Opinion of the Economic and Social Committee on the ' Proposal for a Council Directive to introduce rational planning techniques in the electricity and gas distribution sectors'
Date: 1996-04-24
Institutions: European Economic and Social Committee
Subjects: electrical energy, energy distribution, energy policy, energy use, natural gas













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51996AC0544

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


Official Journal C 204 , 15/07/1996 P. 0078 





Opinion of the Economic and Social Committee on the 'Proposal for a Council  Directive to introduce rational planning techniques in the electricity and gas distribution  sectors` ()(96/C 204/20)On 19  January 1996, the Council decided to consult the Economic  and Social Committee, under Article  130s(1) of the Treaty establishing the European Community, on  the above-mentioned proposal. The Section for Energy, Nuclear Questions and Research, which was responsible for preparing the  Committee's work on the subject, adopted its Opinion on 9  April 1996. The Rapporteur was Mr  Morgan. At its 335th Plenary Session (meeting of 24  April 1996), the Economic and Social Committee adopted  the following Opinion by a large majority, with five votes against and eleven abstentions. 1. Introduction1.1. The Committee would first wish to reiterate its strong support for  the Community objective of stabilizing carbon dioxide emissions by the year 2000 at the 1990 level  in the Community as a whole. However, it also notes that this proposal will not come into effect  until 1997 which means that it could have only limited impact on the year 2000 target. The  Committee thus feels that the proposal must be designed to contribute to further improvements in  energy efficiency beyond the year  2000. 1.2. The Committee recognizes that energy efficiency has an important role to play in the  achievement of the CO2 target and that improved energy efficiency can also bring other benefits -  notably improving the competitiveness of the Community economy and enabling all energy consumers to  meet their needs for heat, light and power at the least cost. For the purposes of social cohesion,  it is particularly important that low income consumers can obtain the benefits of energy  efficiency. 1.3. The Committee also recognizes that gas and electricity companies, which provide the vast  majority of consumers in the Community with energy, have a key role to play in the provision of  least cost energy efficient heat, light and power to households, businesses and other consumers. In  this context the Committee notes the valuable experience which has been gained through the SAVE  programme in a range of energy efficiency projects undertaken by gas and electricity companies. 1.4. The Committee takes energy efficiency seriously - in its Opinion on the SAVE proposal in 1991,  it said that energy efficiency should be given a higher priority in Member States, bearing in mind  the need to conserve energy and for environmental reasons (). In  September 1994 the Committee gave  its opinion on Community energy policy (). It concluded that 'rational energy use is one of the  energy sectors with the best future prospects. Its contribution is wholly positive in terms of  increased competitiveness, security of supply and environmental protection`. 1.5. The Committee recognises that there are very significant opportunities for CO2 reductions if  changes are made to the methods of electricity generation. However, this issue is beyond the scope  of this proposal and so it has not been considered in preparing this Opinion. 1.6. Within this Opinion there is some reference to the effect of liberalisation on the  opportunities for and approaches to energy efficiency programmes undertaken by gas and electricity  distribution companies and the role of new entrants. In all cases however, it is assumed that  appropriate regulatory frameworks will be in force to ensure that obligations of public service  will be met. 1.7. The Committee thus welcomes the objectives of this proposal, although it has had some  difficulty in interpreting the implications of the text of the draft Directive. Accordingly, in  Section 2 we have discussed the key parts of the text which have given rise to the confusion. In  Section 3 we make comments on further issues raised by the draft. In Section 4 we recommend  specific changes to the text. In Section 5 we give our qualified support for a Directive based on  those changes. 2. Interpreting the draft Directive2.1. Article  1There are several important terms in this  Article which need to be clarified: 'electricity and gas distribution sectors` - in particular, the  difference between the supply and distribution functions; 'Integrated Resource Planning` (IRP);  'investment opportunities`; 'single economic basis`. It is also important to be clear about the  Commission's restriction of the application of the IRP to the distribution (and supply) functions  of gas and electricity companies. 