POLICY

Germany, home of the 'energy revolution,' is flubbing energy efficiency

Few economists are as well-informed about energy efficiency policies as Peter Hennicke of Germany.

It is distressing, then, to hear him speak of "dangerous errors" made by German politicians who, he said, still mostly view energy savings as a suspect, second-tier issue unworthy of a robust budget or bold market intervention.

Without a transformation of how we use and manage energy, Hennicke believes it impossible to get a grasp on ambitious CO2 emission reductions. Hennicke, 73, predicted as much in 1985 when he co-authored the book "The Energy Revolution Is Possible," in which he outlined the conceptual ideas of how to implement the revolution ("Energiewende") in governance and economic policy.

Hennicke felt a bold intervention in the energy market -- covering both supply and demand -- would be required, with technology enabling a more decentralized system to emerge. Through his work at the Öko-Institut (Freiburg) and the Wuppertal Institute, he would influence a generation of scientists and politicians.

Yet 30 years later, Hennicke -- affectionately dubbed the "Efficiency Pope" by countrymen -- is still waiting for the second part of the equation to take hold. Germany, an early leader in advancing energy efficiency solutions, has over the course of the last decade slipped behind other E.U. countries, and -- because of this -- is in danger of faltering on its climate commitments.

In some ways, it's as if Hennicke is back in 1985 preaching the same message: At least 50 percent of the necessary global CO2 reductions can and must be delivered by end-use energy efficiency. There's no other way to manage the energy transition, though at least now Hennicke can point to a gradual change in attitudes from key bodies such as the European Parliament and International Energy Agency.

"Talking about the necessity of an Effizienzwende [efficiency revolution] is not a phrase," Hennicke insisted, "but a strong message to politicians, managers and civil society to act now."

Despite 80 policies, Germany fails to cut energy use

As co-recipient of the upcoming Gothenburg Award for Sustainable Development, Hennicke is using the recognition to amplify his advocacy onto a larger international stage. Both China and Japan have called on him to advise their governments. A guest professor at the influential IIIEE/Lund University in Sweden, Hennicke has also been a principal adviser to the bigEE.net initiative, a global Internet platform on efficient buildings that aims to act as an international registry sharing best practice information.

No market in the world is as complex, yet Hennicke's message is fairly straightforward: Mandate ambitious and binding energy efficiency targets and very quickly a functioning market for energy services will take flight. The prescription assumes proper funding under the auspices of one "organizing" agency alongside the lifting of several regulatory barriers.

German law, for example, provides more than 80 policy measures spread out over seven federal agencies, among them a successful preferential loan program for building retrofits and energy-efficient construction that is administered through the KfW development bank. Yet, notes Hennicke, over the past two decades, primary energy consumption in Germany has hardly declined.

Still, to the outside world, Germany has retained its leadership status. Last year, the U.S. nonprofit American Council for an Energy-Efficient Economy (ACEEE) dubbed Germany the "world champion" in its energy efficiency ranking of 16 major industrialized countries. Critics say a more accurate appraisal lies with an analysis conducted by the European Union through ODEX, a kind of Dow Jones of energy efficiency. It summarizes the efficiency gains in the sectors of industry, transport and households, as well as for the entire economy (all final consumers).

Out of 28 E.U. countries, Germany ranks 18th, with a final energy intensity value of 0.0884. In the past 15 years, it has been overtaken by numerous other European countries, including the United Kingdom (1.89 percent), the Netherlands (1.84 percent) and France (1.19 percent). Germany is even below the E.U. average of 1.3 percent.

Consequently, the continent's largest user of energy finds itself in noncompliance with the European Union's 2012 Energy Efficiency Directive (EED). Threatened with legal action, in late 2014 the German government amended its energy efficiency programs to include a tax bonus that would have raised €1 billion ($1.13 billion) for the KfW program. Federal states and the ministry of finance objected, however, and the ambitious program was scaled back to the modest annual sum of €165 million.

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Yet Germany is hardly alone in falling short. According to the Coalition for Energy Savings, an E.U. advocacy group based in Brussels, only Denmark, Ireland and Croatia have provided credible national plans to achieve the annual 1.5 percent savings in energy required under the 2012 EED.

Denmark sets the pace in Europe

"If you go throughout Europe and look into the hundreds of national support programs, the most successful ones are those which have a certain size," said coalition Secretary-General Stefan Scheuer.

"Let's not forget," Scheuer added, "that for renewables the key breakthrough was to organize the market differently, with priority access and feed-in tariffs, which is when renewables gained a completely new market position in Germany."

The energy efficiency obligation on tariffs advocated by Hennicke and the Wuppertal Institute is the type of framework legislation that Scheuer endorses, calling it a "correction of a market failure that could very much benefit all consumers."

It's a fairly simple recipe, but one that faces opposition in the current era of austerity politics. One solution, suggests Scheuer, is to end fossil fuel subsidies. Another is to bring utilities into the energy services market. The Danish government managed to do this by starting with voluntary agreements that were later formalized into law.

Hennicke said, "If a utility is reluctant to contribute to energy savings of its customers, and thus not trying to protect customer loyalty by selling energy services, other actors and competing mechanisms will do the job -- if binding targets are taken seriously."

One advantage of the Danish system is the way it's constructed, said Peter Bach of the Danish Energy Agency. None of the finance for the program comes from the state budget. Rather, the energy efficiency obligation is placed on energy distributors of electricity, gas, district heating and oil who are required to engage with private companies to find savings in the market. The energy distributors finance the energy efficiency activities by adding the cost to their distribution tariffs. In this way, Denmark has developed profitable businesses around energy efficiency.

Since the program's inception in 2006, the country has tripled its energy savings to a 3 percent annual rate, while fostering an energy services industry comprising a range of actors, among them specialized installers, construction companies, engineering firms and real estate managers. They typically do not offer a guaranteed rate of energy savings, or assist with finance, as is the case with so-called energy service companies (ESCOs).

Their role, instead, is to implement the savings, forming the basis for the subsidy from the energy distributors. ESCOs do have a place in the Danish model, but so far their role has largely been limited to contracting out services for large groups of municipal housing stock.

Germany has just decided to introduce tendering procedures for bidding out services to ESCOs and other market participants. This, in theory, generates competition on least-cost options. But Germany hasn't placed a mandate on utilities, and that makes an important difference for the financing of the system, said Bach.

"We have focused on implementation of savings, and not on the actor involved," he added. "ESCOs are only one model for delivering the savings."

Could China take the lead?

Granted, Denmark is a smaller country that is able to more quickly respond to changing circumstances. The German political and energy landscape may already seem impossible, yet it remains that the main success lies in instituting an obligation system -- built in a voluntary format that makes sense for the major energy companies. Denmark has yet to impose penalties on any of its utilities, but the threat remains in place and is part of the country's energy efficiency law.

It's a model Hennicke sees as replicable in Germany -- though he isn't holding his breath to find out.

"There is hope in a global perspective," said Hennicke. China, starting from a very low level, has quickly shown itself to be the lead market for energy and resource efficiency. As it happened with the German market for photovoltaic industries spurring on a worldwide competition, so might the Chinese spur on a race toward improved energy efficiency policies.

"I am still a concerned optimist," he concluded, "because the paradigm shift is quite clear.

"The swing to binding efficiency targets is happening. It is inevitable," Hennicke added, "if climate change mitigation, resource protection and ecological modernization are taken seriously."

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