October 3, 2017
BRUSSELS INSIDER #1 by Clare Taylor
How a new accounting rule can cause a revolution in energy efficiency projects in the public sector
October 3, 2017
A recent Eurostat rule change makes it much easier for public sector authorities to invest in energy efficiency projects. It is hailed as “game changer” which could open the door for “billions of euros in investment”. Some also hope that the new rule will support the business case for a more ambitious EU energy efficiency target to 2030, currently under negotiation. But with a rogue rapporteur at the helm of this file in the European Parliament, this is not yet clear.
On 19 September, Eurostat, the Statistical Office of the European Commission, published updated guidance on the recording of energy performance contracts (EPCs) in government accounts. EPC is a way of financing energy efficiency retrofits, by using the cost savings from lower energy consumption to repay the cost of installing energy conservation measures.
The updated guidance provides new ways for cities and regions to account for energy performance contracts. “Basically, it means that in most cases only the fee paid to the energy service company would be recorded in government accounts – a huge evolution considering that so far, public authorities had to register the totally of the investment on their balance sheet. As many countries have strict rules about public debt, before it was almost impossible to use this kind of contracts,” said Quentin Genard, a Brussels-based policy advisor at the UK think tank E3G.
The accounting rules were one of the main reasons why energy efficiency remains an area of significant under-investment in the public sector, particularly in some of the Central Eastern European and Mediterranean countries who are more squeezed by the EU’s Stability and Growth pact rules. In a 2016 survey, ten Member States (Austria, Belgium, Bulgaria, Ireland, Portugal, Romania, Slovenia, Slovakia, Spain and Sweden) said the previous Eurostat interpretations of accounting rules for EPC had a negative impact on public EPC markets in their respective countries.
“This is a game-changer – it should open the doors for billions of investment into an energy efficient public sector,” according to Ingrid Holmes, a director at E3G, who, amongst others campaigned for the update.
Public sector energy consumption is about 5-10% of the total energy demand of Member States, with an annual energy bill of €47 billion. Buildings owned or managed by the public sector make up more than 10% of the overall EU building stock. For public authorities with older, inefficient systems, street lighting can account for 30-50% of total electricity consumption, with big savings potential – in the range of 30-70% with current technologies. As well as being used in building retrofits, EPC is a well-established model for streetlighting retrofits.
Investors at the ready
Along with NGOs, investors and industry welcomed the move. Speaking at a Sustainable Energy Investment Forum in Dublin, Paul Kearney, Associate Vice President from sustainable energy investment fund SUSI partners, said: “The Eurostat rule change gives the European public sector a golden opportunity. Governments can stimulate the low carbon economy by addressing their own real estate holdings first.”
According to a representative of another investment fund: “There is a wall of finance – around €50 billion of infrastructure asset funds looking to invest in Europe, and we are looking to municipalities to provide bigger project sizes. Investors need strong project pipelines, favourable regulatory frameworks and clear long-term goals.”
The potential market size is indicated by a recent report from the European Commission’s inhouse science service the Joint Research Centre (JRC), estimating that annual savings in the range of 34 to 58.5 TWh (up to half the electricity consumption of a country like the Netherlands) can be achieved in Europe’s public buildings, representing annual cost savings of €2.7 – 5 billion and requiring a total investment of €21.3 – 39.4 billion.
“By updating the guidance note on the accounting treatment of EPCs in government accounts, the European Commission has removed an important barrier to investment in energy efficiency and to the development of innovative services in the public sector”, says Katarzyna Wardal, EU Public Affairs Manager at Knauf Insulation. “The Commission has also opened up new possibilities for Member States to combine private and public sources of financing in their renovation programmes”.
The opportunity seems to be recognized by some Member States. In May, energy ministers from Spain, France, Italy and Portugal sent a joint letter to the European Commission requesting changes to the Eurostat rules on energy performance contracting. They also expressed support for a more ambitious approach for the energy efficiency target in the Energy Efficiency Directive (EED), currently under negotiation as part of the Clean Energy Package proposals.
