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Energy efficiency must be made an infrastructure priority

The energy efficiency gap doesn’t exist because of a lack of effort or will, it exists because we have approached it from the wrong direction, write Ada Ámon and Ingrid Holmes.

Ada Ámon is a senior associate and Ingrid Holmes is a director at climate change think-tank E3G.

Energy Efficiency First: it’s a phrase that has been bandied about a lot over the past months. Vice President Šefčovič said “the energy we don’t use is our first fuel”.  But when we look at capital flows into this sector and the actual energy savings being delivered, it is clear that there is much more to be done to make good on this ambition.

The European Commission has admitted that the energy efficiency targets for 2020 will not be reached. But drawing the conclusion that the energy efficiency gap can’t be closed and so we should give up is the wrong one. The gap exists not because we haven’t been trying hard enough in policy terms: it exists because politically we have failed to properly grasp the shape of the challenge.  In short, we haven’t been thinking about energy efficiency in the right way.

We should be thinking of energy efficiency as infrastructure and prioritising actions to incentivise investment as we would for other infrastructure priorities. This view is backed up by the heavyweight economic consultancy, Frontier Economics, which found a strong case for reclassifying energy efficiency as infrastructure.

The key conclusions they drew from their extensive review of the academic literature is that energy efficiency requires huge upfront capital investment that will be locked for decades in form of physical assets that provide services and fulfil fundamental needs of society: the ‘textbook’ definition of infrastructure.

So it should not be surprising that the UK Government has included energy efficiency within its infrastructure planning arrangements and this summer Scotland announced that improving the energy efficiency of Scotland’s homes and non-domestic building stock will be designated a National Infrastructure Priority. This year also saw collective action from 36 NGOs, think tanks, business associations and companies from 18 countries in the form of a statement calling on G20 leaders to make energy efficiency an infrastructure priority.

Frontier Economics also point out that the multiple market failures around energy efficiency create a strong case for governmental interventions to drive this investment forward. In the same way other market failures are currently being tackled to deliver the EU’s internal energy market, a digital single market and the Capital Markets Union.

The strong public interest case related to improving the energy efficiency of the EU economy only reinforces the intellectual rational for declaring energy efficiency a public infrastructure investment priority. Macroeconomic analyses undertaken in for the UK, Germany and Hungary show very favourable returns on public investment  – in terms of revenue streams to government, current account deficit reductions due to lower imported energy costs and widely distributed job creation.

Wouldn’t these be good enough reasons for any savvy finance minister to consider accommodating energy efficiency within infrastructure budget and planning to deliver the investment needed to harvest these vast macroeconomic gains?

Apparently not. Perhaps mainly because the benefits are just not visible currently in EU or member state decision making. Making energy efficiency a public infrastructure priority would address this ‘invisibility’ problem. Treating energy efficiency like other public infrastructure would require both the European Commission and Member State Governments to undertake a full economic appraisal of the costs and benefits on delivering investment programmes.

This would completely change the optics around the affordability discussion that led to a measly 27% energy efficiency target being agreed by the European Council last year. It would also help open up a discussion on what constitutes the best value public spending decisions – which is just what we need to see in the context of decisions about delivering the Energy Union.

It would also have the effect, at a member state level, of shifting decisions when it comes to national budgets. The capital allocation to energy efficiency programmes would be taken out of the discussion on operational spending priorities and put to decisions about capital investment.

The European Fund for Strategic Investment (EFSI) already recognises this value through positive screening measures for energy efficiency included within the EFSI scorecard. This opens up questions about why under the terms of the Financial Stability Pact there aren’t measures to incentivise investment in this highly productive sector.

Finally, in defining energy efficiency as infrastructure, the logic should follow and State Aid rules need to be revised where currently supply side infrastructure is allowed 100% public finance support but for energy efficiency only 30-50% is the limit.

So if Mr Šefčovič is really behind his own words then ‘First’ really should mean first. It means thinking of energy efficiency as an infrastructure priority. Energy efficiency should be the base-load infrastructure from which Europe’s Energy Union supply side infrastructure is built.

Once the energy system planning has been done right, energy efficiency must then be given the same political and financial support as supply side energy infrastructure projects receive. This will mean moving forward in a comprehensive way to address the multiple financial, economic, market and institutional barriers that exist at EU and member state level to deliver Energy Efficiency First.

The time has come to walk the talk on Energy Efficiency First and translate this slogan into a set of real political priorities and actions. We can start by declaring energy efficiency a key infrastructure priority within the Energy Union and lead the way for member states to do the same.