11: Tried and Tested - Energy Policy Research Group€¦ · Web viewimmensely greater, and more cost effective potential. Pers. comm with officials regarding G.Leach, A low energy

11: Tried and Tested

Contents11: Tried and Tested....................................................................................................................................1

11.1: Introduction....................................................................................................................................1

11.2: Institutional Framework.................................................................................................................2

11.3: Information.....................................................................................................................................4

11.4: Standards......................................................................................................................................13

11.5: Fiscal Subsidies and Cost Transfers...............................................................................................16

11.6: Supplier Obligations......................................................................................................................18

11.7: Other Policy..................................................................................................................................20

11.8 A measured (but poorly measured) success..................................................................................20

11.9: Seeking Synergy............................................................................................................................22

11.1: Introduction

[ Opening for Chapter 10 or 11 along these lines?]The huge potential for improving energy efficiency has long been recognised. In the wake of the 1970s oil crisis, most government agencies continued to project energy demand rising almost in lock-step with economic growth. In Japan, they decided as a matter of national security to do something about it, and ‘Japan, Incorporated’ was soon to emerge with the most energy-efficient industry sector in the world. In the US, energy efficiency guru Amory Lovins contrasted the official, nuclear-and-coal-to-the- rescue view with his ‘soft energy paths’, predicting that a gush of energy effiicency would emerge instead; initiating a thirty-years war over whether and how goernment should be involved in fostering this.

Europe offered a microcosm for the varied approaches. Strong policies for energy efficiency were already embedded in the Scandinavian phyche. Germany and France strenthened centralised policies. Response in southern Europe was patchy and chaotic, whilst the UK found itself deeply confused. At the time that officials were promoting massive new electricity investments, the Department of Trade and Industry bought 100 copies of a book that reached the heretical conclusion that energy demand might not grow, because energy efficiency carried immensely greater, and more cost effective potential.1 Both these views were then largely

1 Pers. comm with officials regarding G.Leach, A low energy strategy for the UK, Science Reviews Limited, London, 1979. I reviewed the options for UK climate change policy a decade later and had the pleasure of reflecting the

swept aside in the first wave of privatisation, arguing that a liberalised energy system would deliver the best outcome and government could wash it hands of any responsibility for the balance between supply and demand.

Yet around the world, analysts continued to point to a huge potential for energy efficiency. Increasingly free-market-oriented governments were at first reluctant to do much about it. But, as understanding of the both the potential and the barriers deepened – and as climate change was add to the list concerns – many governments embarked on efforts to exploit the potential. Incrementally, even the UK’s Thatcher government changed its philosophy on ‘whether to do anything about the weather.’ Thirty years on, what has been done, and what have we learned?

On the surface, energy efficiency measures look like a powerful way to address energy security and energy poverty, whilst promoting economic growth and carbon abatement, with little associated costs or risk. Governments have pursued various ways to speed up the deployment of efficient technologies. Much good has come of these efforts, but they have also underlined one central fact: energy efficiency is not simple. What appeared to be a shallow trough in the way of an energy efficient economy, has revealed itself as a deep and staggered gorge. As inefficiencient technologies and practices continue to manifest, policies have evolved, with each seek to plug the gaps of the former.

This chapter maps out the course that policy has taken. Simple faith in markets – where it existed – has given way to increasingly sophisticated regulatory mesaures. Agencies have been established, to oversee a growing scale of of public funds targeting programmes to reach every corner of the market, and address each and every barrier; monetary, behavioural, organisational, or market based. Legislative priorities have shifted, and been spread broadly across multiple objectives, from uniquely promoting information diffusion, to imposing regulations and standards, followed by fiscal incentives, and finally supplier and distributer energy obligations.

11.2: From exhortation to institutionsThe first response of most governments to the energy price shocks of the 1970s was to Exhort: Jimmy Carter’s appeal at the height of the 1979 oil crisis, that energy conservation had become ‘the moral equivalent of war’, was good for headlines but has gone down in history with some derision. If the history of energy conservation were to be judged as a Thiry Year’s War, we might conclude that we lost. The same to some degree has proved true of climate rhetoric. Against a diffuse, invisible and uncertain enemy, such a level of rhetorical intensity is unsustainable. In many quarters it has bred public cycnicism rather than private action.

ideological confusion of the times with the title, ‘Will Britannia waive the rules?’ (in Grubb et al., Energy Policies and the Greenhouse Effect’, RIIA/Dartmouth, 1991. Eventually, Free-market Brittania did waive the rules, and benefited considerably by doing do.

