EURELECTRICviewsonthe ProposalforaDirectiveonEnergyEfficiency

CommissionProposalCOM(2011)370finalof22/06/2011

AEURELECTRICPolicyPaper

September2011

TheUnionoftheElectricityIndustryEURELECTRICisthesectorassociationrepresentingthecommoninterestsof theelectricityindustryatpanEuropeanlevel,plusitsaffiliatesandassociatesonseveralothercontinents. In line with its mission, EURELECTRIC seeks to contribute to the competitiveness of the electricity industry, to provideeffectiverepresentationfortheindustryinpublicaffairs,andtopromotetheroleofelectricitybothinthe advancementofsocietyandinhelpingprovidesolutionstothechallengesofsustainabledevelopment. EURELECTRICs formal opinions, policy positions and reports are formulated in Working Groups, composed of experts from the electricity industry, supervised by five Committees. This structure of expertise ensures that EURELECTRICspublisheddocumentsarebasedonhighqualityinputwithuptodateinformation. For further information on EURELECTRIC activities, visit our website, which provides general information on the association and on policy issues relevant to the electricity industry; latest news of our activities; EURELECTRIC positionsandstatements;apublicationscataloguelistingEURELECTRICreports;andinformationonoureventsand conferences.

EURELECTRICpursuesinallitsactivitiestheapplicationof thefollowingsustainabledevelopmentvalues: EconomicDevelopment Growth,addedvalue,efficiency EnvironmentalLeadership Commitment,innovation,proactiveness SocialResponsibility Transparency,ethics,accountability

Dptlgal:D/2011/12.105/45

EURELECTRICviewsonthe ProposalforaDirectiveonEnergyEfficiency
CommissionProposalCOM(2011)370finalof22/06/2011

WGEnergyEfficiency
DanieleAGOSTINI(IT),Chair MehmetBULUT(TR),RobertaD'ANCONA(IT),KatarzynaFRAS(PL),ErikGUDBJERG(DK),BojanHORVAT(SI), AnnetteKROLL(BE),GintarasLABUTIS(LT),AngusMACRAE(GB),DanielaMLADENOVSKA(MK),YukioNAKANO (JP),TapioOHMAN(FI),ColinOPENSHAW(ZA),MonicaOVIEDO(ES),PedroPAES(PT),RodolphePOIROUX(FR), RodicaPOPA(RO),AllaouaSAIDANI(DZ),MichalSOUKUP(CZ),OlgaSTOROZHENKO(RU),DavidTHIEL(CH), ZoltnTIHANYI(HU),ContantinosVARNAVA(CY),ElliottWAGSCHAL(NL),GuroWENSAAS(NO),Henrik WINGFORS(SE),JanWITT(DE),HansZEINHOFER(AT),Members Contacts: JohnSCOWCROFT,HeadEnvironment&SustainableDevelopmentUnit(jscowcroft@eurelectric.org) NicolaREGA,AdvisorEnvironment&SustainableDevelopmentUnit(nrega@eurelectric.org)

QuickStart NecessaryimprovementstotheEnergyEfficiencyDirective
Energyefficiencyobligationschemes(Art.6) A well functioning market needs not only strong supply, but even more importantlystrongdemandfromthecustomer;supplierscanencouragebutnot forcecustomerstoimplementenergysavingmeasures. Any savings target should be defined in relation to each member states overall target.Ifappropriate,itcanbedividedintosubtargets. Obligation schemes, if established, should ensure: (1) equal treatment of all energy sectors, with no discrimination based on size or energy carrier, (2) flexibility and predictability, (3) minimum administrative burden, (4) clarity over costrecoverymechanisms,(5)nodiscriminationagainstearlymovers. Extraattentionshouldbegiventoprogrammesaimedatstimulatingdemandfor energy savings by endusers. Alternative or complementary instruments supportingthisshouldthereforebefullyrecognised. Promotionofefficiencyinheatingandcooling(Art.10;AnnexesVIIVIII) National heating plans should aim to reduce demand first, while assessing the marketpotentialforalllowcarbonheatingtechnologies. Compulsory CHP units for all thermal power plants are inappropriate: jeopardisingelectricitymarketswillnotimproveenergyefficiency. Energytransformation(Art.11,Art.19Para.5,andAnnexX) The approach proposed will lead to an excessive administrative burden and threaten future investments. Electricity generators already have strong commercialandregulatoryincentivestoundertakeenergyefficiencyinvestments. PrimaryEnergyConversionFactor(AnnexIV,Footnote3) Keeping the conversion factor for electricity, by default, at 2.5 is arbitrary and technically wrong. This will promote direct fossil fuel combustion instead of electricity,thusincreasingimportdependencyandcarbonemissions. Meteringandinformativebilling(Art.8andAnnexVI)andservicestobeofferedby networkoperators(AnnexXI) More flexibility in billing methods and frequencies should be allowed to enable supplierstomeettheircustomersneedsandpreferences. Thenewdirectiveshouldnotjeopardiseongoinginvestmentplansontherollout ofsmartmeters,asrequiredbythe3rdElectricityDirective.

TableofContent
QuickStart ............................................................................................................................ 5 SectionI:EURELECTRICviewsontheproposedEnergyEfficiencyDirective................... 11 1. Energyefficiencytargets(Arts.36)....................................................................... 11 2. Energyefficiencyobligationschemes(Art.6andAnnexV).................................. 12 3. Promotionofefficiencyinheatingandcooling(Arts.10,12;AnnexesVIIVIII)... 14 4. Energytransformation(Art.11,Art.19Para.5,andAnnexX) ............................. 16 5. PrimaryEnergyFactor(AnnexIV,Footnote3) ...................................................... 17 6. Meteringandinformativebilling(Art.8andAnnexVI) ........................................ 18 7. Servicestobeofferedbynetworkoperators(AnnexXI)...................................... 20 SectionII:Backgrounddocumentsforpolicymakers ....................................................... 21 1. ImpactoftheEEDonotherEUenergyclimatepolicies ....................................... 21 a) Impactonnational2020GHGandREStargetsandlongtermenergyclimate goals............................................................................................................................ 21 b) ImpactontheEmissionsTradingSystem(ETS) .................................................. 21 c) ImpactontheElectricityMarket......................................................................... 22 d) ImpactontheElectricitySystem......................................................................... 22 e) ImpactontheTransportSector .......................................................................... 23 2. Primaryenergyuseinelectricityproduction........................................................ 24 a) Aflawedconversionfactor ................................................................................. 24 b) Changesinelectricityproduction........................................................................ 25 c) Negativeconsequencesoftheconversionfactor ............................................... 27 3. Networks:recognisingtheroleofDSOsinSmartGridsandenergyefficiency... 28

