Opinion of the Economic and Social Committee on the 'Proposal for a Council Directive to introduce rational planning techniques in the electricity and gas distribution sectors` ()

(96/C 204/20)

On 19 January 1996, the Council decided to consult the Economic and Social Committee, under Article 130s(1) of the Treaty establishing the European Community, on the above-mentioned proposal.

The Section for Energy, Nuclear Questions and Research, which was responsible for preparing the Committee's work on the subject, adopted its Opinion on 9 April 1996. The Rapporteur was Mr Morgan.

At its 335th Plenary Session (meeting of 24 April 1996), the Economic and Social Committee adopted the following Opinion by a large majority, with five votes against and eleven abstentions.

1. Introduction

1.1. The Committee would first wish to reiterate its strong support for the Community objective of stabilizing carbon dioxide emissions by the year 2000 at the 1990 level in the Community as a whole. However, it also notes that this proposal will not come into effect until 1997 which means that it could have only limited impact on the year 2000 target. The Committee thus feels that the proposal must be designed to contribute to further improvements in energy efficiency beyond the year 2000.

1.2. The Committee recognizes that energy efficiency has an important role to play in the achievement of the CO2 target and that improved energy efficiency can also bring other benefits - notably improving the competitiveness of the Community economy and enabling all energy consumers to meet their needs for heat, light and power at the least cost. For the purposes of social cohesion, it is particularly important that low income consumers can obtain the benefits of energy efficiency.

1.3. The Committee also recognizes that gas and electricity companies, which provide the vast majority of consumers in the Community with energy, have a key role to play in the provision of least cost energy efficient heat, light and power to households, businesses and other consumers. In this context the Committee notes the valuable experience which has been gained through the SAVE programme in a range of energy efficiency projects undertaken by gas and electricity companies.

1.4. The Committee takes energy efficiency seriously - in its Opinion on the SAVE proposal in 1991, it said that energy efficiency should be given a higher priority in Member States, bearing in mind the need to conserve energy and for environmental reasons (). In September 1994 the Committee gave its opinion on Community energy policy (). It concluded that 'rational energy use is one of the energy sectors with the best future prospects. Its contribution is wholly positive in terms of increased competitiveness, security of supply and environmental protection`.

1.5. The Committee recognises that there are very significant opportunities for CO2 reductions if changes are made to the methods of electricity generation. However, this issue is beyond the scope of this proposal and so it has not been considered in preparing this Opinion.

1.6. Within this Opinion there is some reference to the effect of liberalisation on the opportunities for and approaches to energy efficiency programmes undertaken by gas and electricity distribution companies and the role of new entrants. In all cases however, it is assumed that appropriate regulatory frameworks will be in force to ensure that obligations of public service will be met.

1.7. The Committee thus welcomes the objectives of this proposal, although it has had some difficulty in interpreting the implications of the text of the draft Directive. Accordingly, in Section 2 we have discussed the key parts of the text which have given rise to the confusion. In Section 3 we make comments on further issues raised by the draft. In Section 4 we recommend specific changes to the text. In Section 5 we give our qualified support for a Directive based on those changes.

2. Interpreting the draft Directive

2.1. Article 1

There are several important terms in this Article which need to be clarified: 'electricity and gas distribution sectors` - in particular, the difference between the supply and distribution functions; 'Integrated Resource Planning` (IRP); 'investment opportunities`; 'single economic basis`. It is also important to be clear about the Commission's restriction of the application of the IRP to the distribution (and supply) functions of gas and electricity companies.

2.1.1. Although the draft talks about distribution companies, it is the supply function, rather than the distribution function, that provides the interface to consumers and hence the scope to develop a 'new role as energy service suppliers` and not simply 'commodity traders`. This is recognized in the Commission's Internal Market document, which defines distribution as 'the transport of electricity/natural gas on lower voltage distribution systems/local or regional pipeline systems in view of its delivery to customers`. It defines supply as: 'the delivery and sale of electricity/natural gas to customers` (). The Committee recognizes that, in many Member States, the supply and distribution functions are integrated in the same company which may have a monopoly of supply to local consumers. However, with market liberalization this may change so that supply competition becomes a reality. The proposal thus needs to refer to supply and distribution to reflect different structures in different Member States and the moves towards liberalization.

