Efficiency First policy needs to be effectively applied across the EU in order to meet decarbonisation goals, writes Zsuzsanna Pató and Jan Rosenow.
Zsuzsanna Pató and Jan Rosenow are from the Regulatory Assistance Project, an NGO focusing on policy to accelerate the transition to a clean, reliable and energy efficient future.
As is the case in many countries in Europe, households in Great Britain can benefit from public subsidies if they install renewable heating systems. This is not surprising given that heating our buildings results in about 20% of the nation’s carbon emissions. What is surprising, though, is that the amount of subsidy you receive is higher if your home is less energy efficient.
The subsidies are based on the expected heat demand – the less efficient the building, the more expected heat demand, and the bigger the subsidy payments. This perverse incentive has led installers of renewable heating systems to advise their customers to put energy efficiency measures last instead of first. As a result, energy is supplied that it would be cheaper to avoid, a heating system is installed that is more expensive than necessary, subsidies are paid in excess of what is needed, and heat demand is not aligned with energy system needs but with the subsidy system. This is a shining example of how disjointed policy making can lead to unnecessary and undesirable consequences.
Business as usual is failing us
Whilst this is a single example, there are many others. For too long we thought about the energy system in different silos: end-uses such as industry, buildings, transport, the power sector and the like; energy carriers such as electricity, gas and district heating; or the stages in the value chain, generation, transmission, distribution and consumption. We devised policies and legislation along these lines at both the national and European levels. It made sense because we used certain fuels for certain purposes, and their infrastructures and markets were distinct as well. Individual consumer choices were also separate.
However, what we essentially want is an energy system that focuses on what consumers want: mobility, warmth and light. In addition, we want them to be carbon-free. Luckily, technology now offers a plethora of options, both on the supply and the demand side, to meet our decarbonised energy service needs. It requires the optimisation of the energy system across various dimensions: 1) energy carriers and related infrastructures; 2) supply; demand and storage; and 3) centralisation levels of which those behind and those in front of the meter are the most important.
Unlocking the demand side
Recognising the need to provide guidance in all of these areas, the European Commission launched its Sector Integration Strategy in June.
The strategy’s key building blocks involve putting energy efficiency first (E1st) across the board, boosting direct electrification where possible and economical, and using clean gases where electrification is technologically difficult or too expensive.
On the one hand, it is quite logical that the European Commission placed the concept of “Efficiency First” at the core of its strategy, as it goes to the heart of optimising supply and demand. Efficiency First gives priority to demand-side resources, such as energy efficiency and demand response, whenever they are more cost effective from a societal perspective than investments in energy infrastructure. Or in simple terms – consider both demand and supply options and choose the cheapest.
On the other hand, it is remarkable for a common sense policy concept to become an overarching principle of the European energy transformation in the few, short years since it was injected into the policy discussion.
It is a decision-making principle that needs to be applied systematically at any level to energy-related investment planning and enabled by ‘equal opportunity’ policy design. Although E1st is as simple as it sounds, its harmonised implementation across the various policy areas and its application in the multitude of decision-making processes is far from a given for regulatory or market reasons. Or simply because it is not ingrained in our thinking.
Naming Efficiency First was just the first step
The Sector Integration Strategy states clearly that the European Commission will now need to spell out in detail what ‘Efficiency First at the core’ means specifically and to develop guidance on how to make it operational. Luckily, there is already vast international experience with the implementation of approaches in line with the E1st principle (even if it’s not specifically called E1st) and analysis on how E1st could be operationalised in different parts of the energy system.
Member states have a lot of work to do, including comprehensive implementation of energy market reforms. Ideally, this includes the use of innovative regulation for network companies to incentivise them to invest in demand-side resources or non-wire solutions. Incentive-based regulation allows the companies not only to earn a rate of return on copper and wire investments, it creates better alignment of renewable energy and energy efficiency policies and innovative energy market design to allow demand-side resources to compete on a level playing field with the supply side.
There are things to do at the European level as well. We might rethink European legislation along similar lines not only to make E1st ‘bulletproof’ across decision-making processes, but also to reshuffle the current coverage of individual legislation. There is no way to have a single coherent law covering all aspect of energy generation, transport and use, but there are better ‘silos’, that is, ones that more accurately reflect the current decision-making context.
The way is clear
The fundamentals do not change. We still want mobility, warmth and light. But now we want them to be carbon-free, and we have many more ways to meet energy service needs with our active involvement as consumers. The pool of options has grown; now we just need to optimise them. Efficiency First highlights one important dimension: the possibility of scheduling demand to meet generation, and not vice versa as before, and still have the same energy service. Incorporating these ideas into energy investment and energy use decisions is essential to minimise the cost of the energy transition. Sounds easy, doesn’t it?