EU Energy Efficiency Policy –Achievements and Outlook

Matthias Altmann, Ludwig-Bölkow-SystemtechnikAnthony Brenninkmeijer, Hinicio

Noriko Fujiwara, Centre for European Policy Studies CEPS

European Parliament, ITRE Committee, Brussels, 16 September 2010

Content

1. Energy Savings 2. The role of ESCOs : the energy services sector3. The role of electricity and gas companies 4. Lessons from around the globe5. EU Policy options6. Preliminary Recommendations

Energy Savings

• Why Energy Savings matter• Energy Savings – Past and Potentials • Barriers to Increased Energy Savings • Energy Services Directive

Why Energy Savings matter• Essential to achieve Climate Policy Goals• Improve Energy Security• Save Costs, Improve Competitiveness• Decelerate Energy Price Increases • Increase economic sustainability of our social welfare economies

• Efficient productivity• Resource efficiency

Energy Savings since 1971

Improvement of energy intensity (energy per GDP)

Annual Energy Efficiency Improvements of Households by Country (1997-2007)

Energy Savings Potentials

Source: Study on the Energy Savings Potentials in EU Member States, Candidate Countries and EEA Countries, 2009,www.eepotential.eu/esd.php

At oil prices of 61$2005 in 2020 and 63$2005 in 2030 (real prices)

2020 2030

LPI HPI Technical LPI HPI Technical

Industry 6.7% 7.6% 9.4% 9.4% 10.4% 13.3%

Transportation 14.4% 19.2% 22.9% 15.3% 24.3% 30.2%

Households 7.2% 18.6% 28.9% 17.5% 42.3% 66.0%

Tertiary 13.7% 16.7% 24.9% 21.8% 28.7% 36.8%

Energy Savings Potentials

Source: Energy Savings 2020, 2010

The EU’s 20% Energy Savings Target can be met largely through Cost-Effective Measures

Energy Savings Gap to 20% EU Target

Source: Energy Savings 2020, 2010European Commission, “Energy efficiency: delivering the 20% target”, (COM(2008) 772 final), 2008

European Commission (2008): The current level of implementation of measures will only achieve energy savings of about 13% by 2020.

Barriers to Increased Energy Savings

The Euro Condom project: “How to protect yourself from stupid rules!”

Barriers to Increased Energy SavingsEnergy Prices

• Low energy prices make energy efficiency a low priority for consumersStandard business model of utilities

• Revenue / profit maximization by energy salesInformation failure

• Lack of information, lack of awarenessInstitutional and legal

• Deficits in implementation of EEAP initiatives in Member StatesTechnical

• Deficits in the educational systemFinancial

• Capital market failures, high capital requirements, expected high rates of return, investor-beneficiary-dilemma

Energy Services Directive

The first National Energy Efficiency Action Plan (NEEAP) was due on 30th June 2007 and should include the following elements:

• an overall national indicative energy savings target of 9% for the ninth year of application of this Directive calculated in accordance with the provisions and methodology set out in Annex I (as specified by Art. 4.1),

• an intermediate national indicative energy savings target for the third year of application of this Directive (as specified by Art. 4.2),

• provisions on the exemplary role of the public sector using at least two measures listed in the Annex VI (as specified by Art. 5.1) and

• provision of information and advice to final customers (as specified by Art. 7.1).

•Belgium is the only Member State without a national target

•Most Member States set a national target of 9% or more

•Eight Member States did not provide any intermediate savings target or the calculation of the target was not clear or contradictory

•Most Member States set a comparatively low intermediate of 2% and more

•The Czech Republic is the only Members State without provisions on the exemplary role of the public sector

•Most Member States have an adequate approach

•Provision of information and advice to final customers is provided in all NEEAPs

•The scope in 9 NEEAPs is incomplete as they do not go into detail about the information to final customers.