2.1.1. Although the draft talks about distribution companies, it is the supply function, rather  than the distribution function, that provides the interface to consumers and hence the scope to  develop a 'new role as energy service suppliers` and not simply 'commodity traders`. This is  recognized in the Commission's Internal Market document, which defines distribution as 'the  transport of electricity/natural gas on lower voltage distribution systems/local or regional  pipeline systems in view of its delivery to customers`. It defines supply as: 'the delivery and  sale of electricity/natural gas to customers` (). The Committee recognizes that, in many Member  States, the supply and distribution functions are integrated in the same company which may have a  monopoly of supply to local consumers. However, with market liberalization this may change so that  supply competition becomes a reality. The proposal thus needs to refer to supply and distribution  to reflect different structures in different Member States and the moves towards liberalization. 2.1.2. IRP is generally understood to mean the system which was pioneered in the US - calculating  the comparative costs and benefits of investing in new energy production, transmission or  distribution equipment, on the one hand, as against investment in measures to reduce energy demand  by consumers, i.e. Demand Side Management (DSM), on the other hand. In this form, IRP tends to  require a monopoly of supply to final customers (households and businesses) and is also greatly  facilitated by vertical integration. Contrary to this widespread understanding, the Commission is  applying IRP only to the DSM opportunities in the distribution and (where separated) supply  functions of gas and electricity companies. Accordingly, the Committee prefers to avoid use of the  term IRP and instead uses the term 'rational planning techniques` which is in the title of the  draft Directive. 2.1.3. The Committee understands that the Commission's interpretation of the term 'investment  opportunities` means the following: 2.1.3.1. In the context of supply companies in particular, selling integrated energy services (see  3.2 below) instead of focusing on maximising unit sales of gas or electricity. 2.1.3.2. For a distribution company, introducing DSM techniques (particularly to reduce peak  demand) to avoid or postpone the need for investment in distribution network capacity. In a  liberalized environment, DSM proposals by a distribution company would either have to be carefully  planned in cooperation with supply companies (which may prove difficult), or the distributor would  need to give appropriate price signals to supplies via use-of-system charges. 2.1.3.3. In some countries, distributors and suppliers are free to implement CHP schemes. The draft  does not specifically mention co-generation/combined heat and power (CHP). However, small-scale,  decentralised (localised) CHP has an important role to play in DSM and is a key component of  Integrated Energy Services (see 3.2). In particular, CHP can improve end-use energy efficiency by  facilitating a switch from other forms of heating which produce greater CO2 emissions. 2.1.3.4. However, these opportunities will not always involve the distribution company in comparing  investments - a distribution company may simply buy units of electricity or gas from other  producers to sell on to its customers, involving revenue rather than capital expenditure. The term  'investment opportunities` is thus misleading and should be removed. Our proposed re-wording is  given in Section 4.3. 2.1.4. In order that the proposal can be applicable in a range of market structures and compatible  with the principle of subsidiarity, the Committee understands that Member States and gas and  electricity companies will have complete discretion to determine what the 'single economic basis`  should be. 2.1.5. In order to clarify the restriction of this proposal only to the supply and distribution  functions of gas and electricity companies, it is proposed to add a sentence to the end of Article   1 (see Section 4.3). 2.2. Article  2A key concern of the Committee initially was that the Proposal did not seem to take  sufficient account of the existence of different energy market structures in Member States. There  is a wide range of structures from fully vertically integrated monopolies, monopolies in some parts  and competition in others; those which are liberalized or in the process of being liberalized.  However, it is now our understanding that this Article is deliberately designed as a framework to  accommodate the differences in industry structures and ownership and different market structures in  the 15 Member States and is generally consistent with the development of the single market. It also  recognizes the principle of subsidiarity and accordingly is not prescriptive, giving wide  discretion to Member States over implementation. The 'framework of measures` is to be defined at  country level to suit country circumstances. It is understood that the 'rational` approach  advocated should also be commercial and economic. Interpreted in this way, the proposal can be  suitable for implementation in fully competitive markets. However, if the proposal is to be  properly interpreted in this non-prescriptive way, certain drafting changes will be required to  Articles 2(a) to 2(e). 