Utility Energy Efficiency Obligations in Europe Asia Pacific Dialogue on Clean Energy Governance & Regulation June 21 2011

Grayson Heffner Senior Energy Efficiency Analyst

OECD/IEA 2010

Topics
Why utility obligations? Obligations nomenclature Utility EE obligations in the EU Descriptions of the major schemes UK CERT and CESP Italian White Certificates French White Certificates Results and conclusions

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Why utility obligations?

Mobilizes non-public funding for energy

efficiency
Compatible with Europes market

liberalisation goals
Very flexible - Member States can take

different approaches
Mobilizes delivery of energy efficiency by

the private sector

Funding may be more stable over time

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Obligations nomenclature
Obligations: a business entity is obliged by law

or regulation to deliver an energy efficiency target Portfolio requirements: a business entity is required to procure or deliver specified amounts of energy efficiency, sometimes by measure White certificates: A formal scheme allowing independent verification of delivered energy savings Carbon emissions reduction targets: a form of obligation expressed in terms of CO2
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Steps in establishing a white certificates scheme

Source: EuroWhiteCert Project

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EU Member States (MS) where utilities are obliged to deliver energy efficiency
5 MS with (Belgium, Denmark, France, Italy, United Kingdom) 5 MS on the way (Poland, Bulgaria, Romania, Malta, Portugal) 19 MS without

Spain & Portugal have EE levy on energy distributor

EU Commission now considering legislation to require a supplier mandate or levy in every Member State
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Wednesday, 29 June 2011 OECD/IEA 2010

Details of the schemes vary

Choice of primary or final energy Who is obliged and who is eligible to deliver Types of energy efficiency measures Measurement & Verification approaches How programme costs are recovered Minimum offer or size thresholds Additionality requirements Portfolio requirements and social objectives Tradability Market mechanisms

Source: Paolo Bertoldi and Silvia Rezessy

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Obligation design variations in 4 EU schemes

EU Who is Member obliged Belgium France Italy UK Distributors Retailers Distributors Retailers Trading No Yes Yes No Administrator Government Government Regulator Regulator Portfolio requirements? Yes No No Yes Boilers Lighting Insulation Dominant measures

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The top 10 measures in Italy, the UK and France

Tradable white certificates issued on the basis of gift tokens distributed to end-users for CFL purchase are not included. b Total savings generated 2005-2007 c Total installations 2001-2007 d The application of engineering estimates for the evaluation of savings due to DH and small-scale CHP has been suspended as of June 2007. e Energy saving estimates for class A domestic appliances are being revised. f Official data as of 30th of June 2009 g Estimates of number of installations in general or m2 for roof insulation and windows.
a

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UKs Carbon Emissions Reduction Target

Multi-year scheme recently extended (2008 - 2012) All networked energy retailers obliged Strictly residential Overall target: 0.3 GT CO2 (lifetime) Measure & target group portfolios

40% to Priority Group (vulnerable HHs) 25% for insulation measures Trading is not prominent Supplier can trade amounts in excess of their targets with the regulators approval Most suppliers use the same contractors and offer "standard" solutions Policy set by DECC; administration by Ofgem
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UK CERT Results
Total investment of 3.3

billion (through 2010) (1= 1.1)

NPV = 7.5 billion (3.5%

discount rate)
CO2 saved 2.0MtC/year

(corrected for deadweight and comfort); equivalent to 5% of household emissions

Resource cost to save ton of

CO2 = - 58 i.e. a benefit

National cost to save a unit of

electricity was 2.2c/kWh compare 10.6 c/kWh consumer cost Source: Boussebouef, ADEME
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Italian WhC Programme

1 White Certificate (tee) = 1 toe/tep (~ 11,000 kwh) Equivalent to annual electricity consumption of 2

Italian households 2011 volume approaching 3 million tee/year Obliged parties: DSOs with more than 50,000 customers Voluntary players: ESCOs, installers, entities with an energy manager, non-obliged energy distributors To May 2009, 81% of energy savings attained by registered third parties & ESCOs Average cost: 95-115 /toe Projects can deliver qualified savings for 5 years (and 8-10 years for buildings and cogeneration)
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Institutional Arrangements Italian WhC Scheme

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Italian WhC aggregate results

Source:

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Patterns in the Italian WhC results

80% of savings delivered by ESCOs Savings by energy type: 75% electricity 20% natural gas 5% other fuels 85% verification by deemed savings approach Saving by end-use: 59% from residential electricity end-uses 21% residential thermal end-use 11% industrial end-uses (increasing) 6% public lighting, 3% non-industrial CHP and district heating (likely to increase) Market price of WCs = ~ 2.6 Eurocents/kwh Cost to ratepayers ~ 75 annually

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Tradability in the Italian WhC scheme

By far the most advanced TWhC (Tradable White Certificates) scheme in the world OTC and spot market trading included from inception, although with thin (20%) volume Energy regulator reforms beginning 2007 opened up the WhC market ~80% of WCs are now traded bilaterally and on the spot market From mid-2008 both quantities and prices of bilateral deals (i.e. over the counter trades) must be registered

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Italian approach to M&V

Source: FIRE
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The French WhC Scheme

Energy efficiency standardized actions are

identified and savings are estimated ex-ante through a standard methodology Certificates are delivered by administration A penalty of 2 cts /KWh for non compliance OTC Trading allowed between obligated entities, but no established spot market For strategic reasons suppliers prefer to implement projects themselves and/or through agreement with third parties Relatively small compared with UK and Italian schemes, but expected to ramp up
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Early results from obligations schemes in the EU

Obligations schemes work in liberalised & integrated

markets Different types of energy providers retailers or distributors can be obligated Programs have met or exceeded targets at lower cost than expected Well suited to deliver standard EE measures to smaller energy users, where transaction costs are offset by economy of scale Deemed savings keeps administration, monitoring and verification costs low <1% Cost falls on end users typically 1-4% of energy bill & does not come out of Governmental expenditure
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Comparative Results EU Obligation Schemes

Source: Di Santo et al, FIRE

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What does tradability add?

Options for utility managers considering how to

meet their obligaitons Lower-cost delivered savings Creation of an energy efficiency delivery industry (ESCOs, etc.) Reduced price distortions between energy efficiency delivered in different sectors Reduced transaction costs Consistency with liberalized energy markets

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What do portfolio requirements/social objectives add?

Ensures programmes include vulnerable groups

(small customers, pensioners, hard-to-treat HHs) Defence against cherry-picking Contributions to longer-term goals
market transformation technology development

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Conclusions: what to consider in obligations schemes

The obligation is the essential element Focus on energy end-use savings Include binding energy saving targets

Require demonstrated additionality

Include strong, independent M&V procedures Include real penalties for non-achievement Include oversight on allowed measures Trading and portfolio requirements are optional

considerations Consider provisions for tradability and portfolio requirements if they add value
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Credits:
1. Richard Cowart, Regulatory Assistance Project 2. Nino deFranco, Italian ENEA 3. Dario di Santo, Italian FIRE 4. Didier Boussbouef, French ADEME 5. Jamie Torrens, UK 6. Nicola Labanca, Politecnico di Milano 7.

Paolo Bertoldi and Silvia Rezes, European Commission

Grayson.heffner@iea.org

OECD/IEA 2010