WORKING PAPER
NOVEMBER 2015
OPTIONS FOR A 2030 ENERGY EFFICIENCY
TARGET: DELIVERING “AT LEAST” 40% GHG
CUTS THROUGH ENERGY EFFICIENCY FIRST
INGRID HOLMES AND LU CA BERGAMASCHI
In November 2015 the European Commission will publish its State of the
Energy Union Communication. A largely political document, it will
provide further insights into the direction of travel for implementing the
EU’s Energy Union. In particular, it will start to provide clues to the
Commission’s thinking on how - in the absence of binding national
targets for energy efficiency – the European Union (EU) can collectively
deliver on its commitments to realize the at least 27% non-binding
energy efficiency target in 2030. This briefing sets out some options for
how this could be achieved.
1. Introduction
The European Commission’s State of the Energy Union Communication will kick off a
technical – but important – negotiation between the EU and Member States on the
governance arrangements for 2030. This will include arrangements for delivering
“Energy Efficiency First” (see Box 1). This in turn will set the scene for the opening up
of a slew of reforms to the Renewable Energy and Energy Efficiency Directives as well
as internal energy market proposals. These proposal will determine the success or
failure of the EU in addressing the remaining markets barriers and institutional
failures that stand between us and a competitive energy efficient Europe.
As the negotiation unfolds, there is likely to be a focus on the rules for energy system
planning, indicators used to determine efficacy of the governance regime reporting to
ensure compliance with delivery of the overall 2030 energy efficiency target.
Embedded within this both technical and political discussion are opportunities to
design a governance system focused on delivering energy efficiency improvements in
a way that ensures a 27% target for improvement by 2030 is a floor not a ceiling on
OPTIONS FOR AN EU 2030 ENERGY EFFICIENCY TARGET: DELIVERING “AT LEAST” 40% GHG CUTS THROUGH ENERGY EFFICIENCY FIRST
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ambition1. By maximizing a focus on improving energy productivity in Europe through
delivering Energy Efficiency First, the EU can also achieve its top line political ambition
of delivering “at least” 40% GHG reductions in 2030.
Box 1. Energy Efficiency First: What is it – where did it come from?
Vice President Šefčovič said in press interview in June 2015: “The
energy we don’t use is our first fuel”2. The idea of what Energy
Efficiency First might mean in practice is captured in a definition
developed by the Coalition for Energy Savings. It is an organizing
principle focused on considering the potential for Energy Efficiency
First in all decision-making related to energy. Where energy
efficiency improvements are shown to be most cost-effective,
considering also their role in driving jobs and economic growth,
increasing energy security and reducing climate change, is the
organizing principle will ensure energy efficiency is prioritized3.
2. Allocating effort: a target for the whole economy or non-ETS
sectors only?
One of the main blocks on ambition in agreeing the EU 2030 climate and energy
package was a unfounded fear that a high energy efficiency target would cause the
carbon price to crash and the EU Emissions Trading Scheme (ETS) – the Commission’s
flagship climate policy – to fail4. To focus on solely on the issue impact on the ETS,
misses the wider and more substantial points that:

Energy efficiency has multiple benefits beyond delivering greenhouse gas cuts,
most notably energy security, but also competitiveness and welfare gains. As
such delivering the 2030 targets within the Energy Union should be about making
the system work as a whole. After all, reducing 1 Mtoe has economy-wide
benefits whether it is delivered through savings in power stations or buildings.