Fortunately, most societies did move on to more measured responses. Almost by definiition, most energy effiiency is a ‘bottom-up’ business. A vast profileration of local initiatives, often at town or district level, have complemented, supported, or ohterwise woven into broader pattern s of national efforts.

At the national level, most countries today have established energy agencies of one sort or another, or strengthened Ministry responsibilities, to develop efficiency targets along with strategic programmes to foster energy savings and technology innovation (WEC, 2008). The Agencies specialize in the technical skills required to promote energy efficiency and something broader environmental policy. The objectives, and the institutional arrangements, vary enormously; an interesting and contrasting sample is offered even between London and Paris (see box).

Box 11.1 Energy agencies: A tale of two cities

[To be completed: covering IEA, ADEME, EST and Carbon Trust]

In the Europena Union, the central institutions have sought to complement and strengthen the diverse efforts with EU-level programmes and goals – with a “SAVE” programme in the 1990s leading to some of the concrete measures sketched in this chapter. The directive on energy end-use efficiency and energy sevices2 outlines an annual target of 1% improvement from 2008 to 2016, and 20% by 2020 (part of the Energy Efficiency Action Plan 2007). Some states have set out their own energy efficiency goals, while others have coupled their own targets with reductions in green house gases (GHG) or increases in renewable energy generation objectives.

Along with this, the focus and branding has itself varied and developed; what started as energy conservation developed into an emphasis upon efficiency, with its implication of economic benefit. As thephilosophy of wider sustainability and ‘green growth’ became more established, the EU established the Intelligent Energy Executive Agency (IEEA) in 2003, now renamed the Executive Agency for Competitiveness and Innovation (EACI), to implement the Intelligent Energy Europe programme (2007-2013). Europe wide targets are set out by the Commission, but states are left a lot of room to further develop their own goals.

Quatitative targets have proven very popular globally. These may be in the form of long term goals, but generally broken into shorter term stepping targets or monitoring requirements, energy law is then shaped around the conception of these targets.

Objectives and institutions are all very well, but they dont deliver themselves. What have we learned about the tools?

2 (ESD, 2006/32/EC)

11.3: Information{Most information and data in this section are taken from WEC (2008)}

Armed with knowledge, rational consumers might be expected to make the ‘best choices’. Many early efforts put a lot of emphasis on ‘information provision’ in the pursiut of an energy efficient economy. It has proved a lot more complicated. Information can be transient and easily forgotten, too complex, or too hard to relate to. In companies too training schemes and capacity building measures are often lacking, with insufficient avenues for energy management education.3

Information is most readily available when it serves a private need – usually a producer persuading a consumer to buy something. But much of the information needed for energy effiicency is not like this: it is a “public good”. Even where consumers might benefit from lower energy costs, its often not seen as relevant: few people think about kilawatt hours in standby and on-mode, when they are purchasing a television, or the time it takes their kettle to switch off after boiling. Prospective home-buyers viewing a new house rarely ask about the fuel bill.

The lack of the right information in the right place is at the heart of many of the barriers to better choices. Indeed, it attracts a lot of attention in the mainstream economics literature, where mismatch of knowledge combined with the different interests of ‘principals’ and ‘agents’ - such as sellers and buyers - are at the root of many recognised problems in market economies. These include the problems of ‘moral hazard’ and ‘adverse selection’ outlined in the previous chapter.

While a lack of information poses an obvious inefficiency on market behaviour, an asymmetry of information between principals and agents (buyers and sellers) has catalysed some of the most frequently stressed barriers to energy efficiency, including split incentives, hidden costs, option value, and the experience curve effect. Welfare economics assumes that there exists perfectly symmetric information among agents operating in the market (). This however is not realistic. Take for example a builder and a buyer: the builder is aware of the technologies and effort that went into construction, while the buyer is aware of little more than they can see on the face of a building. It is in the interest of the builder to put in an effort level that he can get a return on, and nothing above that. Investment and time dedicated to energy efficiency will be largely invisible to the buyer, and thus will fall by the way side during construction. Similarly a landlord will make the minumum investments to their property that will impact upon the rental value. While it is in the interest of a tenant, paying the bills, to have the most efficient infrastructure with the lowest long term energy costs, the landlord has no incentive to make costly up-front investments. When there is a split between investor and user, and information

3 Uihlein, A. and P. Eder (2009). Towards Additional Policies to Improve The Environmental Performance of Buildings, European Commisssion. 24015 EN.

flow is limited, there is a welfare cost to the consumer and the market equilibrium reached is sub-optimal.

