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How the European Union incentivises inefficient renewable heating

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The EU’s renewables directives count what fuel is burned for heating, as opposed to the amount of heat produced.

Never has the spotlight shone so brightly on Europe’s heating and cooling sector. And for a good reason. Fossil gas makes up around 39% of the energy used to heat buildings and much of Europe wants to rapidly phase it out.

To help do so, the European Parliament recently voted in favour of a key amendment to the Renewable Energy Directive (RED): raising the annual target for the share of renewable energy in heating and cooling.

The new goal—a 2.3 percentage-point increase each year until 2030—is roughly double the one proposed in the Fit-for-55 package unveiled in 2021.

The clear signal has been set, yet there is something off with the way the metric is measured. By counting fuel burned instead of heat produced and not including electricity used for heating or cooling, the RED favours inefficient technologies.

Ignoring the mushy peas on the floor

Imagine a toddler having lunch. Her father has prepared a bowl of 300 grams of mushy peas and figures that this meal should meet half of the two-year-old’s nutrient needs for the day. She is a messy eater though and jettisons around half of her food on the ground. Once her dad sees the empty plate, he pats himself on the back, thinking that he filled her belly. He should look at the floor.

Measuring the renewable share of heating and cooling in the RED is simple. It tallies all the energy used to heat and cool from renewable sources, then divides it by the total. The key question is: which energy counts as renewable?

Unfortunately, the RED’s answer to this is flawed. It only counts final energy use or, in other words, the fuel that is delivered to the customer to use in their heating appliance. That means if someone burns a log in a fireplace at 50% efficiency and it produces 100 kilowatt-hours (kWh) of heat, how much “renewable heat” does that account for?

If you were thinking “100 kWh” you would be wrong. The RED counts that as 200 kWh, since that is the energy content of the biomass that was combusted at 50% efficiency.

That is a big problem because heating systems have different efficiencies. An electric heat pump typically produces 100 kWh of heat with 33 kWh of input electricity. The remaining 67 kWh is drawn from the ambient air for free. An 85% efficient pellet boiler needs 117 kWh.

The point: Less efficient technologies need more input energy for the same useful heat outcome. The RED discourages switching to more efficient heating appliances and electrification. It counts the full weight of the mushy peas, not just those that were eaten.

Anti-electrification policy

The other problem with the RED methodology is its scope. It does not consider the renewable electricity used for heating and cooling at all. Whether it is used to drive a heat pump or just an electrical resistance heater, it does not count toward the renewable heating and cooling target. Even for cooling, which is virtually only based on electricity.

This is an effort to avoid double-counting. The data wranglers do not want to count renewable electricity in both the power sector and the heating and cooling sector. As a data wrangler myself, I appreciate their commitment to neat allocation. But in this case, neatness has its downside.

Electricity providing a heating or cooling service should be considered towards the renewable heating and cooling target. Otherwise, heat pumps could be undervalued in terms of their contributions. If the methodology does not even consider where the electricity comes from, the heat output of the heat pump can never be fully renewable.

If the renewable share of electricity would be considered in the RED’s methodology as a heating and cooling service, the incentive to promote heat pumps would even be stronger. Member States will thus be encouraged to implement policies that aim to achieve the heating and cooling target, with the ancillary benefit of growing the deployment of efficient heat pumps to do so.

As it stands, the least efficient and least electric technologies are those that have the most potential to meet the goals under the RED. More efficient and electricity-based heating appliances risk falling behind.

The way forward

Getting metrics right is crucial to ensuring a rapid and balanced transition to clean heating and cooling. The Renewable Energy Directive’s goal should be to promote efficient heating and cooling technologies that maximise useful energy while minimising input energy.

This means counting the useful heat that is produced by a heating system, not the input energy needed. It also means including the electricity used for renewable heating and cooling.

Since electricity realistically contributes to both the headline renewable energy target (32% in the RED II and voted to increase to 45% by the European Parliament), as well as the renewable heating and cooling target. Both calculations should factor it in so that the statistics are accurate.

Double-counting can be avoided by ignoring the electricity used in the heating and cooling sector when calculating the headline target.

Metrics matter. Only by counting the useful heat produced can the Renewable Energy Directive provide the right incentives for phasing out fossil gas and spurring the clean electrification of heat.

 

A version of this article originally appeared on Foresight Climate & Energy.

Photo: Holger Schué from Pexels.

