EU "Fit for 55": Energy Efficiency First

Intro

On Wednesday 14 July 2021, the European Commission took a major step towards accomplishing its ambitious goal of making Europe the first climate neutral continent by 2050, as enshrined in the EU Climate Law, by adopting a package of proposals amending the EU’s climate, energy, land use, transport and taxation policies with a view to reducing net greenhouse gas (GHG) emissions by at least 55% by 2030 (the “Fit for 55” package).

This blog post analyses the Commission’s Proposal (including Annexes) to further amend the Energy Efficiency Directive (EED II). For more information on the rest of the package, have a look at our Fit for 55 microsite.

The EED proposal is accompanied by a Q&A, Factsheet and press release, and should be read alongside the Fit for 55 Communication. More info can be found also on the Commission's dedicated Energy Efficiency webpage.

Overview

The EED II itself is relatively new. It was introduced as part of the Clean Energy Package in 2019 and its general transposition deadline expired on 25 June 2020. In order to pave the Union's way to climate neutrality by 2050, the Commission has proposed various changes to the EED II, mainly increasing certain targets and making their implementation more stringent.

The EED II has undergone an ambitious amendment. It is clear that the Commission intends to lay down rules to implement energy efficiency as a priority across all sectors. This key principle is now also embedded in the proposal (the “Energy Efficiency First" principle). In parallel, the EED sets an increased overall Union-wide target for energy efficiency savings in primary and final energy consumption, as well as increased energy savings targets for individual Member States and a target rate for building renovation in the public sector.

With the aim of leaving no one behind in the energy transition, the Commission carried out an impact assessment prior to drafting its proposal. In its impact assessment, the Commission evaluated the opportunities and costs of the green transition. Based on that, it identified specific measures in order to make it just and fair. This explains the increased focus on empowering (vulnerable) energy consumers and combatting energy poverty.

A lot of emphasis and detail is also put on the monitoring and reporting by Member States on their energy efficiency obligations, in accordance with the procedures of the Governance Regulation (i.e., as part of their integrated national energy and climate plans (NECPs) and progress reports).

The details

Raising overall targets and sub-targets

The EED sets an increased target of 39% and 36% of energy efficiency savings in primary and final energy consumption respectively (representing a 9% reduction by 2030 compared to the 2020 baseline scenario), as well as a new target rate for building renovation (see below).

Member States will be expected to contribute to achieving the overall target via indicative national contributions based on benchmarks, to reflect domestic circumstances. In addition, Member States will be required to achieve new savings of final energy consumption of at least 1.5% each year from 2024 to 2030, up from 0.8% for the current period from 2021 to 2023, and 1.7% in the public sector. This doubles the pre-existing annual energy savings obligation that needs to be met individually by all Member States, which is a binding obligation and comes in addition to each Member State’s savings achieved via the implementation of EU law.

The “Energy Efficiency First” principle

As mentioned above, the “Energy Efficiency First” principle will be at the heart of EU energy policy. Energy efficiency must be taken into account in the planning, policy and major investment decisions in both energy and non-energy sectors. Member States will need to appoint an entity responsible for monitoring the application of this principle and report to the Commission as part of their recurrent energy and climate progress monitoring under the Governance Regulation. This principle shows that energy efficiency is a key area of action, without which the full decarbonisation of the Union’s economy cannot be achieved. Put simply, the more energy-efficient Europe is, the less (renewable) energy it will need.

Public sector and public procurement

The legislative proposal also gives the public sector a much greater exemplary role. The public sector must become a leading sector in terms of energy efficiency. First and foremost, the total final energy consumption of public bodies must be reduced. Specifically, the proposal includes a separate target for the public sector to achieve an annual energy consumption reduction of 1.7% (see above). The proposal also sets a renovation target for publicly owned buildings (see below).

In the field of public procurement, Member States will need to ensure that contracting authorities and contracting entities, when awarding public contracts and concessions (with a value exceeding the thresholds for the applicability of EU public procurement rules), purchase only products, services, buildings and works with a high energy efficiency performance. Put differently, public bodies will need to systematically take into account energy efficiency requirements in their public procurement of products, services, buildings and works.

