Commission Recommendation (EU) 2024/2143 of 29 July 2024 setting out guidelines for the interpretation of Article 3 of Directive (EU) 2023/1791 of the European Parliament and of the Council as regards the energy efficiency first principle (notified under document C(2024) 5284)

Official Journal EN of the European Union L series 2024/2143 9.8.2024 COMMISSION RECOMMENDATION (EU) 2024/2143 of 29 July 2024 setting out guidelines for the interpretation of Article 3 of Directive (EU) 2023/1791 of the European Parliament and of the Council as regards the energy efficiency first principle (notified under document C(2024) 5284) THE EUROPEAN COMMISSION, Having regard to the Treaty on the Functioning of the European Union, and in particular Article 292 thereof,

Whereas:

(1) Directive 2012/27/EU of the European Parliament and of the Council(1) introduced a requirement to achieve the headline target of at least 32,5 % energy savings at Union level by 2030.

(2) Directive (EU) 2023/1791 of the European Parliament and of the Council(2)was adopted on 13 September 2023. It recast Directive 2012/27/EU, keeping some of its provisions unchanged while, at the same time, introducing some new requirements. In particular it significantly raised the level of ambition for 2030 in terms of energy efficiency, including in relation to the energy efficiency first principle.

(3) The energy efficiency first principle is defined in Regulation (EU) 2018/1999 of the European Parliament and of the Council(3) and is at the core of the EU Strategy for Energy System Integration(4). Directive (EU) 2023/1791 strengthens the principle and, for the first time sets conditions for its practical application.

(4) To have the desired impact, the energy efficiency first principle needs to be consistently applied by national, regional, local and sectoral decision makers in all relevant scenarios and policy, planning and major investment decisions – that is to say large-scale investments with a value of more than EUR 100 000 000 each or EUR 175 000 000 for transport infrastructure projects – affecting energy consumption or supply. The principle needs thus to be applied in both the energy and non-energy sectors.

(5) Nevertheless, Member States could expand the application of the principle, for example by lowering the aforementioned thresholds or by setting lower thresholds for specific sectors and project types, if they consider that a substantial energy efficiency potential would remain untapped for those sectors and project types.

(6) The proper application of the principle requires using the right cost-benefit analysis methodology for a wider set of economic, social and environmental impacts, setting enabling conditions for energy efficient solutions and enabling the proper monitoring of the applications of the principle by identifying an entity or entities responsible for this monitoring in each Member State. Cost-benefit analysis methodologies should be systematically developed and

(1) Directive 2012/27/EU of the European Parliament and of the Council of 25 October 2012 on energy efficiency, amending Directives 2009/125/EC and 2010/30/EU and repealing Directives 2004/8/EC and 2006/32/EC (OJ L 315, 14.11.2012, p. 1, ELI:

http://data.europa.eu/eli/dir/2012/27/oj).

(2) Directive (EU) 2023/1791 of the European Parliament and of the Council of 13 September 2023 on energy efficiency and amending Regulation (EU) 2023/955 (OJ L 231, 20.9.2023, p. 1, ELI: http://data.europa.eu/eli/dir/2023/1791/oj).

(3) Regulation (EU) 2018/1999 of the European Parliament and of the Council of 11 December 2018 on the Governance of the Energy Union and Climate Action, amending Regulations (EC) No 663/2009 and (EC) No 715/2009 of the European Parliament and of the Council, Directives 94/22/EC, 98/70/EC, 2009/31/EC, 2009/73/EC, 2010/31/EU, 2012/27/EU and 2013/30/EU of the European Parliament and of the Council, Council Directives 2009/119/EC and (EU) 2015/652 and repealing Regulation (EU) No 525/2013 of the European Parliament and of the Council (OJ L 328, 21.12.2018, p. 1, ELI: http://data.europa.eu/eli/reg/2018/1999/oj).

(4) Established in the Communication from the Commission to the European Parliament, the Council, the European Economic and Social Committee and the Committee of the Regions – Powering a climate-neutral economy: An EU Strategy for Energy System Integration, COM(2020) 299 final.

ELI: http://data.europa.eu/eli/reco/2024/2143/oj 1/18EN OJ L, 9.8.2024 carried out, should be based on the most up-to-date information on energy prices and should include scenarios for rising prices, such as due to the application and expansion of the Union’s emission trading system (EU ETS) pursuant to Directive 2003/87/EC of the European Parliament and of the Council(5), in order to provide an incentive to apply energy efficiency measures.

(7) Priority should be given to demand-side flexibility and solutions that are more cost-effective than investments in energy supply infrastructure in meeting policy objectives. Impacts on energy poverty should be assessed. Member States should take into account potential benefits from demand-side flexibility in applying the energy efficiency first principle and, where relevant, consider demand response at both centralised and decentralised level, energy storage, and smart solutions as part of their efforts to increase efficiency of the integrated energy system.

(8) Member States can choose at their discretion the way of transposing and implementing the requirements regarding energy services, that is best suited to their national circumstances. In this context, it would be recommended to interpret the relevant provisions of Directive (EU) 2023/1791 in a consistent way which would contribute to a coherent understanding of Directive (EU) 2023/1791 across Member States as they prepare their transposition measures.

(9) Commission Recommendation (EU) 2021/1749(6), particularly its Annex, contains relevant guidelines and examples for the implementation of the energy efficiency first principle in decision-making in the energy sector and beyond.

HAS ADOPTED THIS RECOMMENDATION:

1. Member States should follow the interpretative guidelines in the Annex to this Recommendation when transposing Article 3 of Directive (EU) 2023/1791 in their national law.

Done at Brussels, 29 July 2024.

For the Commission Kadri SIMSON Member of the Commission

(5) Directive 2003/87/EC of the European Parliament and of the Council of 13 October 2003 establishing a scheme for greenhouse gas emission allowance trading within the Community and amending Council Directive 96/61/EC (OJ L 275, 25.10.2003, p. 32, ELI:

http://data.europa.eu/eli/dir/2003/87/oj).

(6) Commission Recommendation (EU) 2021/1749 of 28 September 2021 on Energy Efficiency First: From principles to practice – Guidelines and examples for its implementation in decision-making in the energy sector and beyond (OJ L 350, 4.10.2021, p. 9, ELI:

http://data.europa.eu/eli/reco/2021/1749/oj).