Levelling the playing field: Aligning heating energy taxes and levies in Europe with climate goals

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Taxing energy in line with its environmental harm aligns the prices facing consumers with policy objectives. Energy taxes and levies encourage energy efficiency and raise revenues for governments, which can then dedicate them to energy transition projects. Not all energy sources are equal, however, when it comes to their environmental-damage costs. Adding taxes and levies disproportionately to electricity encourages the continuation of an emissions-intensive status quo and discourages investments in key decarbonisation technologies, such as heat pumps. This paper shines a light on the imbalance in energy taxation across almost all European markets and makes the case for reform.

The authors explain the current structure of energy taxes and levies in five key European countries where reform would be beneficial: Italy, Spain, the United Kingdom, Belgium and Germany. All five countries overtax electricity — in three cases by more than 200% — and undertax oil and fossil gas while not taxing wood use at all. Only in Italy is the tax rate on heating oil close to the value of the environmental costs caused by its use.

The European Commission’s proposals in the Fit for 55 Package would go a long way towards addressing the taxation issue. But these proposals would need to be implemented and there’s no guarantee they’ll survive the upcoming negotiation process. Member States wishing to align their tax and levy policies with their climate targets can act now to begin the process of rebalancing.

The authors detail four approaches to rebalance energy taxes and levies, drawing on examples from around the continent.

  • Option 1: Lower tax on electricity for heating
  • Option 2: Environmental taxation
  • Options 3 and 4: Shift levies to public budget or fossil fuels

Boosting the EU energy savings obligation

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As part of the Fit for 55 legislative package, the European Commission proposed a recast of the Energy Efficiency Directive in July 2021. The recast includes significant changes to the Directive’s cornerstone article on the energy savings obligation, Article 7 (now Article 8). As a next step, EU legislators – the European Parliament and the Council of the EU – have to agree on a common text. The energy savings obligation in Article 8 requires EU Member States to trigger a certain amount of energy savings among end users. Getting the specifics of this obligation right is vitally important for Europe’s energy transition.

RAP’s Marion Santini, Samuel Thomas and Louise Sunderland analysed the negotiations on Article 8 on 15 June 2022, to assess three critical requirements: the energy savings rate, the exclusion of fossil fuel technologies and the energy poverty sub-target. They identify the important issues and options for decision-makers who are looking to align the Energy Efficiency Directive with climate neutrality, energy security and equity goals.

Measuring and increasing impact: The next challenge for EU energy efficiency policy measures

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The European Union is entering a crucial decade in its energy transition, with the 55% climate goal representing a step change in ambition. Energy efficiency is expected to play a major role in achieving necessary reductions in energy consumption across buildings, transport and industry. Enacting the Energy Efficiency First principle will require reliable data on the costs and benefits of energy efficiency actions, to ensure that policy measures are as effective as possible. Providing this reliable data is the role of evaluation, measurement and verification.

Yet the current reporting obligations on Member States under the Energy Efficiency Directive (EED) — and Member States’ compliance — do not supply reliable and timely information on the key performance indicator for energy efficiency policy measures: energy savings. This paper recommends improvements in evaluation, measurement and verification practices as a way of increasing the impact of the EED and enabling implementation of the Energy Efficiency First principle.

The paper gives clear guidance for the European Commission and Member States to implement seven recommendations for:

  • Independently evaluating energy savings reported under the EED energy savings obligation.
  • Focusing impact evaluation efforts on assessing the costs and benefits of meeting policy goals.
  • Mandating the piloting of pay-for-performance using metered savings in the buildings sector.
  • Providing clear pathways for accessing individual dwellings’ smart meter data.
  • Mandating the publication of verification reports by Member States every two years, alongside the reporting of energy savings.
  • Facilitating knowledge and expertise sharing on evaluation, measurement and verification across Member States.
  • Regularly assessing the accuracy and consistency of energy savings estimates across Member States.

With the EED being renegotiated, now is the time to make the changes that will enable energy efficiency to play its full role in the energy transition.

Fit and fair: The case for a European fund for targeted renovation

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This week European Commission Vice President Frans Timmermans revealed that any extension of carbon pricing to heating and transport would be accompanied by a “climate action social fund.” He states the purpose of this fund is to compensate for possible adverse effects, especially for the most vulnerable citizens.

Our new report Pricing is just the Icing assesses these impacts and carbon pricing’s role in the buildings sector. We propose ambitious regulatory reform and a socially focussed renovation fund — not unlike what Timmermans has proposed this week — supported by a gradual and measured introduction of carbon pricing, either at an EU or member state level.

