Europe's new push for energy efficiency: too little, too late, too complex?

The European Commission’s first-ever Energy Efficiency Directive, which was unveiled last month, has the traces of fierce disagreements and lobbying efforts written all over it. It fails to propose binding targets for energy efficiency, but does require member states to realise minimum energy savings. Then again, it does not say how these savings should be realised, leaving room for plenty of ambiguity. The draft Directive also includes obligations on the public sector to realise a minimum amount of renovations and contains a strong regulatory push for combined heat and power (CHP). Reactions have predictably been mixed – if only because the proposal is so complicated that stakeholders are still struggling to grasp all its ramifications. Sonja van Renssen reports from Brussels.

One would think that energy efficiency is the least controversial way of meeting any kind of climate targets. It seems the ultimate win-win solution, leading to both lower carbon emissions and (ultimately) lower costs. Yet, ironically, of the various climate and energy targets the EU has set itself, the one that it is not on track to meet is its 20% energy efficiency target for 2020. If no additional measures are taken, the EU will realise only 9% energy savings in 2020 compared to 2005 – less than half of the adopted target.

Why the shortfall? Fact is that the EU has struggled to build a policy framework that creates real demand for energy savings and therefore a market for the technologies and services that deliver them. Campaigners have argued that making the 20% efficiency target legally binding would provide investors with the long-term demand certainty to create a market for energy savings. But EU member states have consistently resisted binding targets. Especially today with public budgets under heavy pressure, they are worried about the upfront investments energy efficiency improvements require. They are also afraid of bureaucratic burdens; they point to the difficulty of centrally tracking energy efficiency improvements. There is no generally accepted standard in Europe today.

Most efficient products

In the face of such strong member state resistance, yet knowing that reaching the energy efficiency target requires strong new impulses, the European Commission has come out with a proposal for an Energy Efficiency Directive. It is the first time the Commission has dedicated a Directive fully to energy efficiency. The new Directive is intended to replace two existing EU Directives: one to promote cogeneration, one to promote “energy services” (energy efficiency improvements for end-users). Many of the proposals in the new Directive are based directly on ideas first put forward in a policy paper in March called the EU Energy Efficiency Plan 2011. The proposed new Directive must be approved by member states and the European Parliament before it becomes law.

The draft Directive seeks to create demand for energy savings in two main ways. One, by requiring member states to realise 1.5% of energy savings among end-users every year. Two, by obligating public authorities to renovate 3% of the floor space they own each year and buy the most efficient products and services available.

In addition to these two main initiatives, the draft Directive proposes other measures to boost energy savings, both on the demand and on the supply side. These include mandatory energy audits for large companies and a requirement for energy companies to provide easy and free-of-charge access to data on energy use to consumers through more accurate individual metering.

The Directive further proposes that Member States monitor the efficiency of thermal power plants and oil and gas refineries and possibly make permits dependent on the application of Best Available Technologies. It also suggests that national energy regulators take energy efficient criteria into account when approving network tariffs.

An important element in the Directive is a strong legislative push for cogeneration, or combined heat and power (CHP). Under the proposal, all new power plants with a thermal input of over 20MW would

'There are proven models of implementation. But they shouldn't be compulsory. We want to have a competition of ideas as well'
have to be equipped with the ability to recover waste heat and be situated near “heat demand points” where that heat can be used. The same would go for industrial installations of that size. Certain exemptions are possible, for example when lifecycle cost-benefit analysis suggests it doesn’t make sense, but the default would be CHP. Member states would also have to ensure that high-efficiency cogeneration gets priority access to the grid – like renewables.

Bureaucratic and confusing

The new Directive got mixed reactions from stakeholders, ranging from industry association Eurelectric to environmental NGO Friends of the Earth. Many say it is bureaucratic and confusing and that they would have to spend time trying to understand it before they could comment on its implications.

The measure that seems to be causing the most confusion is the one that is expected to deliver the greatest energy savings: the requirement for member states to realise 1.5% savings among end-users each year, based on energy sales by energy retailers or distributors. The Commission estimates this can deliver 108-118 mtoe (million tonnes of oil equivalent) of energy savings. This equates to over half of what Europe still needs to do to meet its 20% energy efficiency target in 2020. The 20% target is calculated as a 368 mtoe saving below business-as-usual, which is in turn based on a forward projection using energy consumption data from 2005 and the PRIMES energy model.

