EUROPEAN COMMISSION Brussels, 14.7.2021 SWD(2021) 623 final COMMISSION STAFF WORKING DOCUMENT



IMPACT ASSESSMENT REPORT

Accompanying the Proposal for a Directive of the European Parliament and of the Council on energy efficiency (recast) {COM(2021) 558 final} - {SEC(2021) 558 final} - {SWD(2021) 624 final} - {SWD(2021) 625 final} - {SWD(2021) 626 final} - {SWD(2021) 627 final}



Contents 1.Introduction 1.1.The political context 1.2.The importance of energy efficiency 1.3.The role of the EED and interlinkages with key related legislation 1.4.Governance of the Energy Union and Climate Action 1.5.The revision of the EED as part of the ‘Fit for 55’ package 2.Problem definition 2.1.The problem 2.2.The drivers 2.3.How will the problem evolve? 3.Why should the EU act? 3.1.Legal basis 3.2.Subsidiarity: Necessity of EU action 3.3.Subsidiarity: Added value of EU action 4.Objectives: What is to be achieved? 4.1.General objectives 4.2.Specific objectives 5.What are the available policy options?

5.1.What is the baseline from which options are assessed? 5.2.Description of the policy options 5.3.From options to scenarios that build on the Climate Target Plan 5.4.Scenarios discarded at an early stage 6.What are the impacts of the scenarios and policy options? 6.1.How the assessment is carried out 6.2.Summary of quantitative results 6.3.Assessment of policy options 7.How do the options compare? 7.1.How do the policy options compare? 7.2.Conclusion 8.Preferred option 9.How will actual impacts be monitored and evaluated? Annex AProcedural information Annex BStakeholder consultation Annex CWho is affected and how? Annex DKey CTP findings input to the “fit for 55” IAs Annex EAnalytical methods Annex FMain elements of the EED Annex GUnderachievement of targets

Annex HEnergy savings potentials Annex IMechanism to reduce energy consumption Annex JEnergy savings obligation Annex KWhite Certificate Schemes under Article 7 EED Annex LImpacts on energy poverty Annex MOther relevant legislation and policy areas Annex NEstimated administrative costs Annex OThe SME Test – Summary of results



Glossary Acronym Meaning or definition BPIE Buildings Performance Institute Europe BSL Baseline scenario CBA Cost Benefit Assessment CEER Council of European Energy Regulators CHP Combined Heat and Power (generation) CTP Climate Target Plan DSO Distribution System Operator EE Energy Efficiency EED Energy Efficiency Directive EE1st Energy Efficiency First EEOS Energy Efficiency Obligation Schemes EPBD Energy Performance of Buildings Directive EPC Energy Performance Contract ESO Energy Savings Obligation ESR Effort Sharing Regulation EUCO European Council EU European Union ETS Emissions Trading System FEC Final Energy Consumption FF55 Fit for 55 package FTE Full Time Equivalent GDP Gross Domestic Product GEM-E3 An applied General Equilibrium Model GHG Greenhouse Gas GPP Green Public Procurement IA Impact Assessment ICT Information and Communications Technology IEA International Energy Agency JRC Joint Research Centre of the European Commission LTRS Long-Term Renovation Strategies LULUCF Land use, land use change and forestry MS Member States Mtoe Million Tonnes of Oil Equivalent NECP National Energy and Climate Plan NZEB Nearly Zero Energy Building PC Public Consultation PEC Primary Energy Consumption PEF Primary Energy Factor PRIMES An energy system model (Price-Induced Market Equilibrium System) REDII Renewable Energy Directive RSB Regulatory Scrutiny Board SME Small and medium sized enterprise TFEU Treaty on the Functioning of the European Union TSO Transmission System Operator Term Meaning or definition Additionality Energy savings under EED Article 7 must be in addition to those that would have occurred in any event without the activity of the obligated, participating or entrusted parties, or implementing public authorities. Savings resulting from the implementation of mandatory Union law are considered savings that would have occurred in any event and thus cannot be claimed as energy savings for the purpose of Article 7(1). Cogeneration Cogeneration, also called combined heat and power (CHP) is the simultaneous production of electricity and useful heat. District heating District heating is a system for distributing heat generated in a centralised location through a system of insulated pipes for residential and commercial heating requirements such as space and water heating. Energy Performance Contract An Energy Performance Contract (EPC) is a mechanism for an external organisation to finance energy saving capital investments from future energy savings. Energy service Energy service means the physical benefit, utility or good derived from a combination of energy with energy-efficient technology or with action, which may include the operations, maintenance and control necessary to deliver the service, which is delivered on the basis of a contract and in normal circumstances has proven to result in verifiable and measurable or estimable energy efficiency improvement or primary energy savings Final Energy Consumption Final energy consumption is the total energy consumed by end users, such as households, industry and agriculture. It is the energy which reaches the final consumer's door and excludes that which is used by the energy sector itself. Primary Energy Consumption Primary energy consumption measures the total energy demand of a country. It covers consumption of the energy sector itself, losses during transformation and distribution of energy. It excludes energy carriers used for non-energy purposes (such as petroleum not used not for combustion but for producing plastics). Rebound effects The rebound effect is the reduction in expected gains from new technologies that increase the efficiency of resource use, because of behavioural or other systemic responses. These responses diminish the beneficial effects of the new technology or other measures taken. 1.Introduction 1.1.The political context With the adoption of the European Green Deal in December 2019, the Commission set out "a new growth strategy that aims to transform the EU into a fair and prosperous society, with a modern, resource-efficient and competitive economy where there are no net emissions of greenhouse gases in 2050 and where economic growth is decoupled from resource use. It also aims to protect, conserve and enhance the EU's natural capital, and protect the health and well-being of citizens from environment-related risks and impacts”. To reach these objectives, “energy efficiency must be prioritised”. At that occasion, the Commission also announced that it would present an impact-assessed plan to increase the EU’s greenhouse gas (GHG) emissions reduction target for 2030 in a responsible way, and committed to “review and propose to revise, where necessary, the relevant energy legislation by June 2021”. In March 2020, the Commission made a proposal for a European Climate Law, and in September 2020, it presented a Climate Target Plan (CTP) for 2030, emphasising the need for a higher contribution of energy efficiency and renewable energy to enable achievement of a net 55% GHG emission reduction most cost-effectively. This is also in line with the Paris Agreement objective to keep the global temperature increase to well below 2°C and pursue efforts to keep it to 1.5°C. The accompanying Impact Assessment (CTP IA) explored the achievability of the higher targets and the contributions of different instruments, including for energy efficiency, to achieve them. In December 2020, the European Council’s conclusions noted that “To meet the objective of a climate-neutral EU by 2050 in line with the objectives of the Paris Agreement, the EU needs to increase its ambition for the coming decade and update its climate and energy policy framework. (…) To that end, the European Council endorses a binding EU target of a net domestic reduction of at least 55% in greenhouse gas emissions by 2030 compared to 1990.” Moreover, it is noted that: “climate ambition will be raised in a manner that will spur sustainable economic growth, create jobs, deliver health and environmental benefits for EU citizens, and contribute to the long-term global competitiveness of the EU economy by promoting innovation in green technologies”.