2/18 ELI: http://data.europa.eu/eli/reco/2024/2143/ojEN OJ L, 9.8.2024 ANNEX

1. INTRODUCTION These guidelines provide guidance to Member States on how to interpret Article 3 of Directive (EU) 2023/1791 when transposing it into their national law. Nonetheless, the binding interpretation of Union legislation is the exclusive competence of the Court of Justice of the European Union.

Article 3 of Directive (EU) 2023/1791 requires Member States to ensure the assessment of energy efficiency solutions in planning, policy and major investment decisions in both energy and non-energy sectors. The Article also requires the establishment of monitoring mechanisms, the promotion of cost-benefit methodologies, and the removal of barriers to the implementation of the Energy Efficiency First (EE1st) principle. Energy efficiency solutions should go beyond end-use energy savings, covering also demand-side resources (demand response, energy storage, smart solutions) and the efficient conversion, transmission and distribution of energy. It is expected that Member States, by transposing Directive 2023/1791, will incorporate the EE1st principle in their decision-making and permitting processes and apply it in all relevant future planning, policy and major investment decisions.

2. LEGAL AND POLICY CONTEXT The EE1st principle, as defined in Article 2, point (18), of Regulation (EU) 2018/1999, is based on the premise that strategic investments in energy efficiency can cost-effectively reduce demand, thereby reducing the need for, and costs associated with, additional energy production and infrastructure.

As stated in recital (15) of the preamble to Directive (EU) 2023/1791, the EE1st principle is an ‘overarching principle that should be taken into account across all sectors […]. Energy efficiency solutions should be considered as the first option in policy, planning and investment decisions when setting new rules for the supply side and other policy areas.’ Recommendation (EU) 2021/1749, which is relevant to Article 3 of Directive (EU) 2023/1791, sets out specific tools and actions to assist Member States in implementing the EE1st principle. Article 3(3) of Directive (EU) 2023/1791, encourages Member States to take account of that recommendation.

Article 3 is interlinked with Article 7 of Directive (EU) 2023/1791 which requires Member States to ensure that in concluding public contracts and concessions with a value equal to or greater than the thresholds laid down in Article 8 of Directive 2014/23/EU(1), Article 4 of Directive 2014/24/EU(2)and Article 15 of Directive 2014/25/EU(3)of the European Parliament and of the Council, contracting authorities and contracting entities apply the EE1st principle.

Article 3 is also interlinked with Article 27 of Directive (EU) 2023/1791 pursuant to which Member States are to ensure that gas and electricity transmission and distribution system operators apply the EE1st principle, in their network planning, network development and investment decisions. Article 27 also requires national energy regulatory authorities to apply the EE1st principle in carrying out the regulatory tasks provided for in Directives 2009/73/EC(4) and

(EU) 2019/944(5)of the European Parliament and of the Council regarding their decisions on the operation of the gas and electricity infrastructure, including their decisions on network tariffs.

(1) Directive 2014/23/EU of the European Parliament and of the Council of 26 February 2014 on the award of concession contracts (OJ L 94, 28.3.2014, p. 1, ELI: http://data.europa.eu/eli/dir/2014/23/oj).

(2) Directive 2014/24/EU of the European Parliament and of the Council of 26 February 2014 on public procurement and repealing Directive 2004/18/EC (OJ L 94, 28.3.2014, p. 65, ELI: http://data.europa.eu/eli/dir/2014/24/oj).

(3) Directive 2014/25/EU of the European Parliament and of the Council of 26 February 2014 on procurement by entities operating in the water, energy, transport and postal services sectors and repealing Directive 2004/17/EC (OJ L 94, 28.3.2014, p. 243, ELI: http:// data.europa.eu/eli/dir/2014/25/oj).

(4) Directive 2009/73/EC of the European Parliament and of the Council of 13 July 2009 concerning common rules for the internal market in natural gas and repealing Directive 2003/55/EC (OJ L 211, 14.8.2009, p. 94, ELI: http://data.europa.eu/eli/dir/2009/73/oj).

(5) Directive (EU) 2019/944 of the European Parliament and of the Council of 5 June 2019 on common rules for the internal market for electricity and amending Directive 2012/27/EU (OJ L 158, 14.6.2019, p. 125, ELI: http://data.europa.eu/eli/dir/2019/944/oj).

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3. TERMS AND CONCEPTS USED IN THESE GUIDELINES AND IN ARTICLE 3 OF DIRECTIVE (EU) 2023/1791

3.1. The difference between planning, policy and major investment decisions Neither Directive (EU) 2023/1791 nor Recommendation (EU) 2021/1749 make an explicit delineation between planning, policy, and major investment decisions. The following explanations are based on the considerations of the Commission services and are given by way of indication only. Table 1 summarises the characteristics of planning, policy and major investment decisions.

Table 1 Comparison of planning, policy and major investment decisions Decision Type Description Examples Key consideration High-level strategic choices Public planning: integrated national energy Do not necessarily regarding energy systems and and climate plans referred to in Article 3 of involve specific finan­ non-energy sectors, focusing on Regulation (EU) 2018/1999(1); ten-year cial commitments to trends, feasibility, and evaluation network development plans; national projects.

Planning deci­ of energy solutions. transport planning; sustainable urban sions mobility plans; local heating and cooling plans referred to in Article 25, paragraph 6 of Directive (EU) 2023/1791

Private planning: strategic business plan­ ning; real estate planning; fleet planning The development, review, and Financing schemes; energy market design Ensuring that existing

implementation of policies with and regulation: standards and norms; and new policies are in a significant impact on energy energy and CO taxes; information and line with the EE1st Policy decisions 2 consumption and of regulations awareness measures. principle.

by national, regional, and local governments Commitment to specific, indi­ Network infrastructure; electricity trans­ Tangible projects with vidual projects with concrete mission interconnector line; large-scale allocated financial financial implications. offshore wind farm; hydrogen production resources.

Major invest­ capacities, large-scale energy storage, ment decisions building development project, new or extended infrastructure for air transport, new highways.

(1) Regulation (EU) 2018/1999 of the European Parliament and of the Council of 11 December 2018on the Governance of the Energy Union and Climate Action, amending Regulations (EC) No 663/2009 and (EC) No 715/2009 of the European Parliament and of the Council, Directives 94/22/EC, 98/70/EC, 2009/31/EC, 2009/73/EC, 2010/31/EU, 2012/27/EU and 2013/30/EU of the European Parliament and of the Council, Council Directives 2009/119/EC and (EU) 2015/652 and repealing Regulation (EU) No 525/2013 of the European Parliament and of the Council (OJ L 328, 21.12.2018, p. 1, ELI: http://data.europa.eu/eli/reg/2018/1999/oj).