2.2.1. Article  2(a)The reference to 'all` energy resource alternatives is too broad in the  context of a single gas or electricity distribution company and may cause practical problems and  delay implementation, as it would be difficult to determine what 'all` the alternatives could  possibly be. We therefore propose, in 4.4, that the word 'all` be deleted. 2.2.2. The term 'integrated resource plan` needs to be avoided (see 2.1.2). 2.2.3. Article  2(c)2.2.3.1. Our initial reading of this paragraph gave rise to some concerns  about consumer protection because of the apparent linkage to US style IRP schemes which can work to  the disadvantage of the generality of consumers. In the US, all consumers have been required to pay  surcharges to fund IRP when only some have benefitted. However, the Committee understands that the  Commission does not intend its system of rational planning to involve tariff increases for all  consumers -  only those consumes who benefit will pay. 2.2.3.2. We now understand that this Article was drafted by the Commission to ensure that companies  are not prevented from financing energy efficiency schemes because of legal restraints on their  commercial freedom to add such items onto participating customers' energy bills. The current  wording of the draft, however, does not make this clear - the Committee therefore proposes changes  to the text (see 4.6) to clarify the meaning. 2.2.3.3. The wording to 'ensure that distribution companies which undertake demand-side management  programmes are not net revenue losers` raises a concern that this might be over-generous to the  companies, at the expense of the consumer. Regulators faced with such a requirement will tend to  prefer to risk penalizing the consumer rather than the company. We propose that this sentence  should be deleted. 2.2.4. The issues to which Article  2(d) are addressed are discussed in Section 3 of this Opinion. 2.2.5. Article  2(e)The Committee understands that the proposal in the Draft to promote the  integration of demand side management (DSM) into systems for capacity tendering refers to energy  procurement policy in the public sector. This would mean that, when public sector bodies (central  government departments, local government, health authorities, etc.) invite energy companies to bid  to supply energy to their buildings and other facilities, the tendering criteria should, at an  early stage, include a requirement to meet energy needs by the most appropriate combination of  supply and demand options. However, this meaning is not clear in the way that the Directive is  drafted at present and the Committee thus makes a suggestion for re-wording in 4.8. 3. Issues raised by the Directive3.1. Barriers to energy efficiency3.1.1. It is important to  understand why consumers do not invest in energy efficiency, even though it would often be cost  effective for them to do so. Lack of finance, apart from the case of low income households (see  3.1.5 below), is not a significant barrier, because most households and businesses could afford to  borrow to finance energy efficiency investments if they wanted to. 3.1.2. However, lack of information is an important barrier. Consumers have few sources of  independent information and advice on energy use. The case for information for businesses is  particularly strong on economic grounds since resources wasted on inefficient energy use could  often be more productively used elsewhere in the economy, creating jobs, boosting productivity,  boosting exports, etc. Consumer organizations have an important role to play, in collaboration with  gas and electricity distribution companies, in the provision of information. 3.1.3. Many theoretical calculations of the cost-effectiveness of energy efficiency measures may  underestimate transaction/switching costs, particularly in terms of the time investment required of  the consumer to organize the work, obtain finance and so on. These costs can give energy efficiency  investment a longer payback than the cost of the measures themselves would suggest and make the  consumer feel that it is not worth the effort required. For these reasons, many energy efficiency  investments which could deliver significant energy and CO2 savings may fail to be implemented. 3.1.4. A further barrier to energy efficiency can be the investor-user problem. Landlords may have  limited incentives to invest in the cost of insulating their buildings if it is the tenant who  profits from lower subsequent energy costs. Tenants may not be willing to invest in someone else's  property. Appropriate systems need to be established to solve this problem, for example, to enable  rents to reflect the energy efficiency of buildings. 3.1.5. Low income consumers do not have the capital to finance energy efficiency measures  themselves and often cannot secure loans to do so. The low energy use by many low income consumers  means that many will realize limited energy bill savings through energy efficiency measures, making  payback periods longer and hence contracts much more difficult to arrange. 