Capacity building for national/local authorities to plan/implement renewable projects and infrastructures, national and local heat planning

One of the challenges for Member States is to transition their heating systems from high carbon to renewable and low-carbon heating at least and with minimum resources use. Local municipalities are at the forefront of this transition due to the local nature of heating, as they will have to translate the high-level EU and national objectives into concrete projects and actions. Municipalities and cities thus need to be to map the availability of local renewable and other carbon-neutral, provide a regulatory and project development framework for their mobilization, align spatial plans, coordinate with building refurbishment and with all actors involved. They are the key to ensure that local energy planning and ensuing actions, investment, projects are aligned with national energy objectives. This requires specific capacities in planning and developing renewable projects and infrastructures and coordinate among all interested actors. Option 2-A1 enables national and local authorities to gain the knowledge and skills required for integrating renewables in heating and cooling, to make plans, develop, finance and implement projects or programmes and to coordinate the many local actors.

Their capacity should also cover awareness raising campaign, training and qualification.

Coordinated infrastructure planning with more involvement of local and regional authorities could result in important economic savings and avoid issues of mis-planning, mis-communication, misinformation and lack of understanding of the local particularities, needs and opportunities resulting in inefficiencies and enhanced energy system integration. It provides an enabling tool for higher ambition in renewable heating and cooling, and increases the effectiveness of other measures, not only planned replacement or targets but also with carbon pricing instruments. Heat planning enables coordination with the Long-term Building Renovation Strategies (Article 2a of the revised EPBD) and the Comprehensive Heating and Cooling Assessments (Article 14 of the EED and Article 15(7) of REDII) where MS integrated planning remains low¹⁰⁶. There are currently very limited integrated planning in the MS, according to the JRC in 2018 only 26%¹⁰⁷of European cities had a climate action plan or an energy transition strategy¹⁰⁸¹⁰⁹.

106 The Long Term Renovation Strategy of Ireland is one of the few integrated planning, which is mainstreaming

renewables into the renovation of the building stock(

https://ec.europa.eu/energy/sites/default/files/documents/ie_2020_ltrs.pdf)

107 Including cities in the UK.

108 Eurocities (2019) Cities Leading the Way on Climate Action

109 Galindo Fernández, M., Bacquet, A., Bensadi, S., Morisot, P. and Oger, A. (2021). Integrating

renewable and waste heat and cold sources into district heating and cooling systems, Publications Office of the European Union, Luxembourg, 2021, ISBN 978-92-76-29428-3 (online), doi:10.2760/111509 (online), JRC123771

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This shows that MS action alone would probably not have been sufficient to contribute to deploy renewable in the H&C. Therefore, by reason of the effects of the variant, EU action would have an added value, at least to incite MS to take think about integrated planning.This option thus is also key to ensure effective coherence also with the EED and EPBD and effectiveness of carbon pricing.

Option 2a)-A2: Risk mitigation framework to reduce cost of capital for renewable heat projects Investing in new heating and cooling systems entails risks for large and small projects alike. For large projects project developers may have difficulties convincing banks and financial institutions about their loan repayment capacity or would not easily be willing to assume all the risk and uncertain or longer repayment time that the market generally allows. For small investors, banks and financial institutions may not be willing to lend due to high administrative costs and limited return, in turn small projects may face high transaction costs.

The option would effectively address risks inherent to large heat generation and heat infrastructure projects, as well as investments in individual heating systems by households and small businesses representing small capital volumes. ¹¹⁰

Although, there are currently no dedicated financing instruments for H&C at EU level, many generic energy subsidies and grants are available and can be accessed for the purpose of financing H&C initiatives¹¹¹. Given the lack of dedicated instruments, stakeholders need to have a good understanding of the different financial instruments available to exploit them for the purpose of financing green and low-carbon H&C projects. EU action is required to deliver economies of scale and Union-wide coverage as well as to ensure a competitive single market for energy at least to incite MS to take the required action.

