The Energy Union Strategy has called for a fundamental rethinking of energy efficiency. There are some solid arguments to treat it as an energy source in its own right, representing the value of energy saved. Redefining energy efficiency as an own energy source also would have far reaching consequences. Ada Amon and Ingrid Holmes explain.
As Europe moves to implement the Paris Climate Agreement, two-thirds of its low carbon energy infrastructure investment to 2040 will need to be in energy efficiency. This implies an eightfold increase in current levels of investment. The Energy Union Strategy has called for a fundamental rethinking of energy efficiency, to treat it as an energy source in its own right, representing the value of energy saved. Without a major rethink Europe risks its ability to meet its climate and energy targets in 2030 and beyond.
In a recent E3G briefing, Ada Amon and Ingrid Holmes argue that the investment gap exists because, politically, we have failed to properly grasp the nature of the challenge. Going forward, energy efficiency needs to be redefined as an infrastructure priority.
Three core arguments support this:
Functional: In a post-Paris Agreement world, around two-thirds of the investment needed to achieve 2°C in a cost-effective manner needs to be in efficiency, meaning energy efficiency investment is the most critical part of the energy transition.
Logical: Treating energy efficiency as infrastructure and integrating it into wider national infrastructure planning means supply side investment needs will fall as projected demand falls, thus reducing the risk of asset stranding and reducing costs to society.
Definitional: Energy efficiency fulfills the definition of infrastructure used by the International Monetary Fund and other economic institutions. Like traditionally recognized infrastructure, energy efficiency is long-lasting capital stock, provides inputs to a wide range of goods and services and frees up capacity elsewhere in the economy.
Treating energy efficiency as infrastructure would transform how the Commission and Member States approach the energy efficiency agenda in four ways.
First, energy efficiency projects would be subject to economic appraisals that highlight its benefits as well as costs: Treating energy efficiency as infrastructure like other social investments (such as road or school building programmes), will make the multiple benefits of energy efficiency visible – and the fact that a failure to deliver energy savings and demand response actually has a cost to society.
Second, there would be a strong case to review EUROSTAT accounting rules, allowing for adjustments in how energy efficiency investment is accounted: Two review options could be considered: (i) Consider a new off balance sheet classification of ‘productive debt’ (applies to Government-led investment programmes); (ii) Consider an amendment to how IFRS rules are interpreted and recognise cash savings from energy efficiency investment programmes and Energy Performance Contracts in the ‘scoring’ of investments.
Third, there would be opportunities to create a better functioning internal energy market: To ensure the delivery of the best outcomes for consumers, energy markets need to be able to deploy the optimal amount of energy efficiency over time. This requires bespoke regulation of energy markets to drive the deployment of demand response and energy efficiency that create a “level playing field” where efficiency can compete equally with the supply side in energy markets.
Fourth, a review of State Aid Treatment of energy efficiency would be triggered to facilitate streamlining of public-private financing options: The constraints placed on aid intensities for energy efficiency (30-50%) measures are the lowest of all environmental aid measures; energy infrastructure on the other hand is allowed 100% of eligible costs. Revising State Aid treatment of energy efficiency to match the treatment of wider energy infrastructure will streamline the processes by which public-private financing structures are developed to support investment, which in turn will unleash the power of cities and regions to deliver efficiency and demand side measures.
Despite calls by the European Commission for “Energy Efficiency First” and a “fundamental rethinking of energy efficiency” within the Energy Union a clear move to make good on this promise is yet to materialise. The recent EU proposal for a Heating and Cooling Strategy has started that process, stating it at its core is “a plan to boost the energy efficiency of buildings, improve linkages between electricity systems and district heating systems which will greatly increase the use of renewable energy, and encourage reuse of waste heat and cold generated by industry”. This is a positive step forward, but the Commission needs to be more explicit in how linkages between energy efficiency in building and industry are integrated into wider energy infrastructure planning.
If Mr Šefčovič is to stay true to his words that “the energy we don’t use is our first fuel” the time has come to walk the talk on ‘energy efficiency first’ and translate this slogan into a set of real political priorities and actions. The European Commission can start by declaring energy efficiency a key infrastructure priority within the Energy Union. From that point a range of reforms can be implemented to accelerate investment into energy efficiency, close the investment gap and turn up the dial on ambition.