Overview of the type of measures

Measures adopted under the NEEAPs by sector:

• Most instruments reported in the NEEAPs are related either to the residential or transport or industry sector

• Less attention has been paid to the tertiary sector• Almost no attention has been paid to the agriculture sector

Potential Impact and Efficiency Increase by Sector

Impact:•Major impact of the residential and transport sectors

•Minor impact of tertiary and industry sector

Efficiency Increase:•Short-term: highest efficiency increases in the residential and transport sector (<15%)

•Long-term: major efficiency increases in the residential sector (<60%), tertiary sector (<40%)

Expected Savings Potential and Specific Costs

Measures category

Energy Savings Potential

Energy Efficiency Increase

Specific Savings

Specific Costs

Residential Sector +++ +++ ++ - -

Transport Sector +++ +++ +++ - - -

Industry Sector ++ + ++ -

Tertiary Sector + ++ +++ -

Highest Potentials:

• Buildings (notably existing) and Appliances• Transport Sector

Weaknesses of the ESD and the NEEAPs

• Heterogeneous designs, calculation methods and levels of information making comparisons difficult.

• Inconsistency of intermediate and overall targets as well as between the national targets.

• Mixture of old and new measures. • For some Member States there is a considerable gap between the political

commitment to energy efficiency and the measures adopted or planned, as reported in the NEEAPs, and the resources attributed.

The role of ESCOs

• Definitions• Market outlook• Barriers• Policy mix and national strategy• Successful projects business models ideas

ESCOs – Definitions

Energy Service Company (ESCO): “a natural or legal person that delivers energy services and/or other energy efficiency improvement measures in a user's facility or premises, and accepts some degree of financial risk in so doing. The payment for the services delivered is based (either wholly or in part) on the achievement of energy efficiency improvements and on the meeting of the other agreed performance criteria.”

Energy Performance Contracting (EPC): “a contractual arrangement between the beneficiary and the provider (normally an ESCO) of an energy efficiency improvement measure, where investments in that measure are paid for in relation to a contractually agreed level of energy efficiency improvement”

(from the ESD)

ESCOs – Quick EU market outlook

• The ESCO market started in the late 80s-early 90s • It is still an emerging market

− Germany is the leading country: ~500 ESCOs−Other MS with a relatively well developed market: Austria (pioneer country with Germany), France, Italy, UK, Sweden, and also The Czech Republic.−Denmark, the Netherlands and Lithuania: successful energy efficiency policy but no or few contributions by ESCOs.

•Customer segments: local administration, the industry sector and hospital are the most developed; public housing sector, the retail sector and residential sector are the least developed.

ESCOs – Barriers to development

1. Common barriers: low energy price, lack of support from policy makers, lack of awareness and information, mistrust and skepticism, lack of standard procedure (M&V) and documents (contract), pay back time (5-10 years), lack of appropriate form of financing.

2. Public sector barrier: inadequate procurement and tendering rules, split incentives, administrative complexity and transaction costs.

3. Industry sector barriers: organizational structure, level of energy intensity.

4. Commercial sector barriers: reluctance to enter a multiyear contract, large players often have the financial capacity to carry out the project themselves.

5. Residential sector barriers: financial costs, split incentive (renter-owner division), fear of commitment and disturbance, complex negotiation in multi-apartment buildings.

ESCOs – Best practices: Successful policy mix and national strategy

GermanyStrong support of policy makers at all level, governmental, regional and municipal. Key success factors:

Overarching policies: German NEEAP, Integrated Energy and Climate Plan Demonstration projects in public buildings Rise of the energy price (establishment of an energy tax) Project-support by energy agencies Development of standard documents and procedures.

