Measuring Energy Efficiency in EU ETS and White Certificates Paolo Bertoldi ,

1. Measuring Energy Efficiency in EU ETS and White Certificates • Paolo Bertoldi, • European Commission, Directorate General JRC

2. Introduction • Market-based instruments (MBIs) are public policies which make use of market mechanisms with transferable property rights to distribute the burden of a public policy; • In the energy sector MBIs have been used to promote RES-E and to cut harmful emissions (CO2, SO2, Nox quotas coupled with permit trading); • Theoretically MBIs minimize cost for society for reaching a certain target (static efficiency) and create incentives to innovate and improve performance (dynamic efficiency);

3. Structure of the presentation • Review of white certificate schemes in Europe; • Evaluation of savings in white certificate schemes; • M&V for energy efficiency • Integration of energy efficiency in ETS

4. Energy efficiency: policy drivers in Europe • Bringing sustainability to the energy sector • Green Paper on Energy Efficiency: by 2020 the EU could save at least 20 % of its energy consumption in a cost-effective manner; • The Directive on Energy End-Use Efficiency and Energy Services: a target of additional 1% annually over 9 years; the Directive mentions white certificates and leaves the option of the Commission tolater on recommend introduction. • Energy market restructuring and liberalisation; • Directive 2003/54/EC: all customers will be able to choose their supplier by 1 July 2007 at the latest; • Effects of liberalization on energy efficiency.

5. Establishing long-term synergies between the energy sector liberalization and end-use energy efficiency A possible market-based policy portfolio oriented towards end-use energy efficiency could comprise energy-savings quota for some category of operators (distributors, suppliers, consumers, etc.) coupled with a trading system for energy-efficiency measures resulting in energy savings. The savings would be verified by the regulator and certified by means of the so-called “white” certificates (tradable certificates for energy savings).

6. Systems with savings obligations and tradable certificates for energy savings (TCES) in Europe • Four key elements • the creation and framing of the demand, • the tradable instrument (certificate) and the rules for trading, • Institutional infrastructure and processes (such as measurement and verification) to support the scheme. • the cost recovery mechanism in some cases. In Europe variations of this policy mix have been introduced in Italy, Great Britain, and since July 2006, also in France. The Netherlands is currently considering the implementation of a white certificate system. In Flanders (Belgium) and in Ireland there are savings obligations imposed on electricity distributors without certificate trading option; saving obligations on electricity and heat distributors in Denmark.

7. European white certificate systems: general features of the Italian system • Targets in primary energy consumption on electricity and gas grid distribution companies with more than 100,000 customers; • by the end of 2006 the Government is expected to set rules for distributors under this threshold; targets set on an annual basis 2005-2009. • The mechanism is planned to deliver energy savings equivalent to 5,8 millions toe in the five year target period.

8. European white certificate systems: general features of the British EEC • EEC runs in 3-year cycles 2002-2011, • In EEC-1 all gas and electricity suppliers with 15,000 or more domestic customers had to deliver a certain quantity of ‘fuel standardized energy benefits’. Target in EEC-1: 62 fuel standardized TWh, total delivered savings: 86.8 TWh. • In EEC-2 the threshold for obligation increased to 50,000 domestic customers. The target increased to 130 TWh.

9. European white certificate systems: general features of the French system • Targets (2006-2008 with annual adjustments) for energy suppliers delivering electricity, gas, domestic fuel (not for transport), cooling and heating for stationary applications; • A threshold for the imposition of a savings target is set at 0.4 TWh/year (5,000 liters in case of domestic fuel); • Total target of 54 TWh final energy (cumulated), individual targets in proportion to market sales in the residential and tertiary sectors; • Excluded: EU ETS plants, fuel substitution between fossil fuels, savings resulting only from measures implemented to comply with current legislation.

10. Review of experiences with white certificate schemes: eligible projects Italy: all end-use sectors eligible (but “50 % constraint”); an illustrative list of eligible projects; projects contribute to the achievement of targets for up to 5 years (with only some exceptions). So far: generation and distribution systems for various energy carriers (29%); households electricity consumption (28%); energy consumption for heating purposes in the households and the commercialsector(20%) and public lighting (19%). Targets achieved (mostly early action), surplus banked. Great Britain: only domestic users anywhere in the UK, at least 50% “priority group”. Projects can be related to electricity, gas, coal, oil and LPG;non-exclusive list of measures. EEC-1: 56 % of savings from building insulation (wall and loft), 25 % CFLs, 11 % appliances, 9% heating measures. France: all energies (incl. fuel) and all the sectors (incl. transports and excluding installations covered by ETS) are eligible; excluded - ETS installations, fuel substitution between fossil fuels, measures resulting just from measures implemented only to conform to current legislation; savings above 3 GWh over the lifetime of a project are certified, there is a possibility to pool savings from similar actions. FIRST YEAR OF OPERATION!

