European Council set to wipe out energy efficiency progress, leading to a decade of higher energy costs

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Saving energy saves money, improves security, lowers emissions, and makes it easier to meet renewable energy and climate goals. That’s why energy efficiency is the sensible foundation for the Energy Union and the 2030 Clean Energy Package now under review: deeper savings make the rest of the goals so much easier to achieve. They will also generate considerable additional social, economic and health benefits. It is shocking, then, to learn that amendments now being considered in the European Council could weaken that foundation to the point of collapse.

In November last year, the European Commission’s Clean Energy Package proposed a 30 percent energy efficiency target for 2030. Given that the EU is on track to achieve 24 percent savings by 2030, and that deeper savings are both widely available and cost-effective, experts noted that saving just 6 percent more is a very modest goal. This is why the European Parliament called for a 40 percent target in June last year. There was an expectation that the compromise reached might end up somewhere between 30 percent and 40 percent.

Going backwards on energy efficiency

This was, as it turns out, wishful thinking, at least in this Council. Several Member States are pushing for even weaker targets. A vote on this is expected for next Monday. In particular, proposals are being prepared to water down the provisions in Article 7 of the Energy Efficiency Directive (EED), which delivers about half of the entire savings of the Directive and is a key driver for energy efficiency in Europe.

Current proposals circulated in the European Council introduce a range of new loopholes:

  • Double counting all energy savings from new buildings standards/codes even though those are covered by the Energy Performance in Buildings Directive already;
  • Double counting savings towards the period 2021-2030 from energy efficiency measures installed before 2021 with lifetimes longer than 23 years as if they were new savings;
  • Allowing 15 percent of on-site renewable energy generation to be treated as energy savings; and
  • Allowing excess savings from the current Article 7 period 2014-2020 to lower the minimum savings 2021-2030.

As is often the case with legislative loopholes, their impacts are not immediately obvious, but an informed review reveals that they will greatly weaken key features of the EED.

If accepted, those proposals will reduce the current ambition levels by more than 80 percent and perhaps as much as 100 percent depending on the amount of excess savings and how Member States apply these proposed terms. The figure below summarises the impact of introducing the proposed new loopholes.

Proposals reduce ambition levels by 80 to 100 percent

Proposed Loopholes Wipeout Efficiency Ambition

Source: RAP analysis based on EC (2016a), EC (2016b), Ricardo et al. (2016), and data from Buildings Observatory. Mtoe = million tons of oil equivalent

As this simple review reveals, the amendments being considered in the Council (excluding excess savings) will reduce the actual energy savings mandate in the EED from an effective level of 443 Mtoe per year to just 52 Mtoe—a reduction of almost 90 percent. Depending on the amount of excess savings reported by Member States in 2014 and 2015 the total savings target is currently on track to be less than 0 Mtoe.

Even a very optimistic estimate suggests a reduction of the current ambition level by around 80 percent to 92 Mtoe. This assumes very little excess savings, only a small amount of renewable energy being counted, and more efficient new buildings in the absence of building codes than assumed.

This flies in the face of the impact assessment by the European Commission which shows that more ambitious efficiency targets deliver greater benefits for consumers and the economy. Such diluted energy efficiency targets will raise energy bills, raise energy imports, and raise the cost of meeting the commitments that Europe has made to the world in Paris.

Long-term ambitious targets needed to provide investor confidence

Ambitious and firm targets are important for investors. More than 400 individuals attended the Energy Efficiency Finance Market Place conference that took place in Brussels in January, including major banks, pension funds and insurance companies. There was unanimous agreement that lack of capital is no barrier to more energy efficiency. To the contrary, speakers agreed that there are substantial amounts of capital well-suited for investment in energy efficiency. The most important point from the perspective of financiers was a long-term stable policy framework for energy efficiency. This includes an ambitious energy efficiency target and a continuation of Article 7 at least at 1.5 percent.

Consumers reap the benefits from strong energy efficiency policies

Consumers benefit directly from effective energy efficiency policies. This is because the cost of saving energy is far below the cost of consuming it. The most comprehensive data on the investment requirements of measures promoted by Article 7 of the Energy Efficiency Directive can be found for energy efficiency obligations (EEOs), the instruments that provide the largest share of the savings. A review of all EEOs in Europe where data exists demonstrates high cost-effectiveness.

In the case of all five EEOs analysed, the data clearly show that the cost of negawatt-hours is much lower than that of megawatt-hours. Even if the contributions from those who benefit from the programme to the investment cost of efficiency measures are added (which is typically about one to two times as much as the programme cost), the cost per kWh even in the most “expensive” programme is just below 3 eurocents/kWh. This compares to an average cost of supplied energy of 10 eurocents/kWh.

Energy Efficiency Costs Less Than Supplied Energy

Energy Efficiency Costs Less Than Supplied Energy

Source: Rosenow and Bayer (2017)

Data for alternative measures such as loans, tax rebates, and grants shows that the programme costs of those measures are of a similar scale, although somewhat higher. On average, saving 1 kWh through those measures has a public cost of 1.4 eurocents/kWh.