ESCOs – Best practices: Successful policy mix and national strategy

SwedenDevelopment and implementation of a coherent and targeted national strategy

Creation of a Forum for Energy Services Ground studies and market studies Guidelines for procurement and model contracts Pilot projectsTargeted and neutral information on EPC was provided to potential clients Dissemination and capacity building Subsidies for energy efficiency investments in public buildings Evaluation studies

ESCOs – Best practices: successful projects and business models

Energy Saving Partnership (Berlin, Germany) : Established in 19924 shareholders: Federal State of Berlin, Vattenfall Europe, GASAG and KfW Banking Group € 2.5 million of capital stock for an annual turnover of € 6.0 million Energy Performance Contracting with Third-Party Financing Bundling of small projects to push down transaction costsMain results: 21 pools of buildings for a total of 1300 buildings, €10.5 million of guaranteed saving, € 44.43 million of net investment, 63,844 t of CO2 emission reduction per year.

ESCOs – Best practices: successful projects and business models

Integrated Energy Contracting: – Innovative ESCO model that allows the combination of energy

efficiency improvement (EPC) and efficient supply of renewable energy (Energy Supply Contracting, ESC).

– Higher energy saving potential than EPC (15%-20%) or ESC (10%) alone.

Comprehensive refurbishment of buildings through an Energy Performance Contract (CR-EPC):

– Combining construction measures (e.g. thermal insulation of the building envelope) with standard EPC measures

The role of electricity and gas companies

• Energy Efficiency Obligations and White Certificate• Key learning from existing experiences• Towards an EU Wide White Certificate Scheme

Energy Efficiency Obligations and White Certificate

Energy utilities have a critical role to play with energy savings: • From Megawatts to negawatts • Selling less energy and more energy servicesEnergy efficiency obligations (EEOs) • Are legal obligations set on energy utilities to realize energy

efficiency measures and achieve substantial energy savings. • The savings can be certified and traded (White Certificate).• EEOs are currently successfully operated in several MS (Notably:

Denmark, Flanders-Belgium, France, Italy, UK) and similar experience occurs in the USA.

Key learning from existing experiences

EEOs are a successful market-based policy instrument to achieve energy savings:

– cost-effective– over compliance with the savings target,– many design modalities: supply/distribution; monopoly or fully

liberalised, one or more energy sector (gas and oil, electricityand district heating) and one or more end-use sector (residential, commercial, industrial, transport)

Key learning from existing experiences

National experiences provide valuable best practices for the European Union:

– Define clear targets ‘saving, obliged parties, beneficiaries– EEOs are best suited for sectors with low individual energy

demand (residential sector) – Set clear Measurement and Verification methodologies– Integrate a certification and trading dimension– Consider the technological innovation as well and behavioral

change

Towards an EU Wide White Certificate Scheme: opportunities and threats

Opportunities– The tool is market-based– Successful results at national level

Threats lie in the political and technical hurdles created by a potential European harmonization, notably: – Multiplicity of experiences and different design of key parameters

for setting the obligations, assessing the savings and developing the certification and trading

– The need to harmonize M&V methodologies– The lack of mature cross-border energy markets– The differences between MS in terms of energy taxation and

energy efficiency policies

Towards an EU Wide White Certificate Scheme: perspective?

Obstacles related to the EU Harmonization. Differences at MS level (tax, incumbent systems)

If a scheme is created, the saving targets should remain at the level of the MS:

The EU would act on the harmonization and standardization of the certification and trading of the savings.

The obliged parties could undertake savings measures across Europe and the certificates could be traded across Europe

Other alternatives: voluntary schemes, regional schemes, integration with EU ETS

The role for of electricity and gas companies

Technical investments• Smart grid • Smart metering

Economic business model• Higher future energy prices• Investment pay back times

DSM• Aggregators business models• SME’s

Value of Energy Storage

Lessons from around the globe

• Summary• US• Japan• China• Energy Labels

Summary• US, Japan, China have distinct regulatory systems• Success factors • Lessons from the ENERGY STAR (US) and the Top

Runner programme (JP)