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3.2. Expenditure that falls under major investment decisions A major investment decision concerning a physical asset, whether related to energy systems or non-energy sectors, involves capital expenditure (CAPEX). This includes costs associated with acquiring or upgrading physical assets, such as purchasing machinery or equipment, land acquisition, and costs for the construction or installation of the infrastructure. It could also encompass design and engineering costs, permits, and initial training costs for operating the new equipment or infrastructure. These are upfront costs which provide value over a long period of time.

Excluded from those upfront investments are the operating expenses (OPEX), which are the ongoing costs for running a product, business, or system. In the context of an infrastructure project, OPEX would include energy costs, routine maintenance and repairs, personnel costs, and other expenses related to the day-to-day operation of the infrastructure.

These are not usually considered in the initial investment decision as they are recurrent, often variable costs that are incurred for the actual operation of the asset once it has been installed and is in use.

Directive (EU) 2023/1791 does not include any specifications on whether CAPEX and/or OPEX have to be considered to define major investment decisions. Thus, all relevant expenses – whether CAPEX, OPEX or any other type – should be taken into account.

3.3. Phased infrastructure projects in the context of major investment decisions Phased infrastructure projects, such as the construction of wind farms or highways, should be treated as a single investment decision and the total CAPEX for all components should be taken into account to determine whether the project exceeds the major investment thresholds set out in Article 3(1) of Directive (EU) 2023/1791.

For instance, even though each wind turbine within a wind farm might independently generate and supply power, the entire wind farm project represents a single investment decision. Similarly, a multi-year highway construction project should be considered in its entirety for investment evaluation, regardless of whether individual sections can operate independently.

3.4. Non-energy sectors Non-energy sectors are those areas of the economy that do not primarily deal with the production, transmission, distribution, or sale of energy. While those sectors consume and depend on energy for their operations, their main function is not centred on energy production or supply. Article 3(1) of Directive (EU) 2023/1791 provides a non- exhaustive list of examples of non-energy sectors, which includes buildings, transport, water, information and communications technology, agriculture, and the financial sector.

According to the Eurostat energy balance methodology(6), non-energy sectors could be understood as those involved in final consumption of energy (Eurostat code FC_E). Those sectors comprise the industry sector (FC_IND_E), the transport sector (FC_TRA_E), and other sectors (FC_OTH_E), such as commercial & public services, households, agriculture and forestry, and fishing. Therefore, the indicative list in Article 3(1) could equally be aligned to the Eurostat energy end-use sectors, or to a national grouping of energy end-use sectors.

4. OBLIGATIONS UNDER ARTICLE 3

4.1. What energy efficiency solutions to assess? Energy efficiency solutions could be understood as technologies, processes and practices that reduce or shift over time the amount of energy required to provide the same level of performance, service, or goods. It follows from Article 2, point

(18), of Regulation (EU) 2018/1999 in conjunction with Article 3(1) of Directive (EU) 2023/1791 that such solutions

could include:

(a) end-use energy savings, such as, but not limited to, insulation and other energy-saving improvements to buildings, modal shift, fuel-efficient vehicles, energy-saving appliances and devices, efficient motor systems and heat recovery;

(6) European Commission, Energy balance guide, Methodology guide for the construction of energy balances & Operational guide for the energy balance builder tool, 2019.

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(b) demand-side resources and system flexibilities, which might involve elements like demand response, energy storage (including batteries and thermal storage), and smart solutions (for example, smart meters, smart thermostats);

(c) efficient conversion, transmission and distribution of energy, incorporating approaches such as the reduction of network losses, smart grid deployment, and efficient district heating and cooling.

Article 3(1) requires Member States to ensure that energy efficiency solutions, where they are available and can meet the same specific need or policy objective, are assessed in planning, policy and major investment decisions. Member States could, for example, regularly update studies about energy savings potentials, and make available to planners and investors up-to-date catalogues of energy efficiency solutions. The following tables provide some examples of possible alternatives or complementary solutions to plans for additional infrastructure developments in energy systems (Table 2) and non- energy sectors (Table 3), respectively. They are not exhaustive lists.

Table 2 Examples of alternatives in the energy system when applying the EE1st principle Sector Plans for additional infrastructure development Possible alternatives / complementary solutions — generation (conventional and renewable — demand-side flexibility/demand response (for power plants, cogeneration plants) example, electric vehicles demand manage­ ment, responsive/bidirectional charging, flex­ ible heat pumps, Time-of-Use energy tariffs and — transmission and distribution (high-voltage services for demand-response aggregation) Electricity transmission lines, substations, interconnec­ tors, transformers, etc.) — smart grid technologies, including advanced metering infrastructure — storage (pumped hydro storage, battery sto­ — end-use energy savings (for example, efficient rage, etc.) appliances and devices, lighting) — production (gas fields, offshore platforms, — end-use energy savings (for example, insulation shale gas extraction sites, hydrogen infra­ of buildings) structure) — electrification of heating systems and transport Gas — transmission and distribution (pipelines, com­ modes (which has inherent system efficiency pressor stations, interconnectors) benefits) — storage (underground gas storage facilities, li­ quefied natural gas terminals) — reduction in network losses — generation (conventional boilers, ovens, co­ — end-use energy savings (for example, insulation generation) of buildings) — system integration and system efficiency (for ex­ ample, power-to-heat) — networks (pipes, heat exchangers, pumps, sub­ Heat stations) — renewable energy sources (for example, heat pumps, geothermal, solar-thermal energy) — waste heat recovery — storage (thermal energy storage, phase change materials, etc.) — renewable district heating 6/18 ELI: http://data.europa.eu/eli/reco/2024/2143/ojEN OJ L, 9.8.2024 Table 3 Examples of alternatives in the non-energy sectors when applying the EE1st principle Plans for additional infrastructure develop­ Non-energy sector Possible alternatives / complementary solutions ment — large-scale construction (for example, — energy renovations of existing buildings commercial buildings, residential com­ plexes, public facilities like schools) invol­ — mapping of available (unused) buildings before ving decisions on heating, ventilation, and new constructions air conditioning systems — energy efficient construction (incl. nearly zero energy building, zero emissions buildings) — building automation and control systems (for example, smart thermostats, occupancy sen­ sors) — efficient heating systems (for example, heat Buildings pumps, district heating) — passive cooling solutions (for example, sun shading, thermal mass, night cooling, natural ventilation and lighting) — energy efficient lighting and appliances — renewable energy integration (for example, PV, solar thermal) — triggering behavioural change in use of energy — smart charging systems — major transport infrastructures (for exam­ — public transportation (for example, urban and ple, motorways, railways, airports, ports sub-urban mass transit systems, intercity rail and maritime infrastructure) connections, bus fleets) — cycling and pedestrian infrastructure (for exam­ ple, bike lanes, bike-sharing systems) — consolidation of cargo — mobility management (for example, car-sharing Transport programs, stimulating higher occupancy of ve­ hicles) — support for multimodal (combined) transport — measures stimulating an increased use of energy efficient modes of transport — fleet electrification — electric vehicle charging infrastructure

