Breaking the austerity conundrum
The Energy Efficiency Directive is seen as the EU’s main tool to decouple energy use from economic growth.
But faced with a severe economic downturn, member states have rejected binding targets, despite European Commission warnings over the lack of effectiveness of voluntary agreements.
Spain, which won EU approval for a bailout of its ailing banking sector, claims implementing the legislation will be too costly for its already tight austerity budget, according to Danish Social-Democrat MEP Britta Thomsen.
Indeed, the Danish presidency in the first half of 2012 estimated that implementing the directive would cost €24 billion a year until 2020. However, it would also save the economy €44 billion in fuel expenditure and investments in energy generation and distribution.
The European Commission has estimated that the directive will increase the EU's GDP by €34 billion in 2020, and create 400,000 jobs.
But many civil servants are happy with their existing energy system and do not want to change it through the back door, according to an official close to the negotiations on the Energy Efficiency Directive.
“A lot of resistance has to do with finance ministers saying they do not know how to get this money,” an official told EURACTIV. “But they have signed up to 20% indicative energy efficiency targets.”
Their reluctance is strong despite the fact that member states' energy import costs soared to over €400 billion in 2011 alone.
Philip Lowe, the European Commission’s director general for energy efficiency, warned this shortfall in energy savings will also mean the continuation of avoidable capital outflow from the EU economy via energy imports.
A compromise deal
During the negotiation on the directive, member states resisted legally-binding objectives but agreed on an indicative goal of 20% energy savings and to binding "measures" to achieve it.
These measures (see summary) are expected to result in a reduced 15% total energy savings by 2020, well short of the 20% goal that member states had agreed on in principle.
To make up for the shortfall, the 15% will be complemented by fuel-efficiency regulations for automobiles and new standards for consumer and household products such as heating boilers, which will be added to the Ecodesign Directive.
Overall, these are expected to bring savings to 17%. The remaining 3% are expected to come from the following:
- In April 2013, member states are expected to present their national efficiency programmes and calculate what target they are to achieve. The European Commission will then evaluate them.
- If the Commission analysis of the national plans shows that the EU is not on track to meet the 20% energy savings target, it must add more binding measures to the directive in order to fill the gap.
- If member states do not apply the additional measures and are still not on track to meet the target, Commission will then propose binding targets.
- The savings will be calculated as of 2014 and there will be a review of the directive in 2016.
1) 1.5% savings obligation on energy companies
This is the first key "measure" approved as part of the directive.
Under the Commission's initial proposal, energy companies were requested to reduce their energy sales to industrial and household clients by at least 1.5% each year. This would have resulted in a net annual decrease in energy sales by big utilities such as Germany's RWE or France's EDF.
But member states watered down this provision during the negotiation. They obtained that one-quarter of the 1.5% annual obligation can be achieved through a series of different measures. This will be broken down in the following way:
- Emissions trading scheme: 40% of the efforts that industries already make under the EU Emissions Trading System for carbon dioxide (EU-ETS) will now be accounted for in the yearly obligation.
- Early action: Member states will be able to include “early action" taken by energy companies.
- Future action: Countries will be able to count not only current, "real" savings, but also “future actions” taken by energy companies in their national energy savings schemes.
- Savings at source: Countries will also be able to count energy savings made at the source, in the energy transformation sector, before it is distributed to clients. This will account towards a further quarter of the 1.5% obligation.
“All these measures can replace a quarter of the 1.5% energy savings obligation. That means that the level of the target has been reduced to 1.1%,” said Brooke Riley, a campaigner at Friends of the Earth.
Moreover, it was agreed that all the different measures in the directive will be gradually phased in, allowing more time for EU member states and industries to prepare.
2) Public buildings: Setting the example
This is the second key "measure" in the directive.
Public buildings – including those at regional and local levels – represent only 12% of the EU's building stock but the European Commission believes governments should set the example for private owners.
The EU executive proposed a 3% renovation rate that would target public buildings with a total useful floor area of over 250 square metres, an objective which activists already criticised for being too weak.
But member states later restricted this requirement to include only "central government-owned" and "occupied" buildings, "with a useful floor area of over 500 m2". As of 9 July 2015, this would need to be lowered down to 250 m2.
The rewording resulted in significant reductions in scope for many countries. Whilst in Sweden, France and the Netherlands many buildings are owned by the central government, this is not the case in Germany, where regional authorities own most public buildings.
As a result, Germany will have to refurbish only around 37 public buildings. Similarly, in the UK, many buildings owned by the central government are historic and would be exempt from this requirement.
3) Buildings renovation and smart meters
This is the third of the "measures" that was agreed on during the last leg of the negotiations by the European Parliament.
The key "measure" here is an obligation on each EU country to draw up a roadmap to make the entire buildings sector more energy efficient by 2050 (commercial, public and private households included).
EURACTIV understands this measure has been agreed in exchange for watering down a proposed 3% renovation rate for public buildings, which will now only address “central government-owned and occupied buildings”.