3.2. Integrated Energy Services (IES)3.2.1. Section 3.1 outlined the barriers to energy  efficiency. The Committee recognizes that gas and electricity suppliers can help overcome these  information and transaction costs barriers to energy efficiency and sees this proposal as being a  means of further developing such a role. Consumers do not really want to buy units of gas or  electricity - they want heat, light and power. The introduction of techniques to encourage rational  energy use, as envisaged by this proposal, should help to encourage this new approach. Consumers  can achieve lower energy bills in two ways - by a lower unit price or by using fewer units. The  Integrated Energy Services company recognizes this and enables the consumer to achieve a lower bill  (and other desirable things such as a warmer home, better productivity, greater convenience) in the  way best suited to the consumer's needs. IES can encompass a wide range of services including gas  and electricity supply; electricity and heat supply (from CHP); insulation; low energy lighting; a  new energy efficient central heating boiler; a small-scale CIIP unit; all supplied by the IES  company. The aim is to ensure that, even where the consumer is paying for new equipment, the  savings on his unit consumption means that his total bill for energy services will, in the medium  term, be less than he was previously paying just for energy supply. In some cases, the energy  efficiency measures are paid for within 1-2 years; in many others it might take up to five years,  providing net savings from then on. 3.2.2. The energy service concept will mean that new billing structures and approaches have to be  introduced. In doing so, it is important that price transparency is maintained - bills/invoices  should describe in a clear and accurate manner which charges relate to fuel supply and which to  energy efficiency products/services. To ensure that consumer confidence is maintained the Committee  believes that consumers and consumer organisations must be involved in the development and  application of these concepts. 3.2.3. Energy supply competition may be beneficial for energy efficiency and facilitate development  of the IES approach. Gas and electricity companies should find that offering a range of energy  services is a good way to gain and keep consumers. The development of suppliers who offer more than  one fuel is likely to be essential to the development of IES, particularly for household consumers.  The multi-fuel supplier is more likely to give impartial advice on which is the best fuel. 3.2.4. Energy services are also available from independent companies and this trend is likely to  increase as markets are liberalized. Governments will need to ensure that utilities do not exploit  their market power to suppress such companies and that the competition is fair. 3.2.5. To stimulate take-up of the measures outlined in 3.2.1, IES providers may also need to  provide consumers with economic incentives. These might be achieved by either acting as an agent  for the use of government grants (where available), or through bulk purchasing and discounting -  for example, of low energy light bulbs. Article  2(d) (second point), deals with this. 3.2.6. In Article  2(d) there is a Proposal that DSM programmes are established for low income  energy users. As noted in 3.1.5, low income households face significant problems due to lack of  capital. This may mean that they require greater economic incentives than other consumers (see  3.2.5) to enable them to take up energy efficiency measures. To the extent that energy services  cannot be provided to them on a commercial basis, and where subsidies cannot be justified by energy  suppliers/distributors acting commercially or within DSM initiatives (to avoid investment in  distribution capacity, for example), effective programmes for low income consumers will generally  be dependent upon the availability of government grants. 3.2.7. To achieve a market transformation from energy supply to energy services may take  considerable time, particularly in the household sector. In view of the EU's commitments to reduce  emissions, the process needs to be achieved with some rapidity. One of the purposes of this  Proposal, as the Committee understands, is to help overcome the barriers which could inhibit this  market transformation (e.g. Article  2(c)). 3.3. Artificial incentives to supplyRevenue controls (profit or price controls), imposed on energy  suppliers/distributors by Member States can give important signals towards rational energy use. In  this context it is important that they do not give energy companies an artificial incentive to  increase the number of units supplied or distributed. 4. Specific changes to the text of the Directive4.1. In this section of the Opinion specific  amendments to the draft Directive are proposed to meet the issues and concerns raised in Sections 2  and 3. 4.2. First page of the draft Directive, 9th paragraphReplace the following text: 'Cannot be satisfactorily implemented at the level of Member States;` with 'needs to be  satisfactorily implemented in all Member States`. Reason for changeThe action will be implemented at the level of Member States. The purpose of the  Directive is to provide the framework for implementation. 