ELI: http://data.europa.eu/eli/reco/2024/2143/oj 7/18EN OJ L, 9.8.2024 — construction of new industrial sites — promotion of efficient industry sector integra­ tion and clustering at local level — use of new fuels and energy consuming processes — flexible operation via demand response and Industry self-consumption — reuse of waste heat and cold — electrification and ‘no-regret’ use of energy fuels — water supply (for example, desalination fa­ — water savings (for example, water-efficient agri­ cilities) culture practices) — energy efficient pumps, motors and treatment facilities Water — wastewater treatment plants — reduction in network losses — smart water networks and pressure manage­ ment systems — water distribution networks (for example, pipes, pumping stations) — rain- and grey-water usage in buildings — data centres (for example, energy use for — energy efficient data centre design and opera­ computing, cooling) tion (incl. waste heat recovery) ICT — energy-efficient networking equipment — telecommunications infrastructure (for example, broadband networks, mobile — smart grid technologies and digital solutions for systems) energy management — irrigation systems (for example, surface — adapting the choice of crops to local climate, sprinklers) taking into account climate change — agriculture practices limiting the need for ma­ chinery and equipment (for example, perma­ culture) Agriculture — farm machinery and equipment (for exam­ — energy efficient irrigation (for example, solar- ple, combine harvesters, tractors) powered pumps) — precision agriculture (for example, GPS-guided machinery) — renewable energy use (for example, solar dry­ — greenhouses, vertical farms ing, solar panels)

4.2. How to assess energy efficiency solutions? Assessing energy efficiency solutions in policy, planning or major investment decisions means that such solutions should be considered and evaluated as part of the decision-making process. The use of cost-benefit analysis (CBA) for the

assessment of energy efficiency solutions could include:

(a) technical analysis: identification and evaluation of the technical feasibility, performance, and implementation requirements of potential energy efficiency solutions. Considerations at this stage could include energy saving or load shifting potential, compatibility with existing systems, technological requirements, and potential constraints or risks;

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(b) financial analysis: examination of the investment from the perspective of the decision maker; focusing on direct financial costs and benefits, using market prices for valuation, and incorporating transfer payments, such as taxes and subsidies. The applied discount rate reflects the investor’s opportunity cost of capital. Internal wider benefits(7), such as enhanced workforce productivity following an office building retrofit, may also be considered, although these are often challenging to quantify and monetise for private decision makers;

(c) economic analysis: Taking a societal perspective, capturing all economic costs and wider benefits of an energy efficiency solution for the society as a whole; using economic or shadow prices for valuation and exclude transfer payments. The applied discount rate represents societal time preference as regards money and is usually lower than that in financial analysis. This approach considers also external wider benefits, including environmental, health, and other societal impacts that are not captured in a financial analysis(8). Importantly, in line with Article 3(5), point (b), of Directive (EU) 2023/1791, the analysis should also take into account the impact on energy poverty. For instance, it could include a dedicated assessment of costs and benefits for vulnerable and low-income households.

The economic analysis is particularly relevant for the decision-making process of public authorities and their role in upholding public interest by considering the wider societal implications of their actions.

Private entities such as businesses and non-governmental organisations normally accompany their decisions with financial analysis, reflecting their own financial interests, unless the additional societal cost would be covered by public funding.

External wider benefits (for example, effect to air quality) might be considered, but they often constitute secondary considerations, potentially pursued for reasons such as corporate social responsibility. Therefore, Member States could encourage private entities to consider societal benefits alongside financial considerations in their decision-making processes by offering public support and other measures (see also Section 4.9.).

4.3. Handling of major investment decisions above and below the thresholds set out in Article 3(1) of Directive

(EU) 2023/1791 Pursuant to Article 3(4) of Directive (EU) 2023/1791, Member States are to ensure that the competent authorities monitor the application of the EE1st principle. As detailed in Section 5 of these guidelines, part of the competent authorities’ remit should include determining whether investments are above or below the thresholds set out in Article 3(1) of Directive

(EU) 2023/1791.

As regards major investment decisions above the thresholds (EUR 100 million or EUR 175 million for transport infrastructure projects), Article 3(1) of Directive (EU) 2023/1791 explicitly requires Member States to ensure that energy efficiency solutions are assessed. For more details, see Section 4.2. of these guidelines.

As regards major investment decisions below the thresholds, there is no explicit legal requirement in Directive

(EU) 2023/1791 to assess energy efficiency solutions. However, Member States are encouraged to do so whenever those decisions result in significant energy consumption.

4.4. How to ensure proper assessment of wider benefits? Pursuant to Article 3(5), point (a), of Directive (EU) 2023/1791, Member States are required to promote and make publicly available cost-benefit methodologies that allow proper assessment of the wider benefits of energy efficiency solutions.

Wider benefits could be understood as the social, environmental and economic impacts arising from implementing energy efficiency solutions which are not immediate personal financial gains or losses that appear on an energy bill.

(7) See Section 4.4.

(8) See Section 4.4.

ELI: http://data.europa.eu/eli/reco/2024/2143/oj 9/18EN OJ L, 9.8.2024 As outlined in Tables 4, 5 and 6, examples of social impacts include improved indoor comfort, alleviation of energy poverty, enhanced property values and noise reduction. Environmental benefits involve reductions in greenhouse gases, air and water pollution, waste generation, and lower land requirements, aiding ecosystem preservation. Economic benefits lead to local job creation, increased workforce productivity, enhanced energy security, and stimulation of business innovation and competitiveness. Each benefit underscores the broad significance of energy efficiency measures beyond their direct financial implications.