2.1.2. IRP is generally understood to mean the system which was pioneered in the US - calculating the comparative costs and benefits of investing in new energy production, transmission or distribution equipment, on the one hand, as against investment in measures to reduce energy demand by consumers, i.e. Demand Side Management (DSM), on the other hand. In this form, IRP tends to require a monopoly of supply to final customers (households and businesses) and is also greatly facilitated by vertical integration. Contrary to this widespread understanding, the Commission is applying IRP only to the DSM opportunities in the distribution and (where separated) supply functions of gas and electricity companies. Accordingly, the Committee prefers to avoid use of the term IRP and instead uses the term 'rational planning techniques` which is in the title of the draft Directive.

2.1.3. The Committee understands that the Commission's interpretation of the term 'investment opportunities` means the following:

2.1.3.1. In the context of supply companies in particular, selling integrated energy services (see 3.2 below) instead of focusing on maximising unit sales of gas or electricity.

2.1.3.2. For a distribution company, introducing DSM techniques (particularly to reduce peak demand) to avoid or postpone the need for investment in distribution network capacity. In a liberalized environment, DSM proposals by a distribution company would either have to be carefully planned in cooperation with supply companies (which may prove difficult), or the distributor would need to give appropriate price signals to supplies via use-of-system charges.

2.1.3.3. In some countries, distributors and suppliers are free to implement CHP schemes. The draft does not specifically mention co-generation/combined heat and power (CHP). However, small-scale, decentralised (localised) CHP has an important role to play in DSM and is a key component of Integrated Energy Services (see 3.2). In particular, CHP can improve end-use energy efficiency by facilitating a switch from other forms of heating which produce greater CO2 emissions.

2.1.3.4. However, these opportunities will not always involve the distribution company in comparing investments - a distribution company may simply buy units of electricity or gas from other producers to sell on to its customers, involving revenue rather than capital expenditure. The term 'investment opportunities` is thus misleading and should be removed. Our proposed re-wording is given in Section 4.3.

2.1.4. In order that the proposal can be applicable in a range of market structures and compatible with the principle of subsidiarity, the Committee understands that Member States and gas and electricity companies will have complete discretion to determine what the 'single economic basis` should be.

2.1.5. In order to clarify the restriction of this proposal only to the supply and distribution functions of gas and electricity companies, it is proposed to add a sentence to the end of Article 1 (see Section 4.3).

2.2. Article 2

A key concern of the Committee initially was that the Proposal did not seem to take sufficient account of the existence of different energy market structures in Member States. There is a wide range of structures from fully vertically integrated monopolies, monopolies in some parts and competition in others; those which are liberalized or in the process of being liberalized. However, it is now our understanding that this Article is deliberately designed as a framework to accommodate the differences in industry structures and ownership and different market structures in the 15 Member States and is generally consistent with the development of the single market. It also recognizes the principle of subsidiarity and accordingly is not prescriptive, giving wide discretion to Member States over implementation. The 'framework of measures` is to be defined at country level to suit country circumstances. It is understood that the 'rational` approach advocated should also be commercial and economic. Interpreted in this way, the proposal can be suitable for implementation in fully competitive markets. However, if the proposal is to be properly interpreted in this non-prescriptive way, certain drafting changes will be required to Articles 2(a) to 2(e).

2.2.1. Article 2(a)

The reference to 'all` energy resource alternatives is too broad in the context of a single gas or electricity distribution company and may cause practical problems and delay implementation, as it would be difficult to determine what 'all` the alternatives could possibly be. We therefore propose, in 4.4, that the word 'all` be deleted.

2.2.2. The term 'integrated resource plan` needs to be avoided (see 2.1.2).

2.2.3. Article 2(c)

2.2.3.1. Our initial reading of this paragraph gave rise to some concerns about consumer protection because of the apparent linkage to US style IRP schemes which can work to the disadvantage of the generality of consumers. In the US, all consumers have been required to pay surcharges to fund IRP when only some have benefitted. However, the Committee understands that the Commission does not intend its system of rational planning to involve tariff increases for all consumers - only those consumes who benefit will pay.

2.2.3.2. We now understand that this Article was drafted by the Commission to ensure that companies are not prevented from financing energy efficiency schemes because of legal restraints on their commercial freedom to add such items onto participating customers' energy bills. The current wording of the draft, however, does not make this clear - the Committee therefore proposes changes to the text (see 4.6) to clarify the meaning.

2.2.3.3. The wording to 'ensure that distribution companies which undertake demand-side management programmes are not net revenue losers` raises a concern that this might be over-generous to the companies, at the expense of the consumer. Regulators faced with such a requirement will tend to prefer to risk penalizing the consumer rather than the company. We propose that this sentence should be deleted.

2.2.4. The issues to which Article 2(d) are addressed are discussed in Section 3 of this Opinion.

2.2.5. Article 2(e)

The Committee understands that the proposal in the Draft to promote the integration of demand side management (DSM) into systems for capacity tendering refers to energy procurement policy in the public sector. This would mean that, when public sector bodies (central government departments, local government, health authorities, etc.) invite energy companies to bid to supply energy to their buildings and other facilities, the tendering criteria should, at an early stage, include a requirement to meet energy needs by the most appropriate combination of supply and demand options. However, this meaning is not clear in the way that the Directive is drafted at present and the Committee thus makes a suggestion for re-wording in 4.8.

3. Issues raised by the Directive

3.1. Barriers to energy efficiency

3.1.1. It is important to understand why consumers do not invest in energy efficiency, even though it would often be cost effective for them to do so. Lack of finance, apart from the case of low income households (see 3.1.5 below), is not a significant barrier, because most households and businesses could afford to borrow to finance energy efficiency investments if they wanted to.

3.1.2. However, lack of information is an important barrier. Consumers have few sources of independent information and advice on energy use. The case for information for businesses is particularly strong on economic grounds since resources wasted on inefficient energy use could often be more productively used elsewhere in the economy, creating jobs, boosting productivity, boosting exports, etc. Consumer organizations have an important role to play, in collaboration with gas and electricity distribution companies, in the provision of information.

3.1.3. Many theoretical calculations of the cost-effectiveness of energy efficiency measures may underestimate transaction/switching costs, particularly in terms of the time investment required of the consumer to organize the work, obtain finance and so on. These costs can give energy efficiency investment a longer payback than the cost of the measures themselves would suggest and make the consumer feel that it is not worth the effort required. For these reasons, many energy efficiency investments which could deliver significant energy and CO2 savings may fail to be implemented.

3.1.4. A further barrier to energy efficiency can be the investor-user problem. Landlords may have limited incentives to invest in the cost of insulating their buildings if it is the tenant who profits from lower subsequent energy costs. Tenants may not be willing to invest in someone else's property. Appropriate systems need to be established to solve this problem, for example, to enable rents to reflect the energy efficiency of buildings.

3.1.5. Low income consumers do not have the capital to finance energy efficiency measures themselves and often cannot secure loans to do so. The low energy use by many low income consumers means that many will realize limited energy bill savings through energy efficiency measures, making payback periods longer and hence contracts much more difficult to arrange.

3.2. Integrated Energy Services (IES)

3.2.1. Section 3.1 outlined the barriers to energy efficiency. The Committee recognizes that gas and electricity suppliers can help overcome these information and transaction costs barriers to energy efficiency and sees this proposal as being a means of further developing such a role. Consumers do not really want to buy units of gas or electricity - they want heat, light and power. The introduction of techniques to encourage rational energy use, as envisaged by this proposal, should help to encourage this new approach. Consumers can achieve lower energy bills in two ways - by a lower unit price or by using fewer units. The Integrated Energy Services company recognizes this and enables the consumer to achieve a lower bill (and other desirable things such as a warmer home, better productivity, greater convenience) in the way best suited to the consumer's needs. IES can encompass a wide range of services including gas and electricity supply; electricity and heat supply (from CHP); insulation; low energy lighting; a new energy efficient central heating boiler; a small-scale CIIP unit; all supplied by the IES company. The aim is to ensure that, even where the consumer is paying for new equipment, the savings on his unit consumption means that his total bill for energy services will, in the medium term, be less than he was previously paying just for energy supply. In some cases, the energy efficiency measures are paid for within 1-2 years; in many others it might take up to five years, providing net savings from then on.