Lessons from the US- Periodic analysis and revision- Financial incentives (e.g. ENERGY STAR & tax credits and rebates)- Integration of policy to market strategies→National Academy of Sciences & National Academy of Engineering, ‘most cost-effective energy efficiency measures’- Increased investments in cost-effective measures for EE would create jobs and reduce utility bills

Lessons from Japan- Business interest in energy efficiency investment- Cooperation and consultation between the government and business- Clarity about allocation of responsibility (e.g. appointment of an energy management officer)- Best practices: e.g. the Top Runner Programme(appliances, vehicles)- Incentives: e.g. Eco-points

Lessons from China- Phase-in legislative development- Political will (e.g. Five Year Plans)11th Five Year PlanEnergy intensity reduction by 20% in 2006-201010 key projectsSpecific targets for local governments and sectors

Energy labels (1)US ENERGY STAR, Japan

Energy labels (2)Australia China Energy Label

EU policy options

• Binding targets would seem to be preferred• Design Options for Binding Energy Savings Targets• Pro’s and Con’s of binding targets• Potential effects of binding targets on ESCO’s and EEO /

white certificates

Binding or not?

• With current policy measures the energy savings target of 20% by 2020 will be missed by a wide margin.

• EU has sufficient potential to realise the overall 20% energy savings target in 2020. Need to increase policy impact and policy incentives

to retrieve this potential EU Binding target as a feasible option EU Binding target seen as desirable by many

experts to achieve overall EU EE goals

Design Options

Design Options for Binding Energy Savings Targets• EU-level Economy-wide Target• EU-level Sectorial Targets• Member-State-level Economy-wide Target• Member-State-level Sectorial Targets

Binding Member-State-level Economy-wide Target

Pro Con• Need to increase and accelerate

energy savings• Strong international message• Logical next step in climate

policy• Ensures political accountability

and provides flexibility

• Loss of control on European level

• Member State committmentpartly lacking

• Danger of incoherence

Potential impacts on ESCO’s and EEO / WC

Realising cost effective end-use savings through ESCO’s and EEO / WC could benefit from EU binding targets in different ways:• Widened market opportunities and larger scale of actions for ESCOS

=> Promotion of ESCOs• Widened market opportunities for trading White Certificates

=> Promotion of Energy Efficiency Obligations on Energy Utilities=> Improved liquidity for Efficiency projects

• Coherent interaction with EU-ETS and RES policies• Faster EU wide achievement of energy efficiency targets

Preliminary RecommendationsNEEAPS

• Define coherent measurement methodology of energy savings• Define coherent reporting format and information

Policy• Increase policy effort in order to achieve 20% target• Introduce Binding Energy Savings Target• Strong focus on buildings (notably existing), appliances and transport• Promote ESCOs models• Promote Energy Efficiency Obligations and White Certificate schemes

Thank you for your attention

Matthias AltmannSenior ConsultantLudwigBölkowSystemtechnik GmbHDaimlerstr. 1585521 Munich/OttobrunnGermanyp: +49/89/60811038f: +49/89/6099731E-mail: matthias.altmann@lbst.deW: www.lbst.de

Anthony BrenninkmeijerPartnerHinicio SprlRue des Palais, 44 - Bte 71B-1030 BrusselsBelgiumMobile: +32 477 559711Tel: +32 2 211 34 14E-mail: anthony.brenninkmeijer@hinicio.comW: www.hinicio.com

Noriko Fujiwara Centre for European Policy studies CEPSCongresplein 11000 Brussel, BelgiumMobile: +32 485 318948Tel: +32 2 229 39 11 E-mail: noriko.fujiwara@ceps.euW: www.ceps.eu

Back-up Slides

Best practices in the public sectors

Best practices in the public sector which can be observed in different Member States cover one or several of the following aspects:

• Setting quantitative targets for energy use within the public sector

• Development of enhanced public procurement strategies and obligations

• Mandatory implementation of energy saving projects

• Development of ambitious standards for the public buildings sector

• Use of financial instruments for energy efficiency improvements in the public sector