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Bringing Energy Efficiency to the Liberalised Electricity and Gas Markets How Energy Companies and Others can Assist End-Users in Improving Energy Efficiency, and how Policy can Reward such Action

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Bringing Energy Efficiency to the Liberalised

Electricity and Gas Markets

How Energy Companies and Others can Assist End-Users in Improving Energy Efficiency, and how Policy can Reward such Action

December 2002

Definitions used in this report Energy efficiency activity: Either an energy efficiency programme or an energy efficiency service.

Energy efficiency measure: The act of implementing a technical improvement in end-use energy efficiency. This is usually either or both of improved use/management of equipment and buildings, and of investments in improving the energy efficiency of new or existing equipment and buildings compared to the baseline. Examples: change light bulbs, tune-up a heating boiler, replace pumps.

Energy efficiency programme: A specific activity (e.g. targeted information, free energy audits, rebates for energy-efficient equipment, direct installation of efficient equipment...) taken by energy companies and other market actors, and targeted to energy end-users or market agents (e.g., manufacturers or retailers of energy-consuming products). Energy efficiency programmes typically combine information, advice, training of technology providers, and possible a financial incentive to the customer. In contrast to energy efficiency services, energy efficiency programmes are activi-ties not directly paid for by the customer or market agent who directly benefits. However, the cus-tomers will in most cases collectively pay for the bill reductions they get during the following years, through a financing scheme for the energy efficiency programme.

Energy efficiency service: A specific activity (e.g. audits directly paid by the customer, energy performance contracting, supply of useful energy carriers accompanied by an increase in energy efficiency, renting of energy-efficient equipment...) taken by energy companies and other market actors, and targeted to energy end-users or market agents (e.g., manufacturers or retailers of energy-consuming products). In contrast to energy efficiency programmes, energy efficiency ser-vices are activities, which are directly paid for by the customer or market agent who directly bene-fits.

Energy policy mechanism : A policy action aiming to overcome disincentives that particularly pre-vent energy companies from the pursuit and implementation of cost-effective energy efficiency programmes and services. Thus, mechanisms do not target end users but energy companies and other market actors who would offer energy efficiency programmes and services to end users (cf. Figure 11 in chapter 7.1). Chapter 4 identifies a number of energy policy mechanisms, which can create a favourable framework for energy efficiency programmes and services.

Energy companies: All privately-owned, public or mixed-ownership companies, which are active in at least one of the businesses of production, transmission network operation, distribution network operation, or sale (wholesale or retail supply) of electricity, gas, or district heat.

Other market actors: These could be, e.g., performance contracting companies (i.e., “energy ser-vice companies” in the classical sense), manufacturers, installation contractors, or other providers of energy-efficient technologies and solutions, or energy agencies.

Energy Service Company (ESCO): A company offering energy efficiency services but not selling energy that is not produced on site.

Bringing Energy Efficiency to the Liberalised

Electricity and Gas Markets

How Energy Companies and Others can Assist End-Users in Improving Energy Efficiency,

and how Policy can Reward such Action

With support from the European Commission, DG Energy and Transport,

SAVE programme

December 2002

Editor:

Bringing Energy Efficiency to the Liberalised Markets

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Wuppertal Institut für Klima Umwelt Energie GmbH im Wissenschaftszentrum Nordrhein-Westfalen

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Authors and Contributors

Wuppertal Institute for Climate Environment Energy, Germany Stefan Thomas (Co-ordinator of the report) Wolfgang Irrek

University of Antwerp, Belgium Aviel Verbruggen

Energy piano, Denmark Casper Kofod

Agence de l'Environnement et de la Maîtrise de l'Energie (ADEME), France Frédéric Rosenstein

Adene - Agencia Para a Energia, Portugal Carlos Lopes

Ecole des Mines de Paris (ARMINES), France Jerôme Adnot Maxime Dupont

Politecnico di Milano, Italy Pierluigi Alari Lorenzo Pagliano Luca Ruggieri

Lund University, Sweden Lars J. Nilsson

Energy Saving Trust (EST), United Kingdom Zoltan Zavody

Association for the Conservation of Energy (ACE), United Kingdom Lotte Ramsay

Arbeitsgemeinschaft für sparsame Energie- und Wasserverwendung im VKU, Germany Peter Jörg Heinzelmann Markus Eichert

Swedish National Energy Administration, Sweden Egil Öfverholm

BFE-FPE (Beroepsfederatie van de Producenten en Verdelers van Electriciteit in Belgie), Belgium Frederic Lefevre

Fédération de l’Industrie du Gaz, Belgium Ferdinand de Lichtervelde

Electricity Association, United Kingdom Derek Baggs

Office of Gas and Electricity Markets, United Kingdom Charles Hargreaves

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Foreword Restructuring and liberalisation on the supply side of the electricity and gas markets has been accelerated by the EU Directives 96/92/EC and 98/30/EC, and will be further promoted with the amendments currently underway. In this process, demand-side energy efficiency has not yet re-ceived the attention it deserves based on its benefits for the economy, employment, security of supply, and the environment. In order to use these opportunities, national and EU policies are needed to stimulate the markets for energy efficiency.

With this report, we aim to provide readers from the energy supply and energy efficiency indus-tries, parliaments, governments, trade unions, environmental and consumer protection groups, science, and all others interested in the subject with up-to-date background information on possi-ble national and EU policies and measures supporting energy efficiency activities by energy com-panies and other actors. In this context, the report particularly informs on the development of an EU Initiative and possible Directive on Energy Services.

Energy Services are a priority in the Energy Efficiency Action Plan (COM (2000) 247). The Euro-pean Commission has announced a proposal for an Initiative and Directive on Energy Services for early 2003. This follows the announcement of a Directive on Energy Demand Management in the Communication on the first phase of the European Climate Change Programme (COM (2001) 580), and repeated calls for such a Directive by the European Parliament.

The report summarises the results of several case studies and analyses showing

• Why there is a need for energy policy to create a supportive framework for energy efficiency programmes and services by energy companies,

• How national and EU policy can create this framework within the internal energy markets,

• Which good practice in supportive policy, and in energy efficiency programmes and services by energy companies already exists in Europe.

The good practice examples show how policy can create a supportive framework that will enable energy companies to play their role in assisting their customers with the more efficient use of electricity and gas, in co-operation with energy service companies and other actors.

Stefan Thomas, Wuppertal Institute, on behalf of the authors

This report has been produced by the international project ‘Bringing Energy Services to the Liber-alised Markets (BEST)’, which is supported by the SAVE Programme.

For further information on ‘BEST’, please have a look at the project website www.wupperinst.org/energy-efficiency.

There, you will find also some more detailed background materials.

A background document to this report entitled “Energy efficiency programmes and services in the liberalised EU energy markets: good practice and supporting policy” contains, among others, more good practice examples in energy efficiency services and programmes and in policy to stimulate them.

Furthermore, the project organises national workshops in Belgium, France, Germany, Italy, Por-tugal, and Sweden on the subject during January 2003, as well as a European Conference on March 27-28, 2003.

Further information on these events is available at the above website.

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Contents

Executive Summary_____________________________________________________________ 1

1 Energy Efficiency – The Forgotten Half of Competition ________________________ 4

2 Energy Market Liberalisation and Energy Efficiency – Opportunities and

new Barriers______________________________________________________________ 6

3 Why Energy Policy Should Create a Supportive Framework for Energy

Efficiency Programmes and Services by Energy Companies and Others__________ 8

3.1 Why there is the Need for a Supportive Framework ________________________________ 8

3.2 Why Energy Companies should play a Prominent Role ____________________________ 9

4 National Policy Stimulating Energy Efficiency Activities ______________________ 11

4.1 Recommendations for Policy Design __________________________________________ 11

4.2 Overview of Policy Mechanisms ______________________________________________ 12

5 Experiences in EU Member States: Good Practice in Energy Efficiency

Activities and Stimulating Policy ___________________________________________ 15

5.1 The Development of Energy Efficiency Policy Frameworks, Services and Programmes in the Liberalised Electricity and Gas Markets________________________ 15

5.2 Transforming the Market for Energy Efficiency Services: From Energy Analyses to Performance Contracting ____________________________________________________ 16

5.3 More Economic Energy Efficiency through Programmes enabled by a Stimulating Framework _______________________________________________________________ 26

6 Needs for EU Policy Action ________________________________________________ 38

7 Principles and Questions for EU Policy Promoting Energy Efficiency

Services and Programmes_________________________________________________ 40

7.1 Basic Principles for an EU Policy Initiative ______________________________________ 40

7.2 Questions and Arguments on an EU Policy Initiative ______________________________ 41

8 References ______________________________________________________________ 46

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Executive Summary

• Restructuring and liberalisation on the supply side of the electricity and gas markets only addresses half of the market for least-cost energy services. The other half is demand-side energy efficiency, which has not yet received enough support from EU and national policy.

• A professional intermediary between the providers and the buyers or users of energy-efficient end-use equipment and buildings is needed to overcome the many barriers to end-use energy efficiency, and to reduce the transaction costs for energy efficiency measures.

• Energy companies should be involved or play a prominent role in implementing energy efficiency, since they can integrate supply-side and demand-side energy ef-ficiency in providing least-cost energy services. Energy companies, but also other actors, can thus be the professional intermediary needed on end-use technology markets.

• Although there are some economic incentives inherent in the market system for en-ergy companies to engage in end-use energy efficiency, the incentives are too

weak for consistently increasing such activities to levels motivated by the potential for energy efficiency and the broader energy and climate policy objectives.

• A market for energy efficiency services mainly targeted at larger customers be-gins to develop in a number of Member States, or is adjusting to the new market en-vironment in other countries. However, this could and should be accelerated by supportive policy, e.g., stimulating demand for such services.

• In those Member States, which have combined the implementation of the EU Inter-nal Markets for electricity and gas with a supportive policy framework, energy effi-

ciency programmes by energy companies are continuing or even expanding in vol-ume and scope. In Member States without such a policy, such activities have gradually reduced with the introduction of retail competition, and are carried on only by a smaller number of more innovative companies.

• A supportive national policy framework should stimulate both energy efficiency

services and programmes of energy companies and other market actors. In par-ticular, energy policy needs to create mechanisms enabling energy companies to finance energy efficiency programmes in a way not harming their competitive posi-tion in the liberalised electricity and gas markets. This will give to the companies a fair share of the net economic gain to society they are creating with the pro-grammes. It will also support the development of energy efficiency services directly paid by those who directly benefit.

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• Such supportive policy has been most effective where a combination has been created of

1) An agreed or mandated, quantified target for energy savings,

2) A channel or an allowance for raising funding and for avoiding net economic losses in a way not discriminating between companies, and

3) A standardised and mandatory scheme for cost-benefit evaluation of the energy efficiency activities.

• If the good practice examples in energy efficiency programmes and services pre-sented in this report were extended to the whole EU and continuously developed, they could reduce EU electricity and gas consumption by 10 % compared to

the forecast (which is expected to grow by almost 20 %) within the next ten years. This would be equivalent to a net economic gain of around 10 billion e per year. It would also achieve two thirds of the additional CO2 reduction required for the EU to meet its Kyoto target. And it would reduce EU dependence on imports of energy re-sources considerably.

• Therefore, an EU Initiative including a Directive is needed to ensure the un-

ion-wide implementation of comprehensive and successful energy efficiency

services and programmes. This will complement other EU action and legislation on energy efficiency and ensure that the EU can harvest the full net benefits for the economy, environment, security of supply, and employment from energy efficiency.

Such an EU Initiative and Directive is conforming to the principle: “Harmonisation in targets, but subsidiarity in methods”. It should have three interlinked objectives, to be achieved by the Member States:

• First, that all Member States should create a supportive policy framework, which enables energy companies and other market actors to successfully implement en-ergy efficiency programmes, and to finance the programme costs in a way not harming their competitive position in the energy markets. The Member States should be free how to achieve this, e.g., using the most appropriate policy mecha-nisms presented in chapter 4.

• Second, that all Member States should promote further the supply of and demand for energy efficiency services, e.g., by the instruments mentioned in chapters 4 and 5.

• The first two objectives serve the ultimate third objective: to create lasting energy

savings of ca. 10 % over the next decade and additional savings thereafter, com-pared to the baseline trend of energy demand.

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The inner back cover of this report provides an overview of the possible common

elements of such a Directive, and the possibilities for implementation by the Member States.

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1 Energy Efficiency – The Forgotten Half of Competition

Economics is the main rationale for the liberalisation of the European electricity and gas markets. Energy supply is expected to become more efficient. Many customers currently benefit from lower prices for a unit of energy due to the competition between energy suppliers.

But competition for cheap kiloWatt-hours is not sufficient for attaining a sustainable energy sys-tem, combining economic efficiency with respect for the environment and for social matters. It "forgets" the second half of the market: the competition between energy supply on the one side, and efficient final use of energy on the other.