On 22 April 2021, the European Parliament and the Council came to a provisional political agreement to achieve at least a 55% reduction in GHG emissions by 2030. This sets the framework for action to reduce GHG emissions over the coming decades, but needs to be implemented through specific legislation to ensure those reductions occur. For that purpose, in its 2021 Work Programme the Commission announced the preparation of a ‘Fit for 55’ package for the second quarter of 2021. This package covers a wide range of policy areas, including the revision of the Energy Efficiency Directive (EED). This impact assessment examines the options for revising the EED taking into account the other relevant elements of the package (see section 1.5). 1.2.The importance of energy efficiency The importance of energy efficiency is illustrated by the EU’s long-standing policy for saving energy and promoting energy efficiency, and has also come to the fore as a key element for achieving the EU’s climate objectives and a cost-effective clean energy transition. This is because combustion of fuel for energy contributes about 75% of EU GHG emissions, coming from energy industries, energy users in the residential sector and transport (see Figure 1 ). Reducing those emissions is necessary for achieving EU climate goals for 2030 and 2050, as examined in the CTP IA, a view which is supported by 85% of respondents from all stakeholder groups that responded to the Public Consultation (PC) for the revision of the EED. A majority of respondents also support a revision of the EED to achieve this. Reducing energy use is also important for many other reasons ; it reduces the EU’s energy import dependence and improves energy security; it contributes to improved air quality, reduced environmental damage from materials extraction, resource efficiency and a circular economy; it supports energy system integration, has positive effects on social issues, including the alleviation of energy poverty and the creation of jobs, ; and encourages innovation and supports and facilitates economic growth . Most of these co-benefits are difficult to quantify, but its positive effects are well known to Member States, stakeholders and experts in general and they are perceived to the society at large. Efforts have been made to also come to the quantification of these benefits . As illustrated in Figure 2 , energy-related GHG emissions can be reduced by a combination of using less energy and shifting towards the supply of less GHG-intense energy. Figure 2: The contribution of energy efficiency to GHG emissions reduction. Figure 2 also indicates the main EU legislation that is driving changes in these two areas. GHG intensity is reduced by influencing energy supply through promoting renewable energy (e.g. through the Renewable Energy Directive), and influencing demand through GHG-differentiated pricing measures (e.g. the Emission Trading System (ETS) or the Energy Taxation Directive (ETD)) and regulations (e.g. of light vehicles encouraging electrification). The main ways that EU legislation is driving less energy use are by more energy efficient products (e.g. through the ecodesign framework), more energy efficient buildings (e.g. through the building-related provisions and legislation), more energy efficient vehicles (e.g. through road vehicle CO2 regulation), pricing measures (e.g. through the ETS) and better information on energy saving opportunities (e.g. through energy performance certificates and energy labelling and actions for energy efficiency financing). The role of this legislation – as well as that of the main other EU policies and legislation that can have an impact on energy use and may contribute to the EED’s overall energy efficiency target – is described in more detail in Error! Reference source not found.. As the key legislation impacting the level of GHG emissions from energy, most of these instruments are being revised as part of the ‘Fit for 55' package in a coherent and consistent way. The next section looks in more detail at this legislation and how it interacts with, complements and is complemented by, the EED. 1.3.The role of the EED and interlinkages with key related legislation Reducing energy use and the role of the EED Society’s use of energy is largely driven by the size of its population and the level of economic activity and has tended to grow over time. This growth in energy use is offset by technical improvements leading to higher energy efficiency. The natural rate at which energy efficiency improves has been speeded up by the implementation of minimum performance standards that eliminate the worst performers from the market. This primarily relates to new goods (i.e. products, vehicles, buildings) and services. Innovation is further stimulated by providing information such as labels to show the differing performance and encourage economic actors to compete with increasingly more energy efficient offerings. The impact of these standards and labels is determined by the rate of replacement (or upgrade) of the products they apply to. These rates vary enormously (e.g. 1% per year energy renovation of buildings, 6% per year for cars, every 21 months for smartphones). Provided the rate of improvement of energy efficiency of new products is sufficiently high (and the energy needed for their production is low enough), overall energy use can be reduced by accelerating the replacement rate. In addition, incentivising consumers to choose more energy efficient products when they make a purchase also accelerates the rate of reduction of energy use. Moreover, the way of using energy can be influenced through pricing measures as well as behavioural aspects (e.g. fuel-efficient driving and turning off devices not in use). Nevertheless, the existence of market barriers means that pricing is not overly effective as a mechanism to stimulate higher energy efficiency. The EED aims to enhance energy efficiency by using these mechanisms, through the action of the Member States, to deliver increased energy savings above what would be achieved through minimum performance standards and pricing measures alone. Member States achieve the changes in the market through a range of measures at their disposal including removing barriers, offering subsidies, undertaking information campaigns and setting obligations on energy suppliers. The EED also requires a set of enabling measures to facilitate the delivery of higher levels of energy efficiency across the economy.

It is estimated that the impact of EU level action on minimum standards and pricing alone will achieve around half of the additional energy savings needed to meet the increased 2030 ambition, while the remainder will need to be achieved through measures enacted as a result of the EED. The main elements of the EED It can be seen that most of the relevant EU legislation is aimed at improving the energy efficiency of new energy using processes, actions and devices. In addition, the ETS and Energy Tax Directive (ETD) affect prices, which will have an effect on both activity and energy efficiency choices. There are a number of mechanisms by which the EED operates that are complemented by and complement the mechanisms and EU legislation referred to above. One of the main roles the EED plays is to set the obligation on Member States to reduce their energy use. This triggers Member States to use the available mechanisms (making industrial processes more efficient, speeding up replacements, developing skills, investing in higher energy efficiency class devices, altering behaviour, providing good and detailed information, etc.) which lead to the actions and investments that deliver energy savings in use. Energy efficiency faces barriers stemming notably from the involvement of large numbers of actors, the small scale of a very large number of actions to be taken and the remaining perceived uncertainty over benefits. Another important role of the EED is thus to address these and other remaining barriers. Moreover, it is for the EED to ensure that Member States adequately undertake actions in the areas where there are or particular importance (for example district heating, cogeneration and energy services). The main mechanisms through which the EED operates are by: ·Setting an overall energy efficiency target for Member States; ·Creating specific energy saving obligations, which Member States are required to achieve (primarily in Article 7); ·Ensuring an exemplary role for the renovation of public buildings; ·Requiring Member States to support energy savings where these may be too complex, face too many frictions or lack appropriate incentives (e.g. public procurement, heating & cooling, energy transmission and distribution, energy performance contracts.); ·Setting an obligation on Member States to implement enabling measures for example access to energy audits and ensuring adequate qualifications and certifications relevant to energy savings; ·Setting an obligation on Member States to ensure appropriate information is available for energy end users; ·Promoting the provision of finance for energy efficiency investments. These are the broad elements of the EED as it was created in 2012. In December 2018, it was amended as part of the 'Clean Energy for All Europeans package’, in particular to include a new headline 2030 EU energy efficiency target of at least 32.5% (compared to projected energy use in 2030). The intervention logic of the EED is explained in more detail in Error! Reference source not found.. Contribution of other EU legislation to the EED objectives While these many other pieces of legislation have an impact in their own right on energy efficiency, they also contribute to achieving the objectives of the EED, in particular as regards the energy efficiency target. Figure 3 provides an overview of these main impacts and how they are relevant to the EED. In general, any changes to this other legislation, which increase the energy savings from them, will contribute to achieving the overall energy efficiency target set by the EED. Figure 3: How other energy efficiency legislation interacts with the EED The areas where the EED acts Certain elements of the EED are addressed at specific energy consuming areas. Table 1 shows the main energy consumption in key areas of the economy addressed by the EED (with the relevant EED Article shown in brackets). Given that significant savings potential still exist in these areas, further promotion of energy efficiency actions are necessary in all of them.

Area Activity level % EU FEC Businesses (Article 8) (of which industry) 368 Mtoe 240 Mtoe 40% 26% Households / consumers (Article 12) 245 Mtoe 27% Heating and cooling (Article 14) ≈450 Mtoe ≈50% (of which district heating and cooling) 12-14% of EU heat demand 6-7% (of which cogeneration) 40 Mtoe heat 4.4% Public sector buildings (Article 5) 15 Mtoe 2% Public procurement (Article 6) 45-90 Mtoe 5-10% Energy transmission and distribution losses (Article 15) 5-10% of electricity (CEER) Transmission and distribution losses – 23 Mtoe 1.3-2.7% 2.5% Energy services (Article 18) Estimated to be in the order of 25 Mtoe (41 billion Euro turnover) ≈2.5% The transport sector which consumes around 32% of FEC is the sole main energy using sector that is currently not specifically addressed in the EED. 1.4.Governance of the Energy Union and Climate Action Under the Regulation on the Governance of the Energy Union and Climate Action , each Member State is required to establish a 10-year integrated national energy and climate plan (NECP) for 2021-2030, outlining how it intends to contribute – inter alia – to the 2030 target for energy efficiency. Member States submitted final National Energy and Climate Plans in December 2019 and proposed their contributions towards the EU 2030 energy and climate targets (40% GHG emission reduction, 32% renewable energy production in final energy and a 32.5% energy efficiency target). The assessment of these plans showed the existence of an ‘ambition gap’ as regards the existing 2030 EU energy efficiency target, meaning that the sum of Member States contributions fall short of the EU 32.5% actual headline target. Therefore, and in line with Article 31 of the Governance Regulation, relevant policies and measures need to be strengthened, and the Commission must propose measures and exercise its powers at Union level to ensure the achievement of the Union’s energy efficiency target. Also to that end, the revision of the Energy Efficiency Directive will play a crucial role, but it obviously needs to go further as the GHG reduction ambition level and the role played by energy efficiency therein are being changed. 1.5.The revision of the EED as part of the ‘Fit for 55’ package The European Commission 2021 Work Programme announced a ‘Fit for 55’ package to reduce GHG emissions by at least 55% by 2030 and achieve a climate-neutral Europe by 2050. Energy efficiency is a key area of action to enable the cost-effective decarbonisation of the EU economy, must be prioritised and, according to the conclusions of the IA CTP, needs to be decreased by 36-37% as regards final energy consumption. The ‘Fit for 55’ package brings together the relevant policy instruments that can contribute to the 55% GHG reduction target and aims to do so in a coherent and proportional manner among other relevant regulations and directives. This is notably the case for the Energy Efficiency Directive (EED), the Renewable Energy Directive (REDII), the EU Emissions Trading System (ETS), Effort Sharing (ESR), Land use, Land Use Change and Forestry policies (LULUCF), energy taxation and CO2 emission standards for vehicles. With this objective in mind, the CTP IA assessed the interaction and expected contribution of the different measures to the overall carbon GHG emissions objective for 2030, showing that contributions from all relevant policies are needed to reach the 55% increased ambition and, ultimately, the carbon neutrality target set for 2050. In particular, with energy supply and use responsible for 75% of emissions, the CTP underlines the need for higher ranges for renewables and energy efficiency targets, to contribute in a cost-efficient manner to the increased emissions reduction target. Given the key role of the EED in EU energy efficiency policy, the CTP IA also stressed the need for its revision alongside that of the other elements of the EU climate and energy framework. All the CTP policy scenarios include a combination of a pricing mechanism as well as sector specific measures to ensure the required uptake of energy efficiency measures and the deployment of renewable energy. This approach aims to avoid the risk of incoherence or regulatory overshoot among the initiatives under the ‘Fit for 55’ package. More generally, the optimal policy mix is shown to be based on a combination of strengthened economic incentives (in particular carbon pricing) with updated regulatory policies, notably in the field of renewables and energy efficiency. It should also update the enabling framework (R&D policies, financial support, etc.). Regulatory policies, such as renewables, energy efficiency, and CO2 standards for vehicles aim at addressing market failures and other barriers to decarbonisation. At the same time, they also create an enabling framework for investment, which supports cost-effective achievement of the climate targets by reducing perceived risks, increasing the efficient use of public funding and helping to mobilise and leverage private capital. These regulatory policies also pave the way for the future transition needed to achieve the EU objective of the climate-neutrality. Since the CTP IA already explored the balance of combinations of instruments to identify the most cost-effective package, this is outside the scope of this impact assessment. Of the other elements of the ‘Fit for 55’ package, how the approach taken to pricing in the CTP IA is taken over for this impact assessment has the most significant impact. This is because higher energy prices can lead to both a reduction in energy using activity and increase the attractiveness of energy efficient investments. The role energy efficiency can play to reduce the distributional effects from higher energy prices is also important. In view of this the ‘Fit for 55’ package impact assessments retain three different pricing scenarios without any decision on a preference. This assessment checks that the measures assessed are compatible with these scenarios. The CTP IA shows that, depending on the approach taken to pricing instruments, the overall EU energy saving target for Final Energy Consumption should lie in the range of 36-37%, while that for Primary Energy Consumption should be in the 39-41% range. Therefore, this is assumed as the target level to be set in the EED, which the measures explored in this impact assessment need to achieve in concert with the other legislation. Based on the estimated impact of the other legislation, in particular for products and buildings, a consequence of the overall energy efficiency target is the level of the Energy Saving Obligations required. This needs to increase to ensure that Member States take sufficient measures to accelerate energy efficient investments. Depending on the choice of pricing instruments, the range of the obligation needs to increase to between 1.4 and 1.6% per year.