Can we be confident that this data is reliable? We can: It is in line with the most recent data from the De-Risking Energy Efficiency Platform (DEEP) database, which contains close to 6,000 individual energy efficiency projects across the Member States of the EU. Overall, the costs per kWh saved in buildings are 2.5 eurocents and in the industry sector 1.2 eurocents.

Power system savings benefit all customers

Lowering demand at the customer end of the power system lowers costs at every link in the power system. These benefits, often overlooked in Europe, include avoided transmission and distribution costs, avoided line losses, and minimisation of reserve requirements. In competitive power markets, lower demand also means lower clearing prices for power, which reduces per-kwh charges for all customers. A recent study exploring the scale of system benefits in Europe affirms what international experience has demonstrated for a long time—comprehensive, long-term, and aggressive investment in end-use energy efficiency will yield substantial energy system cost savings. The value of electricity savings in Germany to the power system alone is in the range of 0.11–0.15 eurocents per kilowatt-hour saved.

End use efficiency also has the benefit of being available exactly when it is needed. Unlike power generation, which must be managed to line up with energy demand, efficiency is automatically “on” whenever the lights are on, or the motors are turning—provided of course, that we have bothered to ensure that the equipment was efficient in the first place.

Efficiency delivers multiple, wide-ranging benefits

In addition to bill savings and system cost savings (the most obvious benefits of energy efficiency improvements), energy efficiency delivers a wide range of so-called “non-energy” benefits to consumers and society. Amongst those are improvements in health, comfort, air quality, public housing and welfare costs, job creation, and economic growth. Energy efficiency (and the resulting demand reduction) also delivers substantial environmental benefits in terms of CO2 mitigation.

Efficiency provides the foundation for the Clean Energy package

Decades of experience across more than 50 nations, states, and provinces reveals that disciplined energy efficiency programs like those created under the EED are the lowest-cost, most widely-available, and most reliable way to reduce CO2 emissions while we build the new energy systems needed in a low-carbon economy. But energy companies don’t naturally invest in efficiency, and efficiency programs do not spring into being on their own—governmental support is required. That is why the EED is so important.  Europe’s entire Clean Energy package will be less expensive, more reliable, and easier to achieve if it begins with a strong foundation of energy savings. Undermining that foundation with weak savings targets in the EED is a major backwards step for the European Union.

A version of this blog was originally published by Energy Post

Efficiency First: Unlocking the Promise of the Energy Union

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As the Energy Union concept begins taking form, it is essential to consider how to effectively meet the goals of an integrated, secure, competitive, and sustainable energy market. A new policy brief by the Regulatory Assistance Project (RAP) suggests that success of the Energy Union rests on an organizing principle called “Efficiency First”.

The key to this concept, and to a sound Energy Union, is establishing a high-level commitment to systematically identify the multiple decision points where efficiency – including energy efficiency and demand response – is overlooked or undervalued. It further requires establishing concrete policies and measures to ensure that investments happen wherever efficiency is more cost-effective or valuable than equivalent supply-side resources.

Efficiency First: Key points for the Energy Union Communication, sets forth the arguments for an Efficiency First approach and illustrates how this approach fits into the European legislative and regulatory framework. It highlights four areas where applying Efficiency First principles can result in more cost-effective, competitive choices for Europe:

  1. Enable energy efficiency and demand response to participate on a level playing field with supply in both national energy markets and cross-border and regional market interactions through improved monitoring and enforcement of existing provisions of the Internal Energy Market, updated rules on capacity markets, and a stronger governance framework.
  2. Remove all restrictions and incentives that block investment in efficiency by regulated energy companies, and introduce a least-cost investment standard that requires consideration of Efficiency First, before identifying investment needs in supply-side resources on the national, regional, and EU levels.
  3. Closely monitor progress on the EU’s targeted efficiency policies, including the Energy Performance of Buildings Directive, Energy Efficiency Directive (EED), and Ecodesign Directives and, where necessary, launch enforcement actions. Improve guidance on Article 7 of the EED, and extend and strengthen energy efficiency obligations.
  4. Fully account for efficiency in energy resource policy development and planning by revisiting discount rates, aligning demand projections across the EU energy landscape to avoid unnecessary investments in fossil fuel infrastructure and bills, and accounting for the multiple benefits of efficiency.

The policy brief elaborates on a December 2014 RAP policy brief – Unlocking the Promise of the Energy Union: “Efficiency First” is Key – which highlights successful Efficiency First policies in power markets in the United States and suggests opportunities to adapt those policies for European markets.

Energy Efficiency and the Energiewende

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Although Energiewende policies focus primarily on the nuclear phase-out, ramping up the share of renewables in the power mix, and corresponding grid infrastructure needs, many people are looking for solutions to the “affordability” challenges of the Energiewende due to rising concerns over transition costs. Removing market barriers to energy efficiency and establishing foundational policies to capture efficiency resources will help to achieve the Energiewende at least-cost, and decouple economic growth from energy consumption.

