WHY OBLIGATIONS SCHMES ARE THE SOLUTION FOR EUROPEAN MEMBER STATES DURING THE FINANCIAL CRISIS
Experiences from Denmark where energy efficiency obligations have been used as an innovative
way to mobilise funds for investments in energy efficiency outside state budgets.
Abstract
Critiques of an energy efficiency obligation will claim that energy companies are more interested in
increasing the volume of transported energy rather than reducing it. Experiences from the Danish
energy efficiency obligation on the DSOs show that proper regulation, in combination with trust and
options for free choice of efforts, is the way to secure sustained increase in energy efficiency in the
end-use. This is done without huge expenditures for the public budget – implementing an obligation does practically not affect the national budget and it has the opportunity to kick-start the building sector, which is currently suffering greatly in the majority of Member States in the EU. The following short paper will describe the key aspects and advantages of the Danish energy efficiency
obligation system.
What is the framework of the Danish system?
The Danish scheme consists of an energy efficiency obligation with an annual binding energy efficiency target for all energy distribution companies, i.e. electricity, district heating, natural gas and
oil for heating. The binding target was introduced in 2006. The binding target from 2006 is a follow
up on the Danish demand side management scheme which has existed since 1995. In 2006 the
obligation was changed from an information/advice/audit scheme without any possibility to finance
or implement energy savings and with no possibility of reducing the energy consumption outside
the control of the DSO supply area and in other energy carriers. The new energy efficiency
scheme, introduced in 2006, gives freedom to carry out energy efficiency services outside the DSO
controlled supply area and within all types of energy carriers. Furthermore, small scale household
solar photovoltaics and wind turbines count as savings as long as the plants stand on their own
property. All energy distribution companies, regardless of size, are included in the scheme and
obligation.
The EU internal market legislation dictates that the DSOs are not allowed to implement savings
themselves, they have to pass the implementation task on to third party companies. This has the
implication that the energy companies generate a regulated steady cash flow for energy efficiency
services and has kick started the energy service market in Denmark. The third parties are e.g. energy service providers, energy service companies, private companies such as installers, craftsmen,
engineering companies, lighting companies etc. It may be another company in the same company
group but very often it will be a private engineering company or a plumber. Only DSOs can trade
energy savings between one another.
The energy companies are obliged to increase cooperation with external players who have energy
savings as their total or partial business; this is monitored by the authorities. The savings achieved
must be well documented and they must be verifiable by an independent source. All energy companies must have a quality assurance system, which is audited internally every year and by an
independent auditor every second year. The energy companies must develop a transparent accounting of funds they use for energy savings and there are rules for what energy conservation
funds can be spent on. There are clear rules for savings that are categorized as accountable, direct savings and deemed savings (a catalogue). Energy savings may only be traded between en-
1
ergy companies, but all private enterprises can make a contract with an energy company for the
delivery a certain amount of savings.
How does the energy companies calculate the savings?
• The main methods to assess savings are standard values, and average savings are calculated
for standard activities. These are however primarily used for households
• Specific calculation – engineering methods - are used for all big projects, which are especially in
the industry and public sector.
How does the energy efficiency obligation tackle the issue of free riders and additionality?
• The savings may not be implemented before the contract is issued and vice versa.
• A contract between the DSO and third party shall be issued before implementation of the
energy savings.
• Energy companies can only count savings where they are directly or indirectly involved.
The involvement may be advice, energy audit, subsidies, etc.
• Agreements shall cover the whole chain from utility to consumer before savings are
implemented.
What are the details about the target?
The annual target is the main principle, and only final energy savings count towards the target.
Savings only count the first year, and that is as an absolute target, which is not cumulative. In addition to this, simple weighting factors are used in order to incentivise energy efficiency projects outside the ETS. This supports the compliance with the Danish non-ETS target and other general energy policy objectives in Denmark. The simple weighting factors reflect lifetime, primary energy,
non-ETS. The 2006-2009 Energy saving target was 2.95 PJ which corresponded to 0.7 pct. of
consumption in the sectors included (transport is not included). From 2010-2012 the target increased to 6.1 PJ, which corresponded to 1,2 pct. of final consumption in the sectors included and
loses in grids. In 2012 the energy saving target is increased with 50 %. The target on energy companies corresponds to 50 % of the total expected savings from all EE measures implemented in
Denmark. The new broad political energy compromise in Demark will increase the target even
more in the years to 2020.