Theory has encapsulated the impact of asymmetric information, on principals acting in the market, into two risk senarios; moral hazard and adverse selection (Morten-Andersen & Bleischwitz, 2009). Moral hazard arises when output from an agent is unverifiable. As the principal is unaware what level of service they are receiving, and assuming they are risk averse, they will not risk paying more for what is potentially the same level of service as if they had chosen the cheap option. Adverse selection occurs when the quality of a good is not observable, and thus inefficient and efficient goods sell for the same price. The principal risks purchaisng poor performing technology beacuse they do not possess enough information about its’ performance capacity. In this case, they will stick with what they know, and the diffusion of new technologies is stalled.

The observation that energy efficiency knowledge is often a ‘public good’, and that lack of it acounts for numerous problems, forms the bedrock of why most governments have got involved in trying to ensure that consumers are adequately informed, in various ways. Their efforts have included information campaigns, requirements for labels, and various forms of tailored information:

- information campaigns provide the basic knowledge and create awareness among individuals and organisations;

- a variety of labeling programms provide information about the performance of specific goods, initially appliances and consumer electronics, and more recently for vehicles;

- services offering more tailored information, including certiificates and codes, have also grown.

11.3.1: Information Campaigns

Consumer education or conservation programmes, generally targeted at behavioural change have been spread thinly accross a variety of environmental concerns, from littering, to money saving efficiency measures, to helping their country through an econmically challenging time by enduring a little discomfort. With so many messages it remains hard to ascertain whether consumers have an real understanding of carbon mitigation, or energy efficiency as it applies to them. Conservation programmes have had some success during periods of crisis such as fuel price hikes or electricity shortages,4 but an initial assessment of whether the oil-shock campaings of the 1970s & 80s endured through the 1990s concluded that ‘policies that have done things to things have worked; those that did things to people havent’.5

4 (Calwell, 2010)5 Lee Schipper quote to be found

Information and awareness campaigns are of course familiar in the private sector – where its called marketing. It is decades since Galbraith dispatched the quaint idea that marketing in rich countries is simply about informing consumers how to get what they want; it is just as much about creating wants.6 Reviewing the limited impact of many early energy conservation advertising programmes, government-sponsored campaigns eventually caught up.

In Ireland for example a ‘Power of One’ campaign was set up with three goals: i) to enhance awareness of the sources, associated costs, and impacts of energy, ii) to provide consumers with adequate information on the cost and environmental implications of their decisions, and iii) to create a sense of individual responsibility among the public – an attempt initiate behavioural change. The Power of One programme is broken up into multiple targeted campaigns. The ‘Power of One Street’ part of the campaign was aimed at households, taking participants from a variety of geographical locations and setting them efficiency targets on a month by month basis, the results then reported to the media.

In Britain the Energy Savings Trust, a private organisation devoted to the reduction of green house gasses from household activity, have established network advice centres around the country. Initially piloting with only two centres, they deemed these a huge success and have expanded to now have 21 centres nation wide. These offer advice to the public, support local initiatives to improve the infrastructure to facilitate energy savings, and run campaigns and events.

Of course, both energy efficiency and marketing are just as relevant for businesses. The Irish campaing tailored a ’Power of one at Work’ programme for owners, managers and employees, providing basic guidance on the various roles; a webtool and toolkit are provided for participating organisations, and a tailored energy efficiency plan is designed and applied. The UK Carbon Trust, charged with transforming the energy efficiency of UK business, soon concluded that trying to reach out to tens of thousands of companies with piecemeal approaches would be a woefully ineffective in the absence of wider motivation. It spent millions of pounds on advertising, gauging that raising business awareness about climate change and efficiency opportunities would have business knocking at the door of the Carbon Trust for the services it could provide. It proved an effective, if controversial, strategy – take-up increased substantially after each advertising campaign, with cumulative results described later.