11. UK (EEC 2, 2005-2008) Italy France Unit of target TWh fuel weighted energy benefits toe, annual TWh Duration current phase 2005-2008 2005-2009 2006-2008 Sectoral coverage Residential consumers only All consumers All consumers Restrictions 50 % from ‘priority group’ (low income consumers on social benefits). 50 % from reduction in own energy vector (electricity and gas). Obliged parties Electricity and gas suppliers above 50,000 residential customers served Electricity and gas distributors above 100,000 customers served Electricity, gas, LPG, heat, cold and heating fuel above 0.4 TWh/y Trading No certificates; Obligations can be traded; Savings can be traded after own obligation met; No spot market; One-way trade in national emission trading scheme; Certificate trade; Spot market sessions; OTC trading; only bilateral exchange Institutional structure Energy regulator OFGEM Energy regulator AEEG + electricity market operator GME Ministry of Industry + ADEME Penalty No specific guidance on how penalty would be calculated; The penalty can arrive up to 10 % of the supplier’s turnover. Fixed by the Regulator according to criteria such as: the actual possibility to meet the target, the magnitude of the non-compliance, the state of affairs of the non-compliant party. 0.02 Euro/kWh

12. Review of experiences with white certificate schemes: evaluation of savings • Baseline definition • Evaluation approaches

13. Baseline definition • Present regulation; • Sales average and performance of the most commonly used appliance on the market“average-on-the-market” (appliances and equipment); • Averageconsumption of installed stock; • Building stock or equipment stock (e.g. in insulation measures in France);

14. Measurement and verification: Italy 3 valuation (measurement and verification, M&V) approaches: • deemed savings approach with default factors for free riding, delivery mechanism and persistence: no on-field measurements required; • engineering approach, with some on-field measurement, • a third approach based on monitoring plans: comparison of measured or calculated consumptions before and after the project, taking into account changed framework conditions (e.g. climatic conditions, occupancy levels, production levels); all monitoring plans must be submitted for pre-approval to the AEEG and must conform with pre-determined criteria (e.g. sample size, criteria to choose the measurement technology, etc.) Most of the projects submitted to date are of the deemed saving and engineering method variety. There is ex-post verification and certification of actual energy savings achieved (yearly)

15. Measurement and verification: Great Britain • Savings calculated and set when a project is submitted • A standardized estimate: technology used, weighted for fuel type and discounted over the lifetime of the measure of 3.5 %; • ‘Comfort factors’ adjustment of carbon benefits, dead-weight factors accounted for.

16. What Would Have HappenedMeter 1,000,000 750,000 kWh 500,000 Baseline Period Performance Period 250,000 Watt-hour Meter Watt-hour (Wh) meters & What Would Have Happened (WWHH) meters WWHH meter

17. Measuring Energy Savings Common issue in programme evaluation (e.g. DSM programme) and white certificates programmes (creating a real market for “energy savings”); Methodologies have been developed both for individual projects (IPMVP) and for programmes and polices (based on bottom up methods with correction for free riders and spill over effect, life of the measure and persistence of the measure, using deem values, engineering models with partial measurement, and full measurement). Benchmarking is also under development, this is one of the best way to capture the efficiency improvement of complex systems such as production plants, and to measure the impact of energy management practices, Methodologies for the assessment of market penetration of efficient technologies (in particular following labelling/classification schemes)

18. Expected Cash-flow Organization Risk Tolerance Uncertainty w/ no risk mgmt $0 for M&V Uncertainty w/ some risk mgmt $X for M&V Uncertainty w/ more risk mgmt $2X for M&V $/yr Organization’s Cash-flow M&V Risk Management @ a reasonable cost

19. The EU ETS scheme • The Emissions Trading Scheme of the European Union (EU ETS) was launched in January 2005. The EU ETS involves about 12 000 installations from energy-intensive industry and combustion installations (above 20 GWh), covering about 40% of the EU’s total CO2 emissions in 2010. • Each installation is allocated emissions allowances for the full trading period. These allocations are described in the national allocation plan (NAP) of each country in which each EU government specifies the total amount of allowances to be allocated and how these allowances would be allocated to the installations. Therewith an emission cap (quota) is specified for each individual plant. • If installations exceed their quotas they have to pay a penalty of 40 and 100 Euro per ton CO2 respectively for the first and second trading period. For comparison, carbon prices have fluctuated between 8 and 30 Euro/ton CO2 in 2005-2006 and have dropped to below 1 Euro/ton CO2 in February 2007. • Emission reductions from joint implementation (JI) or clean development mechanism (CDM) projects can be used by the companies to fulfil their emission reduction targets

