risk, carbon price risk, supply risk and political risk does not exist in the energy market.
According to the European Commission, the EU is home to 0.8% of the world's proven oil reserves, 2% of the world's proven gas reserves, 3.5% of the world's coal reserves, and 1.9% of the world's uranium reserves. And out of the resources that it has, 80% is coal (the dirty one) and over two-thirds of that coal is lignite (the really dirty one). Europe has no significant resources and the ones we have are extremely dirty. In this carbon and fuel constrained world, Europe has a considerable competitive disadvantage when it comes to conventional energy resources.
In the energy models, imports are the solution to Europe's problem. The EU's is already importing 54% of its energy and that proportion is rising fast as our indigenous resources deplete. A stable flow of energy imports requires a good relationship with the exporters. When it comes to energy, this means Russia and the Middle East. In January, Russia flexed its muscles and cut off its natural gas exports to Ukraine, Romania, Bulgaria, Greece, FYROM, Serbia and Croatia following a bitter row between Moscow and Kiev over pricing. A lot of time and energy has gone into discussing whether to blame Russia or Ukraine. From a European security of supply perspective, it really does not matter. Both countries - individually of each other - have the power to leave Europe in the dark. Our gas imports are dependent on two independent monopolies: one in supply and one in transmission.
So, here we are, stuck with a European supply structure exposed to all kinds of risk that our energy models still deny the existence of.
But a surprising thing happened in December 2008. The European Commission, the European parliament and 27 heads of state decided to ignore their own models and take a look at the real world. Even more surprising, they decided to act on what they saw. They unanimously passed a Climate and Energy Package. The legislation commits each of the 27 EU member states to binding CO2 reductions while establishing mandatory targets for the share of renewable energy in all countries by 2020.
To reach the overall goal of 20% renewable energy by 2020, the European Commission estimates that the share of renewables electricity needs to increase from 16% today, including about 10% large hydro which cannot be expanded much further, to 34% in 2020. The Commission also believes that wind energy will meet 12% of the EU's electricity demand by 2020, up from 4% today. Meeting the 12% electricity target for wind energy will require the EU countries increase wind energy capacity by some 9.5 GW a year over the next 12 years. In 2008, wind energy increased by 8.5 GW, so that is certainly an achievable task for the sector. As the most affordable of the renewable energy technologies, wind energy's share is likely to be significantly higher in 2020.
In 2008, more wind power capacity was installed than any other electricity producing technology, including coal, gas and nuclear. According to statistics from the European Wind Energy Association (EWEA) and Platts Powervision, 43% of all new generating capacity installed in the EU was wind energy (35% was gas, 13% was oil, 4% coal and 0% nuclear). Wind energy is already in the lead when it comes to new capacity, investments and job creation in the EU power sector and this has been achieved by only a handful of first-mover countries. The significance of the new EU directive on renewables is that it provides wind energy (and other renewables) with stable frameworks in all 27 member states.
Meanwhile, Europe's existing power plants are ageing and 50% of all the power generating capacity operating in the EU today needs to be replaced over the coming 15 years. The time is ripe for a complete overhaul of our electricity supply structure. Europe imported 54% of its energy in 2006 and in 2006 energy prices these imports represent an estimated EUR350 billion, or around EUR700 for every EU citizen. We need to end this significant transfer of wealth and start putting a larger part of our citizens' money to work in the European economies by nurturing the energy technologies where Europe has a real competitive advantage.
In 2008, oil reached dollars 150 and our economies tumbled. It is not clear how much high fuel prices contributed to the economic crisis. But what is clear is that the same economic laws apply to both the financial crisis and the energy crisis: we invested too heavily in cheap, risky assets with unpredictable returns and values and European citizens are forced to pick up the bill. With the new EU directive on renewables, EU policy makers seek to reduce the risk and cost of our energy supply and turn an inherent competitive disadvantage in conventional energy into a competitive advantage in a carbon and fuel constrained world.
By invitation, Christian Kjaer, Chief Executive Officer, European Wind Energy Association.