Figure 1: Supply of genuine energy services as the final product of interlinked markets

End-use (or final) energy, e.g., gas or electricity, is not the final product, but only an intermediate product. End-users in industry, the private and public service, and the residential sector do not benefit directly from final energy. What they need is genuine energy services, i.e. the physical amenity provided by energy-using equipment or buildings, for example cooked or cooled food, il-lumination, thermal comfort, transportation or product manufacturing.

Converting final energy with the help of end-use technologies produces genuine energy services. This process can be optimised if energy-efficient technologies are used: several instruments such as targeted consulting, energy performance contracting, etc can promote this. The demand-side energy efficiency potential is large. On average, around one third of all energy can be saved with a net economic gain. It costs less to save a unit of energy than to generate, distribute, and supply it.

Hence, it is not sufficient to limit market reforms to just one part of the market by stopping at end-use energy. This would mean a loss for the economy and a reduction in consumer welfare. A sus-tainable energy system can only be achieved by including the efficient use of electricity and gas into the competition, and developing a European Internal Market for genuine energy services.

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In Conclusion, increasing energy efficiency is a “win-win-win” option. It simultaneously contributes to all major objectives of EU energy policy – protection of the environment, competitiveness of the economy, and security of supply – as well as to increased employment and consumer welfare.

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2 Energy Market Liberalisation and Energy Efficiency – Opportunities and new Barriers

The liberalisation process has increased competition in at least some parts of the European en-ergy markets, thereby leading to new market structures. However, liberalisation has not positively affected the market barriers, which exist on the demand side for a more efficient use of energy, e.g. lack of knowledge among end-users and providers of end-use technology, split incentives, high implicit rates of return, lack of funding, etc. (Vine et al. 2002). On the contrary, the Green Paper on Security of Supply even suggests that electricity demand may actually increase by 20 % due to lower electricity prices.

Therefore, a professional intermediary role is needed between providers and customers of en-ergy-efficient end-use solutions to overcome the many barriers to end-use energy efficiency, and to reduce the transaction costs for energy efficiency measures. This will multiply the effects of economic and legislative instruments such as energy taxes, minimum energy efficiency standards and labelling.

However, the incentives for energy companies to become such an intermediary and to implement demand side energy efficiency activities have changed. In liberalised markets, the power of environmental motivations is diminished and economics become the main rationale for most activi-ties. As an example, for most energy companies integrated resource planning (in the classical sense of optimising the mix of supply-side and demand-side resources) to meet the total demand for genuine energy services at least cost is no longer appropriate due to unbundling of generation, network, and retail, and the incentive for maximising kWh sales (cf. chapter 5.3.4 for exceptions).

Nevertheless, in the prevailing environment of greater competition, there are some market situa-tions in which economic incentives for energy companies to implement energy efficiency meas-ures on the demand-side still exist:

• In some cases, demand-side energy efficiency can - at least partly - avoid the new installation or upgrade of generation, transmission or distribution capacities at least cost.

• Offering individual energy efficiency services to larger customers in industry, commerce and in the public sector often presents a profitable business opportunity providing additional reve-nues.

• If customer retention measures are economical, increased customer loyalty can be a further incentive for energy efficiency activities. In the liberalised markets, activities are increasingly customer-oriented. To retain or gain new customers, innovative energy companies offer spe-cific energy efficiency assistance or even comprehensive energy service packages.

• Energy efficiency activities can improve the corporate image of the energy company amongst the public.

• Programmes supporting energy-efficient fuel switching towards the energy type offered by the energy company increase the company’s sales.

Although these economic incentives for energy efficiency activities by energy companies inherent in the market system exist, they are too weak for consistently increasing energy efficiency activi-ties to levels motivated by the potential for energy efficiency and the broader energy and climate policy objectives. Moreover, if there is no supportive framework, the present strategic orientation of many energy companies to concentrate on their core business, i.e. on selling end-use energy, and the present focus of many customers, regulators and politicians on comparing kWh prices,

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not bills, will make it much more difficult for energy companies to increase demand-side energy efficiency activities.

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3 Why Energy Policy Should Create a Supportive Framework for Energy Efficiency Programmes and Services by Energy Companies and Others

3.1 Why there is the Need for a Supportive Framework

In the absence of a supportive framework, energy companies will hardly perform any energy effi-ciency activity, if its costs are not borne by the customer or market agent who directly benefits. But because of the existing barriers to the uptake of cost-effective energy efficiency measures by the end users, customers rarely ask for these activities either. To overcome the barriers, support to end-users for energy efficiency is needed from market and policy.

A simplified scenario analysis will help us clarify the basic dilemma.

Growth scenario:

Let us assume, the enlarged EU would need 3,000 TWh of electricity in 2010 in the absence of additional energy efficiency activities, and the average electricity price to the consumer would be 10 Cent per kWh.

Efficiency scenario:

Let us now assume that a supportive framework would stimulate additional energy efficiency pro-grammes by energy companies and other actors, which save 10 % of electricity compared to the growth scenario, and around 5 % on the average electricity bill.

As Table 1 shows, energy efficiency will significantly reduce the energy bill (consumption times price) compared to the growth scenario. However, an additional 0.5 Cent per kWh is re-quired to finance the energy efficiency programmes that will ultimately reduce the bill.

In reality, the energy companies would only carry about half of the costs of the energy efficiency im-provements, and their customers the other half. So prices might increase by only 0.2 or 0.3 Cent/kWh, and the customers would still save around 5 % on their total expenditure for heating, cooling, etc..

Table 1: Bills vs. prices in two simplified scenarios of electricity consumption

Scenario Consumption (TWh) Price (Cent/kWh) Bill (billion e)

Growth 3,000 10.0 300.00

Efficiency 2,700 10.5 283.50

Without the assumption of a supportive framework, the efficiency scenario would remain a fiction. With competition in electricity supply, we cannot expect an energy company to voluntarily raise its prices to finance the necessary large-scale energy efficiency programmes, even if these would reduce the bills of the customers (Table 1). Such a company would be afraid that its customers reap the benefits of its energy efficiency programmes and afterwards switch to a competitor with a cheaper electricity price. This is exactly why energy policy needs to create mechanisms ena-bling energy companies to finance energy efficiency programmes, while strengthening or at least not harming their competitive position in the liberalised electricity and gas markets. Only in this

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way can the markets be stimulated to offer more energy efficiency, linking the benefit of the en-ergy companies with the benefit of their customers.

It is important to note that in the medium term, a supportive framework for energy efficiency pro-grammes can (and will) also stimulate the market for energy efficiency services (i.e., activities individually paid by the customer or market agent who directly benefits). For example, projects with energy (savings) performance contracting can benefit from free energy audits or from rebates for the installed energy-efficient technologies offered within an energy efficiency programme. Fur-thermore, the market for energy efficiency services will be improved, if energy efficiency pro-grammes increase the customers’ awareness of the cost-effective potentials for energy efficiency, and if simultaneously the energy companies build up know-how for the realisation of these poten-tials.

3.2 Why Energy Companies should play a Prominent Role

There are a number of arguments, why energy companies should, beside other actors, play an important role in implementing energy efficiency on the demand side:

• As the markets of the future should be markets for genuine energy services, not for energy, the energy companies of today should develop to become providers of genuine energy ser-vices at least cost and least environmental damage, to address the transition to sustainable energy systems. Other market actors can and should supply such services as well.

• It does not make sense to preclude energy companies from the provision of energy efficiency. Pure energy suppliers or distributors can primarily increase their profits through increased sales and will thus market a higher energy use, and possibly lobby against energy efficiency. Thus, it is easier to promote energy efficiency in co-operation with energy companies, who have incentives from a supportive framework for energy efficiency programmes and services. Energy efficiency will then be a competitive advantage for the companies and enable them to compensate for the reduction in sales, profit, and employment that fierce competition on the energy markets may bring to them.

• To engage in the rational use of energy, their core product, should be a part of the product responsibility (and Corporate Social Responsibility) of energy companies.

• Without energy efficiency activities by energy companies, a number of important opportunities will be missed. In particular, distribution and/or supply companies have direct contact with customers. This can help accelerate access to the customers for information dissemination, installation, and billing in the context of energy efficiency services and programmes. Participa-tion of energy companies in energy efficiency activities can thus reduce the transaction costs and accelerate market transformation for efficient end-use equipment.

• It is more cost-effective for society to use existing infrastructure (e.g., customer information centres) and energy efficiency experience of energy companies, than to let it break down dur-ing the present price competition phase and then rebuild independent infrastructure and exper-tise with public funding.

• Participation of energy companies will contribute more ideas to energy efficiency activities. All actors and ideas are needed to realise the potential for energy efficiency.

• Involving the energy companies can also bring considerable synergies to many instruments for promoting energy efficiency, such as incentives, standards, labels, co-operative procurement and other market transformation programmes.

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• In conclusion, realising energy efficiency improvements through participation of energy com-panies will accelerate the potential economic and ecological benefits to society. Through en-ergy companies taking an active role:

� Larger contributions to climate protection will be achieved,

� Advantages for the national economy will be realised faster,

� More employment through energy efficiency will be created or retained, and

� External costs will be avoided, and the market actors causing an environmental damage or risk will be held responsible (thus obeying the ‘Polluter pays’ principle).

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4 National Policy Stimulating Energy Efficiency Activities

4.1 Recommendations for Policy Design

A supportive national policy framework should stimulate both energy efficiency services and programmes of energy companies and other market actors.

Energy efficiency services may not be appropriate in every scenario; some of the barriers to en-ergy efficiency cannot be overcome by them. In fact, some of the barriers (e.g., lack of knowledge) will hinder the development of energy efficiency services too. Furthermore, such paid energy effi-ciency services are often more appropriate for larger, more complex projects yielding revenues high enough to cover the transaction costs for the services. For many other energy efficiency po-tentials, it is easier to assist their implementation through energy efficiency programmes, com-bining information, advice, training of technology suppliers, and often a financial incentive to the customer. These programmes, paid through the energy prices or from tax income, are generally more suitable for promoting energy-efficient appliances or similar measures usually purchased and used in large multiples of individual units.

Experience shows that energy efficiency activities have been most effective where a combination of

• An agreed or mandated, quantified target for energy savings,

• A channel or an allowance for raising funding, and for avoiding net losses,

• And a standardised and mandatory scheme for cost-benefit evaluation of the energy efficiency activities

has been created (e.g., in Denmark, the Netherlands, the UK, or the USA).

Useful combinations of the policy mechanisms described in Chapter 4.2 to create a supportive framework for energy efficiency activities carried out by energy companies and other actors are presented in Table 2.

The overview in Table 2 is divided into mechanisms for creating a quantitative target, which should be combined with mechanisms for raising funding, and which should be completed by further sup-porting mechanisms useful in every combination of policies and measures. Several combinations of these elements are possible, e.g., mechanisms limited to monopoly segments (i.e., distribution and transmission networks and supply to non-eligible customers) can be combined with mecha-nisms for the non-regulated parts of the markets.

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Table 2: Useful combinations of policy mechanisms for stimulating energy efficiency programmes and services

Scenario Main mechanism for cre-ating a quantitative target

Main mechanism for raising funding

Dedicated Funds Size of Dedicated Funds to finance energy efficiency activities

Dedicated Funds to finance energy efficiency ac-tivities, from special levy or from taxes, administra-tion by independent body or by energy companies

Targets and fund-ing for energy companies

Obligations or Negotiated Agreements to implement energy efficiency activities

Price Regulation, limited to monopoly segments*, or regulated special levy system to enable energy efficiency programme cost recovery; Direct revenues from energy efficiency services

Common components of each combination: 1. Price regulation, limited to monopoly segments*, to avoid artificial incentives for increased

sales 2. Other legal and technical support for energy efficiency services and programmes 3. Requirement to report on energy efficiency activity results, using common evaluation methods

* Distribution and transmission networks and supply to non-eligible customers

Chapter 5 will present examples for such national policy frameworks to stimulate energy efficiency services and programmes. Chapter 6 and 7 will deal with the question of embedding these in an EU policy framework to complete the internal EU market for least-cost energy services.

4.2 Overview of Policy Mechanisms

Here, we briefly explain the policy mechanisms for stimulating energy efficiency programmes and services mentioned in Table 2. More detail can be found in a recent study (Wuppertal Institute et al. 2000).

Schemes with dedicated funds to finance energy efficiency programmes by energy com-panies, Energy Service Companies and other bodies To finance the implementation of energy efficiency programmes and the development of a market for energy efficiency services, a dedicated fund is raised through a public benefit charge applied on all or certain actors of the electricity and gas system, or through recycling a part of an energy tax. The type and amount of energy efficiency programmes to be funded, and, as a consequence, the amount of funds, will depend on the specific goals to be reached. Furthermore, the administration of the funds, and the definition and monitoring of the energy efficiency activities, can be in different hands (an existing or new, independent or government body, or the energy companies themselves, with independent oversight). In Europe, such a scheme has been introduced, e.g., in Denmark (the Electricity Saving Trust scheme presented in Chapter 5.3).