In September energy efficiency advocates in Spain met with Daniel Navia Simón, the Spanish Secretary of State for Energy to highlight the Eurostat rule change and press for greater ambition in the 2030 energy efficiency target.
An ambitious 2030 target will be good for business: Yamina Saheb, senior energy policy analyst with thinktank OpenExp, reviewed the modelling assumptions and results included in the Commission’s impact assessments accompanying the directive (EED). “Contrary to common belief, ambitious energy savings targets are not expected to adversely impact the competitiveness of EU industry,” she says.
Saheb’s analysis shows that, compared to EUCO27 (which is the scenario with the agreed 27% energy efficiency target back in 2014), total energy costs decrease in all other scenarios and energy intensity of industry improves.
Analysis published by the European Commission in July also testified to the economic benefits of a higher energy efficiency target to 2030. “As the extent of energy efficiency improvements increase, so do the positive impacts on GDP and employment”, notes the Commission’s report. “In the scenario with a 30% energy efficiency target, GDP increases by 0.4% compared to the (27% target) by 2030 and employment increases by 0.4%. In the most ambitious EUCO40 scenario, there is the potential for GDP to increase by more than 4% and employment by more than 2%.” Furthermore, “The positive effects on public sector budget balances could be as high as 2% of GDP on average in the EU.”
“The Eurostat issue came up repeatedly in the discussions with the Member States leading up to the Council’s decision in June on the energy efficiency target”, according to Paul Hodson, the most senior European Commission official on energy efficiency, speaking at a Sustainable Energy Investment Forum in Dublin. “Now that the Eurostat rules on energy performance contracting has been addressed, we will be eager to hear from stakeholders about how this is affecting the market. In general, I think it can only positively influence this autumn’s discussions on the EU level energy efficiency legislation,”
It remains to be seen, however, how much the Eurostat change will impact upon the 2030 target. According to Wardal of Knauf Insulation: “It can certainly give an additional argument to the supportive Members States to convince other countries which so far have been more sceptical regarding an ambitious energy efficiency target for 2030. This makes it easier for governments to invest in energy efficiency and will help them to reach the national energy efficiency goals.”
A higher 2030 target also depends upon Article 7 of the Energy Efficiency Directive (EED), which concerns energy efficiency obligations that would deliver about half of the Directive’s entire savings and would be a key driver of energy efficiency. Already, the European Council watered down Article 7 considerably; according to a source closely following the dossier, “there’s a good chance now that Parliament will do the opposite”.
Further uncertainty over the terms of negotiation are due to the idiosyncratic views of the Parliament’s rapporteur for the EED, MEP Adam Gierek, as the rapporteur’s role can greatly affect how the debate is framed. In his statement to the ITRE (Industry, Research and Energy) committee, the lead Parliament committee in charge of the revised EED, Gierek said that in its current form the EED promotes “quasi-savings” and could even increase energy poverty – a view which is at odds with his political group’s flagship campaign, which promotes energy efficiency improvements as a solution to energy poverty.
Gierek has put forward a 35% target in his draft report, however he proposes that the energy efficiency target is expressed in accumulated primary energy consumption. According to a source close to the brief, “The way he proposes to count for things is completely new and the impact is unknown. His colleagues probably don’t see the need to change definitions which are widely accepted by Member States.”
NGOs have been vociferous in their criticism, citing Gierek’s worrying ignorance of the existing legal framework, and his draft report as deeply flawed and too bizarre to believe.
On 7 November, ITRE Committee Chairman Jerzy Buzek and European Commissioner for Climate Action and Energy Miguel Arias Cañete are hosting a conference for policymakers reviewing the Clean Energy Package with a focus on investment, including how to finance a shift to clean and efficient energy at a local level.
This may serve to remind policymakers of the economic arguments for higher energy efficiency targets, ahead of the ITRE committee’s vote. Having endorsed a 40% target last year, the ITRE committee are due to adopt their position on the directive on 28 November, after which the trilogue negotiations will start, with a final target expected to be reached early in 2018.