It analyses policy options to inform a decision on how the revision of the EED could, in combination with the other planned policy changes, ensure the necessary energy savings are achieved. It draws upon an ex-post evaluation of the Directive, the CTP IA, the PC results (see Error! Reference source not found.), several studies, targeted stakeholder workshops and the findings of a Taskforce of Member States experts. 2.Problem definition 2.1.The problem Various studies carried out by the Commission, as well as evidence from stakeholders, show that, even with existing technologies, there is still significant scope for energy efficiency investments and cost-effective savings in Member States’ economic sectors and in society at large(see Error! Reference source not found. for further details). However, under business-as-usual, and even more so as a result of the COVID19 crisis, a large share of this energy efficiency and energy saving potential would remain unexploited, largely due to market and regulatory failures, which prevent cost-effective energy efficiency investments and actions from taking place. As a result, unless higher levels of energy efficiency are achieved, GHG emissions would be higher for a given unit of output, important co-benefits would not be realised and the EU would not meet its 55% GHG emission reduction target in a cost-effective manner as shown by the CTP IA. This is driven by three main factors: 1.Insufficient ambition and efforts by Member States; 2.Continued existence of barriers to energy efficient behaviour, including for investments; 3.Lack of systematic information about the impact of energy efficiency measures. The consequences of these three negative drivers, if not addressed, would be higher energy use and the related higher costs, a substantially more expensive path to the EU full decarbonisation by 2050, at best no solution for avoidable energy poverty, more dependence on energy imports, with all the consequences linked to an ever developing complex geopolitical situation, and a worsening of the already depleted environment. The problem tree in Figure 4 shows in a synthetic way the overall issue and its main drivers and consequences and the next section sets out these drivers in more detail. The changing climate itself can also impact energy use. The PESETA III report indicates that EU heating and cooling demand could decrease by 5% in the 2020-2050 period. This trend is not consistent across all Member States, and in some cooling needs may increase substantially accompanied by lower heating demand. Other potential implications may be restrictions on the availability of cooling water for industry leading to the use of alternative cooling technologies and changes in the efficiency of energy transformation installations.” 2.2.The drivers 2.2.1.Driver 1 – Insufficient incentives to drive ambition and efforts by Member States Achieving the necessary level of energy savings relies largely on Member States’ ambition when setting objectives, and their efforts when developing and implementing energy efficiency measures at national level. One key measure of this ambition is the indicative national contributions to the EU energy efficiency target that Member States had to set out in their National Energy and Climate Plans (NECPs) under the Governance framework. These national contributions do not add up to the necessary energy savings in line with the existing 2030 target, showing an ambition ‘gap’ in this area. While these national contributions were designed to meet a lower target in a different political context than today, it still points to the need to look at the incentives Member States have when developing their energy efficiency policies. The Member States’ Taskforce recognised delayed implementation of energy efficiency policies as one of the causes of increased energy consumption.

A possible reason for this lack of ambition may be the fact that there are no binding national energy efficiency targets. This is in contrast with the situation for renewables where until recently Member States were obliged to meet national targets, with the result that the overall EU target was indeed met. It also provided scope for the Commission to effectively enforce compliance with these targets, where appropriate through infringement action. Also the nature of the EU-level target plays an important role. Contrary to the situation for renewables and GHG emissions, the overall energy efficiency target is not explicitly binding at EU level. Although the EED sets final and primary energy consumption limits for the EU as a whole, and the Governance Regulation provides for further EU measures if the targets are not met, the indicative nature of the target does not support its achievement. There are also a number of structural reasons for why Member States struggle to be more ambitious, including the fact that energy efficiency policies are difficult to design, implement and monitor. In fact, such policies typically must combine mutually reinforcing information-based instruments, regulatory instruments, monitoring and reporting mechanisms and economic and financial programmes. At the same time, these policies have to sufficiently reach and incentivise a range of relevant decision makers, be they individual consumers, businesses or investors. This also requires coordinated policy development at national, regional and local levels. While it is important for Member States to make efforts in all the main energy-using sectors, there is no “one size fits all” approach, as the barriers, challenges and actors are different (see driver 2). Therefore, an additional challenge is that the measures will need to differ depending on the sector. Implementing such diversified policies requires a consistent and continuous implementation effort, and the appropriate level of knowledge, skills and tools to be able to reach the target groups and stimulate change. Evidence, for example from the ELENA programme and the Covenant of Mayors, shows that these skills are not equally developed at all levels of government, and this constitutes a barrier to Member States more successfully driving greater energy savings. Given the difficulty of policy-making in this area, Member States tend to prefer acting on the other variables of the fundamental equation highlighted in section 1.3 such as renewables or ETS. However, the CTP IA has shown that this is not cost-effective and would result in achieving the 55% GHG target at much higher cost. Another important element is the fact that, the EED provides for many flexibilities and conditionalities (e.g. in Articles 5 and 6). While originally included to provide for national specificities, these have allowed Member States to choose alternatives that often result in a lower amount of energy savings than would be cost-optimal. This was identified as a shortcoming by stakeholders in the dedicated workshops and through their PC responses where a majority indicated that existing flexibilities does not allow the EED to fully achieve its objectives. In summary, to achieve their contributions Member States must create the appropriate frameworks, provide finance and implement a range of other measures targeting individual decision makers (e.g. consumers and businesses) in a range of sectors, who ultimately need to decide to implement energy efficiency measures. This driver therefore has strong interlinkages with the other drivers. 2.2.2.Driver 2: Continued existence of barriers to energy efficient behaviour, including for investments A key reason for energy efficiency policies is the need to address the behavioural and market failures and barriers that lead, from the point of view of society, to unrealised economically viable energy savings. Behavioural failures refer to the cognitive limitations and biases that prevent consumers and investors to appreciate rationally the benefits of energy efficiency. Market failures arise from the fact that many impacts and aspects of energy supply and use are not priced into the cost of energy. Market barriers such as lack of information and awareness, lack of finance or lack of information about financial opportunities, legal complications of ownership of dwellings and management structures, and split incentives for example between owners and tenants of rented dwellings result in economically rational energy savings not being realised. These factors prevent consumers, businesses and investors from adopting cost-effective energy efficiency measures, and can be categorised into economic, behavioural and organisational barriers or, alternatively, into market and non-market failures. The previous impact assessments extensively detailed these aspects and they have not changed since then. The main consequence of these barriers and failures is that EU energy consumption is higher than it would be with perfectly economically rational behaviour that takes into account long-term benefits. This diverts financial resources from other uses to pay for energy consumption and leads to excessive consumption of natural resources, higher energy dependence, less competitive businesses and higher energy poverty. Although the evaluation shows the EED has made a clear contribution to addressing such failures and barriers, this has been uneven and in some areas unsuccessful, partly due to weaknesses in the provisions of the Directive itself. The following sections provide more details for each of the main intervention areas of the EED linked to this driver – and which should therefore be addressed: Public sector The public sector is an important economic actor in its own right (see Table 1 Estimated EU Final Energy Consumption (FEC) in economic sectors in the scope of the EED Table 1 ) and is responsible for around 5 to 10% of total EU FEC . Overall, the EU-share of public procurement contracts attributed to central government bodies is estimated to be approximately 16%. At Member State level this varies between 5% and 86%. Public buildings are estimated to use around 2% of EU FEC. Cost effective savings potentials still exist in the entire public sector both in the renovation and energy management of existing buildings as well as the future procurement of energy efficient buildings, products and services. The EED recognises the exemplary role of public authorities through the obligation to renovate annually 3% of central government buildings (Article 5), and procuring buildings, products and services with high energy efficiency performance (Article 6). As regards buildings, the existing obligations only target cost-effective savings in the central government sector, which represents a small part of public authorities. Information from the evaluation, from analysis in the EED Concerted Action framework and from the PC replies shows that measures only at national level are not considered sufficient. Moreover, the Renovation Wave initiative highlighted the need to step up renovation rates and depth, including for public buildings. Similarly, the current obligations for public procurement only target cost effective savings in the central government sector, which represent some 15-17% of all public procurement by public authorities. With regard to public procurement and renovation practices, the evaluation showed that there are limited resources and lack of expertise or tools to adequately consider energy efficiency. Moreover, there seems to be a reluctance to include energy efficiency requirements systematically in procurement, mainly because purchase price - rather than ‘total cost of ownership’ - is still regarded as the main criterion. Industry