By coining the phrase “Wirtschaftseffizienzwunder” or “economic efficiency miracle” in a Deutschland Financial Times editorial in early 2012, RAP helped establish a new narrative for energy efficiency in Germany–namely as the engine for Energiewende economic growth along the lines of the “economic miracle” policies put in place by Ludwig Erhard to increase labor productivity following World War II. What Would Ludwig Erhard Say? was highlighted by European parliamentarian Claude Turmes at a conference on the imperative of increasing energy efficiency investments during Germany’s transition to a low-carbon economy.

RAP co-authored and presented The Positive Effects of Energy Efficiency on the German Electricity Sector at the 2014 International Energy Policy and Programme Evaluation Conference in Berlin. It summarizes the results from five different scenarios with a range of power consumption trends, which determine that a significant reduction in electricity consumption can reduce the mid- to long-term costs of the power system—even with much greater use of renewable energy. This paper draws from Positive Effekte von Energieeffizienz auf den deutschen Stromsektor (Positive Effects of Energy Efficiency on the German Electricity Sector), a study commissioned by RAP, in partnership with the European Climate Foundation and Agora Energiewende, to quantify the system benefits to Germany of achieving ambitious efficiency targets. Prognos AG and IAEW Aachen conducted the study, with RAP technical advisors involved throughout the scoping and project development process.

A large portion of the efficiency reduction potential in Germany is associated with retrofit improvements to existing residential buildings. RAP’s Residential Efficiency Retrofits: A Roadmap for the Future  (Zusammenfassung Energetische Sanierung von Wohngebäuden: Ein Fahrplan für die Zukunft), presents eight principles to increase the effectiveness of current retrofit programs in Germany. The principles are premised on the lessons learned from more than two decades of international experience and on the imperative to achieve much deeper levels of savings per building, and reach a much broader swath of the market than any region, nation, or state has achieved to date.

As Germany grapples with how to meet its Energiewende targets for end-use efficiency, and debates a number of proposals for energy savings obligations, including implementation of the recent European Energy Efficiency Directive, RAP has also shared global experience with energy savings obligations. RAP summarized these recommendations in Rethinking and Reframing Energy Savings Obligations  (Energieeinsparverpflichtungen neu denken, neu gestalten). One of the most successful approaches to achieving large-scale energy efficiency goals is the “Efficiency Utility” model, which includes a clear obligation, a capable and motivated efficiency entity, stable funding, and quality control. Germany’s influential energy efficiency industry association, Deutsche Unternehmensinitiative Energieeffizienz (DENEFF), draws on RAP’s examples and global best practices in its Proposed Solution for Implementation of a Market-Based Energy Efficiency Incentive Scheme for Germany (Lösungsvorschlag zur Umsetzung eines marktorientierten Energieeffizienz-Anreizsystems in Deutschland).

RAP identified the efficiency disincentives embedded in Germany’s existing “Concession fee” regulations, and is working with these partners and other German stakeholders to neutralize these disincentives, by decoupling municipal franchise revenues from increased electricity sales. Reform des Konzessionsabgabenrechts describes the nature of these disincentives, the legal basis for changing the Concession law, and language changes enabling a decoupling approach to be implemented under the law is now available in German. An English abstract is provided in Section D of the report.

Visit our Making Germany’s “Energiewende” (Energy Transition) a Reality page to learn more about our work in support of the Energiewende. Other Energiewende topics of interest include:

The Challenge to Meet EU’s 2020 Efficiency Goals

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The European Union set a target of achieving 20 percent energy savings by 2020, thereby saving consumers money, increasing the security of supply, reducing emissions, and creating jobs. The EU faces several challenges with this goal and is taking steps to meet it, including revising the 2006 Energy Services Directive. In this context, RAP is helping policymakers and stakeholders identify the mechanisms, programmes, and sources of funding needed to realize deep, cost-effective energy savings.

RAP made significant contributions through the Energy Savings 2020 study, which found that the EU will need to triple its efforts to meet the 2020 goal. This is achievable and would save EU’s energy consumers up to €78 billion ($100 billion) annually. RAP also demonstrated that energy efficiency policies can help meet carbon reduction goals at lower cost, creating space to tighten carbon caps and reduce the cost of protecting high-emitting industries and new Member States. In Prices and Policies: Carbon Caps and Efficiency Programmes for Europe’s Low-Carbon FutureRAP argues for energy efficiency as an essential component of a combined strategy to reduce greenhouse gas emissions at the lowest social cost.

A crucial element in tapping Europe’s efficiency potential lies in ensuring that deep and broad efficiency savings are tapped from the existing building stock, which currently account for 40 percent of the EU’s greenhouse gas emissions. RAP’s Residential Efficiency Retrofits: A Roadmap for the Future outlines a series of strategies designed to maximize savings efficiencies from home retrofits.

Importantly, RAP helps policymakers tap the full potential of energy savings obligations to fill the critical efficiency “policy gap” in Europe. Rethinking and Reframing Energy Savings Obligations outlines the policy context, the myths and facts about energy savings obligations, and the lessons learned from international experience in designing them.

RAP also assists Member States and the European Commission in addressing the key questions they face as they apply the Energy Efficiency Obligation provisions of the 2012 Energy Efficiency Directive (EED) and take other steps to scale up energy efficiency. Examples include: