Energy efficiency and system integration at the core of EU’s decarbonisation policy

The EED originates from 2012 and was partially amended in 2018, and the latest adjustments have just been adopted in the member states. The consultations for the next EED revision were closed in February, and the EU Commission has scheduled their legislative proposals by the end of June. In this blog post I will open a bit Fortum’s answers to the consultation.

Read Fortum's position paper: Renewables, carbon free energy sources and increased energy efficiency are essential to achieve EU’s climate neutrality goal by 2050

The heating of all residential and service sector buildings in the EU represents around 40% of final energy and 36% of GHG emissions. Approximately 75% of heating and cooling (H&C) is still generated from fossil fuels while roughly 22% is generated from renewable energy. District heating and cooling (DHC) and electricity-based heating represent only approximately 20%–30%, with significant variation by country and Nordic countries as forerunners. Scaling up the use of efficient DHC remains a huge challenge in Western Europe, where building-specific gas solutions are the default.

The de-carbonisation of the H&C sectors should primarily take place through effective carbon pricing and by widening of the scope of the Emissions Trading System to cover all buildings. Key elements of the revision of the ETS should be finalised prior to the deeper revision of the EED. The most appropriate solution is to establish a standalone transitional ETS system for the buildings now outside ETS. This would make the playing field more level, since most DHC systems and electricity-based heating (but only a minority of all H&C) are now covered by ETS. At the same time, the affordability of heating will be a big societal policy challenge to overcome when putting a carbon price tag for all heating solutions and all households. That should however be tackled by well-targeted national social policy measures.

Primary energy savings as a key measure

The EED contains detailed guidance for member states on how to best implement various energy savings measures. Now, an EU-level energy efficiency improvement target of 32.5% by 2030 has been set, but it has been estimated that this is not at all enough considering the new climate target. Reaching this seems fairly demanding with the prevailing energy efficiency steering mechanisms.

Energy efficiency should be reviewed mainly from the perspective of primary energy, which should be the basis for national target-setting. The focus of measures should be on the whole energy value chain, not only on the demand side. The energy efficiency first principle should be applied to all relevant national energy policies, however recognising the fact that member states have varying situations and means. The measures that are now required by the EED should be enforced while maintaining sufficient national flexibility to implement the most cost-effective measures for each state.

Towards energy system integration

The EU issued a Strategy on Energy System Integration in July 2020. The EED revision, together with the revision of Renewable Energy Directive (REDII), is expected to incorporate this strategy into EU legislation. Energy system integration will be vital for the energy sector and industries to transit to carbon neutrality and improved energy efficiency, and to increase system flexibility and security of supply. The two main drivers are cost-efficient electrification and significant increase of all carbon-neutral electricity production, not only wind and solar. A core objective will be the de-carbonisation of the H&C sector through electrification by using low-carbon electricity-based and scalable solutions, e.g. heat pumps and waste heat.

Sustainable energy taxation should have a game-changing role in decarbonising the economy. Electricity taxation should focus on consumption and promote all low-carbon electricity against fossil fuels. It is also necessary to develop electricity network regulation to enable system integration while keeping grid service fees at a reasonable level if we are to encourage the electrification of society.

Powerful promotion of efficient DHC to decarbonise heat markets

The heating and cooling sectors need to gradually integrate with the low-carbon electricity sector, which means a step-by-step phasing out of the combustion of fossil fuels. Further, sustainable bioenergy should be used when electricity-based DHC or waste heat sourcing is not feasible or sufficient. Fortum’s Espoo Clean Heat project in Finland is an excellent example of replacing fossil fuels with smart and flexible solutions such as excess heat utilisation, renewable electricity, geothermal energy and bioenergy. This project will result in carbon-neutral district heating during the 2020’s and can be considered as a European forerunner in de-carbonising a DHC system.

The EED has already recognised the scalable potential of DHC to decarbonise heating and cooling in the residential and service sectors. It further obliges the member states to promote efficient DHC and cogeneration. We estimate that much more powerful national deployment will be needed in countries where the DHC sector is still largely using fossil fuels and where DHC has a relatively low market share.

The Nordic countries are already well positioned for decarbonising the DHC sector with bioenergy, further electrification and use of industrial and urban waste heat. In Finland, over 35% of all residential and service sector buildings are heated by using electricity, mainly heat pumps and electrical heating. Roughly 50% of the whole residential and service sector’s H&C in Finland is already decarbonised.

The main measures to promote efficient DHC even better in the EED revision are:

• Encouraging the member states to deploy ambitious national decarbonisation targets, policies and incentives that however are not overlapping with the EU ETS
• Waste heat utilisation by increasing awareness and imposing better incentives
• Utilisation of waste heat from the data centre sector, which is growing quickly
• Increasing the role of nature’s heat sources, i.e. heat pumps, geo- and solar thermal as part of DHC

But let us not forget that the relevant heating markets are always local and have very different characteristics across the EU. Therefore, EU steering should avoid proposing “fit for all” solutions. The member states are at the core of de-carbonisation. We should strongly emphasise the benefits of competitive and market driven DHC systems that have customers at the centre and will deliver when predictable incentives and flexibility have been provided.

The energy performance of buildings also has huge improvement potential in the EU. Towards the end of 2021, the Energy Performance of Buildings Directive (EPBD) will be revised. Doubling and financing major energy renovations will be the main challenge. There is clear potential to improve the coherence and clarity of all the legislation that is under revision during 2021 due to the GD.

If done well, the EED revision presents a great opportunity for promoting a resource-wise transition to a carbon-neutral energy system. Putting energy efficiency first is a principle which we at Fortum can fully support, since primary energy savings are the cheapest and fastest ways of reducing GHG emissions.