Focusing efforts on the non-traded sectors of the economy will be increasingly out
of touch with how real economy synergies are evolving and so won’t solve the
problem of interaction with the traded sector. More specifically, appliances and
lighting run on power - and power generation is mostly in the traded
1
It is still unclear exactly what the headline target for energy efficiency will be. The European Commission has stated it is at
least 27% energy saving compared to business as usual. See http://ec.europa.eu/energy/en/topics/energy-strategy/2030energy-strategy
2
See http://www.euractiv.com/sections/energy/sefcovic-more-enforcement-stricter-rules-come-energy-efficiency-315523
http://energycoalition.eu/sites/default/files/20150504%20Energy%20Efficiency%20First%20%20making%20it%20happen%20FINAL_0.pdf
3
4
Fears of which are probably unfounded given it is expected this should be addressed by the Market Stability Reserve
OPTIONS FOR AN EU 2030 ENERGY EFFICIENCY TARGET: DELIVERING “AT LEAST” 40% GHG CUTS THROUGH ENERGY EFFICIENCY FIRST
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sector. Increasingly power will play a role in heat and transport as well, moving
them from non-traded to traded sectors, presenting a risk that they shift in and
out of the target and creating more confusion about what the energy efficiency
target means in practice.
As a result, on balance, it seems strongly preferable to structure and energy
efficiency target to focus on the entire EU economy.
But – as a thought experiment – it is worth considering how (to boost ambition in the
buildings, transport and appliance sectors) an energy efficiency target could be
structured to fall across these currently non-traded sectors to deliver at least 27%
energy savings in 2030. The implicit message being that other measures focused on
driving ambition in the traded sectors could be used to over-achieve on this energy
efficiency target and therefore help deliver the EU’s political target of “at least 40%”
GHG cuts in 2030.
3. Target design: ‘budgeting’ an energy efficiency target across
the non-ETS sectors
According to analysis commissioned by the German Government in 2012, more than
70% of the 502 Mtoe of possible cost-effective final energy savings the EU to 2030 are
in non-ETS-traded sectors, of which 187 Mtoe is in buildings and 156 Mtoe in
transport5. The most obvious way forward with respect to allocating the target would
be for the energy efficiency ‘budget’ to be allocated in proportion to the potential for
cost-effective energy savings in each sector. Table 1 sets out how the budget could be
allocated.
Table 1: Allocating the energy efficiency budget to 2030
Buildings
Non-ETS
Transport
Appliances/
lighting
71 Mtoe
ETS
Industry
Full cost-effective potential to 2030
187 Mtoe
156 Mtoe
88 Mtoe
a
(42% or 502 Mtoe)
Option 1 (weighted to potential) %
45%
38%
17%
N/A
effort
Option 2 (split evenly across sectors) % 43%
37%
20%
N/A
effort
Mtoe savings to be delivered in a 27%
108 Mtoe
91 Mtoe
41 Mtoe
N/A
target scenario
(240 Mtoe)
Mtoe savings to be delivered in a 30%
120 Mtoe
102 Mtoe
45 Mtoe
N/A
target scenario
(267 Mtoe)
a
As determined by the Fraunhofer analysis for the German Government. Option 1 weights the split of
additional budget according potential in each sector. Option 2 splits the additional budget evenly across
5
German Environment Ministry/Fraunhofer ISI (2012), Policy Report: Contribution of Energy Efficiency Measures to Climate
Protection within the European Union until 2050 http://www.isi.fraunhofer.de/isi-
wAssets/docs/e/de/publikationen/BMU_Policy_Paper_20121022.pdf
OPTIONS FOR AN EU 2030 ENERGY EFFICIENCY TARGET: DELIVERING “AT LEAST” 40% GHG CUTS THROUGH ENERGY EFFICIENCY FIRST
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the remaining sectors. Option 1 seems most logical since it matches ambition to proportional potential
per sector – so, in the last two rows, the energy efficiency budgets are translated into actual final Mtoe
saved under 2030 energy efficiency targets set at 27% and 30%.
