This is the latest instalment in our series of updates on EU law and policy affecting our clients, brought to you from the SGH Martineau Brussels office.
One of Europe’s flagship 2020 targets is a non-binding 20% reduction in energy usage by 2020 (by reference to a 2007 baseline). Indeed, the European Commission views energy efficiency as a solution to the triple challenge of security of supply, energy affordability and climate change mitigation, and recognises its potential to help drive economic growth.
The current EU legislative framework on energy efficiency mainly comprises Directive 2004/8/EC on the promotion of cogeneration based on a useful heat demand in the internal energy market (the Cogeneration Directive) and Directive 2006/32/EC on energy enduse efficiency and energy services (the Existing Energy Efficiency Directive).
This framework is generally considered insufficient to deliver the 20% target, not least because member states only have a voluntary target to promote energy saving and efficiency measures. According to the Commission's assessment of the national policies and measures in place under this current framework, the EU is on track to substantially undershoot the 20% target.
Therefore, to give fresh momentum to the energy efficiency agenda, in March 2011 a new Energy Efficiency Plan (EEP) was put forward by the Commission, setting out measures to achieve further savings in energy use and supply.
And now, after much discussion and argument, the Commission published in June this year a proposal for a new Energy Efficiency Directive. This latest proposal is designed to radically step up member states’ efforts by establishing a common framework for promotion of energy efficiency, at all stages of the energy chain. The new Directive will replace the Cogeneration Directive and the Existing Energy Efficiency Directive, which will be mostly repealed.
For a copy of the draft Directive, click this link
In addition to revising and consolidating the current EU legislative framework, the draft Directive implements certain aspects of the EEP and crucially, for the first time, introduces legally binding measures which require member states to use energy more efficiently across the supply chain.
The draft Directive is designed to reduce energy consumption and dependence on imported fossil fuels, which cost the EU €573 billion last year. It is projected that, as a result of the measures proposed, there will be an annual reduction in overall spending on energy across the EU of about €20 billion.
The measures focus on the public transport and building sectors where the potential for savings is greatest, but will also affect public bodies, network operators, energy suppliers and large companies.
In what were fraught negotiations, the Commission was forced to scale back its ambition in order to secure a proposal acceptable to all member states. The original concept was essentially to codify as legally binding the current voluntary 20% target. The compromise will allow member states to set their own indicative targets, which must take into account the EU wide 20% target.
With the additional measures set out in the new Directive, the result is considered sufficient to deliver a 17% reduction in energy usage across Europe by 2020.
Public Bodies: The Commission’s original proposals required energy retrofits to the entire public building stock, which would have included social housing, and the upfront associated capital cost would have been vast.
However, the draft Directive is much reduced in scope, now only applying to buildings owned and occupied by central government, requiring retrofit to 3% of the total floor area of building stock each year. However, there is a degree of flexibility because if more than 3% of a building’s floor area is retrofitted within an annual renovation period, member states can use the surplus to meet their targets in the three years before or after the retrofit. The draft Directive also allows member states to include within the annual obligation new buildings owned and occupied by central government where replacing buildings sold, demolished, or taken out of use in the preceding two years.
Furthermore, last minute amendments made to the draft Directive provide further flexibility to meet the retrofit requirement by alternative measures including behavioural changes by occupants.
Public bodies are also required to adopt high energy efficiency standards to the purchase of new buildings, products and services but only if it is cost-effective and/or economically feasible to do so. There are exceptions for buildings that have particular architectural merit, are owned by the armed forces or are used for worship. In addition, member states have an obligation to develop long-term ‘road maps’ for building renovations through to 2050.
Industry: The draft Directive also compels member states to conduct energy audits of large companies and encourages the same for smaller companies and households. It also proposes an obligation for large companies to assess their energy savings possibilities. However, this measure does not guarantee reduction in energy usage as there is no obligation to follow-up on unfavourable audits and invariably, businesses will weigh up the costs of retrofitting against any potential savings. In the current economic climate, an audit might not go far enough to provide the necessary impetus to encourage large companies to invest in energy efficiency measures.
The hope, however, is that the draft Directive will provide enough of a stimulus to drive job creation in energy efficiency products and services.
Energy Suppliers: One of the core features of the draft Directive is an obligation on energy suppliers to help their customers use less energy. Specifically, energy suppliers will be required to achieve annual energy savings across their customer base equal to at least 1.5% of their energy sales, averaged over the most recent three-year period (excluding energy used in transport). In what was a hotly debated aspect of the Commission’s original proposals, this 1.5% reduction requirement can be met in part through a combination of measures already in place. These so called "flexibility measures" include energy savings measures launched before the directive comes into force in addition to any future action.
It is estimated that counting these flexibility measures effectively reduces the target to approximately 1.1%.
Consumers: One of the objectives of the new Directive is to enable end users to better manage their energy consumption, notably by placing a requirement that energy consumption, including heat usage from district heating schemes, is (with certain exceptions) metered. However, this requirement only applies to the extent that such installations are technically feasible and/or cost efficient. Furthermore, energy efficiency is required to be an objective as part of smart meter roll out in the electricity and gas sectors, and energy suppliers will be required to provide clearer, more comprehensive, metering and billing information.
For tenanted properties, there is also recognition that current leasehold structures often do not provide the correct incentives for either the landlord or the tenant to make energy efficiency improvements, and the Directive recognises this with a requirement on member states to evaluate and take appropriate measures to remove these disincentives.
Energy Networks: There are a variety of measures designed to embed energy efficiency to a greater degree in the design of network regulatory regimes, including network tariffs, as well as provide priority grid access for high efficiency cogeneration facilities and promote efficient district heating and cooling infrastructure.
National Energy Regulators (NRAs): NRAs will be responsible for various awareness-raising actions and the draft Directive requires them to have regard to energy efficiency when making decisions concerning the operation of the gas and electricity infrastructure. In addition, NRAs will be responsible for administering certification schemes in relation to the technical competencies of energy service providers.
Once the draft Directive is adopted by the European Parliament and the Council, member states will have to transpose the rules into national law within a year. It is unlikely that the Directive will be implemented before spring 2014.
Notably, the draft Directive requires that, in 2014, progress towards achieving the 2020 20% target will be reviewed, with the prospect that mandatory national energy efficiency targets will be back on the table if progress is insufficient.
The draft Directive has been welcomed by many commentators as an admission that current mechanisms are not working and that more needs to be done to drive energy efficiency in Europe.
Notwithstanding the compromises that have substantially watered down some of its measures, the draft Directive nonetheless recognises the central role which energy efficiency needs to play in helping industry and domestic consumers address rising energy costs, whilst simultaneously reducing carbon emissions against the backdrop of tough binding carbon reduction targets. If encouraging energy efficiency can also stimulate the market in energy efficiency products and services to create “green jobs” then so much the better.
Whilst the UK government is reported to have played a role in lobbying for the watering down of some of the measures in the draft Directive, its provisions nonetheless align in many respects with stated UK government policy. For example, measures recently introduced by the Energy Act 2011, notably the Energy Company Obligation and Green Deal, aim to help transform the energy efficiency of our existing building stock, and the emphasis in the draft Directive on customer awareness is reflected in the UK’s ambitious smart meter roll out programme.
However, from an EU wide perspective, many were disappointed with the compromises made to get the draft Directive this far, and in particular view the failure to enshrine the 20% target in a legally binding framework as an opportunity lost. Whilst the measures in the draft Directive are designed to deliver 17% energy savings by 2020 - a 3% shortfall against the 2020 target - progress towards the 20% target will be reviewed in 2014 and that may yet result in tougher requirements on member states.