Industry is one of the sectors that has achieved significant energy efficiency improvements over the last decade. Nevertheless, as demonstrated in Error! Reference source not found., cost-effective savings potentials still exist. The underlying presumption is that as an economically driven sector, businesses should implement economically viable energy saving investments. There are however various reasons why this may not be the case. There may be challenges related to the availability of finance or to uncertainty over whether energy efficiency investments would really deliver the savings claimed, especially if it is a vendor of the equipment that is explaining its potential. Nonetheless, a key barrier is likely to be that most businesses do not have the expertise to know what technical energy saving opportunities are available, or what their economic benefits might be for the business. It is to address this weakness that the EED contains an obligation for energy audits for larger businesses and requires Member States to also make energy audits available to SMEs. Nevertheless, information from stakeholders and assessments indicates that only a small proportion of cost effective energy saving opportunities identified in audits are implemented. The EED mainly addresses energy efficiency in industry through the requirement for large companies to carry out energy audits (Article 8). The evaluation indicates that audits have been effective for increasing awareness of energy savings potentials, identifying energy saving opportunities and assessing their financial feasibility in enterprises. Nevertheless, the share of cost-effective potential identified in audits that are actually implemented is rather low. A study exploring the implementation of the energy audit requirements notes that recommendations are implemented following mandatory audits are only around a quarter of those for voluntary audits. It states “The main reason for this difference seems to be the lack of implementation of recommendations. While the likelihood of recommendations for activities by the auditor are broadly similar across the two studies, the rate of implementation is much lower for companies in the study undertaking obligatory audits. The reason for this seems to be that voluntary participation in an audit may already signal a motivation to improve and follow through on audit recommendations.” A specific industry sector that has seen a significant increase in energy consumption over the last decade is information and communication technologies (ICT), including data centres. In 2018, the energy consumption of data centres in the EU was 76.8 TWh. This is expected to rise to 98.52 TWh by 2030, a 28% increase. This increase in absolute terms can as well be seen in relative terms: within the EU, data centres accounted for 2.7% of electricity demand in 2018 and will reach 3.21% by 2030, if development continues on the current trajectory. Europe’s Digital Strategy already highlighted the need for highly energy-efficient and sustainable data centres and transparency measures for telecoms operators on their environmental footprint. In the PC, 41% of respondents believed that more action was needed in the ICT sector in view of the higher energy savings ambition for 2030. The disaggregation of these opinions is shown in Figure 5 where it can be seen that this view is relatively consistent across the groups. The siting of data centres and ensuring their waste heat could be used was considered important or very important by the majority of respondents. Heating & Cooling Heating and cooling consumes half of EU FEC, making it the biggest energy end-use sector. There remains much potential for reducing energy use in this sector, while still achieving the temperatures needed. Heating and cooling, therefore, plays a crucial role in the EU’s ambition to transition into a clean and carbon-neutral economy by 2050. Much of the effort is needed in the field of better insulating buildings but there is also potential in terms of more efficiently supplying the heat or cold needed . As Figure 5 shows, there is considerable support for taking more action in this area, especially from business. Measures in other legislation, for example the RED, aim to increase the share of lower GHG energy in the supply of heating and cooling. Similarly, pricing measures can encourage the replacement of heating equipment and use of less GHG intense fuels. The use of networks, which currently supply around 13% of heat needs, for heating or cooling, in particular if these are receiving surplus heat or cooling input from industry, involves many barriers and coordination challenges. It is a sector where there is substantial expertise available within the EU and where an industry has evolved to supply this market. For these reasons, the EED contains specific provisions on heating and cooling, which address high-efficiency cogeneration and efficient district heating and cooling. The EED requires Member States to carry out comprehensive assessments of the potential for high-efficiency cogeneration and efficient district heating and cooling (Article 14) . The requirement to carry out cost-benefit analyses has helped stimulate the uptake of high-efficiency cogeneration that delivered 30.2 Mtoe primary energy savings in 2018 . There is still evidence of considerable amount of waste heat available in the most recent comprehensive heating and cooling assessments submitted by the Member States . PC respondents indicated these elements were considered to have had a moderate impact (3.2/5) in stimulating energy efficiency in the sector. Overall, the evaluation found that the comprehensive assessments helped to increase the overall importance and awareness of heating and cooling in Member States, but that the overall impact is rather low. This is largely due to the lack of follow up given to the findings from these assessments and the wide use of exemptions allowed by Article 14.6. CHP heat supply has remained relatively constant around 40 Mtoe over the whole of the last decade. The definitions are also used in assessing the provision of state aid. Concern has been raised that the current definitions result in state aid being granted to installations with GHG emissions that are unlikely to remain compatible with the decarbonisation trajectory required. Energy transformation, transmission and distribution Energy losses in energy transformation, transmission and distribution can be significant and therefore the EED requires Member States to ensure that energy efficiency is considered in these sectors (Article 15) . At the same time, as equipment is replaced at the end of its lifetimes, there will be a gradual natural evolution toward higher efficiency, in particular for electricity. The available information shows a gradual reduction in energy supply losses , but there remains potential to increase its energy efficiency. However, a number of key factors limit action to realise it. There is a concern that investments to increase energy efficiency may ultimately result in higher prices for final consumers and Cost Benefit Analysis results often advise against significant intervention. In the case of gas network operators, there may be a reluctance to invest because of uncertainty about their long term role.

Given the diversity of network structures there is also a reluctance to have a “common methodology”. The absence of common methodologies and reporting, make it difficult to compare networks or operators or benchmark performance. In fact, there is no uniform EU definition of energy losses, which results in sub-optimal data quality. The evaluation found that several provisions of Article 15 have been effectively implemented in the Member States, for example, treating energy losses as a separate item in the national efficiency regulations and incentivising demand-side resources. However, there is not sufficient data to enable a comprehensive analysis of the effectiveness of the provisions. Transport While the energy savings potential remains large in all sectors, there is a particular challenge related to transport, as it is responsible of 33% of FEC and is one of the few sectors that has seen an increase in energy consumption over the last decade. The Sustainable and Smart Mobility Strategy adopted in 2020 lays the foundation for how the EU transport system could achieve its green and digital transformation and become more resilient to future crises. However, it does not include explicit energy efficiency measures. Currently, the EED does not directly address the transport sector, although Member States can count energy savings from national measures targeting transport sector towards the Article 7 target. Nevertheless, only a small share of energy savings (5%) reported by Member States under the EED stems from transport, indicating a lack of focus on energy savings from this sector. This seems to be at least partly due to the fact that energy efficiency and transport policy are traditionally the responsibility of different government departments with little or no synergies in policymaking. Moreover, the required changes necessitates a multi-level adoption (national, regional, provincial) of specific policy mixes to increase transport energy efficiency and to reduce transport energy, which is complex. The PC results clearly support stronger action on transport energy efficiency as shown in Figure 5 , with 62% of respondents stating that transport is a sector where extra energy efficiency efforts are most needed to achieve a higher energy efficiency ambition for 2030. In the case of public authorities this view is even stronger with 67% stating that more action is needed. It is therefore a legitimate question to explore whether there can be measures under the EED that foster energy efficiency improvements in transport in a manner complementary to the other existing policy instruments targeting the sector, including measures reducing the need to travel, shifting travel to more energy-efficient modes and/or improving the efficiency of transport modes. Enabling and supporting measures – Consumers, financing, energy services and support schemes Consumers & households Table 1 shows the household sector makes up around a quarter of all EU FEC. The behaviour of consumers and citizens has an important impact on this energy consumption and the EED contains several provisions that support the empowerment of citizens and consumers, including: ·The establishment of more frequent and transparent billing regimes based on the actual consumption patterns at the end use level (Articles 9-11); ·Information and empowerment programmes (Article 12), and; ·The exchange and dissemination of information and awareness raising (Article 17). In addition, it contains provisions that aim to tackle long-standing socio-economic challenges like energy poverty (Article 7) and the split of incentives between tenants and owners or among owners (Article 19). Despite these provisions, the evaluation has shown that Member States struggle to address consumer behaviour and consumer empowerment aspects in promoting energy efficiency, in particular at more local levels. This results in insufficient incentives for consumers to realise energy efficiency improvements and to tackle high upfront costs and the split incentives problem. This is compounded by a low level of awareness and lack of information among consumers about the potential of energy services and energy performance contracting. Moreover, certain energy efficiency changes may involve significant hassle costs for those carrying out the investment, which increases the costs of the investment. For example, disruption caused by building works or the efforts needed to identify appropriate financial support schemes. In particular, if the estimated relative gain is small, then the hassle costs can act as a significant barrier, especially if there is uncertainty around the benefits of the investment. This is exacerbated by the fact that the additional benefits of energy efficiency measures – for example regards health, local air pollution, poverty alleviation, energy security, local job creation, etc. – are often not known or taken into account by economic operators or society. As a result of the pervasive externalities linked to these co-benefits, which are not priced, ‘rational’ economic operators do not take them into account when taking decisions. This results in an underinvestment in energy efficiency. While the EED already provides some incentives for Member States to address energy poverty (e.g. Article 7), stakeholders consider energy efficiency as the most effective solution to alleviate energy poverty and suggested to use the revision to overcome some of the potential negative distributional impacts of pricing measures (see Error! Reference source not found. for a more detailed discussion of the link between energy efficiency and energy poverty). Financing

