Should we approach energy efficiency via high-level targets or as part of the decision-making process in every project and measure that involves energy (as a form of the “energy efficiency first principle”)?

By Roberta Milo

Introduction

In the face of climate change ambitious objectives, recent shocks to energy security, and increasing volatility in energy costs, improving energy efficiency has become a crucial goal both for policy-makers and individuals. As a cost-effective and short-term solution to reduce energy demand, energy efficiency has been often referred to as “the first fuel” (IEA, 2019). Although there is little debate on the need to prioritize energy efficiency in policies, investments, and projects, what is the best way to approach energy efficiency is less straightforward. In this context, this essay will explore the advantages and disadvantages of pursuing energy efficiency with different tools, namely high-level targets and the principle of energy efficiency first (EE1st). This essay argues that while prioritizing EE1st is paramount, as it guarantees the pursuit of the most cost-effective alternatives in all energy-related endeavors, high-level targets can still serve a purpose in establishing a common path and instilling accountability among states and stakeholders. As these two approaches are not necessarily mutually exclusive, the optimal path forward, according to this essay, is to combine both approaches. 

High-level targets: Pros and cons 

One of the primary policy strategies employed by the European Union (EU) to improve energy efficiency is the establishment of high-level targets. This approach entails establishing specific, quantitative objectives for energy consumption to be achieved within a specific timeframe. At the EU level, such targets are formulated through directives and regulations, which stipulate precise goals for reducing energy consumption, increasing the share of renewable energy sources, and improving energy efficiency in various sectors. For instance, the amended Energy Efficiency Directive in 2018  established that the EU energy efficiency target in 2030 shall equal 32.5%, among other things (European Commission, 2018).  

The use of high-level targets as a policy tool to achieve ambitious goals can be justified for different reasons.  

Firstly, by setting quantitative goals to be reached within a limited timeframe, EU policy-makers pressure states to take action towards a common goal. In this way, targets create accountability for states and ensure that various stakeholders undertake actions towards energy efficiency (EEA, 2019).

Moreover, high-level targets can incentivize stakeholders in different sectors to invest in energy efficiency improvements. Setting a direction towards specific energy efficiency objectives provides stakeholders with incentives to invest in energy efficiency improvements, which despite upfront costs, might ensure energy and cost savings over time (IEA, 2018).

Finally, setting quantifiable targets allows for monitoring progress over time. In this regard, even though the EU does not have direct enforcement powers over states’ compliance with energy efficiency regulations, it has established a set of mechanisms to monitor and encourage states’ compliance. Such instruments include the National Efficiency Action Plans (NEEAPs) and the Energy Efficiency Directive reporting requirements, which monitor member states’ progress in meeting energy efficiency targets and allow the identification of areas for improvement (Odyssee-Mure, 2015). 

While important, high-level targets for energy efficiency can include a series of shortcomings. To begin with, in an attempt to achieve a specific numerical goal, states may design policies and projects that are not the most cost-effective and efficient options for reducing energy consumption. For instance, energy efficiency policies could prioritize allocating capital to energy supply or networks at the expense of demand-side resources which would enhance energy saving using fewer resources (ENERFIRST, 2019). Adding on that, as fixed and quantitative goals, high-level targets allow for little flexibility. This implies that targets may not always take into consideration the specific needs and challenges of individual circumstances or may not allow for a quick response to evolving conditions. As a result, this may either slow down countries’ progress in achieving specific targets or lead stakeholders to undertake costly projects and policies to reach those targets (Ibid.).  

The Energy Efficiency First Principle: Pros and cons 

Energy efficiency first (EE1st) is a principle applied to policymaking, planning and investment. It represents an overarching framework that prioritizes demand-side resources whenever they are more cost-effective than investments in energy infrastructure in meeting energy efficiency objectives (ENEFIRST). Recently, the principle has been gaining growing prominence in the EU energy and climate policies. Article 3 of the recast of the Energy Efficiency Directive states that EE1st should be applied to planning, policy and major investment decisions related to energy systems as well as non-energy sectors, where those sectors have an impact on energy consumption and energy efficiency (European Commission, 2018).  In practice, EE1st translates into systematically assessing demand-side resources and supply-side investments on a fair basis, ultimately prioritizing the least-cost alternatives available. In this regard, EE1st allows for greater flexibility than other policy tools, such as high-level targets. While the latter may not take into account the unique circumstances of individual businesses or households, EE1st can be customized to the needs of different stakeholders, designing tailor-made solutions for different sectors. Moreover, EE1st allows for better flexibility and adaptability to changing conditions, such as energy prices or market features. As a result, advocates of EE1st argue that the systematic implementation of the EE1st principle ensures that the decarbonisation of the economy is cost-effective (Mandel et al., 2022). 

