The European directive on energy end use and energy services

Energy efficiency is a sound part of the European energy, environmental and climate change agendas and contributes to meeting the goals of improved security of energy supply, economic efficiency and increased business competitiveness, coupled with job creation and improved consumer welfare.

The Green Paper on Energy Efficiency states that by 2020 the EU could save at least 20 % of its energy consumption in a cost-effective manner, and lists a number of options to achieve this. The Directive on Energy End-Use Efficiency and Energy Services ((Directive 2006/32/ EC of 5 April 2006, adopted by the Council and Parliament in April 2006 and published in the Official Journal in May 2006) aims to foster cost-effective improvement of energy end-use efficiency and to transform and promote the market for energy services. The Directive introduces a mandatory annual savings target for Member States of 1% of total energy consumption (averaged over the past five years) for a period of nine years. This target has to be met with energy efficiency policy measures.

The annual savings target has to be measured with a new European harmonised methodology to evaluate energy savings. This methodology is still under development, and will constitute a combination of bottom-up and top-down measurement methods.

A bottom-up measurement system implies that savings are calculated using results from individually implemented measures. The aggregation of results can be done at company, local, regional and national level – a task handled well with standardised templates, web sites, databases etc., using standardised lists of measures and assumptions on their average lifetimes, estimates of the average energy savings impact, and calculations of the total expected or deemed (technical calculation, often ex ante) energy savings.

In a bottom-up system, the impact of measures can usually be estimated before (ex ante) actual implementation or metering, using deemed savings. Metering is required only to calibrate the real effect of such measures and, when necessary, to verify; this can often be done using representative samples. Bottom-up measurement systems can also be implemented ex post by using engineering models. A further advantage of using bottom-up measurements is the additional information obtained on exactly which policies and measures deliver the savings.

While bottom-up measurements could have a high degree of precision for many types of measures, they are difficult to apply to certain types of measures, especially for certain types of cross-cutting measures such as energy taxes or general awareness campaigns. Bottom-up calculations can fail to capture multiplier effects or market transformation, ‘autonomous’ market development and miss ‘rebound effects’, ‘free-riders’ and ‘free-drivers’. A top-down system is thus a necessary part of any national, regional or large system for measuring energy efficiency improvements.

A top-down measurement system is one in which the amount of energy saved is calculated using more aggregated sectoral levels of energy consumption and savings as the starting point.

The Directive also introduces obligations for energy distribution and/or retail energy sales companies to offer energy services, energy audits and energy efficiency measures, or to contribute to an energy efficiency fund. The Directive requires Member States to promote financial instruments for energy savings, e.g. third-party financing and energy performance contracting.

In addition Article 13 of the Directive requests energy suppliers to provide customers with accurate individual meters and information on time of use. It also covers a number of requirements for more regular and accurate billing. Billing should be based on actual consumption and presented in understandable terms – and in addition, should be frequent enough to enable customers to regulate consumption.

White Certificate schemes

The Directive also proposes the introduction of White Certificate schemes as a key instrument to achieve the energy saving target. Recently a number of countries have introduced market-based instruments to foster energy efficiency improvements. Energy-saving quotas for certain categories of operator (in existing schemes energy distributors or suppliers) coupled with a trading system for energy efficiency measures resulting in energy savings, have been introduced or proposed in individual Member States. The savings would be verified by the regulator and certified by means of the white certificates (tradeable certificates for energy savings).

The white certificates involve four key elements:

  1. The creation and framing of the demand.
  2. The tradeable instrument (certificate) and the rules for trading.
  3. Institutional infrastructure to support the scheme and the market (measurement and verification, evaluation methods and rules for issuing certificates, a data management and certificate tracking system, and a registry).
  4. The possible cost recovery mechanisms or the possible integration with other markets (renewable, carbon, etc.).

Variations of this policy mix have been introduced in Italy, Great Britain, and since January 2006 in France. The Netherlands is considering introducing it in 2007. In the Flemish region of Belgium there are savings obligations imposed on electricity distributors without certificate trading options. The first scheme in the world with a white certificate trading element has been introduced in New South Wales (Australia); it is, however, a greenhouse gas (GHG) trading system that has an end-use energy efficiency element.

In Italy energy saving targets are combined with tradeable certificates for energy savings issued to distributors and energy service companies, as well as with a cost recovery mechanism via electricity and gas tariffs, or dedicated funds in some circumstances. The targets are expressed in primary energy consumption and imposed on electricity and gas grid distribution companies with more than 100,000 customers as at the end of 2001. For the time being targets will be set on an annual basis for the period 2005-2009.

