The EU has consistently underperformed in matters related to energy efficiency. Benedek Jávor argues that despite initial costs, improving energy efficiency will be key in addressing Europe’s multiple challenges, including climate change and unemployment

Up to now the EU has consistently underperformed in matters related to energy efficiency. In the case of Hungary, public policy has long stressed the importance of improving energy efficiency.  Studies by independent organisations, such as the Energiaklub Climate Policy Institute, confirm that investments promoting energy efficiency, particularly renovations in the construction sector, are the best among policy tools for any government, whether right or left, green or grey.

According to a survey by Energiaklub, a 50bn government subsidy of Hungarian forints (€175m) which equals 0.15% of Hungary’s annual GDP directed at energy-efficiency renovation schemes in construction would result in 55,000 new jobs within a year and several hundred thousand in the long run. In doing so it is estimated that the country would save the equivalent of 80m euros annually in energy costs. And, on top of that, within two years the state coffers would recuperate the money spent in such an investment – calculated at 30% of the total upfront costs – in the form of excess tax revenues.

A perfect win-win situation, one could conclude. Yet governments not only in Hungary but across Europe seem unwilling to commit themselves to provide the funds. Energy efficiency is proving to be a classic market failure. Even though studies show that energy-efficient building renovations are in many cases a better investment than a bank deposit, the number of renovations taking place is very low. There are many reasons: its capital intensity makes it seem expensive, results are still perceived to be uncertain, banks are not willing to lend and people are unwilling to take on debt for such purposes, and crucially, non-expert individuals need to assume the financial risks of a renovation carried out by developers whom they seldom trust.

The current policy tools are proving to be insufficient in achieving the 20% energy use reduction by 2020 agreed in the 2008 EU Climate and Energy Package. Even if member states and their citizens will unquestionably benefit from it, neither is willing to play its part.  

This has been the underlying reason for creating the EU’s Energy Efficiency Directive earlier this year. The directive’s initial proposals were ambitious, because they set priorities for increasing energy efficiency across all sectors, and particularly in buildings by renovating the entire building stock in the EU. An annual 3% efficiency target was proposed for the renovation of all public buildings and a mandatory 1.5% annual target would be set for European energy retailers and companies to achieve "cumulative annual end-use energy savings equal to at least 1.5% of their energy sales” averaged over the most recent three-year period.

As expected, the targeted actors opposed their binding targets, respectively. Energy retailers resist the mandatory 1.5% annual efficiency target because they prefer to find their own way to improve productivity – through higher electricity prices or subsidies from the public sector. Governments opposed the binding target of a 3% renovation rate because of their unwillingness to commit to an investment whose dimensions are yet unknown.

Since such measures have proven to be a bitter pill to swallow, they have had to be watered-down. For the first time ever, member states will have to have a long term strategy with policies and measures. The 3% annual renovation target is limited to central government buildings, estimated to be 10% of all public buildings, instead of the entire stock of public buildings. Member states are to set up national roadmaps by 2014 for the deep renovation of the existing building stock, both public and private. The 20% cut in EU energy consumption is to be reduced to 17% (and according to green MEP Claude Turmes, the current compromise would result in only 14.5% total energy savings by 2020). However, the Commission must guarantee that the 20% target is reached by 2020. If the Commission assessment of national strategies due in 2014 shows that the EU as a whole is not on target to reach the 20% objective, then it should propose binding targets. The Parliament secured an early review of the deal in 2016. The result is viewed by some as a missed opportunity for the EU to create jobs, cut emissions, increase energy security as well as rely less on imported energy and save many millions of euros.

Regardless of what occurs at a global scale in the energy policy field, energy efficiency remains a highly valid strategy for the EU to pursue, since it is a sine qua non component of green growth, which means far more than having more renewable energy instead of fossil and nuclear. Energy efficiency is not only crucial to reducing air pollution. In fact many analysts herald it as the key tool to create jobs, raise tax revenues, reduce energy dependency, reduce cash outflow from our countries, reduce household spending and increase wealth. It is therefore the most effective instrument for contributing to overall emissions reduction in an economically-efficient way while stimulating job growth. As MEP Turmes highlights, the Energy Efficiency Directive is the indicator of a new business model and culture. According to this vision, the future’s energy companies will be energy-efficiency service businesses.

As a result state contributions to energy efficiency should not be regarded as net costs, but as investments, and more specifically investments with a relatively short return period. The high return rates which would feed into government revenues would be produced thanks to the resulting increase in jobs and economic activity and to the savings generated by reduced spending, both at household and budget levels.

Still, the most important and most challenging question is: are the EU’s energy goals sufficient? The answer is simply “no”. The EU’s current climate and energy targets, namely the 20% emission reduction by 2020, are simply not ambitious enough to reach long-term emission reduction targets and to meet historical obligations. This is all the more true given the economy’s contraction due to the crisis which has unwittingly reduced emissions as a result of the drop in economic activity. Given the current state of affairs even a 30% emission reduction can no longer be considered ambitious – it would fail to generate a carbon price high enough to indicate a real shift for investors towards low carbon technologies.

Another major problem is the lack of a long-term vision. When it comes to building a power plant or even a house, the year 2050 is not so far away. The ultimate aim of our climate and energy policies is to keep global warming below two degrees Celsius against pre-industrial levels. But at the moment we do not know how to get there.  This is why the importance of initiatives like the Energy Efficiency Directive or the 2050 Decarbonisation Roadmap cannot be emphasised enough.

Clearly then, the EU is far from delivering decent energy efficiency results any time soon. This is true not only in light of the current targets in place but also in light of the actual vast potential that Europe has in reducing energy consumption and emissions, cutting down household and industrial costs while simultaneously creating jobs and increasing its competitiveness. No wonder why: we failed in the past to introduce the measures which would generate those outcomes and make those investments happen.

But will the measures introduced in the Energy Efficiency Directive package deliver the indispensable results? Considering previously-agreed energy goals, the answer would be “almost”. Rather than meeting the ideal target of reducing energy demand by 20% from 1990 levels by the year 2020, the measures could realistically reduce it by 17%. There are still crucial questions that need urgent answers, such as: is the 20% target enough? Are the EU’s current energy goals and climate commitments sufficient to meet Europe’s historical responsibility? Is energy efficiency the ultimate silver bullet that will get Europe out of its crisis by creating an alternative business model and culture that will result in the much sought-after job growth? Our best bet so far is to keep improving energy efficiency, which, sooner or later, will become an essential part of the solution to Europe’s multiple woes.

Benedek Jávor is a leading member of the Politics Can Be Different party in Hungary. javor.benedek@jak.ppke.hu