Obligations to achieve a target for energy savings through energy efficiency programmes and services. A quite strict mechanism to stimulate a defined level of energy savings is to set an obligation, i.e. a legally binding target for the energy companies. Obligations can differ by actors (distribution and/or supply companies) and by targets (as a quota for saving X GWh, or for spending a percent-age of revenues on energy efficiency). The way to set the obligation may also differ, e.g.

1. By law or by the regulator; 2. In the license; 3. As an extension of public service obligations;

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4. Targeted to technologies and customers neglected by the commercial services market.

The UK Energy Efficiency Commitment (cf. Chapter 5.3) is the most prominent example of such an obligation in Europe. More recently, Belgium, Denmark and Italy have created energy efficiency obligations for distribution network companies in their energy legislation.

Negotiated energy efficiency agreements with the energy industry. Here, the government or the regulator negotiates the energy efficiency target with the energy in-dustry, and settles the target in an agreement. Such a negotiated agreement can be a substitute for obligations, provided the number of energy companies is not too big (e.g., less than 20), and a good monitoring and enforcement of compliance is in place.

Actions in the price regulation of monopoly segments targeted at making energy compa-nies positively affected or at least profit neutral by performing energy efficiency pro-grammes. When performing an energy efficiency programme, an energy company faces both direct pro-gramme costs and usually net lost revenues due to reduced energy sales from the programme. Under certain regulatory regimes, these costs or losses cannot be recovered and hence create extremely strong disincentives to energy efficiency activities.

There are a number of actions, which still are available for the price regulation of monopoly seg-ments (transmission and distribution networks, supply to captive customers) and targeted at re-moving these disincentives:

1. Recovery of strictly direct costs of an energy efficiency programme within tariffs; 2. Recovery of net lost revenues because of reduced energy sales from energy efficiency within

tariffs; 3. Additional energy efficiency incentives within tariffs (bonus, shared savings, mark-up).

Energy efficiency programme cost recovery has been quite common in Europe, but the cases of recovery of net lost revenues, or of additional incentives are few.

Change the price regulation of monopoly segments to remove pressure to increase sales. With restructuring, the monopoly sector, and hence price regulation, is reduced to the transmis-sion and distribution networks and, at least for some time, to the supply to non-eligible (captive) customers. Price regulation for these market segments should try to better align the evolution of revenues and profits with the evolution of cost drivers (e.g., for distribution networks, this can be energy sales, number of served customers, grid length). A reduced weight of energy sales, typi-cally 25 to 50 %, would better reflect the structure of costs and at the same time reduce or avoid incentives to increase sales. In Europe, such new regulation schemes have been introduced in UK in 1994, and in more recent years in Portugal, Norway, and Italy.

Legal and technical support and quality standards for the development of energy effi-ciency programmes and services. There are a number of policy actions, which are targeted to develop the market for energy effi-ciency services, but also remove some non-financial barriers to the implementation of energy effi-ciency programmes. Such policy actions can be:

• Development of standardised monitoring and evaluation procedures, • Development of guidelines for the tendering procedures in activities of demand-side bidding and

competitive sourcing of demand-side efficiency resources, • Technical support for energy efficiency service or programme preparation, implementation,

evaluation (e.g. training for the staff on EE technologies, evaluation of savings etc.),

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• Development and testing of standardised Energy Performance Contracting schemes, • Guarantee fund for insurance of investments, • Independent certification of energy service companies (ESCOs), • Fostering co-operative processes of the relevant actors in the market for energy efficiency pro-

grammes and services.

More examples for policies particularly to stimulate demand for energy efficiency services are mentioned in chapter 5.2.4.

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5 Experiences in EU Member States: Good Practice in Energy Efficiency Activities and Stimulating Policy

5.1 The Development of Energy Efficiency Policy Frame-works, Services and Programmes in the Liberalised Electricity and Gas Markets

Some experts and policymakers expected that in a liberalised energy market, energy services would flourish, since suppliers would be keen to distinguish themselves from the competition by offering such services. So far, evidence of this is mixed. In many EU Member States, the fierce competition for low electricity and gas prices is still dominant, or it has not even started for all customer groups. In other Member States, this first phase of competition via low commodity prices is over, and value-added services begin to gain in importance. But these value-added ser-vices, or even energy-related services, do not have to include energy efficiency improvements at all.

Still, a market for energy efficiency services mainly targeted at larger customers begins to de-velop in a number of Member States, or is adjusting to the new market environment in other coun-tries. However, this development could and should be accelerated by supportive policy.

In those Member States, which have combined the implementation of the EU Internal Markets for electricity and gas with a supportive policy framework, energy efficiency programmes are also continuing or even expanding in volume and scope. In Member States without such a policy, such activities by energy companies have gradually reduced with the introduction of retail competition, and are continued only by a smaller number of companies that are more innovative, or committed to protection of the environment.

Many good practice examples for energy efficiency services and programmes and for a policy framework supporting them exist in the EU electricity and gas markets. They can be blueprints for dissemination and extension as markets are in the process of further restructuring and liberalisa-tion. In the two following chapters 5.2 and 5.3, we present typical examples. Chapter 5.2 concen-trates on energy efficiency services. Chapter 5.3 focuses on energy efficiency programmes, and on the policy frameworks and motivations that made these programmes possible. All are good practice services or programmes, but we do not claim to have made a comprehensive survey or to have collected the best practice examples. We hope that the operators of other, similar good or even better practice examples in Europe, which we do not present here, will forgive us. More ex-amples can be found in the background document “Energy efficiency programmes and services in the liberalised EU energy markets: good practice and supporting policy”.

Table 3 presents an overview of the policy framework for electricity and gas transmission, distribu-tion and/or supply companies regarding energy efficiency activities in the different Member States of the EU-15.

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Table 3: Framework for electricity and gas transmission, distribution and/or supply companies regard-ing energy efficiency

Electricity energy efficiency Gas energy efficiency Country Energy

efficiency funds

Energy efficiency

Obligations

Others Energy efficiency

funds

Energy efficiency

Obligations

Others

Austria Belgium X1 X1 A X1 A Denmark X X A, R X A, R Finland A A France A A Germany A A Greece ? ? ? ? ? ? Ireland X A Italy X R X R Luxembourg ? ? ? ? ? ? Netherlands X2 A X2 A Portugal R R Spain Sweden UK X R X R

Source: Wuppertal Institute et al. 2000; Wuppertal Institute 2002 A – Negotiated agreements and other commitments for energy efficiency activities or savings targets R – Reduction of disincentives or setting of incentives in ratemaking of monopoly segments ? – No information could be gained in the course of the study, no response to survey

1 The current DSM charge of 0.0248 Cent/kWh in the electricity and gas sector is going to be abol-ished. Instead there will probably be energy saving obligations on the electricity grid and gas com-panies in the whole of Belgium as they have already been stated in Flanders from 1 January 2002.

2 Energy efficiency activities financed via energy taxes and administered by the utilities.

5.2 Transforming the Market for Energy Efficiency Ser-vices: From Energy Analyses to Performance Contracting

Paid or subsidised energy analyses (also called energy audits) are a good starting point for further energy efficiency activities. However, there is often a large gap between the potential and the reali-sation. New and effective combinations of energy efficiency services and programmes are possi-ble. The depth and focus of the services offered can vary considerably, according to the capabili-ties of the supplier, and the needs of the customer. We are glad to present examples for syner-gies between energy audits and energy efficiency services (chapter 5.2.1), the provision of useful energy carriers to satisfy customer needs (chapter 5.2.2), Energy Performance Contracting focus-sing on investments in energy efficiency and/or on operation and maintenance (chapter 5.2.3). Particularly the latter can benefit from legal and technical definitions and standards supporting its development (chapter 5.2.4).

Most of these services concentrate on medium-sized to large public and business customers. This is not surprising, since energy efficiency services carry a transaction cost for selling energy

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efficiency to the customer, and for concluding and implementing the contract, which is usually higher than the transaction cost for energy efficiency programmes. Projects therefore need a minimum volume to cover that cost. Still, chapter 5.2.5 presents two efficient approaches for offer-ing energy efficiency services to domestic customers.

5.2.1 Synergies between Energy Analyses and Energy Efficiency Services

The energy analysis is the first phase of most energy services, because an energy consumer must learn what to do best, and this may stimulate action. Frequently, however, the customer knows that there is a potential benefit but takes no further action unless the equipment breaks down completely. Lack of information is not the largest barrier; in this case it is lack of priority (energy efficiency is not the customer’s core business) and consequently lack of staff time to manage energy efficiency investments, lack of continuity of effort, and financial risks that are as important. Follow-up energy efficiency services can guide the customer through the implementa-tion process for the energy efficiency measures identified in audits.

ENERGILOOPEN® (The Energy Loop)

ENERGILOOPEN® is an energy efficiency and ancillary services concept offered since 1997 by Sydkraft, one of the major energy companies in Sweden. ENERGILOOPEN® targets mainly medium and large-scale customers in the industrial, commercial and public sectors. All energy carriers, as well as material/waste flows and emissions, can be included in the analysis (the cycle includes audit, analysis, decision, implementation, and follow-up). Typical measures include energy-efficiency improvements and peak load reductions from changes in lighting, HVAC, compressed air systems, etc. Cost reductions are typically not only the result of the energy savings, but are also achieved through tariff optimisation, better process reliability and product quality, improved work environment, reduced emissions, etc.

The customer can pay for the initial audit and analysis separately, or enter into longer, typically one to three years, contracts completing the whole loop. A shared savings approach is generally used in the latter. Sydkraft also offers a savings guarantee that reduces the risk for the customer. The customer typically makes the investment, but Sydkraft can be involved in financing. In Sweden there are currently no government subsidies for this type of activity.

Resulting cost savings are typically in the range of 5% to 35% and mainly result from energy savings. The market potential is large. In Sydkrafts assessment, only about 5-10% of the market is tapped today, and Sydkraft probably has a 20-30% share in this market in Sweden (estimates are very crude due to difficulties in defining the market). Investments made typically have one to three year paybacks, and sometimes more.

ENERGILOOPEN® is a completely commercial activity. Sydkraft has the ambition to continue the devel-opment and marketing of the concept.

From audits to implementation of Energy Efficiency opportunities: The MotivaESCO Concept

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Motiva, the Finnish Energy Agency, together with Finnish consulting companies and clients has devel-oped a set of Model Contracts for Performance Contracting. The idea of the MotivaESCO concept is a transparent way of applying Energy Performance Contracting (EPC) in the Finnish market place. This concept is a follow up to the very frequent energy audits subsidised by the Ministry of Trade and Industry and implemented according to Motiva’s guidelines. Finland has a nine-year history of continuous energy auditing and the aim of the MotivaESCO Concept is to increase the value of the audits by offering the customers an easy way of implementation.

The level of realisation of the EE improvements without the new concept is already quite high. For a sample of almost 500 operations with over 3,300 energy efficiency measures in the public services, private services, and industrial sectors, between 55 % (industry) and 70 % (public) of the potential sav-ings detected in the energy audits had already been implemented or decided for implementation. This means, however, that 30 to 45% of the potential savings are not realised in the present market structure.

After the energy audit has been carried out, the customer usually realises the no-cost and low-cost en-ergy saving measures, but there normally is a good energy saving potential in the range of 2 to 5 year pay back time which will be left untouched with the traditional financing mechanisms. In such cases, if the customer agrees, a call for tender is made to determine which ESCO will be in charge of the project. The Energy Performance Contract defines an obligation of results usually for reliability and lower energy consumption; the ESCO is responsible for implementation and operation and is paid according to effi-ciencies achieved. This new approach to energy performance contracts is called the MotivaESCO Con-cept. Its structure and connections to Finland’s Energy Audit Programme are illustrated in Figure 2. As the figure shows, the MotivaESCO Concept has three phases: The Project Plan, the Implementation and the Follow-up.

Figure 2: The MotivaESCO Concept

There are three alternatives for repayment: calculated savings, actual savings based on a short-term measurement or actual savings based on continuous measurement. These alternatives can be negoti-ated with the customer during the project plan phase. A subsidy is available for the implementation costs if the customer has signed an agreement with the Finnish government on voluntary energy con-servation.

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About six months after launching the concept, a few companies started to follow the MotivaESCO Con-cept in detail. Every ESCO will probably have a slightly different way of applying the presented model.

Concluding, EPC is a good way to implement measures that remain untouched with the traditional fi-nancing mechanisms. EPC also allows to introduce new technology, which otherwise is considered too risky. Nevertheless, in Finland the industry and the building owners in the service sector are quite con-servative in their actions and introduction of a new EPC concept requires good planning and patience.

5.2.2 Supply of Useful Energy Carriers to Satisfy Customer Needs

Not only final energy (electricity, gas), but also useful energy carriers (heat, cold, compressed air) or even (genuine) energy services can be sold and billed to customers. The provider will have an incentive to increase energy efficiency, if the contract is made in a way that energy efficiency in-creases the provider’s profit. The energy companies thus acknowledge that the final customer is interested in the unit of such useful energy and not in the kWh of gas or electricity.

