Energy Efficiency: How efficient is the current regulatory framework?

Energy Efficiency – how efficient is
the current regulatory framework?
Vienna Forum on European Energy Law, 2016
Kristóf Ferenczi

Short introduction to Kinstellar

Kinstellar is a leading independent law firm in Emerging Europe,
Turkey and Central Asia, with offices in Almaty (Kazakhstan),
Belgrade (Serbia)*, Bratislava (Slovakia), Bucharest (Romania),
Budapest (Hungary), Istanbul (Turkey), Kyiv (Ukraine), Prague (the
Czech Republic) and Sofia (Bulgaria).
Operating as a single fully integrated firm, Kinstellar delivers
consistently high quality services across all jurisdictions in an
integrated and seamless style. We are particularly well suited to
servicing complex transactions and advisory requirements spanning
several jurisdictions.
We deliver:
 market experience and local knowledge across a wide range of
sectors
 an in-depth understanding of the legal, regulatory and commercial
issues surrounding any type of transaction or project in the region
 a dedicated team of local and internationally qualified lawyers
 a responsive, commercial approach and style
 value for money
Emerging Europe and Central Asia’s independent law firm
* Kinstellar advises international and local clients in Serbia in cooperation with Zajednička advokatska kancelarija Marić & Mujezinović.

CONTENTS
1. Energy efficiency within the context of
current EU energy policy
2. Promoting energy efficiency – a market
based approach
3. Promoting energy efficiency – through
State intervention
4. Conclusions

Energy efficiency within the context
of current EU energy policy

Key elements of the current
regulatory framework
 Energy Efficiency Directive (EED)
 Energy Performance of Buidlings Directive
(EPBD)
 Ecodesign Directive on minimum energy
performance standards
 Energy Labelling Directive on energy
performance information on labels
 EU Regulations on CO2 performance
standards for cars and vans
 Electricity Directive on the roll-out of smart
meters

Energy efficiency as part of the European Energy Union
 Energy efficiency has been a policy objective for quite some time
 New impetus from launching the Energy Union
• „[…] necessary to fundamentally rethink energy efficiency and treat it as an energy
source in its own right”
 Key areas:
• Energy efficiency to become primary consideration in Member States’ policies
• As part of energy market design review, energy efficiency to compete on equal terms with
power generation capacity
• 3 focus points: buildings stock / transport / heating and cooling
• One of the European energy R&I priorities: developing efficient energy systems and energy
neutral buildings
• Smart Financing for Smart Buildings initiative

Recent evolution of EU energy
efficiency targets
 20/20/20 target: 20% energy savings by 2020
 New 2020 – 2030 framework (2014 January): 40%
GHG emission reduction target + 25% energy savings
by 2030
 European Council conclusions in October 2014: 27%
improvement of energy efficiency by 2030
 New 2030 energy efficiency target of 27% to be
reviewed in 2020, having in mind an EU-target of
30%
 Reality in November 2015: only 17.6% primary
energy savings to-be-achieved as compared to
2020 projections

2015 November status of
implementation of EED
 Meeting June 2014 deadline for EED’s
implementation was not a success story
 Admittedly, EED’s implementation is still work
in progress
 Areas where progress is incomplete:
• MS to take additional / new measures
and set more ambitious national targets
• Several MS must reduce primary energy
consumption at a higher rate than prior
to 2014
• Large differences between MS in terms
of energy intensity in industry
• Increase share of high efficiency CHP
and district heating / cooling

Results from the public consultation on EED review (2016)
 Present regulatory framework is so complex that Member States require additional guidance
 Energy savings calculations to be based more on observed data and less on projected estimations
 EU Commission to focus more on the transport sector, monitor Member States' progress and, if
necessary, indeed sanction non-compliance
 Main barriers identified by participants
o Limited timeframe (2014-2020) makes it hard to attract investment for long term measures
o High administrative burden associated with certain measures
o Ensuring sound and independent monitoring and verification of energy savings
 Rules needed aiming at specific sectors such as: building renovation, district heating and cooling
network development and city infrastructures for transport, waste heat recovery, and waste-to-
energy
 Accounting rules biased against energy efficiency investments, e.g. when calculating the balance
of public budgets – public authorities should base public procurement decisions on lifecycle cost
analyses

Energy Union – revision of
EED / EPBD under way
 Review of the 2030 energy efficiency target
 Improving the implementation and
effectiveness of EED
 Review of EED Article 6 on purchasing by
public bodies (public procurement)
 Extension of EED Article 7 beyond 2020 on
energy efficiency obligation schemes
 Review of EED Articles 9 -11 on information
and metering for consumers and Article 15 on
efficiency in transmission and distribution
 Review of various EED Articles on financing /
energy performance contracting