Assessment of those wider benefits could involve the following steps:

(a) ensuring sufficient scope: A balanced assessment requires consideration of all relevant benefits, bearing in mind that such benefits are often spread across various sectors and actors. Ignoring benefits could lead to a partial assessment.

For instance, if the enhanced indoor comfort and avoided illnesses and premature deaths resulting from building retrofits are neglected, the positive results of those buildings retrofits are underestimated;

(b) quantification in physical units: Impacts should be quantified in physical units, such as tonnes of air pollutants, full- time equivalent jobs, or avoided sick days. This provides a preliminary basis for comparing different investment options;

(c) monetisation: The recommended method is to aggregate wider benefits expressed in different physical units. This process is complex as it involves establishing a value for benefits for which there at first sight no market value. As listed in Tables 4, 5 and 6, monetisation techniques could include direct market valuation, willingness to pay for, or willingness to accept approaches.(9)Monetisation is inherently controversial due to the ethical complexities involved, such as valuing human life, and should be conducted carefully using robust methods;

(d) checking for impact overlaps: Aggregation in monetary terms could lead to overlaps. For example, building retrofits improve indoor comfort. This affects human health and productivity, which ultimately may also affect economic aspects like disposable income or public budget. Allowing for overlaps would be double-counting of the benefits and would result in overestimation of net impacts. To avoid this, a ‘multiple impact pathways’ mapping approach could be used, tracing all relevant benefits, their interactions, and the endpoints to be monetised(10).

To support that assessment process, various tools and methodologies for the quantification of wider benefits have been developed, including the Horizon 2020 supported tools COMBI(11), MICAT(12), and Odyssee-Mure.(13) More detailed information on quantification methods and supporting tools for individual wider benefits can be found in point 3.7.1. of the Annex to Recommendation (EU) 2021/1749. For transport, the 2019 handbook on the external costs of transport (or its future updates) should be used.(14)

(9) H. Pollitt, E. Alexandri, P. Boonekamp, U. Chewpreecha, A. de Rose, R. Drost, L. Estourgie, C. Farahani, D. Funcke, S. Markkanen, G.

Moret, C. Rodenburg, F. Suerkemper, S. Tensen, P. Theillard, J. Thema, P. Vethman, F. Vondung and M. Voogt, 2016: The Macroeconomic and Other Benefits of Energy Efficiency. Final Report. T. Mandel, L. Kranzl and S. Thomas, 2022: Energy Efficiency

First and Multiple Impacts: integrating two concepts for decision-making in the EU energy system, Deliverable D3.4 of the ENEFIRST project. F. Suerkemper, F. Vondung, C. Xia-Bauer, J. Teubler, S. Hackspiel, F. Berger, B. Schlomann, W. Eichhammer, F. Wagner, A.

DeVita, Z. Vrontisi and I. Rogulj, 2022: Overall quantification and monetisation concept, Deliverable 2.1 of the MICAT project.

(10) D. Ürge-Vorsatz, S. T. Herrero, N. K. Dubash and F. Lecocq, 2014: Measuring the Co-Benefits of Climate Change Mitigation, 39 Annual Review of Environment and Resources 549, 2014.

(11) COMBI: Calculating and Operationalising the Multiple Benefits of Energy Efficiency in Europe, https://combi-project.eu/.

(12) MICAT: Multiple Impacts Calculation Tool, https://micatool.eu/. The MICATool can be used as a calculator allowing for the use of own data (if available) or otherwise default set values compatible with NECPs and/or EU legislation.

(13) ODYSSEE-MURE https://www.odyssee-mure.eu/data-tools/multiple-benefits-energy-efficiency.html/.

(14) European Commission, Directorate-General for Mobility and Transport, Essen, H., Fiorello, D., El Beyrouty, K. et al., Handbook on the external costs of transport – Version 2019 – 1.1, Publications Office, 2020, https://data.europa.eu/doi/10.2832/51388.

10/18 ELI: http://data.europa.eu/eli/reco/2024/2143/ojEN OJ L, 9.8.2024 In accordance with the EU level CBA methodologies(15) provided for in Article 11 of Regulation (EU) 2022/869 of the European Parliament and of the Council(16), national regulatory authorities could define appropriate methodologies for conducting CBAs in specific areas. If required, those methodologies could be supplemented with additional guidelines, thereby ensuring robust CBAs that thoroughly assess the wider benefits of energy efficiency solutions.

Table 4 Social wider benefits of energy efficiency solutions Possible quantification and monetisation Benefit Description approaches Improved insulation, heating, and cooling systems Survey-based measurements of comfort, could make living and working environments more potentially monetised through health cost Indoor comfort comfortable and contribute to better health savings (willingness to pay/accept method) or productivity gains (revealed preference method) Implementing energy efficiency measures could help Savings on energy bills, reflected in disposable Energy poverty alleviate energy poverty by making energy more income of households (direct market valua­ affordable for low-income households tion) Energy-efficient buildings could have higher market Change in property values, potentially mone­ Property values value due to reduced energy costs, compliance with tised using real estate market data (hedonic national standards and improved comfort pricing method) Energy-efficient building design and insulation could Noise reduction quantified in decibels, mone­ help reduce noise from both external sources and tised using property value impacts (hedonic internal systems, improving living and working con­ pricing method) or health cost savings (will­ Noise ditions. Energy efficient (electric and human-pow­ ingness to pay/accept methods) ered) land and waterway transport could also reduce noise emissions.

Table 5 Environmental wider benefits of energy efficiency solutions Possible quantification and monetisation Benefit Description approaches Energy efficiency solutions could decrease the demand Quantified in tonnes of CO -equivalent 2 Greenhouse gases for energy, which often leads to lower greenhouse gas reduced, potentially monetised using carbon emissions pricing (direct market valuation) Reducing energy consumption could help decrease air Quantified in reductions of pollutants, Air quality pollution from power plants and industrial processes, monetised using health impact costs benefiting public health and the environment (damage cost avoided method)

(15) ENTSOG, 2019: 2nd ENTSOG Methodology for Cost-Benefit Analysis of Gas Infrastructure Projects 2018. ENTSO-E 2018: 2nd ENTSO-E Guideline for Cost Benefit Analysis of Grid Development Projects, Brussels, 2018.

