(19 Oct 15) eceee Press Release – European energy and climate policies are partly based on questionable assumptions, resulting in short-sighted assessments that under-value the economic benefits of energy efficiency, a new study shows. The findings by the European Council for an Energy Efficient Economy suggest that higher targets for energy efficiency in the European energy and climate policies could be more than justified. Most EU Member States use more realistic assumptions in their efficiency assessments.
Days ahead of a hearing in the European Parliament, the European Council for an Energy Efficient Economy (eceee) reveals that there is a clear economic justification for higher energy efficiency investments in Europe than originally anticipated by the European Commission. In the study Evaluating Our Future, authored by Ecofys, eceee demonstrates that EU Member States often apply lower interest rates to evaluate energy efficiency investments than the Commission's own calculations suggest.
Energy efficiency technologies (e.g. in buildings) typically have relatively high upfront costs, which need to be recovered by savings over longer periods. To attribute a value to the future cash flows of an investment, the European Commission uses so-called discount rates. The higher the discount rate, the lower the value we assign to future savings in today’s decisions. Consequently, high discount rates make energy efficiency measures and supporting policies look less attractive.
According to the report, neither economic theory nor actual Member State practice provide good reasons for the major differences between discount rates observed to be used in EU Impact Assessments and individual Members State impact assessments. In fact, some Member States explicitly follow the clear advice from EU Impact Assessment Guidelines to use a discount rate of 4%.
The Commission thus recommends Member States to use a discount rate of 4%, but uses a rate of 17.5% for its own energy efficiency scenarios.
“The report reveals that the Commission in its impact assessments applies many times higher discount rates than individual Member States are doing in their own policy evaluation work” says lead author Dr Andreas Hermelink of Ecofys. “For households this figure is 17.5%, whereas most Member States use figures in the range of 3 to 6%.”