The supply of heat is already quite common, and is an energy efficiency service that can also be profitable with domestic customers. Since useful heat services have been described elsewhere, we present an innovative example of compressed air outsourcing.

Air Utility / E.ON Ultra Air – Compressed Air Outsourcing

Delivery of useful energy (compressed air) to industries, thereby reducing energy costs to the customer, is the essence of the « Air Utility » service. The energy service company is responsible for planning, installation, operation and maintenance of the compressed air system. It delivers compressed air at a specific price per m3. To do this, compressed air generation is outsourced into an independent busi-ness unit. The customer does not bear any risk of financing or operation.

Instead of the complete delivery of useful energy by providing compressed air (« Air Utility »), also the following compressed air service modules can be ordered from E.ON Ultra Air:

• Air Survey – check of the current condition of the compressed air system, first areas with cost saving and optimisation potentials are identified,

• Air Audit – detailed analysis and quantification of the potential cost savings, adequate programme of measures to realise the savings,

• Air Performance – ensuring the quality of the compressed air by continuous network management and detecting and eliminating leaks.

The customer pays the whole service at a specific price per m3. In a good practice example by Ultra Air, the energy service company invested about 338,000 e in the compressed air system. In 2003/2004, the customer pays between 0.37 (heat recovery excluded) and 0.395 (heat recovery included) Cent/m3 for up to 22.5 million m3/year, and 0.175 Cent/m3 for any additional consumption. The electricity consumed has to be paid separately. In the example, it is 4 or 5 Cent/kWh, which leads to total prices for the delivered compressed air between 0.83/0.95 (heat recovery excluded) and 0.855/0.975 (heat recovery included) Cent/m3 for up to 22.5 million m3/year, and 0.635/0.755 Cent/m3 for any additional consumption.

Over the service life of a compressed air system, 55 to 75% of compressed air costs are due for electric-ity. A study co-ordinated by the Fraunhofer ISI on behalf of the European Commission has shown that in Germany alone, the ca. 62,000 compressed air systems consume about 14 TWh of electricity per year, i.e. about 7% of the total electricity consumption of the industry sector. This study confirms that energy savings of 25-40% can be achieved in existing compressed air systems, which would be around 3 to 5 TWh/year. The EU-wide potential electricity savings in compressed air would thus amount to ca. 15 TWh/year.

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The above-mentioned good practice example of Ultra Air shows that with investments of 338,000 e in a new compressed air system, including four heat exchangers, the compressed air-related electricity con-sumption of a customer was reduced by about 27% (730 MWh/year). Additional fuel savings (525 MWh/year) were achieved by the heat exchangers. The duration of the contract is 10 years.

According to information by Ultra Air GmbH, the energy service company has a share of 40 to 50% in the German market for compressed air systems/delivery of compressed air. It has a strategic partnership with the energy company E.ON for the distribution of E.ON Ultra Air.

5.2.3 Energy Performance Contracting – Meeting Customer Needs with less Energy

The energy (savings) performance contracting approach builds on the engagement of an external actor such as an energy service company to enable energy efficiency measures in an organisa-tion. This approach is advantageous compared to the own realisation of the measures in the following cases:

• New means of financing or the special know-how of the energy service company are needed,

• The organisation wants to transfer risks of performance to the energy service company,

• Own staff shall get access to external knowledge and qualification,

• Only limited personnel resources are available,

• Or the organisation wants to concentrate on core activities.

There are large market potentials for energy performance contracting (EPC) in general. According to a recent study by Frost & Sullivan, the market for ”contract energy management” in Europe is expected to grow rapidly with an annual growth rate of 15%, from a turnover of 2,900 million E in 2001 to 6,700 million E in 2007. However, EPC in end-use energy efficiency measures contributes only between 1 and 5% to this total, the rest is EPC for investments in energy supply (plant/grid contracting). For the public sector in Germany, Öko-Institut and the Berlin Energy Agency esti-mated that with the help of EPC in energy efficiency measures public energy budgets could be cut by 25 to 100 million E/year during the contract period, and 310 million E/year afterwards. Current public sector spending on energy is estimated at 3,100 million E/year, of which ca. 1,865 million R/year are assumed to be appropriate for EPC. Between 4,430 GWh/year (=7%) and 8,860 GWh/year (= 13%) of the total energy demand of the public sector could be saved, of which about 430 to 860 GWh/year would be electricity (Umweltbundesamt 2000). In a recent survey, the Wup-pertal Institute found that, depending on the specific circumstances and on the contract type, be-tween 10 and 38% of energy are saved in EPC agreements on energy efficiency measures on the demand side (Kristof 2002).

For the whole EU public sector, potential energy efficiency gains from energy performance con-tracting would thus be around 18 TWh/year of heating energy, and around 2 TWh/year of electric-ity for lighting, ventilation, air-conditioning, and pumps.

Relighting: a Belgian good example for Energy Performance Contracting

FINES N.V., an independent and privately owned Belgian ESCO created in 1997, offers energy-efficient lighting system retrofit (“relighting”) services to high lighting density sites on a turn-key basis. Most of their customers are local authorities (swimming-pool, sports centre, etc.), but FINES also works for the

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industry or office buildings. The turn-key scheme is essential to the realisation of the energy savings because it is the best way to overcome the lack of time, knowledge and financing on the customer side.

In a free pre-feasibility study, FINES illustrates how the project can save enough energy to save money with a reasonable payback period. If the customer agrees to continue, he can define his needs exactly in order to make a full feasibility study. When this study is completed satisfactorily the client is expected to execute the recommendations and continue the project to completion.

Figure 3: The organisational structure of the relighting service offered by FINES N.V.

The ESCO invests with priority in ballasts (25% of the savings), lamps (T8 and T5) and in luminaires (with reflectors). The comparison with the pre-existing situation is very easy in this case (metering of consumption in operation mode). Additional savings can be obtained using lighting management de-vices (occupancy sensors, dimming systems, etc.). These extra savings depend on other factors such as occupants behaviour or daylight intensity and are therefore more difficult to monitor but monitoring is still possible. Although FINES is in charge of the audit, studies and the financing, subcontractors under project responsibility of FINES implement the retrofit.

Independent of any manufacturer, FINES guarantees savings for a minimal investment. As an ESCO, the company bears the technical risk because the contract includes an obligation of performance but also the financial risk. There are two main ways to pay for this service: either the customers have the capital available to pay directly or they need a financing plan (Third Party Financing – TPF - contract). A third alternative would be to sell the new equipment to a financial company, which would rent it to the customer (leasing). Furthermore, rebates from the Belgian energy efficiency programmes improve the profitability of the service for the customer (cf. Figure 3). In the case of a TPF contract, payments are fixed and based on engineering estimates and on-site verifications. Actually, before and after the ‘relighting’, the power consumption in sample rooms is measured over a fixed period. Savings are assessed, and this assessment is the basis for the monthly payments. In most cases, the length of the payback period is about four to seven years.

The overall lighting savings potential in Belgium is estimated at 260 million e and the lighting electricity consumption for the service and industrial sectors is evaluated at about 5 TWh and 1.5 TWh, respec-tively. In around 50 projects to date, electricity savings in lighting between 30 and 70 % were achieved. Excluding technical consultants, FINES is the only ESCO specialised in ‘relighting’ in this market in Bel-

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gium. The potential is enormous and cannot be fully transformed into reality without FINES or similar firms bearing the project risks.

In Belgium, several programmes support audits and implementation of energy efficient measures. Moreover, with the help of advertising, Belgium proved the achievability of important savings by busi-nesses in order to develop the market of efficient lighting.

FINES endorses the European GreenLight programme to reduce the energy consumption from indoor and outdoor lighting throughout Europe, thus reducing polluting emissions and limiting global warming. The objective is also to improve the quality of visual conditions while saving money.

Energy Performance Contracting for operation, maintenance, and energy efficiency investments in public buildings: a good example from Italy

AEM Turin is an energy company 82 % owned by the Municipality of Turin and active mainly in electricity generation and distribution, and in district heating. Since 1995 AEM Turin has managed the heat sys-tems in all the buildings owned by the Municipality of Turin. The contract covers 700 buildings (consist-ing of: offices, kindergartens, museums, libraries, sport facilities and the town hall) with ca. 8 000 000 cubic meters (8% of all the built up volume in Turin). The Municipality’s annual expenditure for heating in 1994 was 37 million e.

The contract aims at achieving general economic efficiency, through the renovation of the heating sys-tems and the rational use of energy. AEM Turin is also responsible for security of the systems, emission controls, and boiler efficiency controls.

Since 1996, after an initial transitory phase, the contract was based on an annual fixed charge. Annual economic benefits are shared between AEM Turin and the Municipality, in order to provide incentives to both the actors. Fuel switching and renewal of equipment are carried out with a third party financing so-lution.

AEM Turin has developed a plan for future intervention (ca. 22 million e) that will cover:

• New fuel mix: increasing district heating; renewable energy sources quotas (wood, solar heating); heat pumps; fuel switching to natural gas;

• Heat generation efficiency: high efficiency boilers;

• Heat distribution efficiency: circuits sectioning; long distance control systems; thermoregulation;

• Building envelopes: double glazing; wall and loft insulation;

• Users involvement: information campaigns.

The new contract will end in 2014.

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Figure 4: Annual heating energy consumption and fuel mix for the buildings of the City of Turin

5.2.4 Legal and Technical Definitions and Standards to Support the Development of Energy Efficiency Activities

The development of energy efficiency services is still in its infancy in Europe. Especially for me-dium and small customers, transaction costs are often (still) too high when compared to the po-tential savings. Legal and technical definitions and standards as well as further additional instru-ments can help to reduce these transaction costs, e.g.:

• Legal definitions of “energy efficiency services” distinct from more general energy-related ser-vices

• Standardised definitions of savings and useful lifetimes,

• Standardised tendering procedures (guidelines),

• Standardised contracts and the allowance of long term contracts,

• Standardised measurement and verification procedures,

• Modified or adapted procurement rules in order to remove the barriers that public administra-tions in most countries face to buy energy efficiency services,

• Extension and adaptation of the rules of fair competition to the situation where the energy companies enter the market of energy efficiency or other services to their customers,

• Guarantee funds for insurance to energy efficiency service providers,

• Certification/qualification programmes for energy efficiency service providers,

• Programmes for coaching potential energy efficiency service customers through the process of tendering for, selection of, and contracting with a provider.

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Energy Performance Contracting with a focus on operation and maintenance: the French standards of HVAC operation

In France, HVAC (Heating Ventilating and Air Conditioning) operators occupy the majority of the energy performance contracting market. The “Operations & Maintenance" activity in France is characterised by three important criteria, which may explain the success of the HVAC actors in this market:

• Contracts define a guarantee of results; usually for a certain level of reliability and a targeted energy consumption well under the current level (usually expressed in Euros),

• Companies carry out energy diagnoses and implement the improvements, of which they later en-sure the profi tability,

• Contracts are drawn up for a period of several years, consistent with the operator’s involvement.

So the model of energy performance contracting in France is based on the close link between who in-vests and who is in charge of the realisation of the gains on the long term. It takes various forms, due to clear- cut definitions given in the public procurement guides.

Figure 5: The standard contracts for HVAC operation in France

The Law requires that the various components of the contracts are separated, in particular that the en-ergy consumption is always known and never hidden in a total cost in Euros. So the client knows the energy savings achieved by the service at every stage. When these savings become one basis for pay-ments, they are tracked even more closely. This process takes two forms:

• A sharing clause on profits associated with a lower energy consumption,

• A target level, below which all profits return to the operator, leading practically to higher savings ob-jectives.

The law fixed a framework for the duration of heating and of air-conditioning contracts, a Central State Commission defined the main types of operation of heating for the public markets. The private markets were also strongly influenced by these definitions. If these definitions are appropriate for a first drafting, they are always personalised according to the installation, in order to adjust them for the specific re-quirements of the building.

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5.2.5 Energy & More: Energy Efficiency Services included in a Slightly Higher Tariff for Domestic and Small Business Customers

Price regulation in the monopoly segments of the liberalised market should enable the implemen-tation of energy efficiency activities financed via the tariffs (as, e.g., in Italy). Even in fully liberal-ised markets customers are often willing to pay more to get economic energy efficiency services; for the energy companies this offer makes sense, because customer loyalty and image are im-proved and they find a way to diversify their activities.

Enercity Strom & More

Since October 1999, the municipal energy company Stadtwerke Hannover AG offers customers the elec-tricity tariff “enercity Strom & More” which includes - in contrast to the low-profile tariff “enercity Strom & Go” – electricity from cogeneration plants and several energy and energy efficiency services. There are some energy efficiency services included in the tariff offered for free, and some for which rebates are given (e.g., a detailed individual on-site energy audit for domestic customers). Examples of free energy efficiency services included in the tariff are:

• For domestic customers: a short individual energy analysis based on a standardised question-naire, lending out of meters and individual energy efficiency advice;

• For business customers: on-site energy advice, an energy analysis, information on energy saving measures, light metering

For domestic customers, “enercity Strom & More” costs 0.15 Cent/kWh more than “enercity Strom & Go”, but less than the existing standard tariff they would keep, if they would not switch to an “enercity” tariff or a tariff of another supplier.