Introduction: The Role of Electricity Companies in Promoting Energy EfficiencytoEndUsers

a) ReachingtheEUs20%objectiveforenergyefficiencyin2020requiresnewthinkingand new measures at EUlevel but, as important, the full implementation of existing legislationtoallowittohaveitsfullimpactbeforedevelopingnewlegislation. In addition, it also requires a steppingup of European and national energy efficiency policiestoreleasethepotentialthatenergyservicescanbringtothemarket. The European Commissions new plan for energy efficiency recognises this. We agree withtheCommissionsassessmentthatthereisaneedtofurtherstrengtheninitiativesto ensurethatmemberstatesreachtheenergyefficiencytargetin2020.Wealsoagreethat aprerequisiteforanenergyefficientEuropeis thecreationof valueforenergysavings throughamarketmechanism.However,instrumentsareneededtocreateamarketand toputafinancialvalueonenergyefficiency. TheEuropeanelectricityindustrywantstobeapartofthesolutionandisreadytomeet thechallengebyofferingmore,andmorespecialised,energyservices. b) Energyefficiencyshouldbedrivenbythemarketonbusinessterms,wheneverpossible. With an existing direct link to all electricity users throughout the EU, electricity companiesalreadyhavecommercialincentivestodesignandprovidetailormadeenergy services to their customers. Moreover, they have the potential to develop new partnershipswithcustomersand,togetherwithESCOs,newbusinessmodelsforenergy services.Energyefficiencyservicesareaninstrumentforbuildingandmaintaininglong lastingcustomerrelationshipsaswellasameanstoreducepeakloadcurvesandtomake roomfornewdemandsforelectricitysuchaselectricvehicles. Marketsaredevelopingmorerapidlythanever;andclimatechangeandcompetitionin energymarketsareamongthemaindrivers. The Commission proposal does not sufficiently reflect the positive impact that markets haveonenergyefficiency.Instead,itplacestoomuchemphasisonregulatorycommand and control measures that do not reap the full benefit in terms of effectiveness and efficiency. Openmarketsservebest Electricitycompaniesasacatalystfortheenergyservicesmarket

c)

Tailormadesolutionstoachievecommontargets

Energycompanieswishtooptimizeandsaveenergytogetherwiththeircustomersand other partners. However, conditions vary between and even within member states. Thesedifferencesareafactbutnotathreattotheenergyservicesmarket. We want to save energy in a way that will underpin the savings and turn them into businessopportunities.Buttherearemanywaystodeliverenergysavings.Onesizedoes not fit all. All market mechanisms for creating value for energy savings should be acknowledgedfortheroletheycanplayinmeetingeachcountrystarget. The subsidiarity principle thus plays a fundamental role. Before introducing new measures, existing national experiences should be carefully analysed and compared, especiallyasregardstheir effectiveness, both in terms of additionality and of real reductions in energy consumption; sectoral coverage, to make sure that all sectors are able to contribute to more efficient energy use in order to make sure no point of the energy process is neglected; abilitytodriveinvestmentswithamediumtolongtermpaybacktime; adequacyindrivingstructuralchangesinsociety.

In addition, any such analysis should specifically address the risk of free riders and increased costs, as well as the measures effectiveness in driving investments in the sectorswheresavingspotentialscanmostcosteffectivelybeexploited. AnyEUwideinitiativeforregulatingtheenergyservicesmarketshouldtherefore Inconclusion,EURELECTRICwelcomestheCommissionsacknowledgementofthevariety ofinstrumentsthatmemberstatescanusetopromotethemarketforenergyefficiency services. The Directive should ensure that and we call upon EU Governments and MembersoftheEuropeanParliamenttoensurethat: Many types of market mechanisms exist, which create value for energy savings basedonnational/regional/localcircumstances; The choice of the most appropriate instrument to turn energy efficiency into a business opportunity is left to each member state, in accordance with the subsidiarityprinciple. beconsistentwithexistingmeasures, deliveranaddedvalue,and becosteffectivei.e.theleastbureaucraticpossible.

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SectionI:EURELECTRICviewsontheproposedEnergyEfficiencyDirective
Energy efficiency is one of the most costeffective way of addressing the EU's key strategic policy objectives: tackling climate change, ensuring security of supply and enhancing competitiveness, while creating jobs and contributing to affordability for customers. A welldesigned energy efficiency policy can significantly contribute to the reductionofcarbonemissionsinallsectors,includingthetransportsector. It is clear from EURELECTRICs Power Choices and the EU lowcarbon roadmap that energyefficiencyplaysacrucialroleinEuropesenergyfutureandshouldbeprioritised. Particularly,giventheongoingfinancialcrisis,itisextremelyimportantthattheEUand memberstatesadoptmeasuresthatarebothcostefficientandequitable. To achieve meaningful behaviour changes that reduce demand and use energy more efficiently,theinterestsofcustomersshouldbeparamountincreatingflexiblesolutions whichmeettheirrequirements. We recognise that the intent of the proposed Energy Efficiency Directive moves in this direction. We believe, however, that the directive is overly prescriptive and often in conflictwithEUenergyandclimatepolicies.Thiswoulddeliversuboptimalresultswhich, in some cases, would even prevent investments in energy efficiency. It is therefore of greatest importance that climate, renewable energy and energy efficiency targets coherently support each other in meeting the EU objectives set out in the 2050 low carbonroadmap. The following paragraphs highlight the views of the electricity industry on the main aspectsoftheproposedEnergyEfficiencyDirective. 1. Multiple, overlapping targets should generally be avoided and, where not possible, the interactionbetweenthemcarefullyassessed. Withthisinmind,theneedfornationalenergyefficiencytargetsshouldbeassessedas follows: Need to create mechanisms that take into consideration member states early actionsonenergyefficiencyandtheircostefficientsavingpotentials; Needtocreatemechanismsthatdonotdiscriminateagainstchoicesonnational energymixes; Clarifytherelationbetweennonbindingnationaltargets(art.3)andtheimpact ofpossiblebindingmeasures(arts.4and6); 11 Energyefficiencytargets(Arts.36)