4.3. Article  1Delete existing text and replace with: 'The purpose of this Directive shall be to contribute to the Community objective of stabilizing CO2  emissions by the year 2000 at the 1990 level in the Community as a whole and to develop a sound  framework for the further improvement of energy efficiency beyond the year 2000. The objective is  to involve the electricity and gas distribution/supply sectors in improving end-use energy  efficiency through the application of rational planning techniques. "End use energy efficiency"  includes small- scale, decentralized (localized) CHP/co-generation. Rational planning techniques  shall be used to evaluate energy resource alternatives (energy supply and energy demand reduction)  on a comparable economic basis. This Directive applies only to the supply and distribution  activities of gas and electricity companies.`Reasons for change(i)The Directive will be able to  achieve relatively little in respect of the year 2000 target and so there is a need to look beyond  the year 2000; (ii)The Directive will have an impact on the supply function as well as distribution (see 2.1.1); (iii)The term Integrated Resource Planning is confusing because of its association with US style  IRP which covers the whole production, transmission and distribution chain. The Committee thus  prefers the term 'rational planning techniques` (see 2.1.2); (iv)The words 'investment opportunities` have been deleted as the choices will not always involve  competing investments (see 2.1.3); (v)Small-scale decentralised (localised) CHP/co-generation can improve the rational end-use of  electricity and gas and hence should be included in the definition of 'end-use energy efficiency`  (see 2.1.3.3); (vi)The final sentence clarifies that the scope of the Directive is confined to the supply and  distribution functions of gas and electricity companies (see 2.1.5). 4.4. Article  2(a)Delete the word 'all` on the 3rd line. Replace the words 'single economic basis` with 'comparable economic basis`. ReasonSee 2.2.1. 4.5. Article  2(b)Delete the existing text and insert the following: 'They shall examine whether the economic energy efficiency measures identified by rational planning  techniques are being undertaken.`ReasonSee 2.1.2 and 4.3 (iii). 4.6. Article  2(c)Delete the existing text and insert the following: 'They shall review existing legislation in this area to ensure that there are no barriers which  will prevent gas and electricity distribution or supply companies from billing customers for energy  services and products provided to them. Any changes to billing must preserve price transparency  between fuel supply and energy efficiency services for the consumer. They shall also ensure that no  obstacles are put in the way of the development of integrated energy supply and services  businesses, offering gas, electricity, heat, other fuels and energy saving measures, so that fully  Integrated Energy Services may be offered to consumers and energy efficiency potential is  maximized. They shall also ensure that independent energy services suppliers are free to enter the  market.`ReasonSee 2.2.3 and 3.2. 4.7. Article  2(d), 3rd pointDelete existing text and insert: 'Target some IES and DSM programmes at low income consumers.`ReasonSee 3.2.6. Article  2(d), 4th pointDelete existing text and insert: 'Support IES by the creation of finance subsidiaries or by cooperation with existing third party  financing companies.`ReasonClarifies the text of the Directive. 4.8. Article  2(e)Delete existing text and insert: 'They shall encourage public authorities to incorporate DSM options into their public procurement  of energy.`ReasonSee 2.2.5. 5. Conclusion and recommendation5.1. The Committee endorses the Commission's objective of  achieving Community targets for the reduction of CO2 emissions. It supports the intention of this  Proposal that gas and electricity undertakings shall contribute to the achievement of these targets  by taking economic initiatives to improve customers' energy use efficiency. However, particularly  in the context of its preamble, the proposal as drafted is unclear. 5.2. Following discussions with the Commission, the Committee understands that its intention is to  encourage Member States to develop a framework for end-use energy efficiency, involving only the  distribution and supply activities of utility companies, and taking full account of consumer  interests. 5.3. From what has been said before, the Committee does not support the Commission's proposal for a  Council Directive in its present form. However, the Committee believes that a Directive is needed  to ensure the adoption of rational energy use techniques in the gas and electricity distribution  sectors. The Committee would only support a Directive which incorporated the drafting changes  detailed in Section 4 of this Opinion and hopes that the Commission will modify the draft Directive  accordingly. 5.4. The Committee recommends the Commission revises the text of the Explanatory Memorandum, taking  into account sections 2 and 3 of this Opinion. Done at Brussels, 24  April 1996. The Presidentof the Economic and Social CommitteeCarlos FERRER() OJ No C 1,  4. 1. 1996, p. 6.  () Opinion of the Economic and Social Committee on a proposal for a Council Decision concerning the  promotion of energy efficiency in the Community (SAVE) (COM(90) 365 final), 20.  3.  1991.  () Opinion of the Economic and Social Committee on Community energy policy (Own-initiative  proposal), OJ No C 393, 31. 12. 1994.  () OJ No C 65, 14. 3. 1992, p. 6.