4. Governance issues
There are concerns that the upcoming governance proposals for a target (an outline
of which will be given in the European Commissions’ State of the Energy Union
Communication) will be very weak – focused only on reporting and not on motivating
action by Member State governments. As has already been seen with the EU 2020
energy efficiency target, while it has motivated the introduction of very effective EU
regulation focused on improving energy efficiency in buildings, appliance and cars, the
broader framework was not strong enough. The Commission estimates that the target
will be missed by 1-2% with only 12-13% of reduction attributable to efficiency
improvements and the other 5-6% delivered by the recession. As such governance
proposals need to be strengthened not weakened going forward.
The elephant in the room - to bind or not to bind?
The EU’s decision to commit to a ‘binding’ EU RES target for 2030 but to leave the EU
energy efficiency target as ‘indicative’ seems entirely inconsistent with delivering the
Energy Efficiency First objective that is now a key objective for the Energy Union.
While on their own, targets won’t catalyse investment, they do play a key role in
signalling potential markets size to investors looking both at projects and supply chain
investment. In addition, the energy efficiency target plays the fundamental role of
shaping expectations, and risk-managing the uncertainty, around future demand
needs. Given the potential that energy efficiency has to significantly reduce the need
of supply-side investment, especially in gas assets, misevaluating demand level could
lead to gas infrastructure investment becoming stranded and energy security
strategies designed around access to supply that Europe will not need.
Binding targets also send an important political signal to investors, governments and
other key stakeholders that the agenda is being taken seriously and that coordinating
action is highly likely to follow. The strength of the signal will depend on the legal
status of the target. So it follows that a binding target will always send a stronger
signal of intent than a non-binding one; and a Member State target will always send a
stronger signal of intent than and EU-level one. Therefore to deliver on the European
Commission’s ‘Energy Efficiency First’ commitment (see Box 1), the EU energy
efficiency target should be ‘binding’ in just the same way as the renewables target is.
On one level, from a strictly legal perspective, a binding EU target is unenforceable
and so not really ‘binding’ in the normal sense. But while such targets may not
enforceable, they do have the symbolic value of law – which is essential in terms of
creating the boundary conditions for a stable, low risk, and investable regulatory
pathway. The ‘bindingness’ can then be delivered through a series of a binding
planning and reporting obligations for energy efficiency to 2030. This will help build
OPTIONS FOR AN EU 2030 ENERGY EFFICIENCY TARGET: DELIVERING “AT LEAST” 40% GHG CUTS THROUGH ENERGY EFFICIENCY FIRST
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investor confidence necessary to catalysing investment both in projects and supply
chains to deliver the target.
Following on from this, to ensure effective delivery on the targets through “Energy
Efficiency First” the following planning, monitoring and reporting arrangements could
be considered.
>
Demonstrating clarity of purpose - In the proposed National Energy Plans there
should be a requirement for Member State governments to publish forward
expectations of energy demand to 2030 and 2050 and set out the potential for
demand versus supply side investment to meet this demand;
>
Building capacity to deliver ‘bankable’ plans- The European Commission should
develop an offer to provide capacity for technical assistance to help Member
States develop National Climate and Energy Plans (NCEPs) that are cost-effective
and make full use of demand side opportunities. This could take the form of
capacity put in place as part of a new EU Energy and Climate Observatory6.
Alternatively new capacity could be provided by a new dedicated Regulatory
Assistance Unit within the European Investment Bank. This would build on the
enhanced and consolidated technical capacity being developed by the European
Investment Bank to support delivery of Investment Plan projects.
>
Building investor confidence through effective monitoring and evaluation - The
European Commission should evaluate and score these NCEPs according to a set
of indicators focused on ability to meet 2030 targets and deliver on energy
security and competitiveness aims and report on progress within the State of the
Energy Union Report. These should include reporting on:
>
Absolute levels of energy consumption – progress to meeting efficiency targets.
Given there is such a lack of credibility/transparency over how the EU 2020 and
2030 targets were constructed (see E3G’s paper Making Sense of the Numbers7),
it would also make sense for the target to be rebased to 1990 energy use and set
based on target energy savings to be achieved against 1990 levels.
