Europe Sharpens Focus on Energy Efficiency

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Energy efficiency has historically been the poor relation of the low-carbon transition. But the war in Ukraine has changed that. With prices and supply security concerns soaring, energy saving is now increasingly a necessity and not an afterthought. Policy tools are being sharpened around the world, nowhere more so than Europe, as it tries to wean itself off Russian energy supplies. Much attention has focused on short- and near-term responses but speeding up long-term energy efficiency measures is a priority, too. This has echoes of the oil crisis of 1973, which also kicked off a decades-long trend of declining energy intensity in major economies.

Improving energy efficiency has long been acknowledged as essential to climate efforts, but has retained a stubbornly low profile. Now, it is being presented by Brussels as not only an immediate way for Europeans to reduce their bills, but also to support Ukraine by reducing the need for Russian oil and gas, “thereby helping to reduce the revenue streams funding the invasion.”

Europe is looking at a number of regulatory tools, including a revision currently under way of its energy-efficiency directive. It also recently teamed up with the International Energy Agency (IEA) to suggest a range of measures consumers can take. Many involve simple, small changes that can add up to large savings. Turning down heating thermostats by 1°C could, for instance, save 7% of energy used, and installing smart meters up to 15% of a home’s energy consumption. Better insulation and draft proofing can bring significant benefits, too.

Ideas like these are “no brainers.” However, the fact that many have been known since the 1970s but still have to be repeated “over and over again” is worrying, notes Monique Goyens, director-general of the European Consumers Organization. The problem is that “energy is not a sexy topic,” she told a recent webinar hosted by the IEA. Goyens thinks that governments need to better engage the public with information campaigns and practical help.

Efforts to change behavior must not be a source of frustration either, she added, but instead “work with people as they are now, not how you’d like them to be.”

Energy Poverty

While high prices are providing a much stronger incentive to save energy, they are also pushing many more people into energy poverty. This underscores a second need: To provide support for the most vulnerable consumers. Europe’s “Fit for 55” package, announced last year, introduced a number of mechanisms to alleviate energy poverty. These include an obligation for EU countries to implement energy efficiency improvements as a priority among vulnerable customers.

The EU also plans to provide funding to help achieve its efficiency goals. As the goals apply to buildings and transport, this will be through a newly established Social Climate Fund, with revenue coming from the EU Emissions Trading System. A Just Transition Fund, with an overall budget of €17.5 billion ($18.5 billion), will aim to alleviate the social and economic costs resulting from the energy transition, including through investments in energy efficiency and building renovation. Another key source of funding for energy-efficiency investments is the Recovery and Resilience Facility, which will make a total of €672.5 billion available to EU member states through a combination of grants and loans.

Pressure on Industry

The EU is looking to industry to speed up energy-efficiency moves, too. High energy prices have already had a profound effect on businesses. In its latest quarterly gas market update, the IEA reckons European gas demand could drop by nearly 6%, or 33 billion cubic meters, in 2022, pushed down by slumping power sector and industrial consumption. The energy watchdog expects industrial gas demand in Europe to drop back to 2020 levels this year.

The current high-price environment means that efficiency projects which would have taken several years to pay back will now do so in months or even weeks. “High prices have transformed the business case for energy efficiency,” according to McKinsey & Co. It notes that European companies have adopted decarbonization strategies that typically involve reducing energy consumption by around 50% over the next decade.

Implementing a big part of those changes in two to three years would fully mitigate the currently expected price increases and also could give firms a real competitive advantage. A 40% gain in efficiency improvements in three years or less can be made, the consultancy suggests.

Geopolitical Soft Power

As well as looking at what it can do internally, the EU says it’s also aiming to work with other developed economies to make energy savings and efficiency a global priority, among other things, building on the IEA 10 Point Plan to reduce oil demand.

Energy and resource efficiency should become a higher priority in the EU’s external relations with less-developed countries, as well, according to Mats Engstrom, visiting fellow at the European Council on Foreign Relations. In many parts of the global south, the negative effects of rising energy and food prices combine with humanitarian and debt crises sparked by the pandemic, he noted in a recent commentary.

Engstom suggests that the EU and its member states need to do more to help manage the situation — out of solidarity, but also to gain geopolitical strength in a world divided by Russia’s war on Ukraine, and to account for the long-standing competition for influence with China in many low-income countries. Unless it develops clear plans to build alliances with countries in the global south, Engstom says the EU will struggle to promote its international climate agenda. “This could also exacerbate disputes over the external effects of the European Green Deal, such as the negative reactions from many low- and middle-income countries to the proposed carbon border adjustment mechanism.”

Brussels can use the soft geopolitical power of its single market, too, by setting ambitious new efficiency standards for consumer goods and vehicles, which often sets a precedent for other parts of the world. But whatever tools it chooses to deploy, Europe will still face tough choices next winter between heating homes or keeping industry running. It can't do both and wean itself off Russian energy supplies, unless it makes rapid and deep cuts in energy use — whether these are voluntary or not.

Ronan Kavanagh is an editor of World Energy Opinion at Energy Intelligence.

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