(16) Regulation (EU) 2022/869 of the European Parliament and of the Council of 30 May 2022 on guidelines for trans-European energy infrastructure, amending Regulations (EC) No 715/2009, (EU) 2019/942 and (EU) 2019/943 and Directives 2009/73/EC and (EU) 2019/944, and repealing Regulation (EU) No 347/2013 (OJ L 152, 3.6.2022, p. 45, ELI: http://data.europa.eu/eli/reg/2022/869/oj).

ELI: http://data.europa.eu/eli/reco/2024/2143/oj 11/18EN OJ L, 9.8.2024 Energy-efficient technologies and practices could help Water savings quantified in volume, poten­ decrease water usage, as water is often required for tially monetised using water pricing (direct Water use power generation and energy production processes. market valuation) This can lead to lower water stress and reduced com­ petition for water resources.

Energy efficiency could lead to a reduction in waste Waste reduction quantified in weight/ generation, as less raw material is required for energy volume, monetised using waste disposal or Waste production, and more efficient processes produce less recycling costs (avoided cost method) waste and by-products.

By reducing the demand for land and resources asso­ Land savings quantified in area, potentially ciated with energy production, energy efficiency could monetised using land value (direct market Land use contribute to the protection of ecosystems. valuation) or ecosystem service valuations (willingness to pay method) Energy efficiency can lead to reduce biodiversity loss, as Even if metrics already exist to quantify less raw materials are required for energy production, biodiversity loss, there is no full consensus including biomass and virgin materials whose extrac­ on the best methodologies. However, the tion can be harmful for nature. Commission is involved in the development Biodiversity of different useful approaches and data(1) that can be used in this context. At the very least, a qualitative assessment of pressures and impacts on nature should be imple­ mented.

(1) The Commission adopted a Recommendation on the environmental footprint of organisations in December 2021, with references to biodiversity (page 27). Also, the Commission Delegated Regulation (EU) 2023/2772 of 31 July 2023supplementing Directive 2013/34/EU as regards sustainability reporting standards (OJ L, 2023/2772, 22.12.2023, ELI: http://data/europa.eu/eli/reg_del/2023/ 2772/oj) refers to biodiversity from page 133. Natural Capital and Ecosystem Services Accounts (Ecosystem accounts – measuring the contribution of nature to the economy and human wellbeing – Statistics Explained (europa.eu)) and the work of Mapping and Assessment of Ecosystems and their Services (MAES, https://data.jrc.ec.europa.eu/collection/MAES), as well as the Habitats and Birds Directives provide relevant data and information about ecosystems, their condition and services.

Table 6 Economic wider benefits of energy efficiency solutions Possible quantification and monetisation Benefit Description approaches Investments in energy efficiency could create local Jobs created, monetised using wage data Job creation jobs in areas such as construction, manufacturing and (direct market valuation) energy services.

Energy-efficient workplaces could lead to better Productivity gains quantified using perfor­ Workforce produc­ working conditions, boosting employee productivity mance metrics, monetised using wage or tivity and job satisfaction. output data (revealed preference method) Energy efficiency could help reduce a country’s Energy savings quantified in energy units, Energy security dependence on imported energy sources, enhancing monetised using energy price forecasts (direct national energy security. market valuation) Investments in energy efficiency could stimulate Difficult to directly quantify and monetise, Innovation and innovation in technology and business models, help­ but potential indicators include number of competitiveness ing companies gain a competitive edge in global patents filed, number of new products markets. launched, or changes in market share 12/18 ELI: http://data.europa.eu/eli/reco/2024/2143/ojEN OJ L, 9.8.2024

4.5. How to apply the EE1st principle within and beyond the public sector and regulated sectors? The practical application of the EE1st principle depends on the decision-making context and the actors involved. Even though the implementation of the principle embodied in Directive (EU) 2023/1791 is vested in the Member States, the relevant decisions on planning, policy and investment are taken by a large number of actors.

Policy makers (ministries and the supervisory authorities at all levels of government) should take into account the various key responsibilities they have when implementing the EE1st principle:

(a) reviewing existing and planned policies to determine if they are consistent with the EE1st principle, that is to say whether the incentives or regulations create a level playing field for energy efficiency solutions and traditional energy supply infrastructure;

(b) developing energy market regulation that is technology-inclusive, that is to say, values the benefit of energy efficiency and flexibility;

(c) taking into consideration the implementation of the EE1st principle when providing any public investment (including network investment) and public funding/support for market actors. If such an investment constitutes a major investment decision above the thresholds of EUR 100 million or EUR 175 million for transport infrastructure projects, Member States are required to ensure that energy efficiency solutions are assessed, including before granting possible public support;

(d) developing strategic planning of energy policies that fully consider the use of energy efficiency solutions.

The leverage of the Member States on the different actors who can actually implement the EE1st principle in their decisions varies considerably. The basic distinction is between public/regulated actors and market actors (including energy market actors and final energy users who should be considered as part of the ‘non-energy sectors’). The scope of leverage and the main tools are summarised in Figure 1.

Publicly owned or regulated entities may be directly requested by national authorities to implement the EE1st principle in their operations if they have to make their planning and major investment decisions based on societal CBA. In addition, the implementation of the EE1st principle by regulated entities, such as network operators means the use of demand-side flexibility and demand response(17) whenever it is a cost-effective alternative to traditional network investment and operation and does not negatively affect the reliability and security of the energy system. Network planning and operation

could involve the following steps:

(a) identifying supply-demand trends: assessing energy trends (for example, electrification of heat and transport, electrolysers, behind-the-meter generation, etc.) in a location-specific manner and analysing the adequacy of the existing infrastructure to meet consumer expectations; properly factoring in price elasticity of demand and the potential for both explicit (traded and dispatchable) and implicit (price-based) demand flexibility;

(b) assessing demand-side and supply-side solutions: carrying out feasibility studies to determine the technical and economic viability of all options, including demand-side solutions (for example, procurement of flexible load) next to supply-side (for example, installation of new substation), including their respective costs and wider benefits. The mandate of national regulatory authorities usually includes consumer protection and that includes the implementation of the least cost solution enforced to shield consumers from cost that are avoidable;

(c) monitoring and evaluation the performance of both demand-side and supply-side solutions to identify opportunities for improvement.