Carbon pricing increases the attractiveness of renewable options in H&C by increasing the revenue streams (or decreasing the operating cost compared to a fossil reference). With adequate and stable carbon prices, the cost of de-risking instruments would reduce accordingly (e.g. risk insurance would be reduced to reflect the risk). Such risk mitigation framework should recall that stable and visible energy price evolution (incl. the carbon pricing components) would have a key role in mitigating the risk.

Option 2a)-A3: Heat purchase agreements for corporate and collective small consumers

Heat purchase agreements can be an important tool to support the creation of heat markets and are currently used much less frequently than power purchase agreements. A recent study shows that a business model based on heat purchase agreements could be used to lower the barriers to heat pump

110 Daniilidis A.; Alpsoy, B.; Herber, R. (2017) Impact of technical and economic uncertainties on the economic performance of a deep geothermal heat system

111 PNO, JRC (2019), Identification of EU funding sources for the regional heating and cooling sector. Available at:

https://op.europa.eu/en/publication-detail/-/publication/782b29a2-4159-11e9-8d04-01aa75ed71a1

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adoption associated with their high upfront costs. The study is the first to consider economic analysis of heat purchase agreements as a third-party ownership model for electric heat pumps.¹¹²

For the MS, the operating cost would be limited to the administrative costs to develop such global framework and the cost for covering (backstopping) pilot or demonstration projects¹¹³ (such as for the case of Bristol Energy). After such trial/demonstration period, operating costs would be tackled by market actors, such as heat/fuel suppliers, to integrate directly in their new business models. This could also provide some commercial advantages compared to formal suppliers not adapting their business models to the needs of the transition to a low carbon heating and cooling system (driving more energy efficiency and renewable, with energy utilities and other suppliers delivering new services).

The example of Bristol Energy highlights a very big opportunity associated with this option – consumer empowerment and increased awareness. Some of the key aspects highlighted during a workshop held on September, 2019 on the topic of “heat as a service”, point out to consumer distrust due to lack of information and the underdeveloped stage of this concept. In particular consumers would be interested in having flexible contracts of no longer than 1-2 years and to be able to “roll-over” unused usage under the “Energy as a Service” contracts (similarity with mobile phone plans).

Further, consumers need to be able to easily quantify the benefits and risks of taking up an offer and how the technology and service is performing in real word scenarios. The design of these instruments would be left to the MS, to comply with the implementation of the market design at national level, and possibly with building codes or requirements (addressing comfort), as inviting MS to develop such schemes would incentivise their development.

Furthermore, the success of this option is dependent on the development of adequate heat network infrastructure, increased digitalisation of buildings and smart meter roll out. By tackling these issues, authorities will support different professionals to developing new business models, helping coordination between heat markets, electricity market, building design and performance. Carbon pricing would also directly have an influence on supporting such heating purchase agreement framework, increasing the attractiveness for renewables H&C, and the interest to develop adequate business models, possibly based on a service concept.

Option 2a)-A4: Planned heating system replacement schemes:

The proposed options on targets for heating and cooling combined with the options proposed for supporting measures (planned heating systems replacement) would ensure that the upcoming replacement cycle is well-used to trigger a switch from fossil fuels to renewables and other carbon-neutral solutions, and prevent the installation of new fossil appliances, which due to the long lifetime of these assets, would result in carbon lock-in.This option would be effective to ensure several goals.

It would help accelerate and wide the deployment of renewables in heating and cooling, and buildings. If applied together with heat planning, it could also ensure level playing field between

112 Kircher, K. Zhang, K. M. (2021). Heat purchase agreements could lower barriers to heat pump adoption. Available at:

https://www.sciencedirect.com/science/article/abs/pii/S0306261921000490

113 Heat as a service project in Bristol example: ttps://es.catapult.org.uk/news/bristol-energy-is-first-uk-supplier-to-trial-heat-as-a-service/

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individual and district heating and cooling solutions depending on whichever is the most cost-effective.

The option on planned renovation is effective to ensure alignment with the CTP, which foresees the need for annual 4% replacement rate of heating systems in building. Since the existing fossil heating systems would be largely replaced with heat pumps and connection to modern district heating systems would grow, planned replacement would also be effective in facilitating ESI and electrification. According to ESI, in buildings, electrification is expected to play a central role, in particular through the roll-out of heat pumps for space heating and cooling.

According to JRC’s NECP assessment, measures related to phasing out of fossil fuels in the heating sector were expressed by eight member states, meaning these are probably already considered as non-regret instruments. In addition to Austria and Germany, Ireland has also set up such scheme.

These schemes are concrete, driven by national or regional authorities, already implemented with success and sometimes could be considered as the key pillar of decarbonising the H&C, depending on Member States strategy. As these schemes would depend on many national/local factors, more requirements from the EU would be counterproductive, although the EU could support the sharing of best practices, and possibly provide some guidance.

Option 2a)-A5: Update of the qualification and certification requirements of installers (article 18 and annex VI), and enabling framework/obligation for technology providers and vendors, that trained and qualified installers are available in sufficient numbers to service the required growth in renewable heating and cooling installations in buildings and industry.

Investment in the training of skilled workers, the development of training courses, investing in teaching resources for disseminating green skills and integration of climate, environment and green energy knowledge in scholarship are measures where the initial costs associated with development and implementation of such efforts is expected to result in broader knowledge dissemination and awareness. Several literature studies highlight the importance of awareness raising and information dissemination in achieving energy efficiency and renewable resources measures¹¹⁴.

Furthermore, given that replacement of heating and cooling equipment is often a result of an emergency (e.g. boiler breakdown), a lack of knowledge and information on the part of the installer when having to make a swift decision on how to replace a broken installation could result in technology lock-in¹¹⁵ and significant associated costs. Thus, enhancing the skills and knowledge of installers and therefore removing a possible inclination towards the well-known (fossil based) solutions should increase the extent to which actual substitution opportunities are recognised and selected. Hence, a possible decision-bias towards fossil-based solutions would be reduced and the

114 Pantovic, V. S., et al., Rising Public Awareness of Energy Efficiency of Buildings Enhanced by »Smart« Controls of the In-door Environment, Thermal Science, 20 (2017), 4, pp. 1307-1319

Ouhajjoua, N., et al., Stakeholder-Oriented Energy Planning Support in Cities, Proceedings, International Building Physics Conference, IBPC 2015, Torino, Italy, Vol. 78, 2015, pp. 1841-1846

115 Davis, S. J. et al. (2016) Carbon Lock-In: Types, Causes, and Policy Implications.

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competitive position of RES compared to fossil-based solutions improved, by increasing significantly investor’s confidence, and hence certainty.

Furthermore, skills is an important area where the EU could ensure competitiveness. Increasing the qualification and training installers would create more experience and share of practice that would also benefit the manufacturer, and further RD&I.

6.2.1.4. Administrative burden and compliance costs

It is not expected that the target design as such would result in additional administrative burden or increased compliance costs for Member States as no new obligations or additional reporting would be required from the Member States compared to the current Article 23 of RED II or the Governance framework.

As stated in Section 6.2.1.3, depending on the measures the Member States use to reach the target there could be additional administrative burden, for example a scheme to subsidise the replacement of heating systems would involve checking applications and that the criteria for funding were met.

Replacement schemes would mainly impact building owners (landlord and tenant), while tenants would be impacted to a limited extent. Administrative burden and associated costs will vary per Member State depending on the extent of multi-level governance between different levels of government (national, regional, and municipal), the choice and level of ambition of the phase-out and the existing administrative framework in place among many other variables. More details are found in the Annex 7.

Targets: RES H&C target and renewable share in buildings and industry