The Commission proposes that member states request all energy retailers or distributors to deliver annual energy savings equal to 1.5% of their energy sales, by volume, in the previous year. Savings are to be delivered among final customers, either a company’s own or those of another.

The kinds of measures companies can undertake to deliver the required savings include improving the efficiency of customers’ heating systems, installing doubled glazed windows and insulating roofs. In practice, they may subcontract this work to specialist firms. Governments can make savings tradable between their retailers or distributors, by issuing so-called white certificates for units of energy saved.

This proposal emulates mandatory energy saving schemes that already exist in some European countries, notably Denmark, France, the UK, Italy and Flanders. The most ambitious among them target 1.5% energy savings a year, the Commission notes. On average however, they aim for just – 0.8% of annual savings. In some countries, such as the UK and France, the obligation rests with retailers, while in others, such as Italy, with distributors (grid companies).

The measure would not amount to a cap on energy sales, the Commission stresses, because if sales are greater one year than the year before, a company would simply be required to save 1.5% of a larger number. For example, if sales in year zero are 100, the company would have to demonstrate savings of 1.5 in year one. If there was 10% economic growth in year one, and sales grew to 110 in line with this, the company would have to realise savings equal to 1.5% of 110 or 1.65 in year two. Its total sales would still have grown.

The difficulty is how to measure the savings. In countries such as France where this kind of saving scheme already exists there is an official catalogue of 170 typical savings measures, from installing a low-energy light bulb to loft insulation, that assigns a default saving to each. At the end of the year, the energy retailer tallies up its actions and their respective savings values to reach a total, which in the European proposal should amount to 1.5% of the previous year’s sales. But there is no pan-European list of potential actions and savings values so far and the draft Directive does not propose creating one.

The Commission specifies only that no more than a tenth of the 1.5% savings may be “short-term”, which it defines as four actions: selling efficient light bulbs and shower heads, and carrying out “energy audits” and “information campaigns”. For the rest, it provides default saving values for a few products – fridges and freezers, washing machines and dishwashers, and lighting – but there is no guidance on for example building renovation work, such as installing insulation, which is where most of the savings are expected to take place. Earlier versions of the draft directive did contain more detailed guidance, campaigners say, but member states pushed for maximum flexibility to meet the saving obligation.

Soft wording

As the draft directive stands, member states are required to deliver the 1.5% saving, but they are not required to deliver it through their energy retailers or distributors, as had been the plan originally. They can also implement “funding programmes” or “voluntary agreements”, as long as they deliver the same saving.

The decision to leave the method of saving open was made at the very last minute by commissioner Günther Oettinger, reportedly under pressure above all from Germany. Germany runs a very successful

Barriers to selling energy services remain and 'this directive does not really address them'
€1.5bn funding programme to renovate buildings through its KfW bank, explains Matthieu Ballu from Stefan Scheuer Consulting, an energy and environment consultancy based in Brussels. Ballu speculates that Germany wants to have the choice of using this programme to deliver the 1.5% saving. The problem, as he sees it, is that the policy tool of imposing energy saving obligations on energy retailers or distributors, has a proven track record. Other methods may not be as effective.

‘There are proven models of implementation’, Oettinger explained at the press conference where he launched the Energy Efficiency Directive. ‘But they shouldn’t be compulsory. We want to have a competition of ideas as well.’

But many observers fear that the chances of member states meeting the saving obligation if they don’t pass it on to their energy companies are slim. Green campaigners such as Brook Riley from Friends of the Earth worry that “funding programmes” and “voluntary agreements” are a return to the vague wording of earlier laws, which failed to deliver. The Commission itself concedes that the existing Directives on cogeneration and energy services, which the Energy Efficiency Directive will replace, have not worked because of ‘their frequently “soft” and open wording’ and their ‘lack of concrete obligations’.

Ballu’s main concern is that if member states decide to opt for funding programmes or voluntary agreements instead of imposing a saving obligation on energy companies, ‘the text is not clear whether the alternative has to be additional to what member states are currently doing’. In other words, while a saving obligation for companies would definitely be new for most countries, it is much less clear that a funding programme or voluntary agreement would be. To what extent the results of the existing saving obligations would count towards the 1.5% is also unclear, Ballu says.