20. ETS and energy efficiency • A number of reasons exist why the EU ETS may be insufficient to stimulate end-use energy efficiency. While the primary scope of the EU ETS is to reduce emissions in a cost effective manner, depending on its design ETS could also foster end-use energy efficiency, thus bringing additional and cheaper options to the carbon market. In this section we discuss the following issues: • The upstream approach chosen for the EU ETS only provides an indirect incentive to energy savings. • Lenient emission caps have resulted in an excess supply of allowances and therewith low carbon prices. This has not had any significant impact on investment decisions and has not promoted more fuel switching or more emission abatement in the industrial sector. • The chosen bases for allocation have not resulted in a large incentive to energy efficiency measures. • Disproportional smaller efforts are required from EU ETS industries in some countries, again not providing sufficient stimulation to emission abatement, including energy efficiency. • Energy efficiency is often not recognised as a business opportunity because of deviation from core business expertise, due to the smaller size of high-cost measures and associated larger transaction costs.

21. Arguments in favour of the integration of white certificates into the EU ETS • White certificates from non-electricity savings can bring more and more cost effective carbon reductions from sectors currently not covered by the EU ETS; this will reduce cost of compliance for parties under the emission cap; • Environmental equity and fairness; • Safety valve for buyers in the EU ETS; • Increasing investors’ trust in end-use energy efficiency measures.

22. Arguments against the integration of white certificates into the EU ETS • Administrative and technical complexity; • Local benefits of energy efficiency and RES will be lost in an international regime; • Measurement and verification difficulties inherent to energy savings; integrating a cap-and-trade regime with a baseline-and-credit one; • Difficulties in find a commonly agreed value to link the carbon, renewable energy and energy efficiency systems whose goals and objectives significantly differ; • Both white certificate schemes and the EU ETS have just commenced – better leave them to develop separately until more practical experience is accumulated.

23. Practical solutions for integration of white certificates into the carbon regime • Direct integration by making tradable commodities one or two-way fungible; • Set-aside quotas for energy efficiency and renewable projects within the carbon regime.

24. One- and two-way fungibility • Three types of targets (an emission cap, an energy saving target and a green electricity target) and three types of tradable commodities (emission allowances, white certificates and green certificates, respectively); • One-way fungibility refers to a situation whereby green and white certificates may be used to comply with emission caps, but in contrast emission allowances cannot be used to meet green electricity or energy saving targets; • Two-way (full) fungibility implies that white and green certificates can be used to show compliance with the emission target and also emission allowances can be used to show compliance with green electricity or savings targets. Note: two-way fungibility will compromise the environmental soundness of green electricity and of energy saving targets

25. Set-aside quotas (1) • A set-aside is a pool of emission llowances that are kept by the program administrator in charge of emission trading and used to reward energy savings and renewable energy projects; • Set-asides described here are of offset type that allows participants outside of formal emissions markets to participate by allowing certain types of activities to be recognized for the emissions reductions these projects provide; • Energy efficiency and renewable energy facilities generate emissions offsets that firms under the EU ETS can purchase to meet their targets.

26. Set-aside quotas (2) • A dedicated set-aside within a cap (see case A on slide 7). Two options are possible within a dedicated set-aside: • Optional • Mandatory set-aside (resembles portfolio standard, see slide 8) • Allow obliged parties to exceed their emission caps if they submit sufficient green and/or white certificates to cover surplus emissions (see case B on slide 7). This option will not compromise the environmental integrity of the emission cap because renewable and energy savings projects have a carbon component.

27. One-way fungibility

29. Conclusions • Depending on its design the EU ETS could also foster end-use energy efficiency, thus bringing additional and cheaper options to the carbon market. The stringency level is very much based on the allocation methodology (grandfathering or benchmarking), and possibly coupled with auctioning; • It is possible to integrate carbon credits from end-use energy efficiency projects into the EU ETS and the most practical way for doing this is via a set-aside quota. • Taking into account the early stage of developments and experiences with the EU ETS, as well as with tradable white certificates, the additional complexity of integrating carbon credits from energy saving projects into the EU ETS may outweigh the benefits. • Great complexity is measuring EE, however a lot of work and activities have been carried out over the pats 10 years (e.g. IPMVP, evaluation protocols, etc.). Benchmarking is also important to capture non technological improvements such as energy management.

30. Thank you for your attention! paolo.bertoldi@ec.europa.eu http://re.jrc.ec.europa.eu/energyefficiency/