11.3.2: Labels

If changing ‘things’ is easier than changing behaviour, label them is is an obvious way to provide information about their energy use; it can also raise awareness (Andersen & Bleischwitz, 2009). It sounds innocuous enough, but proved otherwise. Information could help guide consumers away from less efficient goods; the manufacturers of such goods argued that government had

6 Galbraith, The Affluent Society

no business interfering, and that the costs of measuring and monitoring would be too high. Their next line of defence was to argue that labels should be purely voluntary.

Voluntary programmes are politically easier to initiate, they rarely meet the same staunch opposition and lobbying as mandatory regualtion. However they rely on market demand and interest to gain success. For this reason they are frequently accompanied by an advertising campaign, popularising the label as a new brand. There is not an automatic cost associated with a voluntary labelling programme as no-one has to change – which is part of their limitation. In the US the voluntary Energy Star label, initially developed as a status label for the most energy efficient consumer electronics, now stretches its’ scope to rate the efficiency of home appliances and commercial and residential buildings. Those that score within the top 25% on an efficiency rating are rewarded the label.

Figure 11.3: Energy Star Logo

Energy Star (ES) is managed by the US Environmental Protection Agency, which complements this with media campaigns raising public awareness of the ES Brand, by awarding firms who perform well, and publicizing cooperative efforts among industry players. As a product label, ES has been adopted as a de-facto international standard for consumer electronics. Public interst has been very promising in this efficiency ‘brand’ and since 2000 there has been a 10 fold increase in the number of energy star products purchased annually in the US (energystar.gov, 2010).

Mandatory labels have the advantage that they reach a large number of consumers immediately, and cover all manufacturers equally. Hence the impact is likely to be bigger and quicker. There might not be quite the same drive for ‘brand’ appeal, but the information may be more robust and trusted if it is part of a mandatory programme.

Figure 11.4: Countres with Voluntary, Mandatory, and Planned Lebels.

Source: WEC (2008).

The first target for mandatory labeling was refrigeration, in which the scale of wastage was most striking. In Europe, after long struggle, the basis was set out in the European Energy Labeling Directive of 1992 which aimed to to hamonise labeling and product information schemes for household appliances (Uihlein & Eder, 2009). The actual definition of the levels and standards took longer – the refrigeration industry argued that it needed more time to adapt, “an argument they have been using for the last fifteen years”, as the Financial Times noted drily at the time. The EU scheme applies a ranking order, A-G, on products’ efficiency levels (Figure 11.1).

The European programme led to a rapid increase in the market share of the most efficient appliances; in the decade after 1995 (when labels were first applied to refridgerators), sales of the highest ranking efficiency models sold in the EU rose more than tenfold, from from 5% to 61% . Results have followed a similar pattern across other appliances. In many cases, the combined response of consumers and producers (introducing more efficient models) was complemented by accompanying rebate and information programmes, designed to secure an overall ‘market transformation’. The biggest limitation of the scheme soon emerged as a conversative set of starting assumptions: with the majority of products soon meeting the criteria for “A” classification, the EU had to introduce A+, A++ and even A+++ categories.

Similar approaches have now been adopted in Brazil, Tunisia, China and Iran. The Australian approach, using up to six stars as symbol of efficiency performance, has experienced similar

success, and been replicated in Thailand and Korea. 70% of OECD Asia and America currently having labeling legislation for refrigerators.

Figure 11.4: MEPS for Refrigerators.

Source: WEC (2008).

In Europe and elsewhere, the list of goods was steadily expanded to a wide range of “white goods” - washing machines, dryers, dishwashers - and others, including air conditioners, lights, and water heaters, have followed.

Figure: 11.5: Energy Efficiency Appliance Labels

There are a number of voluntary programmes for energy efficiency labels for products that do not come under the EU directive, and a voluntary European Union eco-label. The US voluntary energy star programme has also expanded its scope, to include buildings energy efficiency, but this has also pointed to limitation. The branding of Energy Star homes tended to appeal to more affluent clientelle, which coincides with bigger homes in which the standard is also easier to reach. In Arizona, a study found that Energy Star homes used 12% more electricity than non labeled homes (Holladay, 2009). It is a reminder that the definition of efficiency, its use, and its scope, matter: branding thermal energy efficiency pe square foot does not guarantee an overall low energy outcome, and may risk a false sense of overall good performance if other indicators are neglected.