Render clearly identifiable the additionality of measures that member states wouldhavetoundertaketomeettheirnationaltargets; Address the linkage between energy efficiency and carbon reduction measures, particularlyinthenonETSsectors.

The need for EUimposed binding national targets on energy efficiency must then be assessedinthelightofthoseresults. Astrongcommitmentfrompublicauthoritiesisparticularlyimportant,notonlyinsetting incentives, but also in assuming a leadership role in opening up and stimulating the demandforenergyefficiencyproductsandservices. We therefore welcome the overall approach in arts. 4 and 5. However, we would like more clarity on the overall financial implications for member states, particularly in relationtogovernmentalmeasuresneededtotackletheongoingfinancialcrisis. More generally, the means for achieving targets, e.g. obligation schemes and CHP promotionshouldbecoveredbythesubsidiarityprincipleandshouldnotbethesubject totheCommissionscontrolthroughdelegatedacts. 2. Electricitycompanieshaveaninterestand,importantly,expertiseindevelopingarobust market for energy efficiency services. This market is very specific, tailored to local circumstances. Obligation schemes are just one of many tools to promote energy services.Wethereforewelcomethepossibilityformemberstatestodevelopmeasures thatbestsuittheircircumstances. According to Art. 3, member states should set their own national target (based on a seriesofparameterswhichincludepreviousandongoingsavingefforts,actualtechnical and economic potential, as well as external factors like economic growth and the development of industrial activities). We therefore find most appropriate for member states to set their own annual savings targets (Art. 6) to meet their overall national target,insteadofasinglesavingstargetsetatEUlevel. Where member states wish to introduce obligation schemes, it should be noted that electricity companies need to have the right instruments to guarantee specific savings (i.e. 1.5%) as they have limited influence over customer behaviour and lifestyle. Therefore it is of great importance that electricity companies fulfil their obligation withouteconomicriskandareabletocovertheassociatedcosts(e.g.throughtariffs). 12 Energyefficiencyobligationschemes(Art.6andAnnexV)

Moreover, a wellfunctioning market needs not only supply push but, even more importantly, demand pull. Demand comes from customers, whose engagement and empowermentcannotbeignoredorbypassed.Actionsdirectlyaddressingendusersor theirclosestlevel(e.g.localauthorities)shouldbepromoted.Forinstance,energyaudits, assetoutinArt.7,andenergymanagement,asdefinedinEuropeanandInternational standards,arenotmeasuresofenergyefficiencybythemselves,buttoolsthatcanhelp companies seek continuous improvement. Member States should aim to promote an energysaving culture in all sectors rather than simply imposing the implementation of energyaudits. Itisalsoimportanttoensurethattheobligatedpartiesaregiventhefreedomtochoose wheretoimplementtheobligation,e.g.intermsofsectors,energycarriers,supplyareas, in the grid in order to secure the best possible basis to fulfil the obligation. Member states should also ensure flexibility for electricity companies regarding corrections and changestotheschemewhennecessaryandappropriate. Ourexperienceincountrieswithestablishedobligationschemeshighlightsthefollowing conditionsforsuccess: Costrecovery mechanisms should be a precondition when setting up the obligation schemes, as they play an important role in ensuring a levelplaying field. The measures should apply to all energy sectors (electricity, gas, other heating andtransportfuels,allsupplyareasandthegrid). Obligation schemes should leave sufficient flexibility and predictability to the obliged parties to enable competition for the best and most costefficient solutions and allow for the creation of a liquid market for energy efficiency products.Multiannualinsteadofyearlytargetswouldbemoreappropriate. Theadministrativeburdenforobligedparties,includingtheprovisionofcustomer consumptiondata,mustbeminimised. The system must be set up in a way that does not discriminate against early moversontheenergyefficiencymarket.

Inadditiontoobligationschemes,successfulalternativeorcomplementaryinstruments havebeendeveloped,andshouldalsobeacknowledged,forexample: LocalandregionalprogrammesandactivitiesdevelopedwithsupportfromtheEU ProgrammeofIntelligentEnergy; Voluntaryschemes; Energyandclimatepolicies(e.g.carbonpricesundertheEUETS,taxation); Regulationdirectlyaddressingthedecisionmaker/enduser; 13

Fundingmechanismsmanagedbynationalauthorities; Covenantsbetweenvarioussectors,i.e.building,housingandenergy; Urbandevelopmentprogrammes(e.g.SmartCities,SustainableCities); VirtualPowerPlantsmechanisms.

