Europe is gradually recovering from the worst energy crisis in a generation, which started as a tight supply market in 2021 and quickly escalated into a full-blown global supply shock, with energy prices peaking in Q3 2022 at levels unseen in decades. This year, as prices and supply readjust to profoundly changed market fundamentals, Europeans are weighing the long-term consequences of this crisis on their consumption behavior, the cost of doing business and broader decarbonization strategy.
In this context, energy efficiency has quickly risen to the top of the business and policy discourse, not only as a tactical tool to tackle higher energy prices today, but also as a key foundation of the EU’s climate transition under the ‘Fit for 55’ strategy.
In the near term, energy efficiency can improve consumer resilience, helping them cope with a higher cost environment. In the medium term, it should make it relatively less painful for Europe to regain its lost energy security, helping reduce energy dependency and diversify supplier risk.
Longer-term, it has the potential for lowering the cost of the energy transition by reducing the investment needed to decarbonize power production and electrify energy use.
Converging Towards Energy Efficiency: Policies, Prices and Demand Across Sectors
From a market standpoint, the time is ripe for Europe to raise its energy efficiency game as it now sits at the convergence of three critical enablers of a functioning energy services market.
- Policies and subsidies. Several pieces of legislation are being (or have recently been) rolled out that will accelerate changes in the way energy is used and produced in the EU. The most critical one on the use side of the balance is the ongoing revision of the Energy Efficiency Directive (EED), others include revisions of Directives covering the Energy Performance of Buildings, Renewable Energy and Energy Taxation.
- Energy prices. In June 2023, EU wholesale electricity and gas prices were still more than 70% and 2.7 times higher than in June 2019, respectively. Pivoting away from cheap and abundant piped Russian gas to new supplies (including via LNG, with all the related infrastructure and transport complexities) means the market may remain tight, resulting in higher prices than pre-2021 levels in the medium term.
- Market demand. In just one year, the energy crisis has done more to fuel the European consumer’s demand for energy efficiency than decades of direct incentives and tax credits. Especially for commercial and industrial energy consumers, from process manufacturers to food retailers and hospitals, the tactical need to react to higher energy cost is triggering investments that can serve these businesses well in their longer-term decarbonization plans. In the immediate aftermath of the energy crisis – IDC data shows – almost half of European businesses were planning to improve the efficiency of their energy use to limit the impact of higher energy prices on the cost of doing business. At the same time, between 50% and 60% were planning to invest in energy efficiency (both data- and capital investment-driven) as part of their broader decarbonization strategies.
This renewed focus has profound implications not only for energy suppliers and service providers but also for large and small energy consumers across European industries and their technical ecosystems.
European manufacturers and retailers, for example, have long been working on their energy mix and consumption to generate cost efficiencies, meet growing customer expectations and target ambitious long-term sustainability goals. In today’s energy price environment, however, energy efficiency has become critical to sustain profitability and competitiveness. This is particularly the case for organizations competing with non-European producers that have access to cheaper energy supplies.
Manufacturing
While energy efficiency has always been a consideration for manufacturing organizations, access to relatively cheap energy, loose regulatory requirements and the lack of effective digital technology led to some complacency in the past. Nowadays, manufacturers have the ability to contextualize and analyze real-time data by breaking down data silos across their IT and OT estate. With access to data, technology owners on the shop floor can adjust production plans and material routes accordingly.
Additionally, energy efficiency initiatives have the long-term potential to help manufacturers jump-start broader data-driven process improvement strategies. For example, a prominent Tier 1 global automotive supplier successfully connected over 250 energy-related data points. The energy management system allowed the company to analyze the energy consumption of injection molding machines for each produced part. With this data, not only could the company adjust production equipment and determine the most efficient injection molding machine based on the parts being produced but also detect and alert supervisors of equipment anomalies.
Retail
Retailers too are prioritizing the implementation of energy management systems in their retail operations, along with a growing focus on supply chain and logistics efficiency, to minimize overall energy consumption.
For retailers in particular, implementing energy-efficient technologies and practices goes well beyond sustaining profitability and competitiveness. As consumers become increasingly conscious of the environmental impact of their purchases, energy efficiency becomes a clear first step towards achieving sustainability goals that align with such changing preferences.
This should not be viewed (only) as a way to enhance brand reputation and attract environmentally conscious consumers, but rather materially help them improve their environmental footprint. For example, at the beginning of the energy crisis, one of the UK’s leading food and grocery retailers strengthened its commitment to tackling the climate crisis. This meant cutting as many as five years from its target to become carbon neutral in its business and operations (Scope 1 and 2), by 2035. To do so, the grocer is focusing on maximizing the energy efficiency of its operations, reducing carbon emissions, food waste, plastic packaging, water usage, and increasing recycling.
Healthcare
For European healthcare organizations, higher energy prices are rubbing salt in the wound of the enormous resource strain caused by two years of pandemic.
