REGULATORY ASSISTANCE PROJECT (RAP)® FIT FOR 55 | 1 JUNE 2021 REGULATORY ASSISTANCE PROJECT Making renewable heating ‘Fit for 55’ Samuel Thomas, Dominic Scott and Jan Rosenow1 Summary In this paper, we propose four design features for a mandatory renewable heating and cooling (RES-H) target:2 1. Caps on the use of unsustainable bioenergy, potentially set at zero. 2. Allowing renewable electricity to count towards the target. 3. A multiplier for ambient heat (including heat pumps — ground, air, water — geothermal and solar thermal). 4. Reporting requirements to ensure the Efficiency First principle is applied. The European Union has committed to reduce its carbon emissions by 55% net by 2030 compared with 1990 levels. The European Commission (EC) expects the 2020s to be the decade of rapid buildings sector decarbonisation. Building fabric renovation and heating system replacements are both projected to increase the share of renewable heating and cooling in all heating and cooling energy. The EC expects a major driver of change will be the replacement of coal, fossil gas and oil heating systems with heat pumps, which use electricity to transfer ambient heat to buildings. Revisions to the Renewable Energy Directive (RED) need to aim to help achieve this goal. A more ambitious and mandatory RES-H target would support this effort, but only if it does not lead to increases in the consumption of unsustainable bioenergy that warms the climate in the next decades and if it is aligned with the rest of the Fit for 55 package. 1 The authors would like to acknowledge and express their appreciation to the following people who provided helpful insights into drafts of this paper: Femke de Jong (European Climate Foundation), Hannah Mowat (Fern), Linde Zuidema (European University Institute), Alex Mason (World Wildlife Fund), and Bram Claeys and Richard Cowart (Regulatory Assistance Project). Tim Simard and Ruth Hare provided editorial assistance. 2 A mandatory renewable heat target would place an obligation on Member States to derive a certain portion of heating and cooling from sources defined as renewable. Member States may then introduce policy measures to help meet this target, such as through imposition of an obligation on heat businesses. 2 | FIT FOR 55TITLETITLE REGULATORY ASSISTANCE PROJECT (RAP)® Caps on unsustainable bioenergy Switching from fossil fuels to some types of bioenergy, such as primary3 biomass from existing forests, would likely increase carbon emissions by 2030 (and in many cases by 2050) compared with fossil fuels, increasing the risk of irreversible climate change.4 In addition, unsustainable bioenergy consumption accelerates biodiversity loss, while the burning of biomass causes local air pollution, with associated health impacts. Weak sustainability criteria that do not discriminate among feedstocks, coupled with funding for biomass — which may extend to unsustainable varieties — conspire to make an increase in unsustainable bioenergy use a strong possibility. Currently, bioenergy accounts for over 80% of renewable heating and cooling, and an analysis of national energy and climate plans (NECPs) concluded that bioenergy use in the sector is set to increase 11% by 2030. Stronger climate targets and a mandatory RES-H target could lead to even larger increases. To help deal with this issue, the RES-H target could adopt either caps — potentially set at zero — or multipliers. Caps would limit the amount, or share, that some forms of bioenergy can contribute to the target. Multipliers would adjust the value of different options to Member States charged with meeting the target. Multipliers may be in the form of an uplift (a multiplier greater than 1) and a downshift (a multiplier lower than 1), applied to the credits of renewable heat options in meeting the target. Multipliers are more economically efficient when the relative values and risks associated with each of the renewable energy options are well understood. Caps are a blunter instrument and are more appropriate when the risks of an increase in the use of some energy sources is high and would undermine the achievement of the overarching policy goal. Given the risks associated with the potential increased use of unsustainable bioenergy, we propose the inclusion of caps for certain types of bioenergy, linked to Member States’ baseline consumption of these sources. This would provide some confidence that increases in renewable heat supply will not simply be met by unsustainable bioenergy sources that increase emissions compared with fossil fuels, delay investment in genuinely low-carbon technologies, and engender other negative environmental and health impacts. Allowing renewable electricity to count towards the target Amongst the most sustainable methods of heating buildings, electrically powered heat pumps are disadvantaged by the current RES-H accounting framework, which does not allow for the renewable portion of electricity consumption to be counted towards the target. There is no reasonable justification for what is in effect a cap of zero on renewable electricity. Removing it would allow heat pumps to deliver a higher proportion of the RES-H target, aligning it with the expectations set out in the EC’s Carbon Plan Impact Assessment. 