>
Energy productivity – progress on improving competitiveness at a
macroeconomic level. Setting out energy use per unit of GDP and targets for
improving productivity. It could also be included in the EU’s macroeconomic
imbalances scorecard as one of the key competitiveness criteria. Also useful
would be metrics on relative energy costs, for example by comparing differences
in purchasing power across Europe and beyond. This is a more useful metric for
economic competitiveness than the current approach of comparing energy
prices.
6
E3G (2015) The Energy Union needs a new approach to policy-making
http://www.e3g.org/docs/The_Energy_Union_needs_a_new_approach_to_policy_making.pdf
7
See I. Holmes & L. Bergamaschi (2015) Making Sense of the Numbers: What does the Commission’s 30% energy efficiency
target by 2030 mean and is it enough? E3G
http://www.e3g.org/docs/E3G_Making_Sense_of_the_Numbers_Energy_Efficiency_September_2014_-_final.pdf
OPTIONS FOR AN EU 2030 ENERGY EFFICIENCY TARGET: DELIVERING “AT LEAST” 40% GHG CUTS THROUGH ENERGY EFFICIENCY FIRST
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>
Energy imports – progress on improving energy security. This would set out %
energy imports by fuel source and progress to reducing dependency of volume.
For example, the European Environment Agency could develop an indicator of %
of “avoided fuel imports” from energy savings and calculate the financial
hardship avoided for each countries.
>
Sector level reporting – monitoring at a granular level progress made. This
could include sector level energy productivity gains, number of housing retrofits
etc.
5. Implementation
In terms of actually delivering the energy efficiency target, for non-traded sectors,
there is a strong case for complementing the expected revisions of the fuel efficiency
standards, Ecodesign/Ecolabelling Directives, Energy Efficiency Directive, Energy
Performance in Buildings Directives with a specific focus on building renovation and
the Energy Services Directive. Additional economic, financial and institutional reforms
(not all of them discussed here) will also be needed to comprehensively address
market barriers and unlock finance8.
But how about the traded sector? Should the ETS continue to be the instrument of
choice to drive investment? There are significant energy efficiency gains to be made in
industry that will help Europe’s businesses transition to be able to operate
competitively in a low carbon Europe. But how much? Analysis by Fraunhofer ISI
found that around 17.5% of the cost effective energy savings in the EU could be
delivered from savings to industry to 2030. This finding was reiterated in a
forthcoming report by the Energy Efficiency Financial Institutions Group, which found
substantial industrial energy efficiency savings that remain untapped across Member
States.
While there are legitimate concerns about an energy efficiency target ‘doubling’ down
on what the EUETS and carbon price is meant to do with respect to driving energy
efficiency through the lens of cutting carbon emissions, there is merit in considering
how additional smart policy design can facilitate further investment in energy efficient
plant. As the Energy Efficiency Financial Institutions Group report sets out, carbon
prices are not a material driver of investment. Instead, along with an overarching cry
for regulatory stability (which could be delivered in part by a binding EU energy
efficiency target along with enforcement measures), the top three reasons cited are:
>
Return on investment (cost of kit, cost of capital and energy prices all play a role);
>
Clear business case and awareness at key decision maker level (the same drivers
as above apply – but regulation and availability of grants are also important as
they were cited as the main reasons for creating awareness at Financial Director
level); and
8
See E3G’s paper I. Holmes, M. Dufour & S. Skillings (2015) Restoring Europe to Competitiveness. E3G See
http://www.e3g.org/docs/E3G_briefing_-_Energy_Productivity_through_structural_reforms-final2982015.pdf
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>
Human capacity and leadership (this can both lead to/come from the creation of
an investment case).
Currently, the business case is often non-visible to Boards and the new requirement
for larger companies to undertake energy audits will help address this information
gap in the EU. But given wider competitiveness and also energy security concerns in
Europe and given that 17.5% of cost-effective energy savings lie within large industry
and the power sector – which are both regulated and traded under the ETS – there is
merit in also considering what more can be done to incentivise the traded sector to
invest in efficiency.
