by Thomas Rowlands-Rees, Senior Analyst, Bloomberg New Energy Finance
Whether the debate is on energy security, resilience, economic recovery, development or climate change, energy efficiency is of universal interest. However while this interest cuts across political, national and economic boundaries it is probably the only thing about energy efficiency that does. Globally energy efficiency activity is fragmented, piecemeal and generally speaking, difficult to scale.
There are several reasons why the broad principle of energy efficiency translates into activity (or inactivity) so differently depending on where one is. Obviously there are differing policy mechanisms and supporting frameworks in different parts of the world. Less obviously, but probably more important are local differences in laws and regulations around buildings (or if we’re speaking about industrial efficiency – local laws and regulations around industry). These don’t generally relate to energy efficiency, but for that exact reason can prove to be obstacles to its implementation. On top of that there are a range of utility industry structures and fundamental differences such as climate, industry types, fuel types and energy prices. Comparing energy efficiency schemes from around the world is not impossible, but it is challenging. Energy efficiency is an international concern, but it is a local game.
The most significant political effort to promote energy efficiency in Europe is the EU Energy Efficiency Directive (EED), which was written into law in 2012 and is targeted at allowing the bloc to meet its 2020 consumption goals. The EED requires EU member states to put in place various pieces of legislation, the most major being the introduction of Energy Efficiency Obligation Schemes (EEOS), analogous to Energy Efficiency Resource Standards.
Implementation of EEOS has been inconsistent across the EU – some countries (France, UK, Italy, Poland and Denmark) had pre-existing schemes while others, most notably Spain, have announced their intention to put one in place. About half of the bloc, however, have opted to use a clause in the legislation which allows them to implement alternatives to EEOS, if they can be shown to yield an equivalent amount of savings. In some cases such as the Netherlands and Czech Republic this will take the form of low interest loans which, while a legitimate strategy for energy efficiency, is highly dependent on market uptake if it is to be successful.
Elsewhere the interpretation of the EED appears less credible, particularly in countries hit hardest by the economic downturn – for example Greece’s plan for ‘equivalent schemes’ includes many government infrastructure projects, such as upgrades to the Athens and Thessaloniki metros. These projects, it argues, will yield an energy saving due to a reduction in the number of vehicles on the road. This may be true, but it is hard to see how this is equivalent to a utility obligation scheme targeted at end users. Ironically these countries are the most likely to hit the consumption targets set in the EED. The same financial crisis that has limited their ability to put in place credible support for energy efficiency has also limited the growth of the broader economy and therefore energy consumption. Politically it is hard to make the case that these struggling countries should be forced into line for the sake of Europe-wide consistency.
It would be wrong to assume that it is only member states that are struggling economically that have not implemented the EED faithfully. According to the Energy Efficiency Communication, a mid-term report from the European Commission assessing progress in relation to the EED, only five member states met the June 2014 the deadline for transposing the directive into national legislation. These were Italy, Denmark, Sweden, Cyprus and Malta. The most notable absentee, given its reputation, is Germany. Germany’s status as a leader in energy efficiency (it was ranked first according to the ACEEE 2014 International Energy Efficiency Scorecard) is well earned. No country can trace more investment, on a per capita basis, to energy efficiency. Even using the most conservative criteria the government-owned bank KfW’s low-interest loan scheme for energy efficiency sees around double the investment of the EEOS schemes in France, UK and Italy combined.
So why isn’t Germany quicker to fall in line with the EED? One could equally ask, why should they be? Throughout the EED’s legislative process Germany argued that the introduction of obligation schemes would undermine its already successful loan scheme and would as such represent a backwards step. It was Germany, more than any other country, which insisted that member states should have the freedom to introduce alternatives to EEOS. So, ironically, the clause that allows a struggling country to count a metro upgrade as an efficiency scheme was actually introduced so that leading countries wouldn’t be held back.
This illustrates the challenge for scaling energy efficiency across Europe. Individual countries are at different stages of progress and so any effort to bring uniformity to the sector means holding back leading countries as much as it means pulling forward those that are further behind. However, as we have seen, introducing flexibility allows for a fairly free interpretation of what constitutes energy efficiency and casts in doubt the effectiveness of the overall initiative.
The story for energy efficiency in Asia’s two economic powerhouses is quite contrasting.
According to our analysis the degree of investment in energy efficiency in Japan is relatively low: it could be that a stagnant economy and years of historically high energy prices means that there are few new opportunities. While there is an ESCO industry, the market is relatively small. The biggest single block of investment actually comes in the form of government subsidy, which are typically at a level of around $1bn per year. These are targeted at specific technologies – in the wake of the 2011 earthquake there was an emphasis on building and home energy management systems, while in the most recent budget there was increased budget to support commercial and industrial energy efficiency.
As China’s rapid economic growth slows industries are beginning to focus on competition rather than expansion. In energy intensive industries the balance is shifting away from building new manufacturing capacity at lowest possible cost towards investing in improving the efficiency of existing, previously inefficient, production lines. This is coupled with a strong government push, driven as much by concerns around air quality as climate change. Government incentives can range from subsidies for performance contracts to the threat of forced closure of inefficient factories. This perfect storm of low hanging fruit and favorable policies (and threats!) has meant that China’s ESCO industry is expanding rapidly. The China Energy Conservation Association estimates that energy performance contracting in China has increased from around $1bn in 2007 to $16bn in 2014. The majority of this revenue is based on single-measure industrial energy efficiency contracts with relatively short paybacks.
US-based stakeholders often assume that Europe has progressed further in the business of energy efficiency than their own country, but this is not necessarily true. Just as states such as California and Massachusetts are leading by example in the US, so are countries such as Germany and Denmark in Europe – but they are by no means typical.
Indeed, while there is much that US stakeholders can learn from other countries on energy efficiency initiatives it is certainly not a one way street. In Europe the US ESCO industry is frequently cited as an example of good practice, although no country has yet been able to successfully replicate its success. China’s rapidly-growing ESCO industry is an interesting example: while the short payback industrial efficiency projects seen there are physically very different from the deep retrofits of government buildings commonplace with US performance contracts, the underlying legal framework for the former is adapted from the latter.
Perhaps this is the most useful lesson that can be learned: given the differences between countries that we have discussed above, a like-for-like adoption of good practice from abroad, such as Europe’s attempts to emulate the US ESCO industry, is unlikely to be successful. However a successful framework in one niche in one country may be appropriate for a completely different niche in another country: a business model developed for deep retrofits of government buildings in the US has proven successful single-measure projects in China’s industrial sector. It is important to learn about what has been successfully applied abroad but, given the differences between countries, it is just as important to remain open-minded as to how these lessons might be applied in one’s own country.
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Posted on: February 12th, 2015