ForthesereasonswewelcometheprovisioninArticle6,para.9,asitgivestheflexibility to member states to develop the most appropriate mix of measures tailored to local realities.Atthesametime,article9shouldbereviewedaccordingly. 3. EURELECTRIC agrees that member states should seriously address energy efficiency in heatingandcooling.Wethereforewelcometheproposaltoestablishheatingandcooling plans, although the proposal should be further strengthened. In particular, member statesshould: Prioritisethereductionofheatingandcoolingdemand; Assess the potential for all lowcarbon heating and cooling technologies. With various lowcarbon heating options available, e.g. high efficiency boilers, district heating,heatpumps,biomassandsolarenergy,itisnotefficientforpolicymakers todictatethebesttechnologythisshouldbelefttothemarket; Minimisenegativeimpactsoncompetitionwithinliberalisingenergymarkets; Takealongerview(2030years)oftheheatingandcoolingforecast,inlinewith the implementation of Directive 2010/31 (Energy Performance of Buildings Directive); Facilitate,whenappropriateandnecessary,thedevelopmentoflocalheatingand coolingnetworkinfrastructure; Identify through costbenefit analysis at district/regional level opportunities for thepromotionofefficiencyinheatingandcooling. Promotionofefficiencyinheatingandcooling(Arts.10,12;AnnexesVIIVIII)

EURELECTRIC supports the development of district heating and cooling, and the promotion of highefficiency combined heat and power (CHP), where economically feasible. However, we strongly oppose the proposal to mandate cogeneration (CHP) unitsforallthermalpowerplants,whichrestrictsnotonlythechoiceoftechnologies,but also the siting of thermal power plants. Moreover, while supporting the need for strengthening grid access for high efficient CHP and the need to remove barriers to accessing the grid, we are strongly against prioritised access or other instruments that provideunfaircompetitiontoother,marketbasedproductioncapacity.

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EURELECTRICisopposedtomandatorycogenerationforthefollowingreasons: With the increasing share of variable electricity from renewableenergy sources, the system will need flexible thermal generation. CHP is a heatled process and does not necessarily constitute the most costefficient way to balance the electricitysystem; The use of waste heat wherever there is such demand from electricity or industrialheatproductionistobewelcomed.Howeveratoostrongfocus,oreven obligation,ontheuseofwasteheatmayhinderchoosingoptionsthatcouldyield moreenergyefficiencyoverall; Siting of power plants depends on many technical and economic factors other thanthedistancetoheatdemandpoints(e.g.fueltransport,coolingpossibilities, permitting issues, connection to the grid, grid congestion). If siting is optimised with regard to only one factor (use of waste heat) this will create economic inefficiencies,resultinginextracostsforcustomers; IndevelopedmarketswheretheshareofCHPandDH&Cishigh,regulationcould even be harmful. The proposed approach would be too mechanistic and inflate costsforcustomerswithoutachievingenergysavings; The guidelines for siting thermal power plants (Annex VIII) will delay or even prevent the construction of new power stations at a time when new capacity is neededinmanymemberstates.Surveyingallheatdemandpointswithin100km meansstartingopenendedadministrativeprocedures; With CHP as the default option for thermal power plants, the combination of prioritydispatchofelectricityfromhighefficientCHPandfromrenewableenergy sources will lead to a progressive undermining of market principles. It is a core market principle that each generation source, once competitive, bears its own costsandcompeteswithothergenerationtechnologiesonalevelplayingfield; Development costs for heating/cooling networks are significant and should be borne by the networks customers to safeguard the dynamics of markets undergoingliberalisation.

In summary, the CHPobligation adds further risks to permitting procedures and may delay or even prevent the construction of new power plants which could hamper competition and endanger security of supply (e.g. Germany will need at least an

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additional10GWontopofthecapacitiesunderconstructioninordertocopewiththe shutdownofnuclear).1 4. EURELECTRIC members are strongly committed to the continuous improvement of the power plant efficiency, and substantial progress has been made in this direction over time. Efficiency is at the core of our competitiveness. The recently adopted Directives 2009/29and2010/75,whenfullyimplemented,willfurtherdriveinvestmentsinenergy efficiencyinoursector. For these reasons, we believe that the directives focus on electricity generation is misplaced. Multiple incentives to improve efficiency of combustion installations, in particularinthepowersector,alreadyexist: The approach proposed in the directive will lead to an excessive administrative burden andcouldthreatenfutureinvestments.Inparticular: Excessiveadministrativeburden Power plants can operate in electricityonly, heatonly or cogeneration modes. Moreover, power plants are often composed of different units, using different fuels at different points in time. Reporting will become quite complex and cumbersomeforbothpowerplantoperatorsandpublicauthorities. Furthermore, electricity generation companies already report considerable data tonationalregulators,statisticaloffices,TSOs(e.g.transparencyobligations)etc, which allow conclusions to be drawn on the efficiency of electricity generation. Additionalreportingrequirementsarethereforenotjustified,inparticularwhen theyincludehighlysensitiveinformationsuchasoperatinghoursandoperational efficiency. Fuel is a major cost for electricity generators, so in a competitive market they haveaparticularlystronginterestinitsefficientuse; TheEUEmissionsTradingSystemwillprovideanevenstrongerincentivewiththe introductionof100%auctioningofCO2allowancesfrom2013onwards; TheIndustrialEmissionsDirective,whichrequirestheuseofBAT. Energytransformation(Art.11,Art.19Para.5,andAnnexX)

For more detailed information on CHP, please see the EURELECTRIC position paper The Role of CHP in the proposed Energy Efficiency Directive, soon available at www.eurelectric.org/energyefficiency
1

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Threattoinvestments Investments to improve the efficiency of a power plant take into consideration not only the overall efficiency of the plant, but also the operating regime. Mandating periodic investments in energy efficiency without assessing whether theinvestmentwouldbecosteffectiveinthefirstplacewilldiscouragenewbuild, lockinginageingandlessefficientpowerplants. Moreover, fossil plant is likely to operate at lower load factors because of the expansion of renewable generation, as promoted by the EU EnergyClimate Package. This will mean less full load hours, more ramping, more startups and shutdowns, thus reducing thermal efficiency. Consequently, there seems to be littlepointinsettingstandardsfornameplateefficiencywhenoperatingregimes willnotallowthemtobeachieved.