Here follow a range of policy ideas that could be use to incentivise energy efficiency
investment in the non-traded sectors to enable the cost effective delivery of
mandated GHG cuts and complement the price signals sent by the carbon price.
5a. Tax relief
UK Enhanced capital allowances 9 – Introduced by the UK Government and still
ongoing, the scheme encourages business to invest in energy saving plant and
technology that is on its pre-approved Energy technology List. It allows businesses to
write off the whole cost of the equipment against taxable profits in the year of
purchase. This approach both creates awareness and senior decision-maker level by
enabling businesses to improve cash flow through accelerated tax relief.
5b. Voluntary performance standards linked to tax rebates
UK Climate Change Agreements tax and rebate scheme10 - Introduced by the UK
Government at the same time as Climate Change Levy, the Agreements offered a
financial incentive to industry to invest in energy efficiency and carbon emission
reduction. The Agreements took the form of voluntary agreements that allow eligible
energy-intensive sectors to receive up to 90% reduction on the Levy in return for
signing up to stretching energy efficiency targets agreed with government. A total of
53 industrial sectors across more than 9,000 sites signed up to targets. Targets apply
to participating sectors from 2013 to 2020, with the scheme running until 2023. The
current CCAs are expected to deliver 11.0% of energy efficiency improvement across
all industry sectors by 2020 against agreed baselines.11 The tax and rebate approach
creates awareness and senior decision-maker level. The financial opportunity
combined with the carbon price and energy cost savings helps build the business
case.
Danish CO2 tax rebate scheme - Introduced by the Danish government in 2001, CO2
taxes were combined with voluntary agreements with energy intensive industry to
9
https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/368320/ECA272_A_guide_to_equipment_el
igible_for_Enhanced_Capital_Allowances__6_.pdf
10
https://www.gov.uk/government/policies/reducing-demand-for-energy-from-industry-businesses-and-the-public-sector-2/supporting-pages/climate-change-agreements-ccas
11
https://www.gov.uk/government/news/industry-agree-stretching-energy-efficiency-targets-with-government
OPTIONS FOR AN EU 2030 ENERGY EFFICIENCY TARGET: DELIVERING “AT LEAST” 40% GHG CUTS THROUGH ENERGY EFFICIENCY FIRST
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improve energy efficiency. To participate enterprises obtained an energy
management certification, made a number of “special investigations”), and
implement all projects with a simple payback horizon of less than four years.
Companies fulfilling these criteria received a rebate on the CO2 tax applicable to all
fossil energy sources. Typical savings of 10-15% were observed during the first years
of implementation. The tax and rebate approach creates awareness and senior
decision-maker level. The financial opportunity combined with the carbon price and
energy
cost
savings
helps
build
the
business
case.
Swedish energy efficiency tax rebate scheme12 – Introduced in Sweden in 2005, this tax
rebate programme focused on the industrial sector, which accounts for one-third of
electricity use and carbon emissions in Sweden. The programme focused on
qualitative targets rather than quantitative measurements for electricity savings.
Almost 100% of eligible firms enrolled in the programme. During the first 5-year phase
of the Programme, electricity savings surpassed expectations. Instead of the expected
annual electricity savings of 0.5 TWh, participating companies reported estimated
savings from the investments in energy efficiency between 0.689 and 1.015 TWh.
Investments totalling $102 million were made that led to $19 million per year in tax
savings and around $71 million is energy savings. The Scheme was discounted due to
the new EU directive on energy taxation. The tax and rebate approach creates
awareness and senior decision-maker level. The financial opportunity combined
with the carbon price and energy cost savings helps build the business case.