Network operators are natural monopolies under regulatory oversight. To deliver on this obligation, regulations for network operators could be reformed to incentivise investments into demand-side solutions by eliminating the CAPEX- bias and introducing performance targets with the adjacent financial incentives. In addition, network tariffs could be designed so that payment is primarily linked to consumption, incentivising consumers to use less energy.

(17) In general, alternatives also known as non-wires alternatives.

ELI: http://data.europa.eu/eli/reco/2024/2143/oj 13/18EN OJ L, 9.8.2024 Energy market actors (producers, storage owners, suppliers, aggregators etc.) make business decisions, based on their own financial analysis(18), without direct regulatory oversight. Energy suppliers, for example, sell energy to customers. They could contribute to the application of the EE1st principle through energy efficiency obligation schemes (EEOS) pursuant to Article 9 of Directive 2023/1791, where they are required to improve the end-use energy efficiency of a customer’s facility.

Final energy users (which are to be regarded as part of the ‘non-energy sectors’) are market actors whose energy related actions can be shaped predominantly via price and tariff signals, and administrative regulations such as product, building or land use regulations. They produce and consume energy (operational decisions) and invest in various energy assets ‘behind the meter’, including buildings (investment decisions). By adopting energy-saving behaviours, investing in technologies and practices linked to participation in demand response programmes, generating energy from renewable sources and using ‘behind the meter’ storage (including power-to-grid electric vehicles), they could directly impact the need for supply-side infrastructure ‘in front of the meter’. Applying the EE1st principle to final energy users would mean providing them with effective incentives and empowering environment that enables them to adopt technologies and behaviours that reduce energy use and introduce demand flexibility. Such empowering environment includes not only provision of incentives but also behavioural and information instruments.

Figure 1 Leverage ladder for the application of the EE1st principle Table 7, which is based on Recommendation (EU) 2021/1749, suggests measures across policy areas to facilitate the EE1st principle’s application.

Table 7 Policy areas and examples of measures to enable the application of the energy efficiency first principle in those policy areas Policy area Selection of measures — Dynamic electricity pricing Electricity markets — Support for installation of smart equipment — Time-differentiated network tariffs

(18) See Section 4.2.

14/18 ELI: http://data.europa.eu/eli/reco/2024/2143/ojEN OJ L, 9.8.2024 — Facilitation for participation of demand response and its aggregators in energy markets — Acceleration of roll-out of smart metering systems — Innovative regulatory incentives for transmission system operators and distribution system operators in network development — Development of joint supply-demand scenarios for infrastructure planning — Requirement to use CBA in planning of regional networks of electricity, gas or heat to Energy supply and distri­ identify the most cost-effective energy supply and demand options bution — Integration of heating and cooling in urban, rural or industrial areas planning — Reuse of waste heat and integration of waste heat in district heating networks — Linking permitting of industrial facilities generating waste to the possibility of connecting to local heat networks Energy demand (industry — Minimum energy performance standards and services) — Introducing requirements for demand response capacities — Introducing augmented tax depreciation or temporary depreciation rules — Inclusion of building renovations in the auctioning of renewable energy sources — Innovative financing schemes for building renovation, including energy efficiency mortgages Buildings — Linking permitting of localization of buildings to renewable energy potential — Using energy performance contracts to ensure guaranteed energy efficiency gains — Installing feedback systems on energy consumption via smart meters and smart devices — Incentivising public transport, cycling and walking — Incentivising purchase and use of zero-emission vehicles Transport — Promoting shared mobility which leads to increasing occupancy rates of vehicles — Taking energy efficiency into consideration when designing infrastructure projects — Linking of electricity and water infrastructure, for example, by pumping water when electricity demand is low Water — Production of biomethane on site in wastewater treatment — Use of process control techniques across water systems to reduce water cooling volumes for energy production

ELI: http://data.europa.eu/eli/reco/2024/2143/oj 15/18EN OJ L, 9.8.2024 — Encouraging localization of data centres close to heat networks — Setting system energy performance standards Information and com­ munications technology — Promoting use of behind-the-meter battery storage for demand response in 5G macro sites — Providing information to consumers on energy consumption variations of streaming options — Applying full asset life analysis of the energy and carbon footprint of the investment, when assessing a financing decision — Developing EE1st application tools to assist developers and project owners to fully assess Financial sector the potential opportunities for improved energy efficiency — Evaluation and design of green components for traditional mortgage loans with energy performance assessment

4.6. How to ensure the application of the EE1st principle in major private investment decisions? Member States are required to ensure the assessment of energy efficiency solutions in major investment decisions(19). When the investment project in question is under public ownership the responsible authorities, based on the analysis could take a decision that would alter or downscale the project to maximise the social benefit.

For investments under private ownership, taking an alternative course of action might not be possible or in the interest of the private owner. For example, where a power plant operator intends to build a new gas power plant valued above EUR 100 million, national authorities could require an economic (social) CBA before the plant construction. Even if that CBA reveals that energy efficiency solutions, such as demand-side flexibility, are economically more cost-effective than the power plant, the plant operator would have no financial incentive to stall its own investment and to forego potential profits, since its primary business concern is energy generation, not savings.

Therefore, rather than imposing the EE1st principle through mandatory assessments, private major investment decisions should be driven by dedicated policy incentives to encourage the adoption of cost-effective energy efficiency solutions.

Carbon pricing provided for in Directive (EU) 2003/87/EC will reduce the financial return of such investments, while also enforcing non-discriminatory market access for demand-side flexibility in energy, balancing and capacity markets and deploying time-differentiated electricity pricing as in accordance with Regulation (EU) 2019/943 of the European Parliament and of the Council(20)will increase the financial return for the alternatives based on demand side flexibility. In addition, credible energy or sectoral planning, such as national energy and climate plans or national transport planning, could provide private decision-makers with information on foreseeable policy frameworks and market conditions.