In conclusion, energy efficiency standards for thermal generation are unnecessary, as outlinedabove,andcouldeitherencourageoperatorstocloseplantprematurelyoract asabarriertonewconstruction. 5. TheconversiontableinAnnexIVsuggests2.5asdefaultcoefficientfactorforsavingsin electricity. Inotherwords,40unitsofelectricityrequire100unitsofprimaryenergy (coal,gas,petrol,uranium).Thisvalue,theoreticallysubjecttonationalinterpretations,is inrealityusedbytheCommissiontodefineefficiencycriteriaforenergyusingproducts (ecodesignandenergylabelling). Butwheredoesthisvaluecomefromandhowhasitbeendeveloped? The2.5defaultvalueisthesamevalueused,backin2003,intheCommissionproposal that led to the adoption of Directive 2006/32/EC now being repealed by the current proposal.2Atthattime,theimpactoffuturelegislationwasnottakenintoconsideration inparticular: By keeping the same conversion factor from 20002001 until 2020 suggests that the Commissionisassumingthattheelectricitymixhasnotevolvedinthelast10yearsand
Proposal for a directive of the European Parliament and of the Council on energy end-use efficiency and energy services, 10.12.2003, COM(2003) 739 final
2

PrimaryEnergyFactor(AnnexIV,Footnote3)

theimplementationofDirective2001/77onthepromotionofRESinelectricity, the2009energyclimatepackagethatsettargetsfor2020, the2004and2010packagesonelectricitymarkets.

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willnotevolveinthenextdecade.Thisisnottrueandcouldsendamessagetoinvestors that: RESshareinelectricityproduction

(Source:EUenergytrendsto2030Update2009)

the2020REStargetwillnotbemet,and/or the2020REStargetwillhavenoimpactinreducingprimaryenergyconsumption inEurope.

2000 15%

2010 19%

2020 33%

Keeping the conversion factor of 2.5 implying an efficiency of 40% for the whole electricitymixisthereforebotharbitraryandtechnicallywrong. Itcreatesaperverseincentivetofocusenergysavingsonelectricity(includingelectricity generated from lowcarbon and renewable sources) and replace it by fossil fuels, thus strengtheningfossilfuellockin.Itwillalso,bystrengtheningdependenceonimported fossil fuels, be counterproductive, given the important role that electricity can play in decarbonising heating and transport. To prevent these distortive effects, it would be moreeffectivetoassessenergyefficiencyintermsofenergyenduse. It is very important that member states are encouraged to apply national conversion factors especially in countries where the share of CO2free electricity production is high. 6. Customersshouldbegiveneveryopportunitytousetheirenergymoreconsciously.We therefore welcome the overall provision to strengthen and clarify aspects related to meteringandbilling. At the same time, the provisions on billing should leave room for different billing methods (including direct debit billing) and frequencies according to customers needs, useandpreferences.Theyshouldalsotakeintoaccountcostefficiency. 18 Meteringandinformativebilling(Art.8andAnnexVI)

In general, the manner in which the customer is informed about consumption data should be left to the market. The presentation of consumption in relation to historical consumptionorrunningcostsandtheprovisionofusefulinformationforamoredetailed "self check" does not fit within the minimum requirements of Annex VI. This is one of many elements in which suppliers can and will distinguish themselves in a liberalised market. Wehaveconcernsaboutspecificprovisionsthatappeartobeinconflictwiththeongoing liberalisation process and do not serve the interests of our customers, as they create additionalcostswithoutdeliveringadditionalbenefits.Inparticular: Distribution companies3 are already engaged in the rollout of smart meters according to timelines defined by the 3rd Electricity Directive (Directive 2009/72/EC),i.e.80%ofcustomerswhohavebeenpositivelyassessedbyacost benefitanalysismustbeequippedwithsmartmetersby2020.Thenewdirective should not jeopardise ongoing investment plans. The financial and operational challenges linked to a largescale rollout of smart meters need to be carefully assessedbytheCommission. The proposals foreseen deadline of 1 January 2015 does not comply with the constraintsoflogisticalrealityandshouldhencebepostponed. It is also worth noting that the EURELECTRIC report Regulation for Smart Grids4 clearlyshowsthattherolloutofsmartmetersinEuropeiscurrentlyhamperedby two factorsat memberstate level:the lack ofclarity of the mandate(on whom willtherolloutobligationfall)anduncertaincostrecoveryconditions.Toensure a smooth and quick rollout of smart meters in Europe, sound and forward lookinggridtariffmodels(whicharesetbynationalenergyregulators)shouldbe established. Laying down a stricter timeline without addressing these two main barrierswillnotdeliverasmootherrolloutofsmartmetersinEurope. The distinction between information provision and billing should be acknowledged: smart meters will in fact allow customers to receive accurate informationfrequentlyenoughtomanagetheirconsumption.Oncesmartmeters arefullyrolledout,energycompaniescouldoffercustomersmonthlybillsbased on actual consumption. Alternatively, they can offer an equally spread payment schemewithanannualreconciliationbill,inwhichcasecustomerscouldreceive frequentinformationonactualconsumptionthroughothermeanssuchasmobile phones,inhousedisplays,ortheInternet.

To provide investors with the legal certainty needed to undertake these significant investments(worthseveralbillioneuros),EURELECTRICrecommendsthattheEUshows consistencywithexistinglegalobligationsandstickstothetimeframeforeseenbythe3rd Electricity Directive adopted two years ago. For the sake of clarity and legal certainty, doubleregulationofthesametopicsindifferentdirectiveshastobeavoided.Issuesof
3 4

Except in the UK, where this is the responsibility of the supplier EURELECTRIC Report on Regulation for Smart Grids, February 2011, http://www.eurelectric.org