Until October 2002, about 100,000 domestic customers have chosen “enercity Strom & More”, i.e. more than 30% of the 320,000 domestic customers in the original supply area, and over 90 % of those who have switched from the standard tariff to an “enercity” tariff. Several thousand of them have taken advan-tage of the energy efficiency services offered, although the Stadtwerke Hannover AG has not advertised these very intensively. An evaluation of the energy savings achieved by these measures has not been carried out.

In addition to these services, Stadtwerke Hannover contribute much higher resources to a regional cli-mate protection fund, which is now – together with the regional climate protection agency - the main actor implementing energy efficiency activities in the buildings sector in the Hannover area.

The UK Energy Saving Trust’s programme for Energy Services

Since 1996, EST has been providing pump-priming funding and assistance to social housing providers, energy suppliers and other organisations to help them develop energy services schemes, primarily for the residential sector. By the end of 2000, a total of 25 schemes had been funded, receiving grants of between 24,000€ and 240,000€ (Jones et al. 2001). Over 100 social housing providers, six utilities and other organisations had been assisted in developing energy services schemes (EST, 1999).

The schemes have included:

• Local authorities and/or housing associations setting up ‘preferred supplier partnerships’ with an energy company and also offering householders bulk-discounted measures (such as loft and cavity wall insulation, efficient heating systems and in some cases efficient white goods), plus in some cases loan finance and/or grants.

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• Energy companies offering customers surveys and discounted measures, plus loan finance (but not on one bill) (see case study below);

• Local authorities and/or housing associations running profitable cogeneration schemes (in partner-ship with private sector organisations) at least partly recycle these profits to fund energy efficiency measures in selected buildings.

The ScottishPower-led scheme is the most promising energy-company-led scheme funded by the pro-gramme to-date. The energy company received 240,000€ in funding from the EST in 1998, to set up an energy services scheme that should be able to demonstrate to other energy companies that an energy services approach can be commercially viable. They are marketing energy services (gas and electricity supply, plus a free energy report and energy efficiency measures) to householders across the UK, as a way of retaining and gaining customers . Surveys are distributed to customers with completed question-naires scanned to produce energy reports including an energy certificate and a comprehensive energy efficiency pack recommending further actions with finance offers. A call centre handles enquiries and installer agreements have been developed to install energy efficiency measures at discounted rates.

The scheme has been marketed to owner occupied households in certain regions by mailshot and through questionnaires, as well as through newspaper advertisements and prize draws. On average, 17% of the energy surveys have been returned, with take-up of offers at 1.4% (168 households by Octo-ber 2000).

Due to the high take up rate of the initial scheme, ScottishPower has been rolling out a second, bigger energy services project called Energy Sense. A mailshot to 250,000 households commenced in March 2001.

5.3 More Economic Energy Efficiency through Pro-grammes enabled by a Stimulating Framework

Several EU Member States have taken action to ensure that energy efficiency programmes, and particularly those implemented by energy companies, can continue after the restructuring and competition enforced by the EU Internal Markets for electricity and gas. These Member States have achieved impressive energy savings during recent years, as we can show by the good prac-tice examples in this chapter.

The first good examples are the energy efficiency programmes from the UK and Denmark, stimu-lated by legal obligations (chapter 5.3.1). A good example of a dedicated fund for energy efficiency at national level is the Danish Electricity Savings Trust (chapter 5.3.2). The Netherlands have found a pragmatic and efficient way for involving the energy companies into the implementation of their very successful energy rebate scheme (chapter 5.3.3). But also without a stimulating national policy framework, there are situations in which it is profitable for energy companies to implement energy efficiency programmes, e.g., to avoid grid system capacity upgrades by load management and energy efficiency measures, or to avoid the purchase of expensive peak power from the wholesale market. In chapter 5.3.4, we present two examples from France and Germany. Finally, also the business customers can be a target group for technology-specific energy efficiency pro-grammes, as an example from Spain demonstrates (chapter 5.3.5).

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5.3.1 Comprehensive Energy Efficiency Programmes Stimulated by Obligations in the UK and Denmark

In the liberalised market, energy efficiency programmes are still possible and can even be enlarged if there is a favourable framework for them, which enables energy companies to refund their programme costs in a way that is not harming their profits. Two basic ways for creating a supportive policy framework for energy efficiency programmes were identified in chapter 4:

(1) Dedicated funds for energy efficiency programmes implemented by various actors, and

(2) Obligations for energy companies to achieve a certain level of savings through energy effi-ciency activities.

An example for stimulating the implementation of a certain level of energy efficiency activities through an obligation is the Energy Efficiency Commitment (EEC) in the United Kingdom, giving electricity and gas retail supply companies the duty to deliver energy efficiency to their customers. The duty consists in the obligation to perform energy efficiency programmes or services, meas-ured in terms of cumulative energy saved by the delivered technical energy efficiency measures during their lifetime.

Other examples are the obligations to save energy or implement energy efficiency programmes for energy companies in Denmark (see below), Italy, Belgium (Flanders) and possibly soon Ireland. In all such policy frameworks, the energy efficiency programme costs are paid for through the energy tariffs, so that the energy company’s competitive position and profits are not harmed. In all in-stances, the customers benefit from reduced energy bills (cf. Table 1 in chapter 3).

In the UK, Italy, Norway and Denmark, price regulation of monopoly segments (transmission and distribution network, and retail supply to non-eligible customers) furthermore fulfils the objective of correctly aligning revenues with sales. This will simultaneously remove any artificial incentives to increase sales, and disincentives to save energy, because net revenue losses from reduced en-ergy sales will be avoided.

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The Energy Efficiency Commitment (EEC) in the UK, 2002-2005

The EEC is directed towards the electricity and gas retail supply companies, which are under full com-petition for all kinds of customers since the year 2000 in England, Wales and Scotland. The companies only have targets for the promotion of improvements in energy efficiency for domestic customers (private households). The obligations are determined by the government (until 2002 by the energy regulator Ofgem) and have been highly cost-effective in previous programme periods since 1994. Benefits to customers and the society on average exceeded the programme costs by more than a factor of 4 (EST 2001). The regulation for the expansion of the programmes under the EEC was introduced since such activity will not take place on a large scale in the newly competitive market, without regulation, be-cause competition is generally driven by unit prices, and this is what is sold to the customer. For the period from April 2002 to March 2005, there will be a focus on helping lower income consumers, includ-ing those in receipt of income and disability benefits. Figure 6 shows how decision, implementation, funding, and evaluation is organised in the EEC framework, while Table 4 displays the types of activities and the respective energy savings targets allocated to them.

Figure 6: The structure of the Energy Efficiency Commitment in the UK

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Table 4: Energy efficiency programmes and savings targets under the EEC

Lifetime of

meas-ure

Ongoing annual en-ergy benefit to h/holds by end of

EEC period

... of which

electric-ity

... of which gas

... of which oil and

coal

Ongoing annual

energy cost savings by end of EEC

period

Annual Carbon Savings by 2005

Illustrative mix of possi-ble EEC measures

Years GWh/year

GWh/y GWh/y GWh/y

Total bene-fits Me/y

MtC/y

Cavity wall insulation 40 4,858 628 3,374 855 126 0.15

A and B-rated boilers 15 1,063 0 1,063 0 24 0.04

Loft insulation – professional

30 1,286 166 893 226 34 0.01

Loft insulation – Do it yourself

30 1,337 173 929 235 35 0.03

Fridgesavers-type schemes

15 70 70 0 0 5 0.01

A-rated appliances 15 201 201 0 0 15 0.02

Heating controls with boiler replacement

15 107 0 107 0 2 0.00

Heating controls – extra 15 180 23 125 32 6 0.01

Compact fluorescent lamps

11 1,154 1,154 0 0 123 0.09

Tank insulation 20 1,096 139 768 189 24 0.03

Draught proofing 10 141 18 98 25 3 0.01

Total EEC 11,492 2,573 7,358 1,536 397 0.41

Source: DEFRA 2001 Notes: 0.41 MtC/y is equivalent to 1.50 Mt CO2/year . The calculation of energy savings here is fuel-standardised and not discounted to take account of energy efficiency measures which would have gone ahead in any event, without the stimulus of the EEC programme, nor enhanced to take account of positive spill-over or market transformation ef-fects.

The mix of energy efficiency measures within the EEC will be pretty much as agreed in the consultation proposals (DEFRA 2001, Ofgem 2001, cf. Table 4). It is estimated that the level of EEC proposed for 2002-2005 will raise prices by 1.2% over that period. However, due to the energy savings, the estimated net benefits in reduced energy costs will rise to about 1.6% of bills by 2005 and last for the lifetime of the relevant measures (8-40 years) (PIU 2002). This shows how an increase in prices is only a necessary vehicle to fund reductions in the bill. All electricity and gas suppliers with 15,000 customers or more will be subject to an EEC obligation. They are able to achieve their EEC targets through consumers' savings of electricity, gas, coal, oil or liquid petroleum gas, i.e. not only with their own customers, and with the energy source(s) they supply (DEFRA 2001).

A further interesting feature of the EEC is that the government and the regulator encourage the compa-nies to achieve their targets by energy efficiency services, packaging energy supply and at least two en-ergy efficiency measures, instead of the standard programmes mentioned in Table 4. The companies receive an incentive through a 50 % bonus when counting the energy savings evaluated for such ser-vices towards their EEC targets.

If the EEC’s energy saving targets were valid for the whole EU-15, this would mean an annual saving of 16 TWh/year of electricity, and 46 TWh/year of gas, of which 32 TWh/y would be achieved through ther-mal insulation of buildings, and 7 TWh/y through compact fluorescent lamps. Extending the effort over 10 years would bring 54 TWh/year of electricity and 155 TWh/year of gas savings.

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Energy efficiency programmes offered by the Danish electricity distribution companies

While the EEC in the UK only targets domestic customers, in Denmark the energy efficiency obligation is placed upon the electricity network companies, who evenly supply energy efficiency activities to all types of customers, as Figure 7 shows.

Figure 7: Electricity savings from the energy efficiency activities in Denmark by customer type

To their business customers, the Danish network companies mainly offer a free on-site individual ad-vice service. They monitor whether the customers implement the energy efficiency measures identified. Each year, the companies have to provide such a free energy audit to 10 % of the business customers with more than 20 MWh/year consumption or customers with 10 % of the total consumption of the cus-tomer group. Each year, equipment and operations using 2.2 TWh/year is screened for energy efficiency. According to the experiences, ca. 5 % of this consumption (110 GWh/year) will be saved, which is the biggest part of the total annual savings from the Danish energy efficiency programmes of around 160 GWh/year.

Extending these activities to the whole EU-15 would yield electricity savings of around 8 TWh/year for business customers, and 12 TWh/year in total. Over 10 years, electricity savings of around 80 TWh/year for business customers, and 120 TWh/year in total could be achieved in the EU-15.

In the future, also the natural gas companies and the district heating companies will work for energy efficiency in Denmark. The framework of the activities will to a high degree correspond to that of electric-ity companies. Following a building-up period, these activities are expected to be considerable in scope.

5.3.2 The Electricity Saving Trust supports Energy-efficient Fuel Switch-ing and other Energy Efficiency Activities in Denmark

Mandatory savings targets as in the UK or Denmark are one way to reach a certain level of energy efficiency activities by energy companies and other actors. As an additional or alternative mecha-nism, a dedicated fund can be created (managed by a new actor) and used to implement diverse innovative energy efficiency activities with the assistance of all relevant market actors.

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Examples of such a dedicated energy efficiency fund in liberalised energy markets are the Danish Electricity Saving Trust, the new energy efficiency and renewable energy agency ENOVA in Nor-way, and the energy efficiency funds in about ten US states (e.g., New York, Vermont). All are funded on a national/state-wide level in a way not putting any energy company in competitive dis-advantage.

The Danish Electricity Saving Trust

The Danish Electricity Saving Trust is funded by a levy of 0.08 Cent/kWh, paid by domestic customers and public institutions and collected by the network companies. Private companies, consultants and/or electricity companies are invited to tender for the design and implementation of the projects. An inde-pendent board oversees the operations and selects the projects with the highest reduction of CO2 emis-sions per unit of programme investment.

Figure 8: The structure of the Danish Electricity Saving Trust

In Denmark, the conversion of electric heating to district heating and natural gas saves energy and costs. From 1998 to 2001, 17,000 apartments and homes were converted from electric to district heat-ing, i.e. 19 % out of a target market of 90,000. Annual electricity savings from the fuel-switching pro-grammes alone are now around 248 GWh. The cost to the owners is only 2,700 to 5,400 s. This was achieved through contributions of ca. 2,000 e each from the district heat suppliers, the installers (as preferential prices following a call for tenders by the Trust), and the Trust itself.