What are the costs?
The average utility costs for implementing the energy efficiency obligation on energy distributors in
Denmark for 2006-2009 was 4.5 Euro Cents per kWh, which includes costs of the consumers, administrative costs in DEA and cost for administration and quality assurance in the DSO. In 2011 the
average cost was 5,6 Euro Cents per kWh.
In January 2012 the Danish Energy Regulatory Authorities published the first benchmarks of the
cost spend on implementing the energy efficiency obligation on energy distributors in Denmark.
The analysis shows that the cost of implementing the target of 1,903 TWh on distributors has been
implemented at a lower cost level than expected. The expectations to the level of cost were expected to be at a level of approximately 6,7 Euro Cents (50 øre) /kWh saved. But the average cost
per saved kWh for all distributors is only 5,0 (37.3 øre) Euro Cent/kWh saved. The benchmark
shows that there are variations in the level of cost for implementing the target between the distributors but that the energy distributors have achieved more savings for the year 2010 than the obligation demands.
2
The total cost of the implemented savings for the year 2010 is 710 million Danish Kroner or approximately 100 million Euros.
7 Advantages of an obligation scheme as the Danish system, which is proposed in the Energy efficiency directive
The Danish experience shows that the main advantages from having obligations on energy companies are:
1) Implementing an obligation does practically not affect the national budget and is one of the most
efficient energy efficiency instruments available for policy makers. The costs of the obligation are
furthermore clearly available for regulatory authorities and to the public.
2) The market for energy services in Denmark has been kick started by creating a strong demand
for energy services.
3) The method is cost effective due to competition between market players to achieve savings as
cost effective as possible.
4) Over the years the energy saving target has been increased. The Danish EEO scheme provides for 52 percent of all energy savings per year in Denmark. Well defined penalty systems are
established – DSOs may loose their licence to distribute energy if they fail to fulfil the target.
5) The obligation has until now been fulfilled by all actors as with most other obligation systems in
the world - a rare sight in public policy in general.
6) Over the years the number of external players in Denmark who have energy savings as their
total or partial business has increased and all customers are free to shop between energy companies.
7) All customers pay proportionally to the EEO scheme in relation to distributed energy and freeriders are thereby avoided. It is thus not only the well-intentioned individuals and green businesses
that are the driving force in reducing energy unlike in other countries and systems.
Need more information?
Check out our website www.danishenergyassociation.com
Or contact our experts in Copenhagen and Brussels from the Danish Energy Association:
Richard Schalburg [email protected] (Copenhagen)
Rasmus Tengvad [email protected] (Copenhagen)
Ulrich Bang [email protected] (Copenhagen/Brussels)
Kim Møller Mikkelsen [email protected] (Brussels)
3
ANNEX:
Figure 1: Regulatory Setup: Monopoly and Market
Figure 2: An evaluation of the scheme from the Danish Energy Agency shows that the scheme is
one of the most cost effective policy instruments used in Denmark to achieve energy efficiency.
4
Figure 3: the actual cost and the weighted cost per saved kWh for electricity distributors. Companies ranked according to average costs
Real cost
Weighted
cost
Figure 4: (cost curve) shows the accumulated cost per saved kWh for Natural Gas distributors.
The averages is 42 øre/kWh saved.
.
5
Figure 5: The total cost of the implemented savings for the year 2010 is 710 million Danish Kroner
or approximately 100 million Euros. Between the distributors there are variations in the level of cost
for implementing the target. This table shows the distributed cost of all obligated parties.
Summary of cost for the energy efficiency obligation for distributors
Electricity Distributors
Natural Gas Distributors
District Heating Distributors
Total
Cost
Savings
mill.Dkr.
379,4
144,6
186
710
mWh
908.007
344.421
650.373
1.902.801
Average
cost
oere/kWh
41,8
42
28,6
37,3
Yearly target for the period 2010-2020
Elelctricity Distributors
Natural Gas Distributors
DH Distributors
Total
PJ
2,9
1,1
1,9
5,9
MWh
805.556
305.556
527.778
1.638,89
Figure 6: intervals of costs/savings (øre/KWh)
The benchmark shows that the cost of implementing the target of 1,903 TWh on distributors has
been implemented at a lower cost level than expected. The expectations to the level of cost were
expected to be at a level of approximately 50 øre/kWh saved. The average cost per saved kWh for
all distributors is 37.3 øre/kWh saved.
6