5c. Technical assistance offers
Canada industry technical assistance offer13 - Introduced in Canada in 2004, the
Canadian Industry Program for Energy Conservation aids the adoption of an energy
management standard, and accelerates energy-saving investments and the exchange
of best-practices information within Canada’s industrial sector. Participating
companies receive technical assistance to develop investment plans and networking
opportunities with other companies trying to cut energy use. It has: saved 6,600 TJ in
fossil fuel and biomass annually, which translates into annual cost savings of
$54 million. It has also enabled participants to increase their overall electricity
generation capacity by 50 MW. This electricity can be used on-site or exported to the
grid to generate a new revenue stream of approximately $15 million. This approach
helps fill the skills gap and creates capacity to identify and develop a business case
for
investment.
Vermont USA technical assistance offer 14 - Vermont’s Public Service Board
consolidated the efficiency acquisition programs of all of Vermont utilities into a
single, state-wide energy efficiency utility (EEU) - Efficiency Vermont. It works with
industry to acquire cost effective energy resources to meet future load growth,
reduce environmental impacts, and avoid or delay the need for additional
12
http://ccap.org/assets/CCAP-Booklet_Sweden.pdf
13
http://www.nrcan.gc.ca/energy/offices-labs/industry/5701
14
http://www.iipnetwork.org/databases/programs/efficiency-vermont
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transmission and generation. Programmes for industrial customers include technical
assistance in the form of auditing, project development, energy management training,
and employee energy efficiency awareness. Financial incentives are available for
investments in common-technologies such as lighting and motors, and for customized
energy efficiency projects. Customized projects are the dominant source of efficiency
acquisition, accounting for approximately 90% of the industrial project total. The
Programme is paid for through an Energy Efficiency Charge (EEC) added on all
customer energy bills. This approach helps fill the skills gap and creates capacity to
identify and develop a business case for investment.
5d. Regulating for higher efficiency in new plant
Raising standards on Best Available Technology - Analysis by ClimateWorks Australia found
company EBITDA could be boosted by ~5% if companies reached best practice on energy
efficiency15. The most efficient plant can have a higher upfront cost, especially with newer
technologies but lower operational cost over the lifetime of the investment. Introducing
minimum energy performance standards to the ETS and Industrial Emissions Directives can
ensure when plant is replaced, the most efficient replacements are used, cutting energy use.
6. Final thoughts
Whatever emerges from the State of the Energy Union Communication, it is clear this
will be the beginning not the end of the negotiation between EU institutions, Member
States and stakeholders on how to deliver the energy efficiency target. Given the
Energy Union initiative stems from ongoing concerns about regional energy security
and there are ongoing questions about how to drive productive investment and
growth in Europe, a stronger focus on strong governance to deliver energy efficiency
should be a ‘no brainer’. As such it should not be surprising that there is a significant
contingent of businesses, investors and public interest groups actively campaigning
for the EU to raise its game on energy efficiency – making 27% in 2030 a floor to not a
ceiling on ambition. In doing so, Europe can not only unlock a pathway to increased
competitiveness but also unlock a pathway to delivering on its legally binding
commitment to deliver at least 40% GHG reductions in 2030.
15
http://www.climateworksaustralia.org/sites/default/files/documents/publications/climateworks_emcc_20141013.pdf
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About E3G
E3G is an independent, non-profit European organisation operating in the public
interest to accelerate the global transition to sustainable development. E3G builds
cross-sectoral coalitions to achieve carefully defined outcomes, chosen for their
capacity to leverage change. E3G works closely with like-minded partners in
government, politics, business, civil society, science, the media, public interest
foundations and elsewhere.
More information is available at www.e3g.org
Copyright
This work is licensed under the Creative Commons Attribution-NonCommercialShareAlike 2.0 License.
© E3G 2015
OPTIONS FOR AN EU 2030 ENERGY EFFICIENCY TARGET: DELIVERING “AT LEAST” 40% GHG CUTS THROUGH ENERGY EFFICIENCY FIRST
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