Promoting energy efficiency – a
market based approach

2014 Energy Efficiency
Communication
 ”Particular attention should be given to the
emerging market for energy services
(including Energy Performance Contracting
and Energy Service Agreements)”
 ”[…] work has to be done to clearly
demonstrate the business case for
investors and financiers”
 ”[…] Transparency, scalability and
standardisation are required to create a
secondary market for energy efficiency
financial products and unlock the potential for
the refinancing of energy efficiency
investments via capital market products
and structures”

Market-based approach:
energy services market and
EPC
 Short recap:
• EPC: Energy Performance Contracting
• ESCO: Energy Services Company
• Underlying principles of EPCs
 Key characteristics of EPCs in practice
• Turn-key services
• Guaranteed energy savings
• Focused around risk allocation
• Long-term cooperation
• Different financing models
• Long-term pay-back mechanism

Market-based approach:
energy services market and
EPC (cont.)
 EPC project contractual framework
• Complex contractual setup
• Structured risk allocation
• External financing adds to complexity
 Typically, EPC contracts are unregulated
agreements
• Outside of the scope of many Civil
Codes
• Annex 13 of EED provides minimum
elements for EPCs with public sector

Experience with and some
conclusions regarding EPC
structures in practice
 Typical examples
 Complexity of contractual framework is a
major challenge
• Significant legal issues with poorly
prepared contractual framework
• Compliance with local regulatory
framework is not self-evident
• Details do matter
 Lack of expertise and misconception of the
need for external advice hinder success

structures in practice (cont.)
 Usual hot spots of EPC contractual
frameworks:
• Measurement and verification of energy
savings
• Allocating risk of regulatory changes,
including e.g. price regulation
• Future changes to the financing of public
bodies
• Dispute resolution clauses
• Accommodating financing banks’
requirements in the project
documentation and addressing
bankability concerns

structures in practice (cont.)
 Recommendations
• Enhance work on removing market
barriers
• Raise awareness of possible benefits
• Still further information-sharing and
training of stakeholders is needed
• Publicize and explain success stories
• Elaborate model contractual framework
and sample contracts, bearing in mind
national law specifics

Promoting energy efficiency –
through State intervention

State intervention: imposing
legal obligations
 Direct legal obligations
• On the public sector – renovation of 3%
of total floor area of heated/cooled
buildings
• On the private sector – setting up energy
efficiency obligation schemes
 Indirect legal obligations
• Energy audit requirements
• Energy efficient public procurements
• National Energy Efficiency Action Plans
 State aid aspects

Energy audit: a practical example for
differences in national implementation
 CEE/SEE survey of energy audit obligations by Kinstellar
(and in Europe by Linklaters)
 Key findings (for the CEE/SEE)
• Inconsistent treatment of partner and linked
enterprises
• Inconsistent application of consumption thresholds
• Inconsistent treatment of holding companies and
companies with no economic activity or energy
consumption
• Different attitude towards the acceptance of internal
and external audits
• Significant differences in the sanction regimes

Conclusions
 Energy efficiency investments can be realised
through market-based mechanisms (EPC)
o Direct regulation plays a lesser role, BUT
o Significant role for EU Commission, MS
Governments, market players in
promoting transparency and enhancing
confidence
o Role of experienced professional
advisors should not be underestimated
 Energy efficiency investments can also be
realised by State intervention
o Lack of clarity, coupled with complexity
of regulation, is an issue
o Differences in national implementation
should be minimised

Thank you for your attention!
Kristóf Ferenczi
Partner
Head of Energy
T: +36 1 428 4471
E: kristof.ferenczi@kinstellar.com

Sofia, Bulgaria
Diana Dimova
T: +359 2 9048 331
E: diana.dimova@kinstellar.com
Almaty, Kazakhstan
Joel Benjamin
T: +7 727 355 0530
E: joel.benjamin@kinstellar.com
Belgrade, Serbia
Branislav Marić
T: +381 11 3210 201
E: branislav.maric@kinstellar.com
Bratislava, Slovakia
Roman Oleksik
T: + 421 2 5929 1113
E: patrik.bolf@kinstellar.com
Bucharest, Romania
Razvan Popa
T: +40213071618
E: razvan.popa@kinstellar.com
Budapest, Hungary
Kristóf Ferenczi
T: +36 1 428 4471
Prague, Czech Republic
Kamil Blazek
T: +420 221 622 258
E: kamil.blazek@kinstellar.com
Your contacts
Firm Managing Partner
Jason Mogg
T: +420 221 622 111
E: jason.mogg@kinstellar.com
Kyiv, Ukraine
Kostiantyn Likarchuk
T: +38 044 394 9040
E: konstiantyn.likarchuk@kinstellar.com
Istanbul, Turkey
Halide Cetinkaya Yılmaz
T: +90 2123495022
E: halide.cetinkaya@ccaolaw.com
HEAD OF ENERGY PRACTICE
Kristóf Ferenczi
T: +36 1 428 4471

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