Building renovation

Renovation is a core part of the EED as well (in line with the Commission’s earlier published Renovation Wave Strategy and the high priority given to it in the EU's EUR 672.50 billion Recovery and Resilience Facility). Most notably, each Member State will have to ensure that at least 3% of the total floor area owned by public bodies is renovated each year, to at least be transformed into nearly zero-energy buildings. The extension to “public bodies” is very ambitious, but necessary to achieve the targets. The targets would be compromised if the renovation obligation were limited to “central governments” (a notion that was removed from the proposal) only.

The proposal also looks at the use of energy performance contracts (EPCs) for large (above 1,000 sqm) non-residential buildings to support renovation. In order to do that, Member States will need to establish one-stop shops and rely on the private sector (in particular energy services providers or ESCOs) to prepare and identify the most suitable projects to receive (public) funding. Hand in hand with that, Member States must maintain adequate qualification and certification schemes for these ESCOs, energy auditors, managers, independent experts and installers, which will need to be accredited, assessed and regularly updated. The upcoming proposal for a revised Energy Performance of Buildings Directive (EPBD II), expected in Q4 as part of the second big Fit for 55 release, is expected to go into more detail on minimum energy performance standards in the context of building renovation and the issue of split incentives (i.e., who will pay for it, amongst owners and between owners and tenants) as a barrier to renovation.

Empowering consumers and combatting energy poverty

Another major development is the attention given to vulnerable energy consumers, people affected by energy poverty (now defined) and people living in social housing. In particular, consumers are entitled to certain minimum contractual rights for heating, cooling and domestic hot water. Obligations towards consumers are also strengthened, providing for, amongst other things, out-of-court mechanisms for the settlement of disputes, such as an energy ombudsperson or a consumer body, or through a regulatory authority.

In addition, Member States shall implement energy efficiency improvement measures or information measures as a priority among people affected by energy poverty, vulnerable consumers and, where applicable, people living in social housing to alleviate energy poverty. However, the national policy mix must ensure that people affected by energy poverty will not be jeopardised by energy savings.

In the same vein, the Commission has also proposed to set up a new Social Climate Fund to supports investment in decarbonisation of buildings and transport, while tackling energy poverty.

Heating and cooling, transmission and distribution

The proposal does not bring fundamental changes to the provisions on efficiency in the energy supply. Specific attention is nonetheless given to heating and cooling, with the introduction of a new article setting out criteria to assess the primary energy efficiency of heating and cooling systems and imposing new obligations on Member States in that regard. Data centres are also given special attention.

The proposal further ensures that transmission and distribution system operators and national regulatory authorities alike, apply the Energy Efficiency First principle in carrying out their tasks and embed it into their day-to-day operations as well as their planning and investment decisions. This includes notably the approval and application of network tariffs. It will be harder in the future to recover avoidable network losses from consumers via those tariffs.

What does it mean in practice?

The Commission’s proposal shows that the existing legislation is insufficient to stick to the roadmap towards climate neutrality. The Commission has also realised that we can only achieve the targets if we leave no one behind. It is a story of all of us. The proposal contains a number of useful mechanisms to achieve this, but it remains to be seen how far Member States will go in actually implementing energy efficiency measures, especially where these might threaten to hit the most vulnerable consumers first.

The renewed emphasis on the public sector playing an exemplary role, together with the broad notion of “public bodies”, show that this sector and all those active in it will be particularly affected by the new and increased (binding) targets for energy savings and renovation. Those supplying the public sector, will need to be especially aware of the new green public procurement requirements for governments and other public entities. They will need to embrace energy performance and circularity as key drivers of the qualitative assessment of public tender offers for products, services, buildings and works going forward.

What’s next?

The proposal will now follow the ordinary legislative procedure, where it will be considered and negotiated by the Council (i.e., the Member States) and the European Parliament. This is likely to take up to a year or longer. The Fit for 55 proposals are interconnected, but as we flagged in one of our previous posts, the timing and fate of each proposal in the Fit for 55 package is to a large extent independent of the other proposals in the package.

After the Directive’s entry into force, the Member States will have time to transpose the new rules into national law. The proposal does not (yet) specify an implementation deadline. This will likely be part of the trilogue negotiations between the institutions.