Achieving energy savings requires investment in energy efficiency (such as insulation to reduce unwanted heat transfers or the acquisition of new equipment that requires less energy to operate). While investments are expected to be paid back over time through the avoided cost of the energy saved, bridging financing is often needed. The CTP IA estimated that average annual energy system investments needs (excluding transport) in the period 2021-2030 to achieve the 55% level of ambition would be between €401 and 438 billion. Energy efficiency faces one of the largest investment gaps, estimated at around €165 billion. This is mostly due to higher rates and stringency of building renovation. The problem is that, despite the profitability of investments, a complex set of market and regulatory barriers may limit the access to finance. Finance market imperfections, in particular at local and regional level, a fragmented market, complex procurement rules and decision making processes (e.g. multi-family apartment buildings), split incentives, scarcity of public funding and difficulty to combine different sources of financing or lending solutions not adapted to energy efficiency needs, are some of most important barriers. Several pieces of EU legislation aim to address these barriers (over and beyond their impact on energy efficiency investments. The EED contain two specific provisions aimed at overcoming some of these barriers: Article 19 on split incentives and Article 20 on support for energy efficiency investments at Member State level by facilitating the establishment of national financing facilities for energy efficiency. However, the evaluation showed that this has only been partially successful. In addition, the lack of available data on the level of energy efficiency investments and financing in the Member States does not allow a comprehensive assessment of the magnitude of the financing measures put in place (and thus hampers a thorough evaluation of their effectiveness). On the other hand, the evaluation found that the requirement for the Commission to assist the Member States in setting up financing facilities and technical support has been effective, due to its active role over the past years through EU funding programmes and support measures. This is expected to continue until 2030 and beyond, in particular under the NextGenerationEU recovery instrument (under which Member States have to ensure that a minimum of 37% of actions included in their Recovery and Resilience Plans contribute to climate action), cohesion funding and InvestEU. In total, this would amount to around 12-14 billion per year in EU funds between 2021 and 2027. About half of the PC respondents consider that Article 20 has contributed to facilitate access to finance for energy efficiency projects, although the impact of the specific provisions was often considered as moderate at best. Certification, accreditation and qualifications In the PC 92% of respondents said that they were aware of the certification, accreditation and qualification schemes for providers of energy services, energy audits, energy managers and installers in their Member State. Respondents’ views on the benefits of qualification schemes vary as shown in Table 2 below: In terms of effectiveness, most stakeholders (68%) thought the schemes were effective to some extent, with 22% saying they were fully effective and 10% finding them not effective. Energy services, support schemes The implementation of energy efficiency measures also requires a supporting structure, for example as regards the availability of a skilled workforce (e.g. installers, energy auditors) or energy services companies. The EED enables the establishment of such structures, in particular through obligations on the availability of qualification, accreditation and certification schemes (Article 16) and the promotion of the energy service market and energy performance contracting (Article 18). With regard to energy services, 56% of PC respondents said that the EED had contributed to the development of the energy services market. Nevertheless, their effectiveness was uneven and diminished due to persistent barriers in the market. When asked for the important factors for the development of energy services the responses are shown in Table 3 below: Of these, the most relevant (financing and information) are addressed elsewhere. The third most important factor, certification and accreditation, is discussed above and this supports the importance of its relevance for energy services. 2.2.3.Driver 3 - Lack of systematic information about the impacts of energy efficiency measures Measuring the impacts of energy efficiency policies requires measuring the bottom-up impact from specific policies, measures and actions in many sectors. This is challenging and requires robust methodologies, which capture rebound effects, interaction or overlaps between the different measures, as well as ‘additionality’ compared to the situation where energy savings could have happened without a policy measure in place. The evaluation shows that comprehensive information on the impacts of energy efficiency measures at national level is often lacking, except for measures reported under Article 7, which requires Member States to establish specific calculation methodologies for capturing energy savings per measure.

Due to the absence of reporting, information on the impact of several provisions is missing or uneven, for example as regards energy efficiency uptake in public procurement, energy transformation, transmission and distribution (Article 15) or national qualification, accreditation and certification schemes (Article 16), making it challenging to assess and compare the impacts of Member States’ energy saving measures. As indicated above, this also applies to the impacts of financing measures. Moreover, in some important sub-sectors, such as ICT, there is a lack of reliable, disaggregated information about energy consumption. The limited resources made available at Member States level to develop new high-quality European statistics for monitoring energy efficiency improvements in detail exacerbate this. Due to lack of robust monitoring and measurement, expected energy savings from planned policies are often overestimated. The Member States’ Task Force identified this as one of the reasons why progress towards achieving the energy efficiency targets is low. These findings are supported by independent research that also indicates the poor quality of underlying data, and that more resources are needed to enhance the availability and quality of data and reporting on demand side energy efficiency in all Member States, which would highlight the large savings that addressing the causes of underinvestment in energy efficiency could deliver. These concerns about the monitoring framework are supported by 72% of PC respondents, who indicated that the EED has not provided the right monitoring and enforcement mechanisms to achieve national energy efficiency targets. 2.3.How will the problem evolve? The increased awareness of the importance of effectively addressing climate change, of the need to act swiftly and of the role that energy efficiency plays in that context are expected to drive policy makers, investors and the citizens at large to give a higher priority to energy efficiency. However, the identified weaknesses in the existing legal framework, including the EED, and the underlying market failures and market barriers will not be solved autonomously. Member States’ ambition, which has been insufficient so far, needs to be supported by strong and effective policies and measures at EU level. Prior to the COVID-19 crisis, the EU was not on track to meeting its 2020 energy saving targets. The above-mentioned Task Force reported in January 2019 that possible, and at least partial, explanations for this were good economic performance, low oil prices, and cold winter and warm summers during some years. The main increases in energy consumption were observed in buildings followed by transport and industry. The latest EU27 energy consumption figures for 2019 showed that PEC was 1 352 million tonnes of oil equivalent (Mtoe), which is 3.0% above the 2020 target and 19.9% away from the current 2030 target. FEC was 984 Mtoe: 2.6% above the 2020 target and 16.3% away from the 2030 target. These are decreases of 2% in PEC and 1% in FEC compared with 2018. The COVID-19 crisis has influenced energy demand, which might make the achievement of the 2020 targets possible. However, this impact is expected to be short-term, since it is not attributable to policies, measures and structural changes to increase energy efficiency. With a possible rebound effect, it would still be hard to reach the current 2030 target. While there might be some longer-term impacts of the COVID-19 crisis on energy consumption (e.g. remote working, video conferencing are likely to remain at higher levels than would previously have been expected), a number of energy consuming economic activities may simply have been postponed rather than cancelled. Therefore, the long-term energy impacts of these changes are at least uncertain, but more probably limited. The assessment of the Member States’ energy efficiency contributions included in their NECPs has shown that the current EU energy efficiency targets for 2030 will not be achieved with the policies planned. The CTP IA concludes that it is unlikely that the necessary higher levels of energy efficiency needed would be achieved through market forces, current market organisation and technology development alone, meaning that further efforts are needed. In conclusion, while the 2020 energy efficiency target may have been achieved due to exceptional circumstances, increased efforts are required to achieve a reinforced energy efficiency ambition level in line with the 55% GHG emissions reduction target as set out in the CTP. 3.Why should the EU act? 3.1.Legal basis The EED was adopted under Article 194 of the Treaty on the Functioning of the European Union (TFEU) in 2012 as the key instrument for reducing the EU's primary and final energy consumption in 2020. In 2018, it was partially amended in view of the EU’s 2030 targets. Article 194 TFEU, paragraph 1, states that the aim of Union policy on energy includes ensuring security of energy supply and promoting energy efficiency and energy saving. This provides the appropriate legal basis for further action to promote energy efficiency and energy savings. 3.2.Subsidiarity: Necessity of EU action