During recent years, the Trust has also been conducting campaigns in co-operation with manufacturers, retailers, the association of the electricity network companies, ELFOR, and the Danish Energy Agency on low-energy light bulbs (CFLs), white goods and standby consumption in TVs and VCRs. In relation to

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the public sector, the Electricity Saving Trust is concluding the A agreements where municipalities, counties and state institutions commit themselves to purchasing only low-electricity-consuming (A la-bel) equipment.

The overall target of the Danish Electricity Saving Trust is to reduce electricity consumption during 10 years of work by 750 GWh/year until 2008 compared to the baseline. By 2001, about half of this had already been achieved. Transferring this target to the EU-15 would mean an electricity saving of around 56 TWh/year after a ten-year period. The budget needed would be around 900 million E/year, based on the 12 million E/year the Danish Electricity Saving Trust has available. The energy cost savings to society would be at least twice as high as the costs. The fuel-switching programme alone would be able to save 46 TWh/year if extended to the EU-15 over ten years.

5.3.3 Rebate Programmes in the Domestic Sector Financed from Energy Taxes and Administered by Energy Companies in the Netherlands

Member States can be very creative in finding ways how to support energy efficiency activities with the involvement of the energy companies: The Netherlands have implemented an approach follow-ing the Dutch tradition of voluntary agreements.

Energiepremieregeling - Netherlands Energy Efficiency Rebate Scheme

In the 1990’s, the energy distribution companies and the Dutch government had agreements on quanti-fied energy savings targets. This scheme ended in 2000 with the liberalisation of the energy markets in the Netherlands. However, the electricity and gas companies are still involved in the administration of the Energiepremieregeling rebate schemes and campaigns in the context of the Dutch “Regulatory En-ergy Tax” (ecotax), where they can build on their experiences with rebate schemes in the ‘90s.

The “ecotax” on electricity and gas is in principle paid by the consumer to the state; but the energy com-panies collect it. The customers have the possibility to get a rebate paid out by the energy company for specific energy efficiency measures. The energy companies subtract these energy rebate payments from their ecotax debt. The energy companies are also reimbursed for the costs incurred in the imple-mentation of the programme. The companies have to document the actual implementation, expenses etc. An independent state body monitors this (checks accounts in detail, visits some actual customers who have signed a paper on having received grants etc).

The list of the technologies addressed contains for example refrigerators and freezers, dishwashers, washing and drying machines (50 E for each appliance with an Energy label class A, 100 E for super efficient appliances: Energy+ fridges and freezers and AAA Class Washing Machines, 160 to 205 E for tumbler dryers); LCD monitors and TV; floor ground or wall insulation (from 2.5 to 12 E per square me-ter); heat reflecting glass (from 20 to 30 E per square meter); high efficiency condensing boilers; low temperature heating systems; lighting systems control. The energy rebate is applicable to the most energy efficient equipment such as Class A appliances or similar certification for other technologies. Also a grant for the energy performance analysis is given when at least one of the measures recom-mended in the audit is carried out. The Energiepremieregeling has been supported by a wide scale information campaign including national campaigns on television and national newspapers, advertise-ment in shops, actions targeting installers, and websites (such as www.energielabel.nl).

In total, about 15% of the ecotax is used for the energy credit scheme. The amount of funds available to the citizens for 2000 and 2001 were 158 million E, of which 97 % was actually spent. The additional im-plementation costs by the utilities were 20% of this expenditure.

Within the first two years of the energy rebate scheme, one third of Dutch households applied for the rebates; of these, around two thirds concern domestic appliances. The introduction of the energy rebate scheme has led to an enormous growth of the supply of A-labelled appliances. The market share of A-

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labelled washing machines has grown from 40 to 88% over the 1999-2001 period. For refrigerators this is from 26 to 67%. This increase is most likely due to the energy rebate scheme and has led to a situa-tion where retailers very often advice their customers to buy an A-labelled appliance as the best on offer. The increase in sales has also produced a decrease in the prices of A-labelled white goods.

Table 5: Market share of class A labelled appliances in the Netherlands and the EU 1999-2001

1999 2000 2001

Refrigerators Netherlands 26% 55% 67%

European Union 12% 19% 27%

Freezers Netherlands 29% 55% 69%

European Union 12% 16%

Washing machines Netherlands 40% 71% 88%

European Union 15% 26% 45%

Dishwashers Netherlands 27% 55% 73%

Source: Belastingdienst (2002), based on GfK data

It can be estimated that total annual savings for the energy rebate scheme are be around 300 GWh/year for the white goods sector only from the years 2000 and 2001 combined, including the market transfor-mation effects as shown in Table 5. The total savings in the heat sector have been estimated as ca. 500 GWh/year. The total CO2 emission reduction achieved by the two-year scheme amounts to ca. 0.3 million tonnes additional per year.

A similar two-year programme implemented at a EU-15 level would thus yield ca. 7 TWh/year of electric-ity savings, 11 TWh/year of heat savings, and 4 million tonnes additional savings of CO2 emissions per year. Extended to 10 years duration, and considering that the market transformation effect for appliances cannot be repeated but stabilised, savings of 17 TWh/year of electricity, 57 TWh/year of heat, and of 26 million tonnes of CO2 emissions per year would be reached at the end of an EU-wide programme.

Other important measurable side effects of the energy rebate scheme were increases in VAT and taxes on profit, and avoided unemployment benefits. For the case of washing machines alone, they have been calculated as follows (VHK 2002):

• Extra Company Profit Tax 1.9 million E/year,

• Extra VAT 6.6 million E/year,

• Jobs created/not lost 152/year.

5.3.4 Localised Energy Efficiency and RES Programmes to Prevent the Building or Reinforcement of Transmission and Distribution Lines or the Purchase of Wholesale Peak Power

In the liberalised markets, integrated resource planning (IRP) in the classical sense of optimising the mix of supply-side and demand-side resources in (long-term) energy planning to meet the total demand for genuine energy services at least cost is not useful anymore for most energy compa-nies. However, under specific circumstances and with co-operative efforts of different actors, an integrated assessment of supply- and demand-side options (IASDO or “micro-IRP”) to find and finally implement least-cost solutions is still useful and possible. As the following example from France shows, a transmission or distribution company could try to avoid grid system capacity upgrades by load management and energy efficiency measures. Energy suppliers can co-operate

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with their customers in energy efficiency and load management efforts to avoid the purchase of expensive peak power from the wholesale market, as a German energy company does.

Energy efficiency and load management for balancing the transmission grid: a large programme in France (Boutre-Carros)

A project for a double electrical line 2 x 400 kV between Boutre and Carros (see map) was the starting point for this effort. The ministries of industry and environment accepted public discussion with one eco-logical organisation (FFN) in the spring of 1998. Governmental decision of July 5, 2000 allowed re-placement of the existing 225 kV line by a 400 kV line with an ambitious energy efficiency and load man-agement programme to compensate for the missing transmission capacity. Within the Provence-Alpes-Côte d’Azur (PACA) administrative region, covering what is known as the "French Riviera", the Eastern part will be subject to a programme targeting both energy efficiency and load management to reduce peak demand by an amount unprecedented in Europe (around 100 MW both in winter and in summer) and which will undoubtedly have the value of an example for the future. The programme will last at least five years and already involves many actors. The energy efficiency and load management programme also includes development of distributed generation from cogeneration and/or renewable energy sources. It is jointly implemented and financed in a co-operation by the electricity company EDF, the French energy and environment agency ADEME, and the PACA region. The independent transmission system operator RTE is involved in the quantification of the necessary demand savings, but by law is not allowed to finance energy efficiency, load management or distributed generation.

Figure 9: The Boutre-Carros project in the transmission grid of the Provence-Alpes-Côte d’Azur region

Three actions have been launched for the time being:

• A set of studies,

• An exemplary programme in five municipalities,

• An initial operational campaign of 9 million e.

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On the demand side, the potential is large (see Figure 10 showing the possible savings in peak de-mand). However, the accessibility of this potential by the measures taken and their adequate localisa-tion compared with the grid problems are still issues to be fully resolved.

Figure 10: The potential peak demand savings in the PACA region

Another significant point is the profitability of the identified actions in the five “early municipalities". The recommended actions represent savings varying between 9 and 60% of the amount of the electric bills. On average, they represent 27%. Profitability of the actions is very high, since pay back times vary be-tween 1.5 and 5 years without fuel switching and between 3 and 11 years with fuel switching. If one cu-mulates the profits possible on the five municipalities, one obtains a saving of 110 000 e per year for an investment of 460 000 e, that is to say a pay back time of 4.2 years on average.

Finally, the benefits for the independent transmission system operator RTE in terms of works deferred on the grid correspond to 60 million e that do not have to be invested before 2020.

A transfer of these data to a total possible energy, peak demand, and cost saving in Europe is not as easy as for the energy efficiency activities analysed so far, since the cost savings are very much de-pendent on the local and regional circumstances in terms of grid capacity.

Synchronous Load Management by Stadtwerke Hannover to avoid the purchase of ex-pensive peak power and/or to participate in tenders for reserve capacity

The “synchronous load management” is a programme of the German municipal energy company of Hannover (Stadtwerke Hannover AG) started in April 1996. The main principle of this programme for larger customers (e.g. industry and administrations) is to influence and control the purchase of power from upstream suppliers during consumption peaks by specifically changing the load variation of the consumers. A side-effect of the energy analyses carried out in this programme was the identification of additional energy saving potential of the customers.

The load management itself was carried out as follows: The remote control system via powerline of the Hannover municipal energy and water company makes it possible for those businesses or administra-tion buildings participating in "Synchronous Load Management” to receive a signal each time that there is the threat of the need to purchase expensive peak-load electricity from wholesale suppliers. Custom-ers can then switch off equipment they can dispose of for a short time (usually for a period of 15 to 30 minutes), e.g. ventilation or refrigeration systems. During this timeframe, Stadtwerke Hannover gains about 20 minutes to react with its available power stations to the expected increase in load.

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In this way, Stadtwerke Hannover manages to avoid purchasing expensive electricity from wholesale suppliers. The participating customers were reimbursed at 1.53 e/kWh in early 2002.

In September 2002, 40 customers took part with a load-reduction potential of about 12,000 kW, i.e. about 2% of the peak load of Stadtwerke Hannover. The electricity savings they achieved sum up to 10,534 MWh/year, i.e. about 0.5% of electricity consumption of the bigger industrial and commercial customers of Stadtwerke Hannover. The average lifetime of the measures is nine years.

Extrapolating these savings to the EU-15, around 10,000 MW of peak load generation and transmission capacity could be avoided by a synchronous load management method (as performed by Stadtwerke Hannover and their customers). In addition, larger customers could save ca. 10 TWh/year of electricity. Over ten years, at least the results for the energy savings might be doubled.

However, the success of such programmes is highly dependent on the market and policy framework. In Germany, the “fines” for deviations from the agreed power purchase of Stadtwerke Hannover from their upstream suppliers are currently not as high as before. Therefore, the programme has been stopped in September of 2002, until it will be possible to participate in the tender of the four transmission system operators in Germany for reserve capacities available within one minute (participation is expected from the year 2004 onwards). The idea of Stadtwerke Hannover is to bid with the combined nation-wide load reduction potential of their customers.

5.3.5 Promotion of Energy-efficient Technologies for Business Custom-ers through Energy Efficiency Programmes

Most of the existing energy efficiency programmes presented here target domestic customers or thermal insulation of housing. The Danish energy audit programmes from the distribution network companies (chapter 5.3.1) and Stadtwerke Hannover’s Synchronous Load Management (chapter 5.3.4) show that there are also technology areas and customer segments among business cus-tomers, for which energy efficiency programmes are useful. This is particularly the case for stan-dardised energy efficiency technologies that are used in large quantities in industry as well as commercial and public buildings, such as energy-efficient lighting technologies and variable speed drives for electric motors, fans, or pumps. We conclude this chapter with an example from Spain. It dates from the pre-liberalisation era, but could as well be implemented under a supportive policy framework in the liberalised markets. Similar programmes existed or continue in Belgium and the Netherlands.

Pyme Energia

In 1998, all major Spanish electricity distribution companies carried out the Pyme-Energia Programme. Pyme-Energia was aimed at reducing electricity consumption in small and medium sized enterprises. It was addressed to electronic control of electric motors (variable speed drives) and efficient lighting. The customers had three months to ask for the contribution and three months to implement the investments. The rebates were 30 % of the total investment costs.

The energy companies received full recovery of the incentives given to the customers, plus a lump sum per watt covering management, promotion and diffusion costs. It was for electric motors and drives:

5 pesetas (3 Cent) per speed-controlled Watt for Control system introduction

5 pesetas (3 Cent) per substituted Watt for substitution of motors by high-efficiency motors

For lighting, the implementation cost refund was 25 pesetas (15 Cent) per saved Watt for any interven-tion that reduces installed power.

