New challenges in energy efficiency in the European Union: a consumer perspective

AutorCosmo Graham

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Cosmo Graham


Leicester Law School, University of Leicester


In November 2016, the European Commission presented an ambitious package of measures for a consumer centred clean energy transition with a central objective of cutting CO2 emissions in the EU by at least 40% by 2030 1. The proposals had three main goals: putting energy efficiency first, achieving global leadership in renewable energies and providing a fair deal for consumers. The aim of this paper is to focus on two aspects of the consumer side of this package: how the market is envisaged to work for consumers in general and the protections which are envisaged for consumers in vulnerable circumstances and those at risk of energy poverty.

It is often said that there are three main objectives in energy policy: security of supply, protection of the environment and affordability and that this creates a “regulatory trilemma” because policies to achieve one policy can undermine the objectives of another policy. This paper argues that the Commission’s priori-tisation of energy efficiency and the development of renewables is likely to make energy more expensive. There are proposals in the package aimed at ensuring better consumer engagement with the energy market but this paper argues, based on the experience of the UK market, it is unclear that these will work effectively without further policy development. Although the package recognises the position of the energy poor and consumers in vulnerable circumstances there are no supporting proposals which would address their position.

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Introduction to the new proposals

The package sets stiff targets for reducing CO2 emissions, cutting them 40% by 2030 and in respect of energy efficiency reaching a target of 30% by 2030. These targets are to be reached by a combination of savings and the encouragement of renewable energy. Under the proposed new Energy Efficiency Directive savings can be made either by imposing an energy efficiency obligation scheme or by alternative policy measures 2. Energy efficiency obligations may have a social aim and may require the share in energy savings to be made in households affected by energy poverty or social housing as a priority. Alternative policy measures should consider the effect on households affected by energy poverty. Increasing use of renewables may be encouraged through the provision of support measures, which must be compatible with state aid rules as well as being provided in an open, transparent, competitive, non-discriminatory and cost-effective manner. Support schemes are also supposed to ensure that renewable energy producers respond to market price signals.

There are two inter-related points about this approach. First, renewable sources of energy are more expensive than conventional fossil fuels and therefore need subsidies to compete on the market 3. This price is ultimately paid for by the consumers and therefore becomes an element in rising energy costs. According to the Commission’s study, the average price of electricity in the EU increased at an annual rate of 3.2% between 2008 and 2015. The main driver of these prices was not the increase in wholesale energy costs, which decreased slightly in this period, but the increase in taxes and levies for households: an annual rate of 7.9% 4. The two largest components of the taxes and levies category were VAT and support for renewable energy 5. This policy does, therefore, seem to create a problem by contributing to the rising cost of electricity in a significant manner unless there is a compensating drop in the wholesale price of electricity. If affordability is one of the aims of energy policy, and this is not explicitly an aim of the EU package, then there is a tension between the two goals6.

There is a further issue with the increasing presence of renewable energy on the market which is that all sources of renewable energy are intermittent, wind power being the obvious example. When this is combined with a system of subsidies for renewable energy this reduces the incentives for investment in conventio-

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nal fossil fuel generation with the consequent risks to security of supply. This can be illustrated by the UK’s experience where the last power station to be built without some form of government guarantee was in 2012 7. What this implies is that again, the consumer will end up footing the bill for ensuring security of supply and not in a way provided by competitive markets.

Controlling such subsidies to ensure that competitive markets are not damaged is a matter for the European Commission under the state aid rules. State aid environmental and energy savings has become a major component of Member States’ expenditure contributing about 46% of total spending in 2015 (about 45 billion euros), largely driven by the inclusion of support for renewable energy 8. A comprehensive framework for the assessment of projects has been developed and, after some initial uncertainty, it appears that most schemes for encouraging renewable generation and energy efficiency will fall to be considered for compatibility under the Commission’s guidelines 9. Although in principle the Guidelines require market failure to be identified, in the case of renewable energy a residual market failure is presumed 10. The

issue of ensuring that subsidies for renewable energy do not distort competitive markets is therefore ultimately a decision for the Commission, although it does seem that the rules are tilted in favour of such intervention. There do not seem to have been any negative decisions so far in relation to energy efficiency, savings and renewable energy to date although this may be because the Member States have adhered to the Guidelines. Even if the Commission can ensure that subsidies in this area do not damage competitive markets, these subsidies will still raise the price of energy. It therefore becomes important that the supply market is competitive and that consumers are engaged with it to benefit from the lowest available prices.

The commission’s vision for the energy market
1. Encouraging active consumers

The Commission’s view is that the energy market should be a competitive one. This is reflected in Article 5 of the proposed new electricity Directive 11 which states that electricity suppliers should be free to determine the price at which they

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provide electricity and that Member States “shall” take appropriate action to ensure effective competition between electricity suppliers.

The Commission also wishes to encourage active customers and local energy communities. The former are defined in the proposed new electricity Directive in Article 2 as a customer or group of customers acting jointly who consume, store or sell electricity generated on their premises, including through aggregators, or participate in demand response or energy efficiency schemes provided that these activities are not their primary commercial or professional activity. The latter are defined as legal entities effectively controlled by local shareholders or members, generally value rather than profit driven, involved in distributed generation and in performing activities of a distribution system operator, supplier or aggregator at local level, including across borders.

Under Article 16(2) of the proposed new electricity Directive Member States are required to provide an enabling framework for local energy communities which will ensure that participation is voluntary, members or shareholders do not lose their rights as households or active customers and that they can leave a local energy community in line with the rules on switching provided in Article 12. System users who are not members of the local energy community connected to the distribution network shall be subject to fair and reasonable cost-reflective charges. If they cannot agree, this will be a matter for the relevant regulatory authority. Local energy communities installing generation, so long as it can be considered small and decentralised or distributed, should be subject to a specific authorisation regime provided for such generation in Article 8(3). Local energy communities are subject to the same obligations as a distribution system operator and may conclude agreements with distribution system operators to whom their network is connected.

Member States are obliged to ensure that local energy communities can exist and operate, can access all organised markets directly or indirectly in a non-discriminatory manner, benefit from non-discriminatory treatment in relation to their operations generally and are subject to fair, proportionate and transparent procedures and cost reflective charges. Member States are also obliged to ensure under Article 15, that active customers can carry out their activities without being subject to disproportionately burdensome procedures or non-cost-reflective charges. In addition, their network charges should be cost-reflective and non-discriminatory and reflect, separately, the amount of energy supplied to the grid and consumer by the active customer.

Supporting these groups of consumers by putting a framework in place seems to be a sensible policy. It is likely, however, that both active consumers (as defined) and local energy communities will constitute only a small proportion of the domestic energy market. Whether this proportion will be sufficient to place competitive pressure on energy suppliers is another question which will

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