Why Brussels is reluctant to adopt an energy efficiency target that’s good for the EU economy

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photo Dave Sag

photo Dave Sag

Within weeks, the European Commission will propose an energy efficiency target for Europe for 2030 that is substantially lower than what many stakeholders and policymakers believe is feasible. It will even be lower than what the Commission’s own impact assessment concludes is beneficial for the economy. And it will probably be non-binding although the impact assessment says a binding target would be more effective. Why this reluctance from Brussels to take strong action? Energy Post’s Brussels correspondent Sonja van Renssen explains that it is motivated by the fear of imposing high upfront costs on member states and of the negative effect energy efficiency may have on carbon prices. 

The Commission officials with the biggest say in EU energy policy –President José Manuel Barroso and Energy Commissioner Günther Oettinger – are discussing a new energy efficiency target for the EU: 25-27% for 2030. This would be set as an absolute primary consumption target calculated as a deviation from business-as-usual. Disbelief has greeted news of this figure: companies in the efficiency business, NGOs and the previous European Parliament have all called for 40% while a leaked draft of the Commission’s own forthcoming policy paper on energy efficiency  recommends 30-35%.

This paper is still being worked on for publication later in July, but the version that has circulated in Brussels says the Commission recommends a 30% EU energy efficiency target for 2030 “to maintain the momentum of energy efficiency policy at the current level” and a 35% target “taking into account the increased importance of energy efficiency in the context of the European Energy Security Strategy and… in promoting jobs and growth”.

In a new draft impact assessment accompanying the efficiency paper, the Commission shows that the higher the energy efficiency target, the greater the benefits to Europe in terms of reduced fossil fuel imports, job creation and industrial productivity (in its earlier publication on energy prices, it noted that European industry remains globally competitive thanks to energy efficiency). The Commission models five energy efficiency scenarios, with primary energy reductions in 2030 of 25%, 28%, 30% 35% and 40%, all relative to a projected business-as-usual primary energy consumption figure based on its 2007 PRIMES model.

A 40% energy saving in 2030 results in a 40% reduction in gas imports relative to 2010, calculates the Commission. Under current policies gas imports would grow by 7% by 2030. A 30% energy efficiency target would cut gas imports by 22%. These figures translate into financial savings of up to half a trillion Euros for 2011-30. At the same time, every €1 million invested in buildings – the sector with the greatest savings potential for energy and consumers – is estimated to create 17 jobs.

“A 1% energy saving cuts EU gas imports by more than 2%”
EU Energy Commissioner Günther Oettinger during EU Sustainable Energy Week, 24 June 2014 

Cost-efficiency

So why aren’t Barroso and Oettinger discussing a 30-40% energy efficiency target? A 40% target would “really be quite expensive” said DG Energy officials during EU Sustainable Energy Week, which ran from 24-26 June in Brussels.

The Commission’s impact assessment shows that higher efficiency brings higher costs and in particular upfront investment costs (with savings further down line). These are mostly for the household and tertiary sectors. According to the impact assessment, direct efficiency investments, for example in insulation and more efficient appliances, would add an additional €12-180 billion to what would be spent under current policies.  Oettinger’s team writes in its draft efficiency paper: “Money has rarely been cheaper [but] public investment will need to focus on leveraging private capital.”

Cost-efficiency is one of the main drivers of the Commission’s proposals for a 2030 climate and energy package, including energy efficiency. Back in January, when the Commission released its 2030 proposals, the impact assessment for the 2030 package showed that the EU needs to deliver a 25% energy saving to decrease greenhouse gas emissions by 40% cost-efficiently. It also showed that the Emission Trading Scheme (ETS) alone could not deliver this saving.

But the 25% does not take into account the benefits that additional efficiency efforts would bring in other areas such as security of supply and employment. The Commission acknowledges this, but insists that 25% must be the starting point for debate.

For efficiency advocates such as Stefan Scheuer, from the Coalition for Energy Savings, which brings together NGOs and businesses with an interest in efficiency, this is completely upside down. He points to a study by the Fraunhofer Institute in Germany, carried out on the Coalition’s behalf, which posits that a cost-effective 40% energy efficiency improvement (504 million tonnes of oil equivalent) is possible by 2030, based on a bottom-up calculation of potential savings per economic sector of 61% for households, 41% for transport, 38% for the tertiary sector and 26% for industry. The savings are “cost-effective” because they will deliver net financial benefits to the investor over their lifetime, as well as macro-economic and societal co-benefits.

On 19 June a group of organisations including the European Alliance of Companies for Energy Efficiency in Buildings (EuroACE) and European Insulation Manufacturers Association (Eurima) issued a press release slating the reported 27% target under discussion as “astoundingly low” and warned it “would completely ignore the wide economic, social and environmental benefits of energy savings”. These groups want a 40% target.

“Even the Commission’s own research demonstrates that higher ambition on energy efficiency equals more jobs and growth”
EuroACE Secretary General Adrian Joyce 

Efficiency advocates such as Scheuer and Brook Riley from Friends of the Earth Europe say the Commission’s PRIMES model disadvantages energy efficiency (see article by Riley and a reply by Brigitte Knopf from the Potsdam Institute for Climate Impact Research (PIK)).

Climate chaos

Another “problem” with a 40% efficiency target is that it would reduce greenhouse gas emissions by more than 40%, namely 45% according to the Commission and at least 49% according to Fraunhofer. This would wreck fresh havoc in the climate policy debate because it would necessitate raising the emission reduction target to keep up demand for carbon allowances and avoid (again) crashing the EU ETS. A 40% emission reduction already risks a veto from some member states such as Poland.