The underlying problems causing a shortfall in energy savings (compared to the optimal level from the perspective of society) are the same across the EU and are present everywhere. In view of the external costs of energy consumption (e.g. greenhouse gas emissions, air pollutant emissions, energy security), actions to increase energy efficiency and reduce energy use are likely to lead to benefits beyond national borders. For trans-boundary problems, Member State action is unlikely to lead to optimal outcomes. In the presence of a higher climate target, which requires a higher energy efficiency target, EU action must supplement and reinforce national and local action. It is worth underlining that the Governance Regulation already foresees the obligation for the Commission to act in case of a lack of ambition by the Member States to reach the targets, thus de facto formally recognising the essential role of EU action in this context. Coordination at the European level, in fact, enhances energy security and environmental and climate benefits, and EU action is thus justified on grounds of subsidiarity in line with Article 191 TFEU. In addition, the nature of the instrument and of the fact that the energy efficiency target is not binding at national level respects the principle of subsidiarity. Member States retain the same level of flexibility in terms of selecting their policy mix, sectors and the approach to achieve the required energy savings by 2030, by taking into account the national context and specificities. However, energy is a policy field with high investment needs. A coordinated approach at EU level can create trust, reliability and continuity, increasing the likelihood of different actors investing and getting involved. Policies at EU level can also create a just and fair transition for countries and regions with economies that may be significantly impacted by changes in industrial structure or employment as a result of the energy transition towards decarbonisation. Coordinated action at the EU level, furthermore, enables fuller account to be taken of the different capabilities to act among Member States. 3.3.Subsidiarity: Added value of EU action As discussed previously, energy efficiency policies are a crucial mechanism to reduce greenhouse gas emissions, something which is also highlighted in the evaluation of the EED and OPC. In this regard, coordinated EU policies have a better chance of transforming the EU to a climate neutral continent by 2050. The EU’s energy and climate targets for 2030 are collective targets. Nevertheless, many actions to reduce energy consumption are taken at Member States’ level. In many cases, this is most appropriate. At the same time, action at the EU level can enable and enhance those efforts by ensuring a more coordinated and harmonised approach, for example by helping to create larger markets for European suppliers, and ensuring that they are under the same obligations and rules. This way consumers enjoy the same basic rights and be provided with comparable and recognisable information across the EU. Delivering on energy efficiency while empowering consumers requires meaningful, accurate and understandable information on energy use, related costs, and easy access to a competitive market of building construction materials (windows, insulation, etc.), heating and cooling solutions, and other products that help improve energy efficiency. Effects on the single market concerning growth, investments and jobs creation can thus be considered when policies and measures are being decided and implemented. Moreover, the EU single market acts as a strong driver for cost-efficiency in achieving GHG emission reductions. A common EU approach to energy efficiency also enables addressing the specific common challenges such as alleviation of energy poverty. The EED framework allows for the inclusion of targeted energy efficiency measures by Member States for certain income classes (for instance promote the achievement of the obligations in Article 7 of the EED by focusing on reducing energy bills of vulnerable consumers). The experience from the implementation of the EED indicates that having a common EU framework is socially just, reduces costs, increases benefits from the internal market and allows national policy-makers to learn from each other. The EED effectively complements and catalyses other national and EU measures. Policies adopted at EU level reflect the close interrelation of the policy areas of climate change, security of supply, sustainability, environment, internal market, social and economic development. This was supported by the Task Force of mobilising Member States efforts to reach 2020 energy efficiency targets, which called for a strong, targeted and common energy efficiency policy framework to attract the necessary investments, ensure the energy savings are achieved in a just and fair way. 4.Objectives: What is to be achieved? 4.1.General objectives In view of the above, the general objective of this initiative is to revise the EED to further promote energy efficiency and energy savings to contribute optimally to the cost-effective achievement of the EU 55% GHG reduction ambition for 2030, by achieving a 36-37% energy efficiency target as shown in the Climate Target Plan. 4.2.Specific objectives Based on the considerations set out in chapters 2 and 3, the intervention has the following specific objectives: ·Objective 1: Strengthen incentives in support of ambition and efforts in the Member States to achieve a 36-37% energy efficiency target; ·Objective 2: Reinforce the EED to better address market barriers and failures; ·Objective 3: Improve understanding of impacts of energy efficiency measures taken by Member States, while optimising the administrative burden through the approach of the Governance Regulation. The revision of the EED also needs to consider the broader objectives of the European Green Deal, which aims to leave no one behind and to deliver a sustainable economy. Furthermore, as this is a revision of an existing Directive, the Better Regulation framework requires exploring the potential for simplification and improving the efficiency of the legislation (e.g. by reducing regulatory costs and administrative burden).

Table 4 sets out the relation between the problem, the problem drivers and the objectives. Problem Current policies and measures are not sufficient to meet the 2030 energy efficiency target Problem drivers Insufficient incentives to drive Member States’ ambition and efforts Continued existence of barriers to energy efficient behaviour, including for investments Lack of systematic information about the impacts of energy efficiency measures General objective Promote energy efficiency to ensure a 36-37% energy efficiency target for final energy consumption to contribute optimally to achievement of the EU 55% GHG reduction ambition for 2030. Specific objectives Strengthen incentives in support of ambition and efforts by Member States Reinforce the EED to better address market barriers and failures Improve understanding of impacts of energy efficiency measures taken by Member States, while optimising the administrative burden through the approach of the Governance Regulation 5.What are the available policy options? 5.1.What is the baseline from which options are assessed? All the ‘Fit for 55’ initiatives are considered as one package and share a common baseline. Concerning energy system modelling, the EU Reference Scenario 2020 (REF) is the common starting point for energy system modelling in the impact assessments for all the initiatives of the ‘Fit for 55’ Package). More details about the Reference scenarios (including assumptions and main results) is presented in Error! Reference source not found.. A separate publication dedicated to the Reference scenario contains complete information about preparation process, assumptions and results. The most relevant information for this assessment is also presented in Error! Reference source not found.. REF reflects the agreed 2030 EU climate and energy targets: at least 40% GHG reduction, at least 32% renewables share and at least 32.5% energy efficiency (energy efficiency target is, however, not achieved – see below). REF also reflects main policy tools at EU level to implement these targets as well as the aggregate ambition and, to the extent possible, the complete range of foreseen national policies and measures of the final NECPs that Member States submitted in 2019 according to the Governance Regulation. In particular, at the EU level, the REF2020 takes into account the legislation adopted in the Clean Energy for All European package . The REF also takes into account the energy system impacts of the COVID-19 crisis that already heavily impacted the EU and Member States’ economies in 2020/2021. The Reference scenario does not assume intensification of any type of policies beyond what Member States have already implemented or committed to (including any intensification of non-regulatory instruments). For 2030, REF projects that final energy consumption is 886 Mtoe, which is 29.3% below the trajectory of the 2007 Baseline and thus below the agreed 2030 energy efficiency target of at least 32.5%. Both projections are in line with the Commission’s assessment of final NECPs. In REF, GHG emissions from the European Union in 2030 (including all domestic emissions & intra EU aviation and maritime) will be 43.7% below the 1990 level. An EU allowance price of 30 EUR/tCO2eq. in 2030 drives emissions reduction in the ETS sector. Primary energy consumption decreases by almost 17% in 2030, compared to 2015. Over the same period of time, final energy consumption decreases by almost 8%. Figure 6 shows final energy consumption by sector in the reference scenario. The reference scenario models the policies already adopted, but not the target of net-zero emissions by 2050. As a result, there are no additional policies driving decarbonisation after 2030. However, climate and energy policies are not rolled back after 2030 and several of the measures in place today continue to deliver emissions reduction in the long term. By 2050, GHG emissions in the EU are projected to be 60.7% lower than in 1990 and final energy consumption is projected at 792 Mtoe. These results fall short of the European goal of climate neutrality by 2050. All the other scenarios used in this Impact Assessment are built on the REF scenario. The REF is similar to the Baseline used in the CTP Impact Assessment, however, it incorporates in much more detail Member States’ policies and objectives as put forward in their NECPs and makes assumptions on the impact of the COVID crisis linked to recent macro-economic forecasts. The projected energy use for 2030 in the baseline referred to above falls short of meeting the required level of energy savings as defined by the CTP. 5.2.Description of the policy options Addressing the problems and drivers outlined in chapter 2, and meeting the objectives set out above, will require improvements to the EED across many areas. In this context, 63% of PC respondents support stronger implementation and enforcement, and 41% favour additional technical support for Member States. This was also acknowledged by the Member States themselves, which called for increased capacity building and exchange of best practices in view of meeting the 2030 targets. These general views have informed the measures explored. Based on the evaluation outcomes, an assessment of the final NECPs, the support study, the results of stakeholder meetings and the PC, a broad set of potential measures was identified. These were then further assessed based on their pertinence, feasibility and coherence with the existing framework to produce a shorter set of retained measures, divided into ‘intermediate’ and ‘higher’ ambition packages. A distinction was also made between regulatory and non-regulatory measures. 5.2.1.Policy measures to address driver 1 – Insufficient incentives to drive ambition and efforts by Member States