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billing and smart metering should therefore only be regulated within the 3rd Electricity Directive. 7. Theproposalforeseesthatnetworkregulationandtariffsshallallownetworkoperators to offer system services and system tariffs for demand response measures, demand managementanddistributedgenerationonorganisedelectricitymarkets AnnexXIliststheseservices,amongthemenergystorage. Principally,EURELECTRICbelievesthattheroleofnetworkoperatorsshouldbetoactas neutralfacilitatorsbyprovidingbehindthescenedemandsidemeasureswhilstservices will be provided to the customers by ESCOs, suppliers and load aggregators. In this regard,wewouldappreciateifthisapproachwouldbemademoreexplicitinthewording ofAnnexXI. Morespecifically,manyoftheserviceslistedinAnnexXIarecurrentlyprovidedorcould in the future be provided by market actors.5 If these services were to be provided by network operators, this would contradict the unbundling requirements under Directive 2009/72/EC on the internal electricity market, and would not provide cost effective provisionoftheserviceslisted.Serviceswillbeprovidedmostefficientlywhenthereisan adequate market price signal and free choice for customers so they only pay for the servicestheywant. At the same time, we consider that the adoption of the proposed Energy Efficiency DirectiveshouldusherinpositiveregulatoryandtariffincentivesdesignedbyNational Regulatory Agencies that will put DSOs in the best position to facilitate demand side participationtothebenefitofcustomers.6 TheDirectiveshould,therefore,strengthenthedualroleofthenetworkoperator;both as the agent in charge of reliability and as market facilitator to enhance the market dynamicsdrivenbytheliberalisationprocess. Servicestobeofferedbynetworkoperators(AnnexXI)

To take an example, the storage of electricity by pumping installations is carried out by agents involved in the wholesale electricity market, buying and selling electricity at market prices. 6 EURELECTRIC Views on Demand Side Participation, August 2011

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SectionII:Backgrounddocumentsforpolicymakers
1. a) TheEuropeanCouncilhasestablishedanobjectiveofan8095%reductioningreenhouse gas(GHG)emissionsby2050toaddressthegrowingriskofclimatechange.Moststudies todateshowthatenergyefficiencyiscriticalindeliveringthelowcarbonobjective.The studies, including the EUs 2050 roadmap to a low carbon economy, show that the objectivecanbeachievedmosteconomicallybydecarbonisingtheelectricitysectorand utilising electricity, by substituting it for fossil fuels, to decarbonise the economy. The proposedEnergyEfficiencyDirective(EED)blocksthispossibility,reducingtheprospects of achieving the EUs objective and, consequently, increasing the risk of this existential threattotheplanet. Thedifficultyarisesinthemethodologybywhichenergysavingsareaccountedfor,and theapplicationofanerroneousfactorfortheprimaryenergyequivalenceofelectricity. Thisfactorassumesaconstant40%conversionefficiencyfortheelectricitysystem(see section II.4), making it more attractive for governments to move away from electric appliances.Thisunderminesthecapacityforelectricitytoreplacefossilfuelsand,inthe contextofenergyefficiencycertificationforbuildings,positivelypromotestheopposite. The more we promote direct use of fossil fuels in enduser appliances, the more we promoteGHGemissionsinsectorsoutsidetheETS,primarilyintransportandbuildings, therebyincreasingthedistancetothe2020GHGreductiontargetformemberstates. Atthesametime,renewableenergysources(RES)willprimarilybeusedintheelectricity mix, so the more member states move away from direct use of electricity, the more difficultachievingthe2020REStargetwillbecome. Moreover,themorefossilfuelsarechosenoverthedirectuseofelectricity,themorethe distancetotheEUgoalofsecuringenergysupplywillincrease. b) TheImpactAssessmentfortheproposedDirectiveandtheLowCarbonRoadmapto2050 indicate that achievinga 20% energy efficiency target and meeting the mandatory 20% renewable energy target will result in a 25% reduction in GHG emissions by 2020. The proposedDirectivemakesprovision(Art18)toextendthetargetbeyond20%.Boththe CommissionersforEnergyandClimateActionhavepubliclyindicatedadesiretoestablish 21 ImpactontheEmissionsTradingSystem(ETS) Impactonnational2020GHGandREStargetsandlongtermenergyclimategoals ImpactoftheEEDonotherEUenergyclimatepolicies

afurtherrenewablestargetfor2030(andbeyond)andhaveindicatedthepossiblescale ofthistarget. The effect of defining these measures is to ensure the current GHG emissions target trajectoryismetataminimumwithoutanyfurtheractionrequired.InadoptingtheRES Directive and the proposed EED, policymakers have determined the technologies and methodologies by which the climate target will be met. In so doing they have moved awayfromtheprinciplecontainedintheETSDirectiveofmeetingthistargetatminimum cost, i.e. the cost of meeting the targets will now be the ETS cost, plus the cost of RES supprtmplusadditionalcostsfmandatingCHP. Compliance costs to meet the 2020 targets will therefore rise, which will inevitably be translatedintohighercostsforsociety,withunevendistributionalimpactacrossmember states. c) TheRESDirectiveprovidesrenewableformsofgenerationwithpriorityaccesstothegrid andfordespatch.TheproposedEEDprovidesCHPwithsimilarpriorityaccess.Itfurther specifiesthatallnewthermalgeneration,whichincludesnuclear,shouldbeCHPunless proven uneconomic based on an assessment to be determined by the Commission. Priority grid access and generation despatch, in a market increasingly dominated by renewable generation holding this advantage, will significantly influence investment decisionstowardsCHP. However, priority access for CHP places this technology outside electricity market mechanismsandleadstodistortionsofcompetition.Thiscomesinadditiontosignificant volumesofrenewableenergieswhichdependingonsupportschemesalsodonotreact to price signals on the wholesale market. The consequence for the residual cohort of balancing plant that remains in the market is that it will have limited operation, with lower marginal wholesale prices (zero on many occasions) that will make conventional generators not economically viable. The resultant depression in electricity prices will require very high marginal wholesale prices if investment costs are to be recovered, or theintroduction/increaseofcapacityremunerationmechanisms.Theinevitableoutcome of such a scenario would see all plants centrally despatched and the electricity market ceasingtofunction. d) TheverystrongincentiveforCHPintheproposeddirectivewillmodifythedesignofthe electricitysystemandhasthepotentialtoincreasecosts.Thisisbecausethelocational pricingsignalsfornewgenerationthatareprovidedbythenetworkmaybeoutweighed by the advantage derived from priority access and despatch. Other locational factors, 22 ImpactontheElectricitySystem ImpactontheElectricityMarket