The sector is one of the largest and most sophisticated energy consumers and hospitals are typically among a territory’s most energy-intensive buildings. Not only medical equipment and healthcare facilities, on which patients’ lives depend, necessitate 24/7 power supply. But within the same hospital, each of those facilities and departments have their own requirements in terms of access, lighting, temperature and humidity, cleanliness and air filtration, availability of water, power, medical gases and communications.
With healthcare fees typically lagging inflation, often by several years, and with energy bills up by as much as 100% or more since 2021, energy prices are not only hurting hospitals’ bottom lines but diverting crucial resources from patient care. This adds to inflation increasing the cost of medical equipment, pharmaceuticals, medical logistics and other expenses outside core operations.
In this context, European hospitals are prioritizing efforts to reduce energy consumption (and limit their carbon emissions in the process) without impacting the quality and safety of day-to-day care.
Two investment areas are worth calling out. Adopting sustainable design principles for new builds using, for example, parametric modelling to track the rise and fall of the sun in different seasons, allowing to make the most of natural light and solar radiation. Plans for rooftop solar are also increasing, enabling hospitals to self-generate and decarbonize part of their energy needs. Deploying smart assets and measurement systems is also on the rise, to monitor temperatures, air quality, occupancy and overall humidity and optimize operations.
Public Sector
European Governments and public administrations, for their part, will have an increasingly relevant role to play going forward. They are expected to not only regulate and orchestrate but actually lead the energy transition, demonstrating best practices and setting a benchmark against which other organizations can measure themselves.
The proposed revision of the EU EED is a case in point. It firmly establishes that the public sector should have an “exemplary role” underscored by specific, more aggressive energy efficiency goals than the rest of the economy. Similarly, the UK Government’s Net Zero Strategy states that “the wider public sector will lead by example during the transition to net zero.”
This is critical because governments are among the largest contributors to European economies. They have their own significant direct environmental footprint and therefore have a critical influence on the journey to net zero. For example, in the UK, the Government estimates that emissions from public buildings account for approximately 2% of total UK emissions. And this only includes estimates of fuel burnt not wider scope 1, 2 and 3 emissions.
Driven by regulation, higher energy prices, NextGeneration EU funding, and public expectations, local, regional and national governments are putting in place measures to improve the efficiency of their biggest emitters – transport fleets and public buildings and assets.
IDC research highlights that, across Europe, 37% of governments are investing in building energy management systems and nearly 60% are investing in workplace management systems to optimize space utilization and occupancy. It must be noted that a selection of government departments, due to their size and function generate the bulk of public sector emissions.
For instance, the Ministry of Defence is estimated to account for 50% of the UK central government emissions; therefore, accelerating energy efficiency measures in those departments is essential.
Financial Services
As a relatively less energy-intensive sector, the direct effects of higher energy costs on the financial services industry were less critical than for others. The major energy consumers in financial services are data centers and, to a lesser degree, office buildings, and even for these the increase in cost remained manageable.
Financial services, however, play a critical role in enabling the energy transition of their corporate and consumer customers through the issuance of green and social bonds, credit and other financing options. The surge in energy prices, however, will likely have delayed the net-zero targets of banks’ lending portfolios, as customers have been forced to use working capital to pay their energy bills.
The bigger dilemma however is that, in addition to renewables, diversification from Russian gas will require major investments in oil and gas exploration and import infrastructures, which is fundamentally countering Europe’s green deal policies.
In autumn 2022 there were also concerns that energy suppliers and the energy-intensive industries may bend under the crisis, which increased the pressure on banks to prepare for loan defaults. Thanks largely to the estimated €758 billion (Source: Bruegel) in fiscal policy measures allocated by European government to protecting consumers from rising energy costs (including nationalization of energy utility giants Uniper and EDF), European banks only saw a marginal increase in loan defaults.
Overall, the energy crisis may have slowed down the green transformation of the financial services industry asset base, but the long-term opportunities of going net-zero remain sound.
Utilities
Finally, turning to the supply side of the energy balance, energy and utility companies represent the business and infrastructure backbone of the energy transition.
Over the past five to 10 years there has a been a substantial uptick in investment by European utilities and energy suppliers in the energy services (ESCo) space. From diversified energy companies to international electric utilities, energy infrastructure operators and municipal multi-utilities, many traditional players have added energy management technology and efficiency capabilities to their portfolios.
For example, between 2015 and 2019, a major European power utility acquired companies covering the full stack of B2B energy technology and services. The resulting ESCo offers energy analytics and energy management technology, financing and operations of solar, storage and co-generation plants, energy audit services and performance contracting, as well as demand side response solutions.
The strategic intent is clearly to integrate horizontally by adding to the existing commodity business a set of solutions that enable customers to consume more sustainably and cost-effectively, in an effort to meet the growing demand for efficiency. The energy crisis has obviously provided fresh impetus to this type of strategies. To reflect this acceleration, at the end of last year, IDC predicted that by 2025, a third of competitive gentailers would set up integrated supply, efficiency, decarbonization, and electrification service portfolios, growing average profit per customer by more than 20%.
Contributing analysts: Jan Burian, Adriana Allocato, Massimiliano Claps, Louisa Barker, Tom Zink and Filippo Battaini
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