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We focus here on the results obtained by Endesa and Iberdrola, which performed about 88% of the total results (CNE 2001). Iberdrola supported 27,538 lighting units (25,185 was the target) and 40,346 kW of regulated engines (34,000 kW was the target). ENDESA supported 55,163 lighting units (53,935 was the target) and 29,516 kW of regulated engines (31,260 kW was the target).

Table 6: Results of the Pyme-Energia programme

Programme Pyme Energia Iberdrola ENDESA Group

Energy saving objective MWh/year 58,672 20,152

Actual energy savings MWh/year 63,953 (109%) 19,527 (97%)

Foreseen power saving objective MW 14.67 5.08

Actual power savings MW 15.99 (109%) 4.97 (98%)

Foreseen total costs Million e 3.15 2.69

Actual total costs Million e 3.38 (106%) 2.66 (99%)

Actual levelised costs of con-served energy (4% interest rate; 10 years useful life)

Cent/kWh 0.78 2.02

Incurred costs Iberdrola ENDESA Group

Costs of incentive 59.6% 54.8%

Management of programme 16.2% 19.6%

Promotion of programme 16.2% 15.0%

Diffusion of programme 8.1% 10.6%

What should be noted is the extremely low cost of saving energy. It cost only 0.8 Cent to save one kWh in the Iberdrola area! This is much less than even the wholesale energy price in the liber-alised energy markets, let alone the price to the customer.

Implemented in the whole EU-15, a ten-year programme could achieve savings of ca. 20 TWh/year, and over 500 MW of capacity. The costs would only be 115 million e per year over that ten-year period, or a total of 1,150 million e.

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6 Needs for EU Policy Action

If the highly successful energy efficiency programmes presented in chapter 5.3 were imple-mented throughout the whole EU-15 over a period of ten years, the EU-15’s annual electricity and gas consumption could be reduced by around 8 % compared to the baseline (which is expected to grow by almost 20 % during that period). This estimate is based on the results or targets mentioned in chapter 5.3, and excluding overlap in target groups and technologies (cf. Wuppertal Institute et al. 2003). It is also supported by many other examples this project has col-lected. However, without a supportive policy framework from the national level, most of these programmes would not exist, and it would be highly unlikely that they would spread to the whole EU-15 and the Candidate Countries due to the barriers mentioned in chapters 2 and 3.

Well-designed energy performance contracting and other stringent energy efficiency services can save on average 20 % per service customer, as highlighted by the good practice examples in chapter 5.2. However, customer demand for energy efficiency services is increasing only slowly, and statistics on the overall savings achieved in one country or region do not exist.

Combining the potential effectiveness of energy efficiency services and programmes, we es-timate that it will be possible to achieve savings of 10 % of the EU’s annual electricity and gas consumption compared to the consumption forecast within 10 years.

Therefore, an EU Initiative is needed to ensure the union-wide implementation of compre-hensive and successful energy efficiency services and programmes as those described here. The many good examples developed in pilot projects under the SAVE programme are also waiting for replication with the support of this Initiative. It does make a difference whether 1 % or 20 % of the business customers in the EU can be won as customers of energy efficiency ser-vices, and whether an energy efficiency programme is implemented in Denmark with its five million inhabitants, or in the EU-15 with 375 million.

Further arguments in favour of such an Initiative, including a Directive, are:

• The Internal Markets for electricity and gas needed harmonisation through an EU Directive. The completion of the Internal Market for least-cost genuine energy services through energy efficiency services and programmes will therefore also need harmonisation of the national markets through an EU Initiative and probably a Directive.

• This would be a complementary action to improve the environmental performance of the Inter-nal Markets for electricity and gas, as with the Directive on renewable electricity, or the Initia-tive on cogeneration of heat and power (CHP). It would add to renewables and CHP the third pillar of a sustainable energy system – demand-side energy efficiency. This is why the Euro-pean Commission has announced such a Directive on Energy Demand Management as a pri-ority action in the communication on the implementation of the first phase of the European Climate Change Programmes (COM(2001)580).

• It would implement the priority for demand-side energy efficiency that has been stated in the Green Paper on Security of Supply.

• Net economic benefits to society and to customers of 10 billion EUR per year, and a net in-crease in employment, will be gained. Therefore, a harmonised level of energy efficiency activi-ties and results will also contribute to the social and economic convergence within the EU.

• A policy stimulating energy efficiency activities needs to be harmonised between Member States to provide the same conditions for companies operating in different Member States,

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and to avoid cross-subsidisation of the costs by energy companies active in different Member States.

• The EU needs to know how much energy is being saved through energy efficiency activities of energy companies and other non-government actors, in order to prove action and results to-wards reaching the targets agreed to under the Kyoto Protocol.

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7 Principles and Questions for EU Policy Promoting Energy Efficiency Services and Programmes

7.1 Basic Principles for an EU Policy Initiative

Concluding from the evidence presented so far, the EU Initiative, including a Directive proposal announced by the European Commission for early 2003 should follow the principle: “Harmonisa-tion in targets, but subsidiarity in methods”. It should have three interlinked objectives, which would have to be achieved by the Member States:

• First, that all Member States create a supportive policy framework, which enables energy companies and other market actors to successfully implement energy efficiency pro-grammes, and to finance the programme costs in a way strengthening competitive positions in the energy markets. The Member States should be free how to achieve this, e.g., using which of the policy mechanisms presented in chapter 4.

• Second, that all Member States promote further the supply of and demand for energy effi-ciency services, e.g., by the instruments mentioned in chapters 4 and 5.

• The ultimate third objective, to be reached by the implementation of the other two, is to create lasting energy savings of ca. 10 % over the next decade and further savings thereafter, com-pared to the baseline trend of energy demand.

Based on the experiences presented in chapter 5 and in the background document to this report (download is possible at www.wupperinst.org/energy-efficiency), it can be recommended that the EU Initiative strives for achieving a target of at least 1 % additional annual final energy sa v-ings per year through energy efficiency programmes and services by energy companies and other actors. I.e., with each year of implementation of energy efficiency programmes and services, the annual electricity and gas consumption in a Member State would be reduced, relative to the baseline, by 1 % of the consumption in the year before. If the latter was 100 TWh, the savings target is 1 TWh/year.

That this saving would indeed be relative to the baseline would be proven for each programme or service by bottom-up evaluation methods that are converging over time towards common and har-monised standards (see below and chapter 7.2). Energy savings from ongoing energy efficiency programmes financed by a Member State government itself or local and regional authorities could also be counted towards achieving that Member State’s target, if the energy savings achieved by these programmes are evaluated using the same bottom-up methods.

The previous chapter showed good reasons for creating a harmonised 1% per year savings target to all the Member States in a Directive on energy efficiency programmes and services.

Such a 1 % target per year would result in a cost-effective saving, compared to the baseline, of 10 % of the annual final energy consumption within ten years. This would be equivalent to 4,200 PJ/year of primary energy, and 3,000 PJ/year of final energy, of which 260 TWh/year would be electricity. This would generate net economic savings to society of around 10 billion e per year, half of which would be on electricity, the other half on heating and process fuels. A CO2 reduction of 230 million tonnes per year compared to the baseline would be a further benefit of it. This would be about two thirds of the additional CO2 reduction required for the EU to meet its Kyoto target (European Commission 2001).

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An important requirement towards this Initiative and Directive is that the subsidiarity principle is respected. The very different structures, organisation, and regulation of the electricity and gas markets throughout the EU require freedom for the Member States on how to achieve these tar-gets, i.e., how they create the supportive policy framework for energy efficiency programmes and services.

Therefore, the targets themselves should be as harmonised in the percentage level of energy sav-ings as possible. But they should be targets for the Member States, not directly from the EU to the energy companies. In this way, the Member States remain free as to the extent and the way, in which they wish to involve energy companies and other market actors in the implementation of the energy efficiency activities.

The Member States should be responsible for monitoring and collecting the information about the savings actually achieved, as measured for each programme or service by converging bottom-up evaluation methods. A basis for these methods can be the European Ex-Post Evaluation Guide-book for DSM and EE Service Programmes (SRCI et al. 2001) and the European Benefit/Cost Analysis Methodology (SRCI et al. 1996). The Member States would then report to the European Commission on a regular basis, so that the EU as a whole knows and can prove how much en-ergy and costs have been saved.

An overview of the possible common elements of such a Directive, and the possibilities for the Member States for implementation, is given on the inner back cover of this report.

Figure 11 shows how this Initiative and Directive would support the development and implementa-tion of energy efficiency services and programmes, and thus assist final customers to become more energy-efficient.

Figure 11: How an EU Initiative and Directive on Energy Services will support energy efficiency

7.2 Questions and Arguments on an EU Policy Initiative

While the basic idea and principles for an EU Initiative, and a possible Directive on the promotion of energy efficiency services and programmes are quite simple, there are still a number of ques-tions in detail that may need discussion and clarification.

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What is the relation between this Initiative/Directive and other EU Directives in energy efficiency? Why do we need this Initiative/Directive in addition to them?

Looking at Figure 11, the difference between this Initiative/Directive and other EU Directives in energy efficiency is easy to explain.

Other existing or proposed EU Directives on energy efficiency, such as the Directives on Labelling for appliances, the Directive on the Energy Performance of Buildings, or the Framework Directive for Mini-mum Efficiency Requirements for End-Use Equipment target market actors in the supply chain (manu-facturers, retailers, architects, planners, installers) as well as buyers and users of end-use technology and buildings directly. They require general energy efficiency information on products and buildings. They also exclude the least energy-efficient products from the market and prevent too inefficient build-ings to be constructed.

Those other Directives are an important complement and basis for the actions that will be promoted by this Initiative/Directive on energy efficiency services and programmes.

They do not, however, remove all barriers for energy efficiency, such as lack of funding, split incentives between building owners and tenants, lack of individual information and guidance (not only for energy consumers). This is why energy efficiency services and programmes are needed to assist individual energy consumers in optimising their own buildings and in actually choosing the most energy-efficient end-use equipment.

Energy efficiency services and programmes need a professional actor as an intermediary between the suppliers of end-use equipment or buildings and the buyers or users. This actor bundles the necessary individual information and assistance in implementation, and possibly financing capacities to guide consumers towards the most efficient solution.

In some cases, this service can be profitably sold to the consumers (cf. the examples in chapter 5.2). This is typically possible for larger projects, yielding energy cost savings in excess of 50,000 e, and/or for some types of standardised equipment such as efficient boilers.

In most cases the task is to first inform and convince consumers of the benefits of energy efficiency and to enable them to use energy efficiency technologies and services effectively and efficiently. Therefore, the extra information and communication, acquisition and administration costs could outweigh the prof-its that can be generated from selling the energy efficiency advice and services. In those cases, pro-grammes are needed for reducing the barriers to demand-side energy efficiency and thus reducing transaction costs. Such programmes will combine information, training, advice and incentives, initiate implementation processes and build up networks of relevant actors (cf. the examples in Chapter 5.3). These programmes, as long as they are cost-effective from a macro-economic or societal point of view, have to be financed collectively by the society and/or the customer group that benefits, via the energy prices, or from the income from an energy or CO2 tax, or from general tax revenue, in order to enable the professional intermediary to take action.

And this financing possibility would be one target of an EU Initiative/Directive on energy efficiency ser-vices and programmes; the other one is increasing the demand and supply of energy efficiency ser-vices.

What is the relation between the energy savings targets proposed for this Initiative/Directive and the EU’s general target of 1 % per year reduction of energy intensity compared to the baseline? How would the savings be measured, and achievement of the target monitored?

The EU has an indicative general target of 1% reduction per year in energy intensity, mentioned in sev-eral documents, e.g., the Action Plan to Improve Energy Efficiency in the European Community (COM (2000) 247). This 1 % improvement of overall primary energy intensity compared to the baseline is

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measured by comparing the development of overall primary energy consumption and Gross Domes-tic Product.

In contrast to this, the achievement of the energy savings targets as proposed for this Initiative/Directive would have to be measured on a programme by programme, or service project by project basis. For energy efficiency programmes targeting appliances and equipment, the savings can be calculated from the average efficiency of equipment reached due to the programme as compared to the situation without the programme. For energy efficiency services and for programmes targeting energy efficiency in build-ings and industry, the savings achieved at the premises of individual customers must be monitored and added up to the national total. This requires bottom-up monitoring and evaluation methods such as those described in the European Ex-post Evaluation Guidebook for DSM and EE Service Programmes. The methods adopted in different Member States should be converging to a common method over the first years, in order to achieve agreed standards, e.g., for the definition of the energy efficiency baseline in different types of energy efficiency programmes and services. This activity-specific baseline of course needs to take into account the results of other existing energy efficiency policy and legislation.

In this way, the programmes and services of energy companies and others to promote end-use effi-ciency will certainly contribute to reaching the general target of 1 % reduction of energy intensity com-pared to the baseline.

Should it be energy or CO2 targets?

Since an important background for an EU Initiative and Directive on energy efficiency services and pro-grammes is the completion of the internal markets for electricity and gas, this is an argument to choose energy-based targets. Furthermore, there are other benefits from energy efficiency than just CO2 reduc-tions, such as economic net gains, increased security of supply, and increased employment. Only if this Initiative and Directive was solely based on the European Climate Change Programme, might a CO2 target be appropriate.