Activists such as Riley however, point out that an efficiency target of as high as 35% does not interfere with the 40% greenhouse gas emission reduction target. They believe that opposition comes from climate policy officials who are afraid a high efficiency target could further lower the carbon price. The draft efficiency impact assessment suggests that a 35% target could cut the carbon price to €13 a tonne in 2030. That’s compared to €40 a tonne expected under a 40% emission reduction target-only scenario. A 30% efficiency goal would lower it to €25 a tonne and 28% to €33, while 25% would actually raise it to €42 a tonne.

But Commission climate officials such as Yvon Slingenberg have publicly insisted that an ambitious energy efficiency policy and the EU ETS can co-exist. They are proposing a new “market stability reserve”, inspired by the economic crisis, which will mandate officials to add or remove carbon allowances from the EU ETS in relation to the total number of allowances in circulation, according to pre-set rules. This will enable the system to automatically adjust to changing economic circumstances, as well as effects from other policies such as on efficiency or renewables.

If there is a problem, it is timing: the new reserve, if agreed by member states and the European Parliament, is set to enter into force from 2021. But it would only work away the existing surplus of carbon allowances stemming from the crisis by say 2025. That means new efficiency efforts would ideally need to start post-2025 to avoid new downward pressure on the carbon price. There is talk however, of getting the reserve up and running 3-4 years earlier – the Commission has said it’s happy to do this if member states and MEPs are. Talks on the reserve are due to start under the Italian EU presidency in the second half of this year and may be concluded in the first half of 2015.

EU ETS advocates are also keen for any future energy efficiency measures to focus on the non-ETS sector. There is likely to be a discussion over how member states might be able to shift part of their emission reduction burden from the ETS to the non-ETS sector and vice versa. Both options can be interesting, depending on which member state you are.

2020 paradox

DG Energy officials are in something of a bind when it comes to evaluating the EU’s existing, indicative 20% energy efficiency target for 2020. On the one hand, Marie Donnelly, Director for Renewables, Research and Innovation, and Efficiency, highlighted at a press conference in Brussels last week that the EU is now on track to achieve an 18-19% energy efficiency improvement in 2020 – and that the remaining 1-2% (equivalent to 20-40 mtoe) can be met with full implementation of the existing legislative framework.

The Commission is using this to argue that the current framework for energy efficiency policy is working and can continue. “If the formula has worked, should you change it?” asked Donnelly. This suggests the idea of a binding 2030 efficiency target is off the table.

If the formula has worked, should you change it?
Marie Donnelly, Director for Renewables, Research and Innovation, and Efficiency, European Commission

Yet when presenting his new European Energy Security Strategy in May, Oettinger still said “yes, it would be appropriate to propose a binding energy efficiency target”. Indeed the draft efficiency impact assessment says a binding target at EU level would have the benefits of being economically efficient and coherent with the 2030 package, while being more effective than an indicative target. But then the draft communication proposes an indicative target anyway.

At the same time, Donnelly and her colleagues suggest that the 20% for 2020 target is not a good guide to setting future ambition levels because average economic growth has been very different in reality (1.5%) from what it was projected to be (2.2%) when the target was set.

For campaigners such as Scheuer, it is “absolute nonsense” to laud the success of current energy efficiency policies to deliver the 20% efficiency target when two-thirds of the reduction in energy demand projected for 2020, are due to the economic crisis and not energy efficient improvements, he estimates. And even with that, he notes, the 20% target is still set to be missed. The Coalition for Energy Savings has warned that some member states, including big ones such as Germany, France, and the UK, have not yet produced credible plans on a centrepiece 1.5% energy end-use saving obligation set out by the EU’s 2012 Energy Efficiency Directive. It wants a binding 2030 efficiency target to provide certainty for investors.

Return to reality

Energy efficiency has not only been a product of the crisis. The Commission – and other stakeholders – also refer to the success stories of eco-design and energy labelling rules for products. They are to account for a third of total energy savings in 2020. Both Directives are currently under review.

Re-elected German centre right MEP Peter Liese said at the opening session of EU Sustainable Energy Week that eco-design had already delivered energy savings equivalent to the production of all 143 nuclear stations in the EU (870 terawatt hours). Moreover, some of the biggest savings come from non-controversial products such as electric motors (and not light bulbs, which have attracted far more publicity).

When European leaders met in Brussels at the end of last week to set the agenda for Europe for the next five years, energy and climate change was up there  as a priority. Donnelly says the number one energy priority for the new Commission “without doubt will be energy security”. Member states want the Commission to act on this. One element will have to be an ambitious energy efficiency policy for Europe, with all the benefits for jobs, growth and emission cuts that come with that. A focus on efficiency – and financial aid to realise it – could create the political space the EU seeks to seal a climate deal too.

Editor’s Note

For more on the economic case for energy efficiency, see also Energy Post’s recent article “An economic disaster in the making: how Europe is losing its energy efficiency lead” by Rebecca Lawson from think tank E3G.

Comments

  1. Claude Mandil says

    Two short examples of the reasons why we should be ambitious on energy efficiency but avoid binding targets if we are serious on Climate Change:
    1) If a nuclear plant (conventional energy efficiency: 30 %) is replaced with a CCGT (energy efficiency of, say, 45%), global energy efficiency goes up. But so do CO2 emissions !
    2) If a coal fired power plant is equipped with CCS, energy efficiency goes down, by at least 20 %. But CO2 emissions almost disappear!
    The devil is in details.

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