includingaccesstofuelsupplysystemsandcoolingwater,mayalsobeovercome,adding toexcesscosts. Moreover, according to the proposed directive, if the performance of thermal power facilitiesisassessedtobewellbelowthatprovidedbyBAT,theCommissionshallpropose requirementstoimprovetheenergyefficiencylevelsachieved. However there is a difference between optimal design efficiency of a power plant and actual operational efficiency determined by market conditions. While the former is certainlypursuedfornewpowerplants,thelatterwilldeterminethetimingandneeds fornewinvestmentsinexistingpowerplants. Forcinginvestmentswhennoteconomicallyrewardingwoulddelayinvestments,withthe perverseeffectofloweringtheelectricitysystemsoverallefficiency. e) The proposed directive addresses the energy efficiency of the heating sector and the electricity sector. The transport sector, the fastest growing energyuse sector in the EU andglobally,isoutofthescopeofthedirective.Thelogicingivingnoconsiderationto thesectorwiththegreatestenergysavingspotentialandthehighestgrowthindemandis unclear. It is therefore crucial to tap the enormous energy saving potential in the transport sector as well. Possible instruments include efficiency standards for cars, the taxationofconventionalfuelsinthetransportsector,taxrebatesandotheradvantages for highefficient vehicles etc. This way, electric vehicles can be promoted and make a valuablecontributiontoenergyefficiencyinthetransportsector. ImpactontheTransportSector

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2. a)

Primaryenergyuseinelectricityproduction

Aflawedconversionfactor

EURELECTRICstronglyopposestheuseofaPrimaryEnergyFactor(PEF)of2.5toconvert electricitytoprimaryenergy,asthedefaultcoefficientintheproposedEnergyEfficiency Directive(AnnexIV,footnote3). Theuseofthisconversionfactorwould,inouropinion,be: discriminatory, technicallywrongand undermine the longterm objectives of EU energyclimate policies, as stated in the recently published Commission Communication "A Roadmap for moving to a competitivelowcarboneconomyin2050".

While member states could in theory still opt for a different value, the European Commission has, in fact, repeatedly tried to apply this default value in ecodesign and energy labelling implementing measures. This has been justified by referring to the default value first proposed in the existing directive 2006/32/EC as an authoritative source,thusdevelopingaselffulfillingprophecy. Following the Commission suggestion, a member state could be inclined to meet the 2020 energy efficiency target primarily by saving electricity over other energy carriers, thuslockinginCO2emittingtechnologieslikeboilersforthenext3040years. The consequences of applying such an arbitrary figure would result in artificially distortingtheinternalmarketbyexcludingcertainelectricitybasedproducts.Evenmore importantly, it could cause serious social consequences in those countries or regions wherenoalternativeinfrastructuretoelectricityexists. EURELECTRIC is thus of the opinion that using the Primary Energy Factor should be seriouslyreconsideredand,ifdeemednecessary,adjusteddownwards,soasto: reflectchangesintheelectricityenergymixsince2000withregularreview,or be based on 2020 figures, as appliances installed from 2011 onwards will have an expectedoperationallifeatleastuntilthatdate. 24

 b) Theconversionfactorof2.5wasintroducedinthefootnotetoAnnexIIoftheDirective on energy enduse efficiency and energy services (Directive 2006/32/EC). The footnote wasalreadyintheCommissionproposalforadirective,tabledinDecember2003,where itwasstated: ForsavingsinkWhelectricityMemberStatesmayapplyadefaultcoefficientof 2.5 reflecting the estimated 40% average EU generation efficiency during the targetperiod.Source:Eurostat. Taking into consideration the structural delay in publishing official data, Eurostat data usedintheCommissionproposalwere,atbest,basedon2001values(Eurostat,infact, collectsstatistics,notforecasts!). Since 2001, the electricity generation mix has changed, in part arising from the EU Directive on the promotion of renewable sources in electricity. In this respect, the Commissionwebsiteclearlystates: SincetheadoptionofDirective2001/77/EC,theCommunityhassettargetsand triedtoremovebarrierstoencouragethegrowthintheshareofelectricityfrom renewableenergysources.Thissharehasrisenfromroughly13%in2001to16% in2006,butunderthenewdirectiveonrenewableenergyitisexpectedtoneed todouble,toover30%fortheEUtoreachitsoverallrenewableenergytargetof 20%by2020. Concerningthermalpowerplants,newinvestmentsincombinedcyclegasturbinesand moreefficientcoalfiredpowerplantshavesignificantlyimprovedtheefficiencyoftheEU portfolioofplants.Moreover,lookingtothe2020horizon,theEUETSwillbeoneofthe primarydriversinboostingefficiencyincombustionplants. The recently published EURELECTRIC study, Power Choices, based on the 2009 PRIMES model, shows investments in the power sector which took place in the past and those expectedtomeetthe2020targets: Changesinelectricityproduction

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 Model results for Mitigationscenario

Observed Projection MarketData GWnet Capacity in2005 Coal/lignite 195.7 Capacity in2010 191.9 117.4 89.5 55.8 127.0 24.1 80.1 4.3 16.2 107.3 813.8

Decommis Confirmed sionings constructions Capacity Investment 20102020 20102020 in2020 20102020 76.9 5.4 27.5 36.8 27.0 2.3 0.4 0.2 176.4 32.0 73.2 9.1 2.7 12.0 15.4 79.5 35.0 38.0 7.7 304.6 167.3 150.8 76.0 40.0 123.5 46.2 162.7 53.1 43.9 114.3 977.9 48.5 82.1 19.5 14.7 16.1 31.0 122.8 52.4 41.4 10.0 438.5

Gas Turbine CC 74.1 Small plants Oil Nuclear Biomass gas 84.0 62.1 134.4 17.5

Windonshore 39.9 Wind offshore Solaretc. Hydro TOTAL 0.7 2.9 104.5 715.7

Investmentsinelectricitygenerationhaveimprovedtheefficiencyofcombustionplants andincreasedtheamountofelectricityfromrenewablesources.Asaresult,theshareof technologiesusedinthetotalelectricitymixin2000wasdifferentfromthatin2010,and willbedifferentagainfromthatin2020.Thetrendtomorethermallyefficientandless carbonintensiveplantisclear: 26