3 Primary products (i.e., plant mass) are formed through direct photosynthetic utilisation of solar energy. Secondary products are formed by the conversion or decomposition of organic matter. Marquard & Bahls. (2015, December). Important terms from A to Z: Biomass. https://www.marquard-bahls.com/en/news- info/glossary/detail/term/biomass.html#:~:text=Primary%20products%2C%20i.e.%20plant%20mass,by%20animals%20or%20other%20 consumers 4 Camia, A., Giuntoli, J., Jonsson, K., Robert, N., Cazzaniga, N., Jasinevičius, G., Avitabile, V., Grassi, G., Barredo Cano, J.I., & Mubareka, S. (2020). The use of woody biomass for energy production in the EU. Publications Office of the European Union. https://publications.jrc.ec.europa.eu/repository/handle/JRC122719 REGULATORY ASSISTANCE PROJECT (RAP)® FIT FOR 55 | 3 A multiplier for ambient heat Applying a multiplier to ambient heat over the period to 2030 would encourage Member States to put in place policy measures to help overcome the market failures and barriers that slow the uptake of technologies that transfer ambient heat to buildings (heat pumps, solar thermal, geothermal). These technologies have high upfront costs and low running costs. Myopic decision-making, split incentives between building owners and tenants, and barriers to finance justify policy intervention, if cost- effective. Similarly, the relative novelty of heat pump technology in the heating sector in some European markets means that supply chains and end users can be reluctant to switch from boiler-based systems, particularly when making urgent purchases. A multiplier for ambient heat would encourage innovation in technology design and installation to bring down costs in future. Reporting requirements to ensure the Efficiency First principle is applied RES-H targets are defined as RES-H divided by all renewable heating and cooling. This means that an increase in renewable heating or cooling will help to meet the target, regardless of whether it displaces nonrenewable heat or is purely additional. In the latter case, both the numerator and the denominator increase by the same amount, increasing the renewable fraction. This is not aligned with one of the key principles of the Clean Energy for all Europeans package, which aims to put energy efficiency first. To deal with this issue without scrapping the mandatory nature of the target, a reporting requirement could be introduced, asking Member States to explain how their policy measures avoid the expansion of unnecessary heating and cooling and the oversizing of equipment when cheaper energy efficiency options are available. Introduction Heating in buildings is responsible for almost one‑third of total EU energy demand, and around 75% of heat is still produced by burning fossil fuels.5 The European Union must make decarbonising heat a major priority if it hopes to meet its new more ambitious climate goals for 2030 and beyond. This will require a vast programme of energy efficiency complemented by a shift to renewable heat. To reach the 2030 target, the European Commission foresees significant changes to the fuels used for heating. In 2015, coal, oil and fossil gas accounted for 48% of residential buildings’ final energy consumption. In the commission’s impact assessment scenarios for reaching the new more ambitious 2030 target, this share is halved by 2030, with coal all but disappearing from the mix, oil consumption falling by 80%-84% and fossil gas by 37%-48%. The share of renewable heating and cooling (RES-H) is expected to rise to 39%-41%, largely driven by the take up of heat pumps that use electricity to transfer ambient heat to buildings from the air, the ground or water sources.6 In addition, energy efficiency actions are expected to drive down final energy 5 Rosenow, J. & Lowes, R. (2020). Heating without the hot air: Principles for smart heat electrification. Regulatory Assistance Project. https://www.raponline.org/knowledge-center/heating-without-hot-air-principles-smart-heat-electrification/ 6 European Commission. (2020, 17 September). Communication from the Commission to the European Parliament, the Council, the European Economic and Social Committee and the Committee of the Regions: Stepping up Europe’s 2030 climate ambition; Investing in a climate-neutral future