4.7. How to address the impact on energy poverty? As defined in Article 2, point (52), of Directive (EU) 2023/1791, energy poverty means ‘a household’s lack of access to essential energy services, where such services provide basic levels and decent standards of living and health […], caused by a combination of factors, including at least non-affordability, insufficient disposable income, high energy expenditure and poor energy efficiency of homes.’ Recital (23) of the preamble to Directive (EU) 2023/1791 highlights that individuals at risk of energy poverty or residing in social housing should benefit from the application of the EE1st principle. In particular, by promoting ‘cost-efficient energy efficiency measures’ as referred to in Article 2, point (18), of Regulation (EU) 2018/1999, the EE1st principle inherently aims to reduce costs and increase benefits for consumers, including those impacted by energy poverty. This approach directly addresses structural issues, such as inefficient homes, that contribute to energy poverty.

(19) See section 4.2.

(20) Regulation (EU) 2019/943 of the European Parliament and of the Council of 5 June 2019 on the internal market for electricity (OJ L 158, 14.6.2019, p. 54, ELI: http://data.europa.eu/eli/reg/2019/943/oj).

16/18 ELI: http://data.europa.eu/eli/reco/2024/2143/ojEN OJ L, 9.8.2024 Pursuant to Article 24(1) of Directive (EU) 2023/1791, Member States are required to empower and safeguard individuals affected by energy poverty. Suitable measures could include:

(a) promoting energy efficiency solutions;

(b) prioritising public funding for vulnerable beneficiaries;

(c) providing comprehensive technical assistance and information;

(d) deploying funding and financial tools to help vulnerable groups capitalise on energy efficiency investments.

4.8. What institutions could act as monitoring entities? The ‘entity’ referred to in Article 3(5), point (c) of Directive (EU) 2023/1791 could for example, be either a public entity (national regulatory authority, the energy ministry, a government agency) or an independent third-party actor with a specific and explicit mandate from the State to execute this task. It would be important that the entity has the required cross-cutting institutional mandate for coordinating all ‘relevant entities’ as referred to in Article 3 of that Directive and in Recommendation (EU) 2021/1749. Monitoring should not be limited to the new policy decisions or investments but include the assessment of the status quo with regard to all relevant policies and regulations. Even though the choice is likely to be country specific, depending on the existing institutions and their tasks, some general considerations are

provided in Table 8:

Table 8 Relevant institutions for Article 3(4) Institution Pros National regulatory authority/ Energy (all fuels) and regulation focused; often tasked with the implementation of energy agency energy efficiency policies such as EEOs; experience in data collection and monitoring Direct impact of policies on both energy supply and demand; established coordination Ministry (of energy) mechanisms with other sectoral ministries on certain final energy users (non-energy sectors) Independent body No conflict of interest, available human capacities, cross-sectoral experience

4.9. How to promote the application of cost-benefit methodologies? Article 3(5), point (a), of Directive (EU) 2023/1791 requires Member States to promote cost-benefit methodologies that allow proper assessment of the wider benefits of energy efficiency. Potential promotion initiatives could include:

(a) developing comprehensive guidelines: Member States could establish guidelines for conducting CBAs that require the inclusion of wider benefits and a societal perspective, referring to the Commission guidelines referred to in Article 3(6) of Directive (EU) 2023/1791;

(b) training and capacity building: Member States could organise training programmes and workshops to equip decision makers, such as public authorities and network operators with knowledge and tools for CBAs in line with the EE1st principle;

(c) including CBA in regulatory frameworks: legislation and policy directives could require the use of CBA in decision- making processes, particularly in areas related to energy systems;

(d) establishing independent oversight bodies: those bodies could review CBAs to ensure that they have been conducted properly and that they comply with the EE1st principle.

ELI: http://data.europa.eu/eli/reco/2024/2143/oj 17/18EN OJ L, 9.8.2024

5. REPORTING REQUIREMENTS UNDER THE APPLICABLE LEGAL FRAMEWORK

5.1. Update of the integrated National Energy and Climate Plans Pursuant to Article 3(3), point (b), of Regulation (EU) 2018/1999, Member States are to take into account the interlinkages between the five dimensions of the Energy Union, in particular the EE1st principle in their national energy and climate plans (NECP).

5.2. Progress Reporting Pursuant to Article 3(4) of Directive (EU) 2023/1791, competent authorities(21) should monitor the application of the EE1st principle, where policy, planning and investment decisions are subject to approval and monitoring requirements.

The data framework for monitoring the EE1st principle could build on existing monitoring processes and related data sources that fall within the scope of Directive (EU) 2023/1791 Directive 2010/31/EU of the European Parliament and of the Council(22), Directive (EU) 2019/944 and Regulation (EU) 2019/943.

In particular, Article 3(5), point (d), of Directive (EU) 2023/1791 requires Member States to report on the application of the EE1st principle in their integrated national energy and climate progress reports submitted pursuant to Regulation

(EU) 2018/1999. This reporting should include at least two aspects.

First, the progress reports should include an assessment of the application and benefits of the EE1st principle. For that purpose, Member States may use the monitoring indicators provided for in Commission Implementing Regulation

(EU) 2022/2299(23). Examples of monitoring indicators relevant for EE1st monitoring may be found in the Annexes to Implementing Regulation (EU) 2022/2299 and include:

(a) national contribution and indicative trajectory for primary and final energy consumption (Annex IV, Table 1);

(b) progress towards national objectives relating to consumer participation in the energy system (Annex VI, Table 6);

(c) available projected and realised costs and benefits of individual or groups of policies and measures on energy efficiency (Annex IX, Table 5);

(d) reporting on indicators in relation to energy poverty (Annex XIX, Table 2).

Second, the progress reports should include a list of measures taken to remove barriers to the implementation of the EE1st principle, including in national legislation. Section 4 of the Annex to Recommendation (EU) 2021/1749 provides a detailed overview of measures to apply the EE1st principle in specific sectors and policy areas, a non-exhaustive list of which is

provided in Table 7 of this Annex.

(21) See Section 4.8.

(22) Directive 2010/31/EU of the European Parliament and of the Council of 19 May 2010 on the energy performance of buildings (OJ L 153, 18.6.2010, p. 13, ELI: http://data.europa.eu/eli/dir/2010/31/oj).

(23) Commission Implementing Regulation (EU) 2022/2299 of 15 November 2022 laying down rules for the application of Regulation

(EU) 2018/1999 of the European Parliament and of the Council as regards the structure, format, technical details and process for the integrated national energy and climate progress reports (OJ L 306, 25.11.2022, p. 1, ELI: http://data.europa.eu/eli/reg_impl/2022/ 2299/oj).

18/18 ELI: http://data.europa.eu/eli/reco/2024/2143/oj