Very big interest

Certainly many energy companies seem to be interested in selling energy savings. Nicola Rega of industry association Eurelectric says a survey of 170 energy companies earlier this year showed ´very big´ interest in promoting ´energy services´ to create loyalty. But, he notes, promoting energy services should be viewed as a complement, not an alternative, to selling energy. As consumers replace fossil fuelled-appliances with electricity-fuelled appliances – think of electric cars for example – they will be more efficient yet consume more electricity in total, he says. Rega is still concerned that the mandatory 1.5% saving could end up amounting to a cap on energy companies’ sales, despite the Commission’s insistence this is not the case.

In any case, Rega says, barriers to selling energy services remain and ‘this directive does not really address them’. He cites access to funds to invest in energy efficiency improvements, distrust among consumers that their energy seller is really out to help them, and the problem of placing incentives with those who really make the decisions. The new Directive asks member states to address the familiar problem of split incentives between building owners and tenants but does recommend how to do this.

‘The problem with the energy services market is not so much the lack of supply, but rather the lack of demand,’ Rega notes. Eurelectric favours the flexibility left to member states to decide whether energy retailers or distributors should deliver savings or not. Others argue that this introduces exactly the kind of uncertainty that undermines demand.

In the US, energy services have taken off precisely because of clear energy efficiency obligations, says Stephen Benians from the Brussels branch of the Regulatory Assistance Project, a global non-profit team of experts which investigates best practices for the energy sector. Different States have different

'The problem with the energy services market is not so much the lack of supply, but rather the lack of demand'
models, but they are all underpinned by legal obligations. Examples range from straightforward saving obligations on distribution utilities (e.g. in California) or state agencies (e.g. in New York) to utilities selling “negawatts” – energy savings – and demand side bidding into regional capacity markets (e.g. the New England ISO Forward Capacity Market). When New York’s electricity provider, the regulated utility Con Edison, puts out a tender for new distribution infrastructure, the winners are often energy services firms that propose to deliver a reduction of demand rather than new capacity. In Europe, the UK is currently looking into demand side bidding as part of its electricity market reform, Benians adds.

Near-zero

The second main way in which the Commission wants to realize energy savings is through obligations on the public sector. The draft directive requires public authorities to renovate 3% of floor space annually in public buildings larger than 250 m2. The renovations should bring these buildings in line with minimum energy efficiency requirements under the EU’s energy performance of buildings directive. The Commission also wants to “green” public procurement, and proposes that public authorities be obliged to buy products “belonging to the highest energy efficiency class”. But it has added the following last-minute caveat: ‘...while taking into account cost-effectiveness, economical feasibility and technical suitability, as well as sufficient competition’.

EuroAce, the European Alliance of Companies for Energy Efficiency in Buildings is not impressed by the proposals. ‘It’s weaker than we had hoped for,’ says a spokesperson. ‘It’s not strong enough when it comes to renovating existing buildings, which is what is really needed.’ EuroAce points out that the renovation requirements apply only to public buildings, which make up just 8-12% of the European building stock, and that the 250 m2 threshold means that smaller buildings (for example, many post offices) will be excluded.

EuroAce suspects that member states are concerned about the cost of renovations and the administrative burden of tracking efficiency improvements in smaller buildings. The association is also disappointed that the draft directive seeks to renovate buildings according to minimum requirements rather than requiring them to be “near-zero energy users” for example. Since buildings are only renovated every 30-40 years, there is a risk that the investments made today will not be enough to meet the requirements of the 2050 decarbonisation roadmap, says EuroAce.

Overly complicated

Eurelectric’s main problem with the draft directive is not the potential energy saving obligation its members could face but rather the Commission’s push for CHP. The industry association fears extra regulation, especially when it appears to come with complicated demands, such as requiring an energy company to survey all the municipalities within 100km of a power plant to work out total heat demand and where it would be best to build pipelines to meet this. This is what would be required in the heat-led energy generation landscape envisaged by the Commission.

Rega is not alone in calling this part of the Commission’s proposal overly complicated. Sabine Froning, head of Euroheat & Power, which represents the district heating and cooling sector, welcomes the

'We've got two policy approaches knocking up against one another and unless we do it in the right way, it's not going to be very helpful'
Commission’s plans but also finds them unnecessarily complicated in places. She suggests for example that instead of specifying exactly where CHP must be located in future, it would be easier to require an increase of 1% per year in the average overall efficiency of thermal power production facilities. The Commission could add they must reach at least 60% average efficiency by 2020, up from around 40% today, she says.

