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Germany gets one energy policy right: Efficiency

Germany gets one energy policy right: Efficiency

by host

Martin Rossen is senior vice president for communication and sustainability at Danfoss and is former chief of staff at the Danish prime minister’s office.

Europe’s energy future rests not only on its ability to produce much more renewables, but it also depends on reducing demand through improvements to energy efficiency.

Europe’s energy problem is, in essence, quite simple: For the foreseeable future, we simply don’t have enough energy to meet demand. The European Union and its members countries are all net importers of energy — the same is true for the United Kingdom — and more than half of the EU’s energy needs are covered by imports.

Yet, the only country that seems to have taken an approach addressing both the supply and demand side of the energy challenge is Germany — and more could do with following its lead.

For years, Europe seemingly forgot that energy is a scarce resource. However, this changed abruptly when Russia invaded Ukraine earlier this year. Energy scarcity is now the backdrop for governments all across the Continent, as they seek to evaluate energy shortage scenarios and build a portfolio of policies in response. 

While initial responses to the energy crisis centered on hoarding gas, not least LNG, and diversifying fuel sources, policies are now focusing on taking the pressure off steep energy prices for companies and citizens, so both can make it through the winter. However, whether we can make it through the following winters is the bigger question.

Currently, few policies take aim at the fundamental challenge of reducing energy demand by improving energy efficiency — which is fundamentally puzzling, considering the calls from experts and analysts seem unambiguous.

Samantha Dart, a senior energy strategist at Goldman Sachs, argues that most policies currently address the affordability issue, but ignore the fact that Europe has an energy deficit and should focus on curtailing demand. Similarly, Jason Bordoff, director of the Center on Global Energy Policy at Columbia University, argues that European countries should pursue policies that improve energy efficiency to increase competitiveness and energy security, easing the path to green energy.

Over past months, the International Energy Agency (IEA) has, on multiple occasions, also called for a serious ramp up of energy efficiency, while the Organisation for Economic Co-operation and Development recommends that policy interventions dampening incentives to reduce consumption be supplemented by those that support energy efficiency improvements.

Yet, worryingly, what’s currently happening in European capitals doesn’t reflect these expert opinions.

The Bruegel Institute, a Brussels-based think tank tracking government responses and their related spending on the energy crisis, found that European countries are spending billions of euros on reducing energy taxes for households and companies, subsidizing energy bills and ramping up energy production — but a much smaller proportion, if any, is being spent on energy efficiency programs.

As an example, the U.K. government has only recently announced a £1.5 billion program to improve energy efficiency in low-income households — a figure that is dwarfed by the £150 billion program to freeze annual household expenses on electricity and gas. In addition, the U.K. has now dropped its plans to prepare for winter blackouts and roll out an energy rationing campaign.

Programs that improve energy efficiency aren’t just driven by government spending, however. They are also shepherded through provisions that drive private action. While it’s true that these policies are harder to get a grasp of, currently only few countries seem to demand any energy savings in return for energy tax breaks or subsidies at all.

And even where there is some focus on the demand side, it is mainly to promote behavioral change, such as imploring citizens to turn off the lights, or in the form of deprivation, like rules that require lowering the temperature in public buildings. Such policies do have a role to play in acute energy crisis management, of course — they are cheap, or even free, and they take the edge off demand. After all, reducing your thermostat by just 1 degree Celsius can save 10 percent on your gas bill.

At the time of writing, however, the only real exception to these supply-leaning strategies is in Germany — the very country at the center of the energy crisis and whose energy policies have been dubbed everything from naïve to disastrous.

Germany is currently the only country that has an actual plan to reduce energy demand permanently. Its goal is to reduce gas consumption by 20 percent, and includes a set of energy savings provisions for both companies and state entities.

These include mandatory heating system maintenance and optimization, whereby landlords of gas-heated buildings must carry out respective inspections within the next two years. Large building owners are obliged to carry out hydronic balancing, which is the process of optimizing the water flow in a heating system. And companies are obliged to implement small efficiency measures with a payback period of less than three years, if their energy use is greater than 10 gigawatt-hours per year.

The accumulated effects of these initiatives are massive.

Optimizing heating systems alone is expected to save 21 terawatt-hours (TWh) in total. To put that in co

ntext, the electricity consumption in all of Belgium, a mid-sized European country, was 83 TWh in 2021. And the financial bottom line is that optimizing heating systems will save energy bills amounting to €4.2 billion per year.

Due to this approach, Germany may well emerge from the energy crisis as a greener and more efficient economy — and other European countries could benefit from the same. After all, if governments really want to fight energy inflation on a continent with an energy deficit, improving efficiency is the best remedy.

Using the energy crisis to improve energy efficiency can give countries a triple advantage: It will boost productivity through lower energy costs; it will increase energy security; and it will ease the path to a renewable energy system.

The good news is the solutions are there — now they just need a push.

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