Nonetheless, the operationalization of EE1st is less straightforward than in theory. Despite its growing influence in EU legislation, there is a gap between the theoretical and practical application of the principle. To begin with, it is difficult to accurately measure energy savings or determine the cost-effectiveness of certain measures. The lack of appropriate assessment frameworks adds to the difficulty in identifying and quantifying benefits derived from EE1st that go beyond energy savings, such as environmental, social, and economic benefits. Other barriers to the implementation of EE1st include a lack of understanding and awareness of the principle, regulatory barriers and legislations that may favour the construction of new infrastructure over demand-side resources, and high upfront costs that stakeholders may not afford (ENEFIRST, 2022).

Discussion: 

Both high-level targets and the principle of EE1st as policy tools to approach energy efficiency have advantages and disadvantages. Yet, given the current state of increasing uncertainty regarding energy stability and prices, coupled with worsening climate conditions, it is incumbent upon policy-makers to focus on adopting solutions that provide immediate benefits while still paving the way towards achieving long-term targets. Moreover, policy-makers should identify and prioritize the most cost-effective solutions, minimizing resource usage while still reaching the same objectives. Regrettably, high-level targets do not always ensure that the most cost-effective measures will be employed. In fact, European Energy Efficiency policies have generally disregarded demand-side resources, prioritizing market design, norms, and incentives for energy suppliers (ENEFIRST, 2019). While these policies may have contributed to reaching energy efficiency objectives as set by energy efficiency directives, they may not have always been the most convenient option. Conversely, expensive energy-efficient measures may also act as a deterrent, hindering policy-makers’ and individuals’ willingness to engage in behavior that promotes energy efficienc (Chlechowitz et. al, 2022). In light of this, policy-makers should place greater emphasis on the operationalization of the EE1st principle, which can deliver short-term benefits while still contributing to reaching quantitative goals, such as those established by high-level targets on energy efficiency. This is because EE1st is a guiding principle that is integrated into all aspects of energy policy and decision-making, while the high-level targets are specific goals intended to be achieved through the implementation of various policies and measures. Thus, if the EE1st principle were systematically applied in any policies and projects that impact energy savings, states would not even need to strive for achieving high-level targets. Operationalizing EE1st would mean that the most cost-effective decisions, with a focus on demand-side resources, would be always be prioritized. However, as discussed above, implementing EE1st is inherently challenging. Firstly, EE1st is a relatively new concept, and there exists a significant amount of confusion and lack of clarity on its implementation at various levels. Moreover, there is a need to improve coordination between different actors, stakeholders’ awareness, and frameworks for cost-benefit analyses. Therefore, the EU should keep establishing high-level targets to provide states with common goals and exert a sense of urgency. However, policies to achieve those targets should be designed exclusively rely on the principle of EE1st to ensure a cost-effective decarbonisation.

Conclusion 

In conclusion, there are advantages and disadvantages to both high-level targets and EE1st in achieving energy efficiency goals. High-level targets provide clear and common objectives, incentivize stakeholders to invest in energy efficiency improvements, and allow for monitoring of progress over time. However, they may not always be the most cost-effective option and can lack flexibility to take into account individual circumstances. On the other hand, the EE1st principle prioritizes cost-effective demand-side resources, provides flexibility to stakeholders, and is adaptable to changing conditions. However, it can be difficult to measure energy savings and determine cost-effectiveness, and the practical application of the principle may be challenging. While policy-makers keep working for improving the operationalization of EE1st, which may eventually make high-level targets unnecessary, a combination of both approaches is the best way to achieve energy efficiency goals. High-level targets can provide a common direction and create accountability for states and stakeholders, while the energy efficiency first principle can guide the decision-making process and individuals’ behaviour to ensure that the most cost-effective and efficient options are pursued in every project and measure involving energy. Ultimately, the key is to strike a balance between both approaches to maximize the benefits of energy efficiency.

Bibliography 

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DIRECTIVE (EU) 2018/2002 OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL of 11 December 2018 amending Directive 2012/27/EU on energy efficiency [2018] OJ L328/210. 

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ENEFIRST. (2022). Putting Energy Efficiency First into practice – Final report. Retrived from: http://enefirst.eu

European Environment Agency. (2019). Trends and projections in Europe 2019: Tracking progress towards Europe’s climate and energy targets. Retrieved from https://www.eea.europa.eu/publications/trends-and-projections-in-europe-2019

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Mandel, T., Pató, Z., Broc, JS. et al. (2022). Conceptualising the energy efficiency first principle: insights from theory and practice. Energy Efficiency 15, 41.  https://doi.org/10.1007/s12053-022-10053-w

Odyssee and Mure. (2015). Synthesis: Energy Efficiency Trends and Policies in the EU: An Analysis Based on the ODYSSEE and MURE Databases. Retrived from https://www.odyssee-mure.eu/publications/archives/energy-efficiency-trends-policies-in-europe.html