Which energies to address?

The completion of the internal markets for electricity and gas, and the avoidance of discrimination be-tween companies due to the different stage of liberalisation in the different EU countries, is reason for focussing on the electricity and gas industry. It is, however, worth discussing if, and how, a harmoni-sation of support by the Member States for energy efficiency activities by other segments of the energy supply industry, e.g., the industries supplying oil, coal, bottled gas, district heat, and heat from renew-able energies, could be stimulated. E.g., in the case of a dedicated fund mechanism, this should be quite easy to achieve.

Which actors should be involved for implementation? Is there a danger of market distortions in the installer or ESCO markets?

In principle, every actor capable of being a professional intermediary between the suppliers and the buyers or users of end-use equipment or buildings (cf. Figure 11) can be the operator of an energy effi-ciency programme or service. Particularly if a levy and funds system is chosen for implementation of the Directive, ESCOs, installers, local or regional energy agencies, consumer organisations, and others can tender for the task of implementing the programme as well as energy companies.

However, following the arguments in chapter 3.2, energy companies should play a prominent role in the implementation. Different roles for them are possible, from carrying full responsibility to just being a market partner responsible only for the administration and distribution of information and rebates, as in the Dutch Energy rebate scheme (cf. chapter 5.3). Particularly if a Member State installs an obligation for electricity or gas companies to perform energy efficiency activities, the companies will have the primary responsibility for the implementation of the activities. Even in this case, they will co-operate with partners

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such as planners, installers, retail trade, local authorities, manufacturers, marketing consultants, and ESCOs etc. to actually implement their energy efficiency activities. In any case, these market actors will benefit from increased investment in energy-efficient technologies and buildings.

Provided retail competition in the electricity and gas markets is functioning properly, there will not be an unfair advantage for energy companies over ESCOs: any ESCO can package retail energy supply from the market together with the energy efficiency services, in some cases perhaps even cheaper than an energy company. Certainly, such packaging should be allowed as an option but not required.

Which types of energy companies should be involved?

Energy efficiency activities are a customer-oriented activity; therefore, such activities should mainly in-volve the distribution and/or supply companies, which are closest to the customer. Transmission com-panies or transmission system operators can carry out a demand-side bidding, i.e. call third parties for bids of energy efficiency or load management implementations, and so should be involved as well. If independent generators combine energy and energy efficiency services to large customers, they will be suppliers, and are thus included. On the other hand, pure generators selling on the wholesale market are not the focus of an Initiative/Directive on Energy Efficiency Programmes and Services.

Which customer groups should be involved?

Certainly, larger energy consumers from industry or the commercial sector often have better capacities for implementing energy efficiency measures on their own, and can already choose from an increased offer of energy efficiency services at least in some EU Member States. Still, there is the need to assist them in using such services, since it still can be time-consuming for the customer company to assess and compare offers, make and monitor contracts, etc. Usually, there are also a number of possible en-ergy efficiency measures in each company that could be detected by a free or partially paid energy audit (cf. the Danish or Finnish energy audit programmes mentioned in chapter 5). Furthermore, there are a number of standard technologies that have a small energy saving potential per unit but exist in high numbers of units in each company, such as light sources, pumps, fans, and office equipment. Those technologies are usually not attractive for an ESCO, but can achieve high net cost savings for the con-sumer company if it receives assistance in using these potentials through an energy efficiency pro-gramme (such as the Spanish Pyme-Energia example in chapter 5).

Therefore, it would not be wise to limit this Directive to smaller or medium-sized customers, e.g., those sectors that are not involved in the planned EU Carbon Emissions Trading scheme.

On the other hand, specially addressing the groups of lower income consumers, e.g. those in receipt of income and disability benefits (cf. the UK example in Chapter 5.3.1), provides additional contributions to reducing public budgets and increasing social welfare and equality.

What is the relation to CO2 emissions trading?

A question is whether the trade-off between an EU Initiative and Directive on energy efficiency services and programmes and the planned EU Directive on emissions trading is positive or negative, or if these instruments should even be kept separate in terms of target groups.

A full discussion of this complex matter is not possible here. Nevertheless, a few considerations point to the conclusion that the two initiatives are not mutually exclusive, but rather can achieve synergies:

A reduction in the overall energy consumption in the EU achieved as a result of an EU Initiative and Di-rective on energy efficiency services and programmes will help all EU electricity generators to stay within their allocated budget of emission allowances, and will probably reduce the price of an allowance. This likely effect is another argument for a harmonisation of the targets for energy savings from energy effi-

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ciency programmes and services between Member States; without harmonised targets, generators in one country that has a national supportive framework for energy efficiency activities would be favoured against generators from a country that does not.

Another aspect is proving that there is no overlap between the Emissions Trading (ET) Directive and a Directive on Energy Efficiency Programmes and Services (EEPS): While the ET Directive will, among others, be targeting electricity generators, the EEPS Directive will be targeting electricity and gas trans-mission, distribution and retail supply companies as actors of EEPS.

Furthermore, emissions trading will at least for the next ten years not be sufficient as the single motiva-tion for the electricity supply industry to offer large-scale energy efficiency programmes and services (assuming a continued integration between generators and suppliers at least by ownership). The rea-son is that the prices of a carbon allowance as they are currently estimated (between 5 and a maximum of 33 e/tonne of CO2) are equivalent to between 0.2 and a maximum of 1, maybe 2 Cent/kWh. This is in many cases not enough to cover the costs and lost revenues due to an energy efficiency programme, even if the programme is cost-effective compared to long-term avoided costs of 5 Cent/kWh or more.

Still, assisting larger energy consumers in realising further cost-effective energy efficiency potentials will allow them to stay within their allocated amount of carbon emission allowances at a lower cost or a net economic gain, or even to sell CO2 allowances. The estimated market price of a carbon emission al-lowance can thus help to make energy efficiency services attractive to customers participating in the emissions trading scheme, or increase acceptance for energy efficiency programmes in this customer group.

Alternatively, energy companies could ‘buy’ excess emission allowances from the industrial customers they assist and use the revenue in the emission allowance market to finance the programmes. Simi-larly, a dedicated energy efficiency fund could buy emission allowances resulting from energy efficiency projects carried out by large consumers or third parties in an auction procedure, and resell them in the carbon allowance market. However, double-counting must be avoided in such arrangements: in each case, only either the energy company or the customer can hold the allowances. The same applies to emission reduction credits generated from energy efficiency projects with customers not subject to the ET allowance scheme.

Finally, emissions trading and energy efficiency services and programmes will mutually benefit from the bottom-up evaluation methods that they each need to function, e.g., for defining the baseline consump-tion and the additionality of savings.

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8 References

Belastingdienst (2002): Rapportage van Onderzoeksbevindingen in het Kader van de Energiepremiere-geling (Report on the analysis results on the subject of the Energy rebate scheme), Den Haag

CNE (Comision Nacional de Energia) 2001: Informe resumen de los resultados de los programas de gestion de la demanda de 1998 asignados a las grandes empresas distribuidoras, Madrid

DEFRA (Department for Environment, Food & Rural Affairs) 2001: Energy Efficiency Commitment 2002-2005, Consultation Proposals, August 2001, London

EnergieNed 1997: MAP 2000 – Environmental Action Plan of the Energy Distribution Sector, Arnhem

EST (Energy Saving Trust) 1999: Energy Services Support Service, London

EST (Energy Saving Trust) 2001: Energy Efficiency Commitment Report 2000/2001, The Energy Saving Trust's Annual Review of Energy Efficiency Activities by Electricity and Gas Suppliers Throughout the UK, London

European Commission 2001: European Climate Change Programme, Report – June 2001, Brussels

Jones, Emma, Joanne Wade, and Dave Barton 1999: Residential sector energy services in the UK: Can legislation turn rhetoric into reality? In: Further than ever from Kyoto? Rethinking energy efficiency can get us there, Proceedings of the 2001 ECEEE Summer Study, Paris

Kristof 2002: Aktueller Stand des Contracting in Deutschland, Beitrag zur EUROFORUM-Konferenz „En-ergie-Contracting“ am 4./5. Juni 2002 in Köln, Wuppertal

Ofgem 2001: Energy Efficiency Commitment Administration Procedures, Consultation document, Sep-tember 2001, London

PIU Performance and Innovation Unit) 2002: The Energy Review, A Performance and Innovation Unit Report to the Government, London

SRCI (SRC International ApS) et al. 1996: European B/C Analysis Methodology: A guidebook for B/C Evaluation of DSM and Energy Efficiency Services Programmes, Copenhagen

SRCI (SRC International AIS) et al. 2001: A European Ex-Post Evaluation Guidebook for DSM and EE Service Programmes, Copenhagen

Umweltbundesamt 2000: Energiespar-Contracting als Beitrag zu Klimaschutz und Kostensenkung, Ratgeber für Energiespar-Contracting in öffentlichen Liegenschaften, Berlin

VHK (Van Holsteijn en Kemna BV) 2002: Evaluation EPR Costs and Benefits, Additional information to the tax office report and case study on costs and benefits of the EPR for washing machines, Delft

Vine, Edward et al. 2002: Public policy analysis of energy efficiency and load management in changing electricity businesses, Energy Policy, forthcoming

Wuppertal Institute et al. 2000: Completing the Market for Least-Cost Energy Services, Strengthening Energy Efficiency in the Changing European Electricity and Gas Markets, A Study under the SAVE Programme, Project Final Report, Wuppertal

Wuppertal Institute 2002: Review of Demand Side Management (DSM) Programmes in the European Union countries, unpublished, Wuppertal

Wuppertal Institute et al. 2003: Energy efficiency programmes and services in the liberalised EU energy markets: good practice and supporting policy, Wuppertal

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Possible Elements of an EU Directive on Energy Efficiency Programmes and Services Common elements to be realised in each Member State in order to achieve a common, harmonised framework consistent with the needs of a common market without major distortions, as opposed to the implementation elements to be decided at national level (see below):

1. A harmonised quantified energy saving target for the Member State, to be obtained primarily through energy efficiency programmes implemented for at least 5 to 10 years. The proposal for the target is 1 % per year of the electricity and gas consumption in the previous year.

2. For achieving the target, a supportive policy framework enabling energy companies and other market actors to successfully implement energy efficiency programmes and services must be cre-ated.

3. The funding at least for the direct costs of energy efficiency programmes must be secured, paid either directly through energy prices for at least 5 to 10 years, or through taxes, if governments can prove they will keep the funding necessary to achieve the energy saving targets for at least 5 years.

4. Standard common (or converging over a certain time) methods for bottom-up evaluation of savings are used, and an independent body or bodies responsible for the evaluation exist.

5. States should be required to ensure that in the monopoly segments (transmission, distribution, and retail supply to captive customers) the evolution of revenues is closely correlated to the evolution of costs and to avoid that companies are allowed extra-profits when increasing sales.

Other fundamental implementation elements - who is responsible for the administration, who for the implementation, ways for funding - would be decided at national level according to the subsidiarity principle and coherent with national market and institutional features. A number of alternative scenar-ios are possible, for example:

Scenario 1

Administration: Distribution or transmission network, or retail supply company, with an obligation

for achieving a certain saving target and for managing the necessary funding (ad-ministration function) under the oversight of a supervisory body.

Implementation: Distribution or transmission network, or retail supply company, which can imple-ment the energy saving programmes and services directly or through ESCOs and other partners.

Funding: Cost recovery from energy prices or network charge, and payments for energy effi-ciency services.

Scenario 2

Administration: Independent body (Energy Efficiency Trust) or government.

Implementation: Distribution or transmission network, or retail supply company, but also involving ESCOs, energy agencies, local governments and other actors.

Funding: Funds for the Energy Efficiency Trust from energy prices or network charge or taxes.

It should be noted that:

• Different schemes can be applied in different Member States and, within a state, to different cus-tomer groups (e.g. industry on one side and services and households on the other).

• Member States may also decide to achieve a part of their target through energy efficiency services, provided they have in place a reliable methodology and a body responsible for the evaluation of the energy savings.

• Regional and Local Governments and energy agencies can be involved in the design and imple-mentation of the energy efficiency activities in all the scenarios.

• ESCOs are always involved. In scenario 2, they might be the main actors if a state decides for low involvement of energy companies (provided that points 1 to 5 of the common elements are fu lfilled).

• Installation contractors, planners, retail trade, and other market actors will also be involved in the implementation, and will benefit from increased investment in energy-efficient technologies and buildings in any case.

Possible additional element:

A market for Energy Saving Certificates trading (and/or direct bilateral trading) can be established. Dou-ble-selling on the CO2 emissions allowance and/or reductions credits markets must be properly ad-dressed.

Co-ordinator

Partners

Contact Stefan Thomas

Wuppertal Institute for Climate Environment Energy

Döppersberg 19, 42103 Wuppertal, Germany

[email protected]