EU underplays financial benefits of a 40% 2030 target for energy efficiency.

Mark Lewis for Kepler Cheuvreux (no url): “The European Commission presented its 2030 Climate & Energy Package in January of this year, targeting a 40% reduction in EU greenhouse-gas (GHG) emissions by 2030 relative to 1990 levels (building on the 2020 target of a 20% reduction), and a 27% target for energy consumption from renewable sources by 2030 (building on the 2020 target of 20%).”
“The Commission did not present an energy-efficiency (EE) target in January, but last week it announced a target for improving the EU’s energy efficiency by 30% by 2030 versus 2005 levels (building on the 2020 target of a 20%  improvement versus 2005 levels). This is lower than the 40% target called for by the European Parliament, but we think this largely reflects the Commission’s assessment of what will be politically achievable given its estimate of the greater upfront costs in moving to a 40% versus a 30% target. As with the 2020 EE target, the 30% EE target proposed for 2030 would be non-binding.
The detailed communication of the Commission’s 2030 target for energy efficiency sets out the main points of the Commission’s proposal and underlying analysis, building on the existing 2020 target. As explained in the current Energy-Efficiency Directive, the 2020 target entails reducing the EU’s primary-energy consumption by 20% against what the Commission’s 2007 projection of what the business-as-usual (BAU) level of primary-energy consumption would be by 2020. This projection gave a 2020 BAU primary-energy consumption of 1,860 million tonnes of oil equivalent (mtoe).  Accordingly, the current 2020 energy-efficiency target is 1,483mtoe of energy consumption, and this means that the Commission’s proposed new 2030 target is 1,307mtoe. Given that the EU’s 2013 primary energy consumption was 1,676mtoe, this means that the proposed 2030 target implies a reduction of 369mtoe (22%) from current levels.
The Commission’s  modelling, estimates that a 40% EE target by 2030 would increase the EU’s energy-system costs by €92bn per year out to 2030 relative to the 30% target, and we think this is one of the key reasons why the Commission felt a 30% target would be more politically achievable. That said, the Commission’s proposal has been criticized for a lack of ambition not only by NGOs but also by a number of high-profile EU parliamentarians. The methodology used by the Commission in its modelling has also been criticized for over-inflating the costs and under-estimating the financial and other benefits that would accrue from a 40% target relative to a 30% target. Our own view is that as the world’s largest energy importer (the EU currently imports c.60% of its gas and nearly 80% of its oil), the EU needs to reduce its dependence on imports of both dramatically over the next two decades, and especially of oil. This is because the IEA sees oil prices rising in real terms out to 2030, and we think there is upside price risk to the IEA’s forecasts. The 2014 BP Statistical Review of World Energy shows EU oil consumption of 12.8mbd in 2013, or 4.67Gb for the year as a whole. Given that oil prices averaged $109/bbl in 2013 and the EU imported a total of 3.57Gb, total EU expenditure on oil imports alone in 2013 would have been in the order of $390bn (€290bn). Given that a 40% target would imply 2030 consumption of 1,106mtoe (i.e. 200mtoe less than the 30% target), and that c.35% of EU consumption is in the form of oil, this implies that oil imports  would be some 480m bbls per year lower by 2030 under a 40% EE target than under the proposed 30% target. Even at average 2013 oil prices this would imply an annual saving of c.$52bn (c.€40bn) per year by 2030 under a 40% EE target versus the proposed 30% target on oil imports alone. A tougher EE target would also protect the EU against the risk of a big increase in oil prices over the next two decades. In short, we suspect that the Commission has indeed likely underestimated the financial benefits of a 40% target, as adding in the savings from lower gas imports on top would further mitigate the extra upfront capital costs entailed by a 40% target.
Both France and Germany have already publicly backed the Commission’s proposed new 30% EE target, and yesterday France announced its own proposed law for a domestic energy transition. The draft law proposes a reduction in France’s GHG emissions of 40% by 2030 versus 1990 levels (in line with the Commission’s EU-wide proposal), a renewable-energy target of 32% by 2030 (above the Commission’s EU-wide target of 27%), and a 50% improvement in France’s energy efficiency by 2050 versus 2012 levels. The proposed French law also proposes a specific target for reducing France’s fossil-fuel energy consumption by 30% by 2030 versus current levels (there is no equivalent EU target). We await more details on how the Government expects these targets to be met when the law is formally presented to Parliament in late September.
As part of the 2030 Climate & Energy Package, the Commission’s proposed new 2030 EE target will now be submitted along with the 2030 targets for GHG emissions and renewable energy for approval by Member State Governments at the Council of Ministers’ meeting in 2030. Based on Member-State discussions of the 2030 Package at the March Council of Ministers meeting, we are cautiously optimistic that the three key targets will be approved, especially given the extra urgency that recent geo-political events have given to the EU debate over energy security (in addition to their environmental and economic benefits, the proposed 2030 targets for both renewable energy and energy efficiency are both important ways of reducing the EU’s dependence on imported energy from Russia). We will give a more detailed analysis of the implications of the 2030 Package after the October meeting of the Council of Ministers.
Finally, we would note that the Commission also noted last week that the EU is currently behind schedule on meeting the 2020 EE target (DG energy sees the current trajectory resulting in a reduction of 18-19% versus the targeted 20%), and it will formally review Member States’ progress in September prior to a formal review of the EE Directive in 2016.”