Other "detailed measures" that were added at the last minute include "binding financial instruments" for energy efficiency and "better consumer information," such as the use of smart meters.
The key question, however, is where to find the money.
When it comes down to the economics, it seems difficult at first to see how energy savings can be financed, given that cash-strapped governments have to make painful cuts to their budgets.
The European Commission initially estimated that the directive would trigger an increase in the EU's gross domestic product of €34 billion by 2020, creating almost half a million "green" jobs along the way and reducing fuel expenditure by €38 billion annually.
Economists agree that energy efficiency investments provide financial returns in the medium to long-term, but households and businesses first need the cash to make the investment.
A study on the effectiveness of energy efficiency investments made by Germany's KFW banking group showed that every €1 that went into energy-efficient construction and refurbishment in 2010 returned €4 to €5 in revenue. This was calculated as a return of investment in society and counts the creation of jobs and the social benefits to the total payback.
"Without the necessary financing mechanisms the measures proposed in this directive will be wishful thinking and will not create numerous jobs and trigger innovation,” said Claude Turmes of Luxembourg, the Parliament negotiator on the directive.
One direct consequence of the directive is that consumers’ bills will likely have to rise in order to cover the initial upfront costs of housing insulation and more efficient energy systems. On the other hand, pressure on household bills will be lowered by the obligation on energy companies to deliver annual 1.5% energy savings for their customers.
The most important direct source of public funding is expected to come from the EU's budget for the 2014-2020 period, which will see around €20 billion dedicated to 'green' projects and energy efficiency in buildings.
The investments needed for member states to reach their targets would require twice as much money, however, at around €40 billion to €50 billion, according to estimates.
Energy companies: Resistance and opt-out
Long before its adoption, the directive was held back by the "vested interests" of large energy utilities with close ties to member states. But the resistance grew bigger as the negotiations went on.
>> Read: Energy efficiency deal blocked by 'vested interests'
The obligation imposed on energy retailers to cut sales to their clients appeared as a major obstacle during the negotiation. This would have implied a radical change to their business model by forcing energy utilities to seek profit from energy services rather than energy sales.
“The concern is that energy companies will end up paying for everything ,” said Nicola Rega of the energy companies consortium Eurelectric, adding that that there is no guarantee that power utilities will be able to recuperate the cost through higher consumer bills.
In the end, this obligation came with the possibility of an opt-out, allowing energy companies to choose how they want to achieve their savings.
Advocates say this is a missed opportunity as governments can help sweep those worries away. In Denmark, for example, electricity utilities received money from the national budget to make the initial investments needed to create a new market for energy efficiency.
There was also resistance to the implied increase in energy costs, especially from the side of the energy-intensive industry, such as chemical manufacturers.
Building consumer trust
Energy utilities criticise the EU for failing to provide a driver for stimulating consumers’ appetite for energy efficiency improvements and create the demand necessary for an energy services market to take off.
Some companies have already developed new products. Rather than selling new units of energy, they get involved in selling energy-efficient heating systems.
But this was not convincing enough. “We often knock the doors and the doors to not open when we have to sell energy efficiency services. Ultimately, the customers need to want to take up the measures. There is a big learning process ahead of us,” said Rega of Eurelectric.
Lack of information amongst consumers is a big obstacle to promoting energy efficiency services. Germanys' EWE, for example, offers customers new boilers if their old one breaks and pays for the full installation cost. It also sells heating to customers on a long-term contract and offers to instal heat pumps, which reduce heating bills year-on-year.
Another example is the energy retailer Centrica in the United Kingdom, which estimates that its energy services business will be bigger than its energy supply business in the future. The company has invested in smaller firms selling meters, heat pumps and solar equipment, offering their customers a wider range of services.
“Now they make a bigger profit margin on energy services than they do on energy supply,” said Jon Slowe, energy expert for the think tank Delta Institute for Energy.
National implementation will be key
Energy savings advocates have warned about the risk that member states will fail to implement the directive at national level.
Many countries, they claim, will be tempted to recycle existing national energy efficiency programmes and place them under the directive's umbrella, without really taking new initiatives.
For example, Britain is likely to integrate the refurbishment of buildings under its planned Green Deal Scheme, which will be fully rolled out in 2012. And Germany will likely choose an existing and widely popular energy refurbishment programme for homes instead of annual energy savings for energy providers.
Similarly, France could opt to integrate EU building renovation obligations into its existing national programme. Ireland is looking into using energy performance contracting more effectively. And Sweden and Denmark will most likely integrate the new directive into their existing national action plans.
“Countries are likely to use their schemes if they already have good ideas and solutions in place to save energy,” said Riley, of Friends of the Earth Europe, which has pressed for a more ambitious European energy-savings law.
The Commission has set up a special six-person implementation team for the directive. The team is expected to quickly issue several interpretative notes to address the text's ambiguities. These notes will not be legally binding, which leaves countries free to follow their own interpretation of the law.