1.Energy efficiency targets at EU and Member State level Under BAU, the EU level energy efficiency target set in the EED determine the overall level of energy efficiency efforts that Member States must collectively attain by 2020 and 2030. This target is expressed in the EED as a percentage of energy efficiency improvement (in Article 1) and as a maximum level of final and primary energy consumption (in Article 3). Although the Governance Regulation provides for a mechanism that allows for EU measures in case these targets are not met, they remain indicative, unlike the EU-level targets for GHG emissions reduction and the share of renewable energy. Making the EU-level energy efficiency targets binding would align them with the other Green Deal targets and make it clear that they are of equal importance (TARGET.1). Although the Directive requires each Member State to set “an indicative national energy efficiency target”, there is no indicator of how the efforts ought to be spread among the Member States and there may be reasons for some Member States to take more action than others. The evaluation of the EED showed that Member States have made efforts to promote energy efficiency and the EU energy efficiency target and the binding measures have contributed to this. Nevertheless, the efforts fell short of the required energy efficiency ambition in some Member States and for the EU as a whole. In the PC responses, as shown in Figure 7 above, 42% of stakeholders who thought the EED had helped to promote energy efficiency believed that the national targets had been important. Of those who believed the EED had failed to achieve its objectives, 57% indicated that the absence of binding national targets was one of the factors. Whether or not Member States have a binding target can have an impact on the certainty with which the overall EU target will be achieved. This is likely to also have an impact on the degree of certainty for business operating in the field of supplying energy saving solutions. It also impacts on the scope for the Commission to effectively enforce compliance with these targets, e.g. through infringement action. In view of these potential benefits, options are explored for targets for Member States. In their PC responses, overall 36% of responses favoured indicative national targets while 47% favoured binding national targets. The responses disaggregated by category of respondent are shown in Figure 8 . It can be seen that public authorities’ views are close to the average while businesses and civil society have opposing views that diverge from the average. In view of this, two further options are explored of setting indicative Member State targets (TARGET.2) or binding targets (TARGET.3). A further aspect that is important to explore is how the overall effort should be distributed across Member States. No indication is given in the current EED. However, in contrast, both the Effort Sharing Regulation and the Renewable Energy Directive have mechanisms to distribute effort based upon a set of parameters. In the case of the RED, this provides the basis against which Member State efforts are assessed, even though it does not have a mandatory effect. Having indicative benchmarks for Member States could facilitate more constructive dialogue on the level of ambition and the possible closing of any ambition gap by Member States (as shown by the experience with the collective ambition gap for RES in the draft NECPs). This aspect therefore is also explored. As regards the way such indicative benchmarks would be established, the Commission is currently studying different alternatives but, following the experience gained with a similar approach for renewables, it is considering a formula based on a set of criteria taking into account national circumstances. Tentatively, this could be based on the following criteria (having an equal weight): ·Fixed rate (all Member States have to decrease their energy consumption – same rate as for the EU compared to REF2020 i.e. 9%); ·Energy intensity (EU ambition multiplied by intensity factor FEC/GDP); ·Wealth (EU ambition multiplied by wealth factor GDP/capita); ·Energy savings potential (it is associated with PRIMES MIX scenario results). Other criteria and weightings are possible but these are still under consideration. The approach to the definition of the target that currently uses both FEC and PEC remains unchanged in the absence of clear evidence of need for any change since the last revision of the EED in 2018. Options:

Nature of the target. ·BAU: EU-level target is not binding and Member States’ voluntary contributions are delivered through NECPs ·TARGET.1: Binding EU-level energy efficiency targets ·TARGET.2: Indicative national benchmarks based upon a mechanism for distribution of effort taking account of relevant parameters ·TARGET.3: Binding national targets 2.Energy savings obligations Article 7 is an important provision delivering around 50% of Member States’ savings necessary to meet the overall EU energy efficiency target. It requires Member States to achieve a total amount of energy savings by the end of the obligation period and provides a specific rate for new annual energy savings to be achieved by Member States. A detailed description of how Article 7 works and the types of actions taken by Member States under it is set out in Error! Reference source not found.. Under BAU the requirements for Member States are not given any specific focus and they therefore have full flexibility how to target their efforts. In the PC, 47% of respondents who believed that the EED had been important in promoting energy efficiency said that the binding nature of Article 7 was part of the reason for that as shown in Figure 7 , with civil society thinking it much more important and business a bit less. The PC asked how Article 7 might be amended in view of the need for a higher level of energy savings. Figure 9 below show the responses by stakeholder group. Public authorities showed the least support for all aspects with businesses showing the second least support. Civil society and EU citizens were the most positive about almost all of the options. On possible specific changes, in the PC 69% supported requiring a certain level of energy savings from building renovations and half the respondents supported requiring Member States to target specific (undefined) sectors. Some 60% of respondents supported requiring a certain level of energy savings in transport. As already noted, transport accounts for a third of all final energy use yet only 5% of the measures reported under Article 7 are transport specific. In the transport field it is acknowledged that it is necessary to follow an ‘Avoid-Shift-Improve’ methodology to address energy use and GHG emissions. While the EU addresses the ‘Improve’ element of vehicle efficiency through EU standards, there is limited action to address the other two legs. This is not because these actions are not cost-effective. Analysis shows that different types of actions can have high benefits. An often encountered difficulty is that these benefits occur in different areas such as air quality, noise, health, and energy savings, and that hence they are not always seen holistically. There are therefore clear public policy benefits to encourage further intensification of measures in this area and this is explored further (ESO.1). While the average of energy savings from the transport sector is 5%, some Member States such as Italy and Spain are planning to deliver respectively 23% and 38% of their savings in this sector. The added value of a sub-target for transport in article 7 would be to focus attention and measures by Member States (as well as stakeholders) on a sector where energy consumption is still increasing and where energy efficiency improvements are long overdue. Also, such a target could be used for enforcement by the Commission. The level of such a target would have to be above 5% and below what some Member States are planning to achieve (e.g. up to 40%). It can be achieved by a reinforcement of the proposed policies and actions in the Sustainable and Smart Mobility Strategy, which are expected to lead to tangible energy savings (such as modal shift, transport system optimisation, seamless mobility etc.), for example thanks to subsidy schemes, regulations and incentives that would ensure the assumed impact (i.e. energy savings) is delivered in reality. In view of the EU funding, which is being provided to support building renovation, it could be reasonable to ensure that a proportion of it is specifically targeted at addressing energy poverty, which has been identified as a major challenge for the EU, due to the fact that nearly 34 million Europeans are unable to afford keeping their homes adequately warm in 2019. Such a programme would contribute to the savings required by Article 7. Stakeholders have called for measures and requirements at EU level to accompany Member States’ social safeguarding policies, whilst delivering targeted energy savings among energy poor households.

In workshops organised with stakeholders to discuss the energy saving obligations, a number of stakeholders identified energy efficiency measures as the most effective solution to alleviate energy poverty, and to mitigate social impacts from pricing measures, e.g. from carbon pricing under an extended ETS. Stakeholders also stated that NECPs submitted by Member States failed to address a sufficient level of policy measures alleviating energy poverty. They called upon the Commission to ensure that energy efficiency improvement measures alleviating energy poverty are planned and implemented throughout the EU by all Member States and to ensure that vulnerable customers have access to technical and financial support. In total, 61% of respondents voiced some to a high degree of importance to requiring a specific share of measures to address energy poverty and this is explored further (ESO.2). This could be achieved by obliging Member States to deliver a certain percentage of the annual energy savings obligation to come from measures directed at energy poor and vulnerable households, to require a certain number of measures to address energy poverty, or to prioritise energy poor and vulnerable households when implementing energy efficiency measures. As energy poor households often live in poorly insulated housing, building renovation is a very cost-effective measure to address energy poverty and brings additional benefits in terms of increased job creation, skills improvement, comfort, air quality and health. Social policy, and therefore measures to address energy poverty, is primarily the responsibility of Member States. Nevertheless, supporting energy poor households to reduce their energy consumption through targeted funding programmes is a mechanism that can help to reduce their energy consumption and expenditure. The Commission has issued a Recommendation to Member States and uses EU funding programmes to address the issue. While sub-targets for other key sectors (e.g. heating and cooling) could also be considered, the specific nature of transport (i.e. large and increasing energy consumption; limited success of existing policies) and energy poverty (i.e. key to address for just transition and mitigating distributional impacts of ETS extension) make these sectors a priority for action under the EED. In view of the need to accelerate the transition to electrification to reduce GHG emissions, for example through the promotion of heat pumps, and align the energy savings with the rapid need to decarbonise energy use, the option of excluding energy savings from fossil fuel using technologies being counted under the ESO will be explored (ESO.3). Finally, an alternative option (ESO.4) would be to replace the Article 7 scheme by an EU-wide scheme of tradeable certificates for energy savings often referred to as White Certificates. Such a scheme may present opportunities and also challenges and further details are provided in Error! Reference source not found.. Measures: ·BAU: Member States have flexibility on how to target their savings efforts under Article 7. ·ESO.1 (Energy Saving Obligation.1): Require a share of the energy savings to come from transport. ·ESO.2 (Energy Saving Obligation.2): Require a minimum share of energy savings to be achieved in vulnerable households to contribute to alleviating energy poverty. ·ESO.3 (Energy Saving Obligation.3) Exclude energy savings from measures promoting savings from fossil fuel using technologies. ·ESO.4 (Energy Saving Obligation.4) Replace the Article 7 scheme by an EU-wide scheme of tradeable certificates for energy savings. 3.Energy Efficiency First (EE1st) principle Energy Efficiency First (EE1st) principle is a guiding principle of EU energy policy, already set out in the 2015 Energy Union Communication , and the need to prioritise energy efficiency is recognised in the European Green Deal. The principle is defined in the Governance Regulation as “taking utmost account in energy planning, and in policy and investment decisions, of alternative cost-efficient energy efficiency measures to make energy demand and energy supply more efficient, in particular by means of cost-effective end-use energy savings, demand response initiatives and more efficient conversion, transmission and distribution of energy, whilst still achieving the objectives of those decisions.” Following strong support for this principle from the European Parliament, it was incorporated in the EED noting that it “contributes to the implementation of the energy efficiency first principle”.