Social climate spending is needed regardless of carbon pricing

Timmermans explains the necessity for this fund as a consequence of the introduction of carbon pricing, but it is needed and justified even if the Commission does not proceed with the pricing proposals. Europe has already set itself social objectives for the energy transition to be “just and inclusive” and for the Renovation Wave to alleviate energy poverty this decade.

Achieving these obligations will require significant new socially focussed climate measures. The introduction of carbon pricing would increase the need for such assistance and should accelerate the rate at which funding is dispersed.

The impact of the Fit for 55 Package will be felt by Europeans like no previous set of climate measures. The European Commission expects emissions from the residential buildings sector to fall by more than 60% by 2030 from 2015 levels as the Renovation Wave builds over the course of the decade.

To ensure that this transition delivers on the EU’s social goals and turns the tide on rising inequalities, there are opportunities across the entire Fit for 55 package to ensure that the benefits of the transition are available to low-income and vulnerable citizens.

Carbon pricing plays only a small role in buildings’ sector decarbonisation

In our report, we assess the role of carbon pricing in buildings decarbonisation. We examine the options open to the Commission, including extending the Emissions Trading System (ETS) or implementing a parallel ETS for the buildings sector. We conclude that neither of these options would be best for the sector.

We analyse how higher energy prices have a regressive impact in many different ways, including geographical impacts, income-based impacts and impacts based on a range of other factors, including efficiency of buildings, access to clean fuel alternatives and other horizontal inequalities.

To shield low-income and otherwise heavily burdened households from the impact of the carbon price on bills, some direct payments to support incomes or reduce energy bills will be required in the short term.

Efforts should be concentrated, however, on low-carbon investment. This permanently reduces heating bills, brings the full benefits of energy efficiency and decarbonisation, and reduces the need for ongoing income or energy bill support. These objectives require up-front investment, which should be a major priority for the new European fund.

Structuring a social renovation fund

This fund should contribute significant additional, dedicated funding for renovations targeted for specific household groups. Many European funds can be used for renovation but not many must be used for renovation.

Buildings therefore have to compete with other decarbonisation or recovery projects, which are often more centralised and rely on fewer dispersed stakeholders. Renovation finds it hard to compete.

Many European funds can be used for renovation but not many must be used for renovation.

The fund should frontload spending as one of the key policy measures to alleviate energy poverty this decade. Funding should ensure as many households as possible are helped to decarbonise in advance of any carbon pricing or mandatory renovations required by minimum energy performance standards.

The fund’s design should meet the following priorities:

  • Adequate to the scale of the need. All possible sources of funding should also be pursued to adequately resource the fund, including revenues from the existing EU ETS. If pricing is extended to the buildings and transport sectors, the equivalent of 100% of the new revenues at a minimum should be ringfenced, not as Timmerman’s proposes, “part of the revenues generated.”
  • Target all households in need, not just those in poorer geographical areas. Funding should be available to those already struggling with their energy bills and who will be additionally burdened by the carbon price. This includes households already in energy poverty, those on low-income who will be disproportionately burdened but have no investment ability to decarbonise, and those living in the worst-performing homes, using high-carbon fuels who will also experience high burdens. These households live in almost every community in Europe. Existing approaches to targeting European funds commonly use geographical eligibility — the Modernisation Fund is available to the 10 lowest income Member States and the Just Transition Fund is available to coal and carbon-intensive regions. Following this approach would not make funds available to all households who need them.
  • Reach delivery bodies at the right geographical/administrative level. Funding should be available where it can be used most effectively. For energy poverty alleviation, support is often best delivered at the local level, through local authorities, integrated renovation services and one-stop shops. Funding could be combined with technical assistance to cities, regions or communities.
  • Aim for swift dispersal. Funding should be dispersed to those that can use it quickly. Given the urgency of the climate and social goals this decade, there is no time to waste. The fund should be structured to ensure that money is released as quickly as possible and frontloaded to increase impact this decade. Assessment procedures and granting should be as streamlined as possible. To enable local delivery organisations and supply chains to scale up, and aggregators to build business models, funding should be available in short lead times.
  • Secure social impact. Funding should be governed by proportionate but adequate oversight and verification of impact. Given the scale of the funds that should be available and the granular level at which they will be spent, defining eligibility criteria, application and dispersal processes, reporting and verification all needs careful attention. They should ensure robustness and value for money and that the bureaucracy does not create barriers to the target recipients.

The commitment from the Commission to create a social fund is very welcome. Its design will be crucial. If it is dedicated to building renovation and is sufficiently large, targeted and quickly dispersed, the fund can significantly contribute to both its climate and social objectives.

A version of this article originally appeared in Euractiv.

Photo courtesy of Metro Centric / Flickr.