 Nuclearenergy FossilFuels Solidsfired Oilfired Naturalgas Derivedgasses Renewableenergy Hydro(pumpingexcluded) Windonshore Windoffshore Solar TWhnet Sharesin%

2000 2010 2020 2000 2010 2020 892 880 849 31.7 28.5 24.5 1503 1597 1511 53.5 51.7 43.5 870 786 707 31.0 25.5 20.4 158 62 63 5.6 2.0 1.8

449 722 704 16.0 23.4 20.3 26 27 37 0.9 0.9 1.1

416 612 1112 14.8 19.8 32.0 348 318 335 12.4 10.3 9.7 22 0 0 147 349 0.8 14 17 0 6 174 0.0 50 3 12 0.0 0.0 0.2 4.8 0.5 0.5 0.0 0.2 3.5 10.1 5.0 1.4 0.1 0.3 5.4

Other renewables (tidal etc.) 0 Geothermalheat Biomasswastefired TOTAL 4 42

110 188 1.5

2812 3090 3473 100 100 100

These figures clearly show that setting the conversion factor at 2.5 is, at the very best, outdated. Moreover, if the European Commission believes that Europe will meet the 2020target,itwillalsohavetorecognisethatanyconversionfactorsetatthe2010level willbetoohighforthesubsequentperiod. c) Inadditiontotheabove,keepingtheconversionfactorat2.5willdiscriminateagainstthe use of electric appliances, as they are deemed, in effect, to be no more than 40% efficient. This is fundamentally wrong, considering the real, high efficiency of electric appliances,andhasthefollowingnegativeeffects: Negativeconsequencesoftheconversionfactor

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Highercostsinmeetingthe2020GHGemissionreductions EmissionsfromtheelectricitysectorfallwithintheEUETSwheretheyareaccountedfor atthepointofgeneration.Consequentlytheuseofelectricityinelectricalapplianceshas no associated CO2 emissions as this would constitute double counting. Replacing fossil energy use with electricity thus results in a 100% saving in emissions for the nonETS sectors(transport,buildings,SMEs,agriculture),forwhichgovernmentsareaccountable. Asthecorrespondingincreaseinelectricitydemandmustbedeliveredwithintheexisting fixed ETS cap, the result is a real reduction in EU emissions. Ignoring this effect would thusincreasecostsformemberstatesinmeetingtheirindividualeffortsharingtargets, as they must offset CO2 emissions associated with directuse of fossil fuels elsewhere amongtheothernonETSsectors. Highercostsinmeetingthe2020renewableenergytarget Themostcosteffectivewaytointegrateelectricitygeneratedfromrenewablesourcesis through developing controllable demandside measures which can adapt instantaneous demandtothefluctuatingsupplythatistypicalofrenewablesourceslikewind.Electrical heatingandcoolingappliancesingeneral,andboilersinparticular,offerthisopportunity. Indoingsotheyalsoallowbenefitsfromthedeploymentofsmartmeterstobebetter realised. Discriminating against electric appliances in favour of directuse of fossil fuels will, in effect, result in lockingin CO2emitting gas technologies operating for the next 3040 years. 3. Thecoretaskofdistributionsystemoperators(DSOs)istodevelop,maintainandoperate themediumvoltageandlowvoltageelectricitygridsinanefficientandreliablemanner. Energy efficiency services, by contrast, should be delivered by competitive market providers. DSOscanneverthelessfacilitateenergyefficiencybyestablishingasmartinfrastructure that will enable the provision, by market players, of energyefficient solutions/offers as emphasised in the proposed directives article 12 and the related annex. These new solutionssuchasdemandresponseanddemandsidemanagementoffertheprospect 28 Networks:recognisingtheroleofDSOsinSmartGridsandenergyefficiency

of large energy savings for households, ranging from 515% depending on research projectresults. However,DSOsarecurrentlynotinapositiontoinvestinnewtechnologiessuchassmart metersandsmartgrids,althoughthesecouldprovideenergyefficiencygainstosocietyas a whole and enable a more efficient use of energy through better demandside participation. As a regulated business, DSOs actions are strictly circumscribed by the regulatory framework that determines their level of revenues and expenditures. This framework set by national energy regulators often disregards climate and energy efficiencyobjectivesandonlyfocusesoncostefficiency. EURELECTRIC hence strongly welcomes the first provisions in article 12 (on energy transmissionand distribution) and itscall on Member States to ensure thatnetworktariffsandregulationsprovideincentivesforgridoperatorstooffer systemservicestonetworkuserspermittingthemtoimplementenergyefficiency improvement measures in the context of the continuing deployment of smart grids.WeanticipatethataskingMemberStatestoadjustthenationalregulatory framework (i.e. the socalled grid tariff models) will give European DSOs the means to act as neutral market facilitators and as enablers of energy efficiency. ThiswhilekeepinginmindthatitistheenergycompaniesandESCOswhoarein directcontactwithcustomers,offeringservicesthatwillallowthemtogetagrip onenergysavingsandefficiency.

Similarly,EURELECTRICsupportsthemeasureproposedintheDirectivesarticle 12 (4) to decouple the revenues earned by network operators from the electricity they distribute by removing those incentives in transmission and distribution tariffs that unnecessarily increase the volume of distributed or transmittedenergy.

EURELECTRIC does not support article 12, paragraphs 5 and 6, deeming it a technical challenge, often unfeasible or open to misreporting, to assess ex ante whichCHPplantisoperatinginhighefficiencymodeinordertoguaranteehigh efficiencyCHPpriorityaccess.

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 UnionoftheElectricityIndustryEURELECTRICaisbl BoulevarddelImpratrice,66bte2 B1000BrusselsBelgium Tel:+3225151000Fax:+3225151010 VAT:BE0462679112www.eurelectric..org