Efficiency, Efficiency, Efficiency

In a move reflecting Europe's growing fears about record high energy prices, its energy dependence on countries outside of its borders, as well as its clear focus on reducing emissions and protecting the environment, Andris Piebalgs, European Union (EU) energy commissioner, has announced an action plan to cut the EU's energy consumption by 20 percent before 2020.

Piebalgs said, "Energy efficiency is crucial for Europe: If we take action now, the direct cost of our energy consumption could be reduced by more than 100 billion annually by 2020." The figures are striking and the move has been widely welcomed, but doubts have already been raised as to whether the target can be met.

The action plan, which will be implemented over the next six years, comes specifically in response to the urgent call from heads of state and government at this year's spring European Council for a realistic energy efficiency strategy. The plan contains a package of measures covering a wide range of cost-effective energy efficiency initiatives.

It calls for actions to make energy appliances, buildings, transport and energy generation more efficient, proposing stringent new energy efficiency standards, promotion of energy services, and specific financing mechanisms to support more energy efficient products.

Turning specifically to the power market, demand for electricity has experienced considerable growth in recent years and a variety of statistics highlight that approximately two-thirds of the primary energy needed to generate electricity is lost in generation transmission and distribution. Thus, a stated goal for the Commission's action plan is to make these three areas far more efficient.

By 2008, the Commission said it will develop minimum binding efficiency requirements for new electricity, heating and cooling capacity lower than 20MW and consider such requirements for larger production units. Together with the energy supply and distribution industry, as well as the Council of European Energy Regulators (CEER) and the European Regulators Group for Electricity and Gas (ERGEG), it will also develop guidelines on best operating practices to raise average generation efficiency for all plants and agree upon best regulatory practices to reduce transmission and distribution losses. A proposal for a new regulatory framework to promote the connection of decentralised generation will be put forward in 2007.

Additionally, the Commission stated that within the framework of the implementation of the Directive on the Promotion of Cogeneration there is scope for reducing losses in distribution networks. To date, only around 13 percent of the electricity consumed in the EU is generated using this technology. Harmonising calculation methods and guarantees of origin, as well as improved metering and establishment of norms, are also viewed as essential to stimulate further progress in developing cogeneration.

Though there was only a passing reference to "improved metering," the plan does propose to issue more detailed metering and billing requirements in 2009. In fact, improved metering in the form of "smart meters" that enable consumers to check how much energy they are using and how much it will cost, are already being leveraged by many countries as a means of improving energy efficiency. For example, Italy and Sweden have taken the lead in rolling out smart metering and the United Kingdom has also started making some moves in this direction, though at present there is a lack of regulatory guidance, with the complexity of regulation, standards and codes, particularly in electricity, creating a barrier in itself.

There is certainly much to be lauded in the plan, but there is also much at stake. To date, the Commission's efforts to enhance security of supply and reduce emissions have been a mixed bag. The room for manoeuvre on the energy supply side is particularly limited, as renewables have evolved much slower than originally anticipated and the EU is still reliant on a relatively small number of countries for its primary energy supplies. For example, Russia supplies a quarter of Europe's gas and EU states were alarmed last winter by disruption of supplies in a pricing row between Russia and Ukraine. Though these concerns have not turned to realities for the EU, and only last week Russian President Vladimir Putin met with EU representatives for talks centered on strategic partnerships and common approaches in the energy arena.

On the emissions reductions side, the EU's Emissions Trading Scheme (ETS) was one of a small number of substantial initiatives that came out of the Kyoto Protocol and this is certainly praiseworthy. Its purpose was threefold: to cut emissions; to get polluters to pay for the damage they cause; and to get industry to invest in cleaner technology. To date, however, these goals have not been met.

Emissions remain fairly flat, even though much manufacturing is moving out of Europe. In fact, figures released by the European Commission in June, show that EU emissions rose by 0.4 percent in 2004 relative to the previous year. Some polluters have actually made money as the price of carbon credits were passed on to consumers. According to a report from IPA Energy Consulting, the United Kingdom's power generators alone made a profit of around ?800 million from the scheme in its first year. And finally there has been a distinct lack of investment in cleaner technologies even though other commodity prices, such as gas, have risen sharply. For many, this has been largely down to the time horizons (2005-to-2007, then 2008-to-2012) being too short for companies to factor the cost of carbon into their investment plans.

Consequently, much is expected form energy efficiency measures, as the plan emphasizes, "It is by far the most effective way concurrently to improve security of supply, reduce carbon emissions, foster competitiveness and stimulate the development of a large leading-edge market for energy efficient technologies. This remains equally true when the investment costs required to achieve this savings potential are taken into account."

On top of the potential energy saving benefits, the measures certainly represent an ideal opportunity for the EU to take the lead in energy efficient technologies. Figures of around one million new jobs have been banded around and Piebalgs added that it was "very important that the experiences we have are brought to other regions of the world that are more energy-intensive." Nevertheless, for many, clearer and stronger policies are still required. For example, EU governments are largely free to set consumption limits for energy-intensive industries like power generation and for many businesses the incentives to invest in carbon abatement technologies are just not there.

In fact, much of the plan relies on individuals changing their behaviour, which has led to some questioning whether energy efficiency measures can really bring energy savings on a macro-economic scale. A number of economists have looked at the "rebound" effect of energy efficiency measures, whereby the energy savings produced by the measure are taken back by consumers in the form of higher consumption in another area.

A 2005 study by the International Energy Agency (IEA) looked at some of these doubts around energy efficiency and concluded, "Energy efficiency analysts who suggest that the rebound effect erodes some of the energy savings due to technical efficiency improvements do make a valid point, based on the empirical evidence. Some consumers and businesses will increase their demand for energy services as the cost of the service declines. But empirical evidence suggests that the size of the rebound effect is very small to moderate, with the exact magnitude dependent on the location, sector of the economy, and end-use." The European Commission has also stressed that they have looked into the possible rebound effects and have calculated them in the 20 percent target.

The plan concludes that "more than anything, political will and engagement at national, regional and local level are necessary if the objectives here are to be achieved." The focus must thus be on raising awareness of energy efficiency and developing coherent and robust partnerships. The potential advantages are clear, for the EU it will help alleviate security of supply fears and reduce emissions, for utilities and many other businesses, it offers upside in the development of new market-leading energy efficient technologies, and for businesses and individuals it promises less energy costs and other associated benefits. There is much riding on the action plan, but it needs to be remembered that to achieve, efficiency, efficiency, efficiency, requires the buy-in of the vast majority, if not all.

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