3.2.2. The energy service concept will mean that new billing structures and approaches have to be introduced. In doing so, it is important that price transparency is maintained - bills/invoices should describe in a clear and accurate manner which charges relate to fuel supply and which to energy efficiency products/services. To ensure that consumer confidence is maintained the Committee believes that consumers and consumer organisations must be involved in the development and application of these concepts.

3.2.3. Energy supply competition may be beneficial for energy efficiency and facilitate development of the IES approach. Gas and electricity companies should find that offering a range of energy services is a good way to gain and keep consumers. The development of suppliers who offer more than one fuel is likely to be essential to the development of IES, particularly for household consumers. The multi-fuel supplier is more likely to give impartial advice on which is the best fuel.

3.2.4. Energy services are also available from independent companies and this trend is likely to increase as markets are liberalized. Governments will need to ensure that utilities do not exploit their market power to suppress such companies and that the competition is fair.

3.2.5. To stimulate take-up of the measures outlined in 3.2.1, IES providers may also need to provide consumers with economic incentives. These might be achieved by either acting as an agent for the use of government grants (where available), or through bulk purchasing and discounting - for example, of low energy light bulbs. Article 2(d) (second point), deals with this.

3.2.6. In Article 2(d) there is a Proposal that DSM programmes are established for low income energy users. As noted in 3.1.5, low income households face significant problems due to lack of capital. This may mean that they require greater economic incentives than other consumers (see 3.2.5) to enable them to take up energy efficiency measures. To the extent that energy services cannot be provided to them on a commercial basis, and where subsidies cannot be justified by energy suppliers/distributors acting commercially or within DSM initiatives (to avoid investment in distribution capacity, for example), effective programmes for low income consumers will generally be dependent upon the availability of government grants.

3.2.7. To achieve a market transformation from energy supply to energy services may take considerable time, particularly in the household sector. In view of the EU's commitments to reduce emissions, the process needs to be achieved with some rapidity. One of the purposes of this Proposal, as the Committee understands, is to help overcome the barriers which could inhibit this market transformation (e.g. Article 2(c)).

3.3. Artificial incentives to supply

Revenue controls (profit or price controls), imposed on energy suppliers/distributors by Member States can give important signals towards rational energy use. In this context it is important that they do not give energy companies an artificial incentive to increase the number of units supplied or distributed.

4. Specific changes to the text of the Directive

4.1. In this section of the Opinion specific amendments to the draft Directive are proposed to meet the issues and concerns raised in Sections 2 and 3.

4.2. First page of the draft Directive, 9th paragraph

Replace the following text:

'Cannot be satisfactorily implemented at the level of Member States;` with 'needs to be satisfactorily implemented in all Member States`.

Reason for change

The action will be implemented at the level of Member States. The purpose of the Directive is to provide the framework for implementation.

4.3. Article 1

Delete existing text and replace with:

'The purpose of this Directive shall be to contribute to the Community objective of stabilizing CO2 emissions by the year 2000 at the 1990 level in the Community as a whole and to develop a sound framework for the further improvement of energy efficiency beyond the year 2000. The objective is to involve the electricity and gas distribution/supply sectors in improving end-use energy efficiency through the application of rational planning techniques. "End use energy efficiency" includes small- scale, decentralized (localized) CHP/co-generation. Rational planning techniques shall be used to evaluate energy resource alternatives (energy supply and energy demand reduction) on a comparable economic basis. This Directive applies only to the supply and distribution activities of gas and electricity companies.`

Reasons for change

(i)