For Rega, apart from the administrative challenges, there are other problems. What happens when buildings are renovated to reduce heat demand? An energy company would have to be 100% sure a municipality was committed to using the heat from a CHP plant and that this demand was not about to fall away, ‘so we can recover our costs’, he says. Froning argues that promoting CHP and efficiency in buildings at the same time is not contradictory: in Denmark almost all power is in the form of CHP and they already have relatively efficient buildings, yet policymakers think there is scope to do more with both, she says.

Rega also wonders how the push for CHP can be reconciled with renewables promotion. If new capacity is heat-led, it may not be located in those areas where thermal generation is most needed to balance the grid. More fundamentally, the draft directive does not address the relative priority of CHP over renewables, says Rega: ‘Would high-efficiency CHP burning coal have priority over wind?’ He adds: ‘In theory, as CHP follows heat demand you cannot shut it down so you probably have to give it priority.’

Eurelectric would prefer to stick to the EU’s carbon market – the Emisson Trading Scheme (ETS) – as the main driver of efficiency, renewables and decarbonisation. As it is, many fear the new efficiency directive will end up sucking the life out of what has to date been the EU’s flagship climate policy instrument. There is a worry that a strong increase in efficiency will bring down emissions and with it the carbon price. ‘We’ve got two policy approaches knocking up against one another and unless we do it in the right way, it’s not going to be very helpful’, warned Peter Vis, head of EU climate commissioner Connie Hedegaard’s cabinet.

The Commission’s impact assessment on this is, in the end, inconclusive, but it proposes to “monitor” the impact of the Directive in future. Commissioner Oettinger said he does not expect a “decisive” impact on the carbon price. Scheuer Consulting calculates that no more than a fifth of the savings triggered by the new efficiency directive would come from ETS-covered installations. The potential effect of reduced energy use by non-ETS sectors on the carbon price remains unclear.

Multiple loopholes

Plenty of new initiatives, but what if they don’t deliver? Oettinger has pledged to propose binding national energy efficiency targets if a review of the new Energy Efficiency Directive in June 2014 indicates the EU is still not on track to deliver its 20% efficiency target for 2020. The efficiency target is the only European climate and energy target that has always been and remains non-binding.

Under the new draft directive, member states have to draw up “indicative” efficiency targets, expressed as an absolute level of primary energy consumption in 2020. The thinking behind getting them to express targets in this manner, rather than committing to deliver a proportion of the required 368 mtoe saving, is to leave member states the room to use their own energy projections to 2020. But this will not make it easy to compare different member state targets or to assess whether they add up to Europe’s overall 20% target.

As it is, member states have started including energy efficiency targets in their National Reform Programmes (NRPs), broad political programmes, updates of which are submitted to the Commission every spring in the context of the Lisbon strategy and more recently Europe’s 2020 strategy for growth and jobs.

However, indications so far are that the indicative targets in the NRPs are not comparable and ‘far below’ what is needed to meet the 20% objective, says Ballu from Scheuer Consulting. For example, the UK, the Netherlands and Slovenia do not indicate a target at all and Lithuania and Slovakia indicate only relative targets. Out of 14 countries whose targets had been calculated in such a way that they could be compared with the EU’s 20% goal, only five declared a level of ambition close to or above it.

At their biannual summit in Brussels at the end of June, European heads of state and government adopted country-specific recommendations based on the NRPs. But these recommendations do not

'If the Commission does not even respond to inappropriate and insufficient voluntary target setting, how can we trust it will act later on?'
address the efficiency targets at all, says Ballu. Only six even mention energy efficiency. ‘It confirms our findings on the absence, lack of comparability and weak ambition of voluntary national target setting,’ he notes. ‘If the Commission does not even respond to inappropriate and insufficient voluntary target setting, how can we trust it will act later on?’

In the summer of 2014, the Commission will assess whether member states are aiming for a 20% energy efficiency improvement for 2020 and whether their plans are sufficient to get them there. It will also assess the latest macroeconomic and policy conditions and decide whether the energy efficiency directive is getting the EU to where it wants to be. Some suspect the review will not finish in time for the outgoing Commission to follow it up with legislative proposals, leaving these to the next Commission to follow up in 2015. In that case it could be 2016 before binding national efficiency targets are in place, if they are needed.

The new energy efficiency directive was eagerly awaited, but in its current complicated form, with multiple loopholes and lack of detailed guidance, it remains to be seen whether it can get the EU on track to its 20% energy efficiency target. If it fails, binding targets may yet be adopted, but they may be too late to make a real difference before 2020.