Failure to take firm action on energy efficiency would be bad news for the European economy – all member states should learn the lessons from Denmark - claims think-tank
Denmark uses energy more efficiently than any other European Union member state. Successive governments have implemented ambitious and consistent policies on energy efficiency since the oil shocks of the 1970s. As a result, Denmark today only uses 60 per cent of the energy per unit of gross domestic product of the EU average. Therefore, it was no surprise when in January the new Danish presidency of the EU's Council of Ministers identified a draft Energy Efficiency Directive' as one of its priorities for its six-month term. But Copenhagen's efforts look unlikely to lead to agreement before the end of June, when the Danish presidency ends. Several member states, including Germany and France, are trying to weaken key aspects of the draft directive. The Danish government's desire to oversee agreement on the directive is understandable. But a lowest common denominator agreement would be worth little. It would be better for Copenhagen to stick to most of the European Commission's proposals and remind its partners that in the long run these reforms would save them billions of euros. Where necessary, Denmark could point to its own experience to underline the point.
Failure to take firm action on energy efficiency would be bad news for the European economy. The commission's proposals are sensible, shifting the emphasis away from overall medium and long-term targets - of which the EU has too many - towards annual obligations and specific actions which governments will have to take. The EU director general for energy policy Philip Lowe correctly points out that using energy more efficiently would reduce the cost of importing energy, which was €400bn in 2011, and create hundreds of thousands of new jobs. The union has a non-binding target to become 20 per cent more energy efficient, compared to the predicted 'business as usual' trend, by 2020. To date, it has only become 9 per cent more efficient. Lowe argues that the extra energy used under the scenario without greater energy efficiency would cost member states at least €34bn by 2020. Such counterfactual calculations are not precise, but it is clear that failure to act on energy efficiency will cost the EU many billions - hard to justify under any circumstances, but even more so when finances are stretched.
The commission has proposed two annual obligations. First, member states should renovate at least 3 per cent of the large public buildings in their country. Second, energy retailers should take action to deliver 1.5 per cent energy saving among their clients. Both these proposals are modest and achievable, and are essential to delivering substantial energy savings. Yet several member states, led by Germany and France, are trying to weaken them substantially. The obligation to renovate public buildings would, as well as delivering energy savings, put governments in a position of leading by example - as the commission has pointed out. But some governments are trying to reduce this obligation to cover only properties owned and occupied by central government, which would significantly dampen the intended impact of the proposed reform. The Danish presidency should stick to the commission's approach on this issue.
On the energy retailers' obligation, Austria is arguing that action taken since 2005 should be taken into account. This is a valid point. Retailers who have taken action to get their clients to use energy more efficiently will find it harder to make efficiency improvements in the future - unless they get substantial numbers of new clients - because the low hanging fruit has already been picked. Clients' buildings will have been insulated, inefficient boilers replaced and so on. So there is scope for compromise with the member states on this issue. However, Poland and Sweden are seeking to cut the annual savings obligation from 1.5 per cent to 1.2 per cent. This would substantially reduce the impact of the obligation and should be strenuously resisted by the Danes and other member states. Some governments, led by France, are also arguing that some of the energy sold by retailers to Emissions Trading System sectors should be excluded from the requirement on retailers.
This would not be a sensible approach. The ETS, the EU's cap-and-trade scheme for greenhouse gases, has had little impact on energy efficiency so far and with prices at around €7 per tonne of carbon dioxide will have even less impact in future - unless the system is strengthened. At the time of the last amendment to the ETS directive in 2009, prices of around €30 per tonne were anticipated. Progress on energy efficiency could lead to a further fall in the carbon price unless the overall cap was lowered, as less energy being used would mean lower emissions from key sectors - including the power sector - so lower demand for allowances. The draft directive does include proposals to withdraw - or 'set aside', to use the Brussels jargon - a number of allowances in response to energy efficiency measures, so that energy savings do not lead to further falls in allowance prices.
A recent report from the academic network Climate Strategies argues correctly that 'set aside' is a necessary step to prevent further reductions in allowance prices, but will not deliver price stability or predictability. Stability and predictability are needed in order to attract investment into energy efficiency and low-carbon energy supply sectors. Nor will 'set aside' increase the ETS price significantly. So 'set aside' is not sufficient. But it is a necessary first step and should be included in the directive. France is also resisting the commission proposal that most new power stations should capture and use the heat created when fuel is burnt to generate electricity - an approach called combined heat and power or co-generation. France's opposition is presumably due to its desire to keep the cost of new nuclear power stations down. The French get over three-quarters of their electricity from nuclear power. Nuclear power stations create heat, which can be used in buildings or industrial facilities. Switzerland got 7.5 per cent of its heat from nuclear power stations in 2009. Within the EU, Slovakia got more than 5 per cent of its heat from nuclear stations in 2009.
Hungary and the Czech Republic also use nuclear heat. But in the EU's main nuclear players, such as France and the United Kingdom, the heat is simply expelled into rivers and seas. Combined heat and power becomes a more usable technology when a country has installed a district heating system, to transport the heat to homes and factories. In the Nordic countries, heat produced in this manner is transported up to 100 kilometres. A small amount of heat is lost on route. But since it would otherwise just have been pumped into the atmosphere or the seas, this does not represent wastage. Denmark installed extensive district heating networks in the late 1970s and 1980s, and now tops the European league of combined heat and power as a proportion of total energy generated. So whatever the Danish government does to try and get agreement on energy efficiency before the end of June and whatever its temptation to act as chairman of the council rather than leader, it should remain firm in support of the commission proposal on combined heat and power. Stephen Tindale is an associate fellow at the Centre for European Reform think-tank, in the United Kingdom. The CER first published this paper here