Energy efficiency directive in limbo

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The purpose of the Energy Efficiency Directive is to save energy and boost growth, but the means through which it will simultaneously achieve both are still to be fleshed out.

“We are working hard to get compromises on this directive,” British MEP Fiona Hall (Liberal Democrats) told EURACTIV.

The European Commission’s Energy Efficiency Directive proposal is widely seen as the only complete piece of legislation to date that encompasses not only the need to save energy, but also the economic need to stimulate growth and create jobs.

Critics of the directive suggest it cannot work, because it lacks a clearly defined purpose in its current form. Lobbying group Business Europe said in a letter sent to the Polish presidency of the EU that the directive must stimulate energy productivity instead of reducing growth.

Some studies do show that energy efficiency contributes to economic growth, however. 

“Saying that it could slow down economic growth is ridiculous," said Anders Wijkman, a former MEP and vice president of the Club of Rome think tank. "You can do more with less energy through the rebound effect, so how could it impede growth?”

Wijkman believes the argument is "false" both from a climate change and an energy security point of view.

Still, finding funds for the necessary investments in energy efficiency is “the key problem that is being debated right now in the European Parliament”, said Samuel Flückiger from the European Climate Foundation.

Tap the money or this is wishful thinking

The MEP working on this directive in the European Parliament, Claude Turmes, has already tabled a key amendment that spells out how energy savings will be financed in a way that will not hamper growth.

”Without the necessary financing mechanisms the measures proposed in this directive will be wishful thinking and will not create numerous jobs and trigger innovation,” Turmes (Greens, Luxembourg) said in his report. 

He said that member states should establish financing facilities which would aggregate a mix of funds. He called for the financial mechanisms to be funded through cohesion and structural funds; technical assistance and financial engineering funds; resources allocated to energy efficiency from the European Investment Bank, the European Bank for Reconstruction and Development and the Council of Europe Development Bank.

These financial mechanisms would pool the money so that it would generate the highest leverage possible of private capital, in particular drawing on institutional investors who would also provide loans, grants and credits to reduce the perceived and the actual risks of energy efficiency projects.

“Once all money is put together, the financial mechanism would make all the investments available immediately,” Flückiger told EURACTIV. “The costs will be recovered through the bills of consumers but since companies will reduce the consumption of energy for their users, the balance will be neutral.”

“There are many different ways of financing these already, but there is a lack of understanding how these work. We need to make them available and publicise around Europe how the financial mechanisms work,” said British MEP Fiona Hall (Alliance of Liberals and Democrats for Europe). 

The need for initial capital

When it comes down to number crunching, it could seem difficult at first to make the financials stack up. The current proposal focuses on binding measures such as the 3% renovation of public buildings and the 1.5% energy savings obligation scheme for energy companies. Implementing any of the measures requires initial capital.

One recent study on the effectiveness of energy efficiency investments made by Germany's KFW banking group showed that every €1 that went into the promotion of energy-efficient construction and refurbishment in 2010 returned €4 to €5 in revenue.

But the financial crisis makes it harder to put together the needed minimum investment in technologies that would increase energy efficiency and provide financial returns in the medium to long-term, analysts said. Energy efficiency measures might pay off in the long run, for instance, but companies would see losses on their annual balance sheets.

"This is not a really attractive business for investors if you’re losing money every year. Companies would have to put the costs up, or else they’d find themselves unable to recover the initial costs of their investments," a senior expert told EURACTIV.

Green or growth?

Are growth and turning green compatible or contradictory issues? George Osborne, the British chancellor of the Exchequer, considers energy savings a burden for business and he reiterated that in a recent statement.

Those who agree with him believe it is a twofold choice – you either go green or you grow.

Refurbishing a house is a one-off situation, so it will not create so many jobs, the top expert told EURACTIV.

“Probably companies will use the already existing construction workers and this will not matter much. Instead, one could create a momentum for innovation and focus on selling more energy-efficient products such as washing machines, make the energy industry more competitive and thus create growth and jobs,” he said.

Jørgen Knud Henningsen, senior advisor on energy and environment at the European Policy Centre, says it is a matter of how one defines growth. “The scope of the directive is absolutely direct. The problem is that it does not go far enough,” he said.

“If the oil import price goes up, then energy efficiency creates qualitative growth, as opposed to quantitative growth. If you spent more money on creating smart solutions to save energy, this will be reflected not in GDP, but in job creation. You need a more sophisticated view on what growth is,” Henningsen said.