The Directive will be able to achieve relatively little in respect of the year 2000 target and so there is a need to look beyond the year 2000;

(ii)

The Directive will have an impact on the supply function as well as distribution (see 2.1.1);

(iii)

The term Integrated Resource Planning is confusing because of its association with US style IRP which covers the whole production, transmission and distribution chain. The Committee thus prefers the term 'rational planning techniques` (see 2.1.2);

(iv)

The words 'investment opportunities` have been deleted as the choices will not always involve competing investments (see 2.1.3);

(v)

Small-scale decentralised (localised) CHP/co-generation can improve the rational end-use of electricity and gas and hence should be included in the definition of 'end-use energy efficiency` (see 2.1.3.3);

(vi)

The final sentence clarifies that the scope of the Directive is confined to the supply and distribution functions of gas and electricity companies (see 2.1.5).

4.4. Article 2(a)

Delete the word 'all` on the 3rd line.

Replace the words 'single economic basis` with 'comparable economic basis`.

Reason

See 2.2.1.

4.5. Article 2(b)

Delete the existing text and insert the following:

'They shall examine whether the economic energy efficiency measures identified by rational planning techniques are being undertaken.`

Reason

See 2.1.2 and 4.3 (iii).

4.6. Article 2(c)

Delete the existing text and insert the following:

'They shall review existing legislation in this area to ensure that there are no barriers which will prevent gas and electricity distribution or supply companies from billing customers for energy services and products provided to them. Any changes to billing must preserve price transparency between fuel supply and energy efficiency services for the consumer. They shall also ensure that no obstacles are put in the way of the development of integrated energy supply and services businesses, offering gas, electricity, heat, other fuels and energy saving measures, so that fully Integrated Energy Services may be offered to consumers and energy efficiency potential is maximized. They shall also ensure that independent energy services suppliers are free to enter the market.`

Reason

See 2.2.3 and 3.2.

4.7. Article 2(d), 3rd point

Delete existing text and insert:

'Target some IES and DSM programmes at low income consumers.`

Reason

See 3.2.6.

Article 2(d), 4th point

Delete existing text and insert:

'Support IES by the creation of finance subsidiaries or by cooperation with existing third party financing companies.`

Reason

Clarifies the text of the Directive.

4.8. Article 2(e)

Delete existing text and insert:

'They shall encourage public authorities to incorporate DSM options into their public procurement of energy.`

Reason

See 2.2.5.

5. Conclusion and recommendation

5.1. The Committee endorses the Commission's objective of achieving Community targets for the reduction of CO2 emissions. It supports the intention of this Proposal that gas and electricity undertakings shall contribute to the achievement of these targets by taking economic initiatives to improve customers' energy use efficiency. However, particularly in the context of its preamble, the proposal as drafted is unclear.

5.2. Following discussions with the Commission, the Committee understands that its intention is to encourage Member States to develop a framework for end-use energy efficiency, involving only the distribution and supply activities of utility companies, and taking full account of consumer interests.

5.3. From what has been said before, the Committee does not support the Commission's proposal for a Council Directive in its present form. However, the Committee believes that a Directive is needed to ensure the adoption of rational energy use techniques in the gas and electricity distribution sectors. The Committee would only support a Directive which incorporated the drafting changes detailed in Section 4 of this Opinion and hopes that the Commission will modify the draft Directive accordingly.

5.4. The Committee recommends the Commission revises the text of the Explanatory Memorandum, taking into account sections 2 and 3 of this Opinion.

Done at Brussels, 24 April 1996.

The President

of the Economic and Social Committee

Carlos FERRER

() OJ No C 1, 4. 1. 1996, p. 6.

() Opinion of the Economic and Social Committee on a proposal for a Council Decision concerning the promotion of energy efficiency in the Community (SAVE) (COM(90) 365 final), 20. 3. 1991.

() Opinion of the Economic and Social Committee on Community energy policy (Own-initiative proposal), OJ No C 393, 31. 12. 1994.

() OJ No C 65, 14. 3. 1992, p. 6.