Targets for the post-2009 period are to be fixed by the government by the end of 2006. Current targets are just for savings achieved each year, and do not include expected savings in the future. In the fifth year of the current phase approximately 3 Mtoe (million tons of oil equivalent) of primary energy savings/year are projected, of which 1.6 MTOE/year will come from electricity distributors and 1.3 MTOE/year from natural gas distributors. The mechanism is planned to deliver energy savings equivalent to 5.8 million TOE in the five year target period. The Italian scheme became operational in January 2005.

In Great Britain, the Energy Efficiency Commitment (EEC) runs in three-year cycles from 2002 to 2011. The EEC-1 programme required that all gas and electricity suppliers with 15,000 or more domestic customers deliver a certain quantity of ‘fuel standardised energy benefits’ by assisting customers to take energy efficiency measures in their homes. The overall savings target was 62 fuel standardised TWh, and the total delivered savings reached 86.8 TWh. In EEC-2 (2005-2008) the threshold for obligation has been increased to 50,000 domestic customers, and the target to 130 TWh. Thanks to a carry-over of savings from EEC-1, more than a quarter of this target had been achieved by 2005. Certificate trading is not a feature of the scheme in Great Britain.

In the French system obligations are set for energy suppliers delivering electricity, gas, domestic fuel (not for transport), cooling and heating for stationary applications. A threshold for the imposition of a savings target is set at 0.4 TWh/year (5,000 litres in the case of domestic fuel). The suppliers have received targets in proportion to their market sales in the residential and tertiary sectors. The obligation covers the period 2006-2008; annual adjustments are made to take into account variations in the market. The system excludes plants under the EU ETS Directive and fuel substitution between fossil fuels, as well as energy savings resulting only from measures implemented to comply with current legislation. The total target for the first three years is 54 TWh (in final energy) accumulated over the life of the energy efficiency actions, with a 4 % discount rate.

MEASUREMENT AND VERIFICAT ION

One of the most crucial points of a white certificate scheme is the measurement and verification of the savings. The Italian scheme uses three methods of physical valuation:

  1. A deemed savings approach with default factors for free riding, delivery mechanism and persistence.
  2. An engineering approach.
  3. A third approach based on monitoring plans, whereby energy savings are inferred through the measurement of energy use. All monitoring plans must be submitted for preapproval to the regulatory authority, AEEG, and must conform to pre-determined criteria (e.g. sample size, criteria to choose the measurement technology).

In practice, most of the projects submitted to date have been verified using the deemed saving approach. There is ex post verification and certification of actual energy savings achieved on a yearly basis1. In principle the metering approach is a more accurate guarantee of energy saved than the standard factors approach (the latter cannot verify details such as location and operating hours of installed CFLs), but in practice it can be difficult to identify the actual saving (for example in households there is only one meter for all electricity usage, which increases each year due to growth in appliances and can fluctuate with changing household numbers, lifestyle, weather etc.). The metering approach may be reasonable for large installations or projects, but may result in high monitoring costs for projects of smaller size.

In Britain the savings of a project undertaken under the EEC scheme framework are calculated and set when a project is submitted, based on a standardised estimate taking into consideration the technology used, weighted for fuel type and discounted over the lifetime of the measure. The government carries out limited ex post verification of the energy savings; although this work would not affect the way energy savings are accredited in the current scheme, the monitoring work affects the energy savings accredited in future schemes.

In addition, white certificate schemes may foster the support of energy supply companies (ESCOs) and of energy services companies, as in some national implementations ESCOs are allowed to receive credits for the savings achieved. In general white certificate schemes can be considered as a financial support scheme, similar to green certificates for renewable energy.

Both the new Energy Saving Directive and the existing white certificate schemes bring the issue of measuring and evaluating energy saving from a physical and financial perspective, and the matters of measurement accuracy, financial reward and risks associated with energy efficiency measures, to the attention of policy makers, ESCOs, investors and end-users. These activities have been pioneered by the IPMVP.

In the authors’ view white certificate schemes allow the achievement of large cost-effective energy saving in harmony with the liberalised and fully competitive energy and energy services markets. In addition, with both carbon and energy saving markets maturing, white certificate schemes could relatively easily be integrated in the emerging carbon market.