Giles Dickinson of the energy company Alstom thinks the directive does not hamper growth. “Having these targets is good for economic growth. With our current policies we are only half way to achieving the 20% energy savings until 2020.” Dickinson thinks energy efficiency will be made more possible through the implementation of the available technologies, which, through mass deployment, could see their costs go down.

“Energy companies, energy distributors, they can finance energy improvements and make money out of it. Danish companies want Article 6 of the directive to be more ambitious, as they will be more subsidised in that case,” said Friends of the Earth Europe's Brook Riley.

"Part of the problem is that governments, in order to get money out of their pockets, they would want to see it back immediately," said Jørgen Knud Henningsen, senior advisor to European Policy Centre on energy and the environment. He believes that it is a question of a general unwillingness to spend money upfront in order to have a long-term profit. “It is a psychological thing, the idea of not investing in the long term. You can buy an electric car with  €21,000, but you prefer to get the standard one for €20,000. It is not because they don’t have the €1,000, but they are thinking: Could we be sure? How could we know?”

When it comes to the industry, Brook Riley of Friends of the Earth Europe thinks it is also a psychological barrier: “They fear it hampers growth – isn’t that actually a fear of change? They are not asked to make improvements,” he said.

“First of all, we should look long-term. That means we shouldn’t address these issues at all? Any sensible credit institution would be ready to give credit to investments that will pay off in three to five years,” said Anders Wijkman, former MEP and vice president of the Club of Rome think tank. “It usually pays out in the medium term,” he added, "plus, we are virtually running out of high-quality primary energy resources”.

Peter Bach of the European Council for an Energy Efficient Economy says it is more expensive to wait. “What we do today shall be seen in the long-term perspective. We need deep renovations, not cream skimming,” he says of the 3% renovation of public buildings measures.

“I think concerns about economic growth are the main barriers to introducing binding targets. I think we can have both economic growth and ambitious targets. Denmark will undoubtedly push for as strict measures as possible,” MEP Bendt Bendtsen (European People's Party, Denmark) told Euractiv.

“New credit mechanism need to be implemented. It can be either FIT or more investment-oriented ETS allowance,” said Markus Becker of GE Energy. “At the end of the day, we will import less oil, so consumers’ bills will not necessarily go up”. He believes ETS does help in this situation, as it only plays a role in day-to-day operations and says that ETS allowances should be directed towards investments as well.

Another way of funding the changes needed in order to save energy and stimulate growth at the same time is through feed-in-tarrif systems, similar to those used to subsidy the solar and wind energy projects. FIT could work, but who would pay? “So far no one has put money on the table”, according to Eurelectric.

Energy Efficiency, however is not a topic hot enough to debate with friends over dinner. It is not tangible and does not have a material form, like renewable energy. It is more interesting to show people your new solar panels than your energy-efficient washing machine, it is also a question of image, said Nicola Rega, advisor for Eurelectric.

“Policy can easily deal with the financing issue” said Michael Brown, director of Delta Energy and Environment

Business Europe says the energy efficiency obligation scheme (Article 6) is not unattractive, but that the situation is equally diversified at the sector level with energy-intensive industries having already exploited a large part of their potential compared with other sectors.

Business Europe also wanted the directive to clarify that connection charges and costs for the development of heating and cooling networks should be fairly distributed between the involved actors, ensuring that benefits for the industry outweigh the costs.

"The 3% public building refurbishment  rate is an opportunity to stimulate the local economy in times of crisis. We are aware of the constraints and opportunities of such a measure, but if the European Commission and Member States are serious about their words on a new (green) economy, they  will  have to  set up favourable (financial) frameworks that make these targets feasible," said Gérard Magnin, Executive Director of Energy Cities.

Europe aims to reduce its primary energy use by 20% in 2020 “simply by applying cost-effective energy savings measures”.

The current Energy Efficiency Directive was proposed by the Commission last summer to update the previous Energy Efficiency Action Plan, which had not been designed to fashion full energy savings. The 20% will not be reached, unless the EU doubles its energy savings efforts from the current projection of 9%.

In its directive, European Commission proposes individual measures for each of the sectors that could play a role in reducing energy consumption. 

  • Mid-Dec. 2011: New draft energy efficiency text to be discussed in a Council working group.
  • 1 Jan. 2012: Denmark takes over presidency of the EU.
  • Jan.-Feb. 2012: First discussions on the directive between member states.

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