Will Energy Efficiency be achieved by obligation?

Jan Rosenow finds that Energy Efficiency Obligations are conquering Europe. He is not so sure that they are the silver bullet for energy independence

 

Energy efficiency has risen rapidly up the European political agenda, due in no small part to the recent Ukraine crisis. The timing of the European Commission’s proposal this July, to cut Europe’s energy consumption by 30% by 2030, demonstrates Europe is pushing ever more strongly for greater energy independence. Currently, about one third of Europe’s energy use is met by Russian gas supplies.
So where will these energy savings be made? A major share of the proposed 30% reduction in energy consumption is supposed to be achieved by the EU Energy Efficiency Directive, which demands that Member States put binding energy savings targets and national energy efficiency action plans in place.
One of the most controversial provisions in the Directive, evident through several heated political debates, is the demand that Member States implement Energy Efficiency Obligations. This policy requires energy suppliers to deliver energy efficiency improvements to customers, a model that has been in place in the UK since 1994.
Until recently, only five EU Member States used such Obligations. However, since the Directive has come into force the number of Member States that have existing or planned Energy Efficiency Obligations has risen to 18 – more than two thirds of all Member States. This suggests that the Directive has been a success. According to individual Member States’ national energy efficiency action plans, Obligations will deliver a significant chunk of the Commission’s 2030 savings target by 2020.
However, this policy is no silver bullet. Simply placing an obligation on suppliers to carry out energy efficiency improvements is no guarantee that the Directive will be delivered successfully. The real challenge lies in the appropriate design and implementation of Energy Efficiency Obligations. Otherwise the policy will be ineffective.  Crucial issues to consider are what types of energy efficiency measures should be supported, what level of energy saving needs to be achieved, and how to monitor and verify that real savings are being delivered.
Since the cost of Energy Efficiency Obligations is ultimately borne by every single customer, their benefits of should ideally be shared as widely as possible. This suggests that measures with high costs are not ideal candidates to be supported via Obligations. In the UK, Energy Efficiency Obligations have delivered large numbers of low-cost improvements since 1994, including more than 5 million cavity wall and loft insulations and the promotion of more than 30 million energy efficiency appliances. The potential for low-cost measures will, however, vary by country and sector.
But how can we be sure that the improvements made under the Obligations policy equate to energy savings in real terms? There will always be some free-riders i.e. people who benefit from energy efficiency programmes that would have taken up energy efficiency measures even in the programme’s absence. In order to get beyond simply supporting free-riders, the scale of Energy Efficiency Obligations needs to be sufficiently ambitious. A good indicator of the level of free-ridership is historic market activity. If Obligations increase the uptake of efficiency improvements significantly beyond past activity levels, it can be assumed that additional energy savings are being delivered.
Effective monitoring and verification is also key to successfully delivering energy efficiency improvements. This involves independently checking that the energy companies are doing what they are supposed to do, including quality checks and independent verification that the measures do not just exist on paper. Generally, measures that can be standardised are preferable to bespoke projects as this enables effective monitoring and verification and will also keep costs down.
Identifying the best efficiency measures to support, delivering programmes that result in widespread change and ensuring that improvements are actually being implemented is fundamental to the success of the EU’s Obligations policy. If energy efficiency is to be taken seriously in order to achieve energy independence, Europe needs to get these three components right. Announcing an ambitious target and policy package is one thing, delivering it will be another.

 

Jan Rosenow is Senior Consultant with Ricardo-AEA

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