However, limited progress has been made with applying the EE1st principle across sectoral policies and making it more operational. The feedback from national authorities and the experience from the NECPs show that the principle is still not fully understood and needs to be better explained in specific contexts. This was confirmed by two specific expert meetings where stakeholders indicated that a specific cost-benefit analysis methodology, manuals and methodologies in line with the EE1st would be useful, as the application of the principle is quite complex. At present, the precise application is less clear and the Governance Regulation merely requires Member States to “take into account the interlinkages between the five dimensions of the Energy Union, in particular the energy efficiency first principle”. This situation with the statements in the EED and Governance Regulations represents BAU. The Commission, therefore, aims to adopt guidance on the application of the EE1st principle together with the ‘Fit for 55’ package so as to facilitate and clarify its use. This is included in the non-regulatory option (EE1st.1). The non-regulatory measures could also cover the development of a CBA methodology that includes the co-benefits from energy savings. However, their voluntary nature will mean that their implementation will largely depend on the willingness of Member States to apply them. Providing guidance and requiring application of EE1st are relatively well supported by stakeholders. In view of this, as a cornerstone of energy policy and with the EED providing the framework for energy efficiency policy and measures for the EU, the EED would be the appropriate instrument to provide a legal basis for the practical application of the principle. In the PC 53% of respondents supported making the “Energy Efficiency First” principle a compulsory test in relevant legislative, investment and planning decisions in view of the higher energy savings target for 2030. This option is also explored (EE1st.2). Figure 10 below shows stakeholder views on which measures are needed to ensure it is consistently applied. It is also possible to conceive of a stronger requirement for Member States to assess their legislation in key areas to identify measures that are contrary to EE1st principles. This could be accompanied by an obligation to set up a structure responsible for applying the EE1st principle and monitoring the impacts of policy and investment decisions on energy consumption (EE1st.3). Measures: ·BAU: The EED and Governance Regulation do not provide clarity on the action Member States should take to implement the principle. ·EE1st.1: Provide Member States guidance on applying the EE1st principle and develop a CBA methodology including energy savings co-benefits. ·EE1st.2: Oblige Member States to implement the EE1st principle and test energy infrastructure projects or plans against alternative energy efficiency measures. ·EE1st.3: Member States would be obliged to review their legislation for coherence with the EE1st principle and establish a body for applying the principle. 5.2.2.Policy measures to address driver 2 – Continued existence of barriers to energy efficient behaviour, including for investments 4.Obligations for public sector buildings In the Commission’s original proposal for the EED, it envisaged that the public building renovation requirement would apply to all public buildings except social housing. It was estimated that the energy savings till 2020 would amount to 3.4 Mtoe. The final requirement only applies to central government buildings and these represent somewhat less than a quarter of all government buildings, and maybe only a tenth. This means that the energy saving potential from increased renovation rates for these buildings has not been realised (the underlying renovation rate was reported as around 1.5%). BAU therefore requires the renovation of 3% of central government building floor area annually. These buildings are required to be renovated in line with the minimum energy performance requirements set under Article 4 of the EPBD. PC responses show a considerable support, except among public authorities, for strengthening the public building renovation and energy performance contract (EPC) requirements as shown in Figure 11 below.

In view of the lower energy savings as a result of the limitation to central government buildings, one option to realise greater energy savings is to increase the target annual renovation rate (BUILD.2a). An important reason for requiring public buildings to be renovated was because of the fact that they are visited by many people and would therefore play an exemplary role in demonstrating the potential for energy savings. The buildings that are likely to be most visited by the public are ones that are more a part of their daily life rather than central government buildings. Therefore, to address this while increasing overall energy savings, another option is to extend the scope of the requirement, for example to all government buildings(BUILD.2b). The energy savings from this provision of the EED depend not only on the renovation rate and the scope, but also on the depth of the energy renovation carried out. The EPBD requires all new public buildings to be nearly zero-energy buildings (NZEB) after the end of 2018 and all new buildings to be NZEB by the end of 2020. The 2018 cost-optimal reports developed by Member States show that the progressive tightening of the Minimum Energy Performance Requirements for existing non-residential buildings undergoing major renovation reveal that for many Member States these minimum requirements are already at a comparable level to NZEB requirements. While achieving the NZEB levels may not be possible for every building due to technical or economic reasons, in general it could be considered feasible for major renovations. Already ten Member States have equal requirements for new and existing buildings in their national legislation transposing the EPBD. According to the 2020 assessment of the progress made by Member States towards the implementation of the EED and towards the deployment of nearly zero-energy buildings and cost-optimal minimum energy performance requirements in the EU in accordance with the EPBD, the construction market is ready to take steps towards the improvement of the energy performance of the future building stock. A significant reduction of relevant technology costs is expected (e.g. in heat pumps, biomass boilers, heat recovery systems, solar thermal collectors, photovoltaics energy storage, etc.), which could make it possible to further increase the level of ambition for NZEBs. A detailed assessment of the progress with energy renovations in buildings including to NZEB standards illustrates that at present energy renovations represent only a third of expenditure on renovations. It also showed that at that time some non-residential buildings were being renovated to NZEB standards but that these were a small proportion of the total. No barriers to carrying out renovations to this standard are identified in the report. (BUILD.3) The provisions on public buildings provide for many flexibilities and conditionalities allowing Member States to choose alternatives that often result in a lower amount of energy savings. While a certain level of flexibility is justified to account for national specificities, it also provides a way for Member States to avoid taking measures that are perceived to be too difficult despite their clear benefits. The feedback received in the targeted stakeholder workshop revealed that Article 5 is perceived as a crucial aspect of the EED, as they consider that the public sector should lead by example. At the same time, stakeholders expressed the view that because of the limited scope, the limitations of alternative approach and the absence of a clear link between the regulatory provisions and available funding, the results are insufficient. Stakeholders also stated that this made it hard to monitor and led in many cases to only short-term energy savings. In this context, a recurrent issue is that a number of articles allow alternative ways of compliance, but these do not always result in the same level of energy savings. For example, the flexibility given to Member States in view of the renovation target limits its effectiveness, as it allows to renovate less buildings to the cost optimal level. In addition, the option of using alternative measures (instead of renovating 3% of building owned and occupied by central government) often results in energy savings measures (e.g. awareness raising) that tend to end after only a few years and are often not repeated. Research shows that individuals tend to slowly resume previous habits, if awareness raising campaigns are not repeated , and actions of this kind therefore have a limited effect compared to the actual renovation of a building. The PC responses echo these findings. Some 47% of stakeholders identify the binding nature of the EED measures (including Article 5) as important with a majority indicating that existing flexibilities (e.g. alternative approach in Art. 5) does not allow these articles to fully achieve their objectives. Buildings are considered as one of the most important area for strengthening EED requirements as shown in Figure 5 for all stakeholder groups. Of the respondents, 85% agreed that strengthening the renovation obligation for public buildings should be considered to achieve a higher ambition, while 15% disagreed. Among public authorities 72% agreed and 28% disagreed. Moreover, 82% of respondents support strengthening the energy performance contracting requirements in the renovation of public buildings. The evaluation therefore supports the need for strengthening the requirements to drive more, and more ambitious, renovations of public buildings. In view of this, a reduction of the flexibility available is therefore explored as an option through the removal of the alternative method (BUILD.4). Measures: ·BAU: The public building renovation requirement applies only to central government buildings, requires 3% of the floor area to be renovated annually, only requires renovation to minimum energy performance requirements and allows for alternative approaches. ·BUILD.1: Provide further guidance and necessary tools to national authorities and procurement officials, and strengthen the existing support fora (e.g. Concerted Action) to guide Member States towards renovation and uptake of energy efficiency requirements in building procurement and management practices. ·BUILD.2a: Increase the overall ambition through an increased annual target. ·BUILD.2b: Increase the overall ambition through a wider scope. ·BUILD.3:

Strengthen requirements to achieve the obligations, for example renovations to the Near Zero Energy Building (NZEB) standard. ·BUILD.4: Delete the alternative method in Article 5. 5.Obligations for public procurement Under BAU the EED requires central governments to purchase only products, services and buildings with high energy-efficiency performance. This is limited by possible exclusions on grounds of cost-effectiveness, economic feasibility, sustainability, technical suitability and sufficient competition. There is no definitive information available about the impact of applying BAU as there are no reporting requirements for this. In the PC, 85% of all respondents, and 63% of public authorities, agreed to some degree that strengthening the energy efficiency requirements for public procurement should be considered as a way to contribute to achieve a higher energy savings ambition. Figure 11 shows this support by stakeholder group. The PC also asked whether the requirement for central governments to purchase only products, services and buildings with high energy-efficiency performance helped to develop a market for energy efficiency products and services. In response 64% said no. They were then asked about the reasons for this and the options as well as the proportion supporting them are shown below in order of decreasing support: It is too easy to evade the requirement to purchase highly energy efficient products, services or buildings on grounds such as cost-effectiveness, economic feasibility or technical suitability 67% The scope is too limited as it applies only to the central government bodies 63% It is too difficult for public bodies to identify energy efficient products in case they are not regulated under the EU Energy Labelling rules 49% Public authorities lack specific guidelines to improve their purchasing practices 47% There is no obligation to apply Green Public Procurement criteria 39% Of these issues, there is clearly potential to reduce the conditionalities that are reported to be used to avoid the requirements as well as to extend the scope beyond central government. It is less clear what can be done to assist public bodies identify efficient products not covered by energy labelling, but it i