Figure 11.6: EU voluntary eco label

Europe Australia

The european voluntary Eco Label takes a life cycle approach, taking account of emissions produced during the production process of a good and the emissions from its use. This covers a host of appliances, clenaing products, paper products, home and garden materials, clothing, tourism and lubricants. Labeling based upon emissions from the procustion process has raised some concern regarding compliance with WTO Law, and the 2010 revised Eco Label Scheme will serve as a test case for the legitimacy of this kind of climate labelling.

On the whole, mandatory labeling regulations have had greater success, in increasing the market share/number sold of the most efficient innovatiosn, than voluntary programmes. This is partly becuase a market wide label protects those living up to the new standard from being undercut by competitors producing cheaper goods or services. Also, while ensuring that all products are labeled, and not just the efficient ones, there is greater scope for product comparison, greater awareness among consumers, and a higher push to increase the efficiency of product lines. However politically it can be slow and arduous to impose obligatory labeling, whereas voluntary programmes can be initiated more quickly and easily.

11.3.3 Tailored Information and services

Whilst information and label campaigns provide the same information to all, the most effective response can require more tailored input. Not surprisingly, this has emerged first and foremost for large entities, for which energy audits provide a detailed analysis of current energy use and identify the available opportunities for improvements. Alone they do little more than provide

European Ecolabel

information, but the case specific information coupled with subsidies for the recommended improvements, or other fiscal policies (e.g. tax deduction, low or no interest loans, grants or credits for energy efficiency improvements) might be powerful.

.

Smart Metres

A large step in the direction of information provision is the distribution of smart metres to households. A smart metre allows consumers real time information on the energy they are using within the home. It enables transparency of relative energy intensities of various appliances and the associated costs. The adoption of smart metre regulation ensures everyone receives the same technology, dispersion is geographically concentrated, and there is a fast increase in awareness of this new technology and of the information it provides. A disadvantage to forced distribution is that is narrows the market for competeing technologies in smart metering, hence could be stagnating innovation (WEC, 2008). In April 2009 the European Parliamint agreed that by 2020 at least 80% of electricity customers should have a smart metre. Western European nations have moved faster than any other region on initiating smart metre rollout, with Sweden being the first, soon followed by the Netherlands, Ireland, Norway, Italy, France and Spain. The Uk and Finland have been the most recent to announce regualted meter adoption. In Italy they have already been dispersed, however in most other countires there are long timelines set before distribution.

Energy audits are the first step for many organisatins to understand their enrgy performance, the associated costs, and the opportunities for improvement. The main issue is how to fund and deliver such activities. The simplest is to leave it to the market, perhaps supplemented by general information campaigns. Energy Service Companies (ESCOs) can provide applied information to clients who might lack the know how to be more efficient - in principle, a valuable assessment of costs and opportunities. ESCOs offer a promise of energy efficiency improvements, tailored to the client, with a guarantee of savings. They may also design and develop energy efficiency projects, and take on the installation and maintenance of the equipment, hence eliminating the large burden from transaction costs. They must also provide a measure of, monitor and verify the energy savings over a period of time.

Initial financing may be provided by the client, the ESCO themselves, or by a third party fund (TPF) normally from a financial institution, and backed by the guarantee of energy savings; subsequent payment is calculated from the sum of energy saved, known as energy performance contracting. The EU directive on energy end-use efficiency and energy services requires member states to provide ‘adequate incentives’ for energy consultants and advisors to

develop, and distribute information on energy efficiency, energy audits, and financing recommendations to consumers (Uhlein & Eder, 2009).

ESCOs initially became prominant in the US during the first oil cricis in the nineteen seventies. The idea spread to some countires in Europe, including Germany, where they prospered. Given the apparent scale of potential, this might seem a natural process. Unfortunately the universal lesson is that it ain’t so easy. That’s partly because of the underlying lack of interest in ‘incidental’ savings sketched in Chapter 10, and because no amount of information will overcome some of the barriers – such as the landlord-tenant split, manifest in the commercial sector where most companies rent their properties but pay the energy bills. Also of course, armed with a good energy audit, a company might decide to improve things itself, or go to another ESCO to do the implementation. Yet the harsh reality remains that its a lot harder to structure a business deal around saving something, rather than buying it: there is always lots of room for debate and doubt about how big the cost savings really will be, and how they should be shared.

To try and force the pace, mandatory audits across industries, buildings or trenasport have been introduced in some countires, but this relatively recent and hence little is know of their impact (WEC, 2008).

A true free-market idealogue could choose to stop there. Acknowledging a role for governments to provide collective information is one thing; but if the market for energy efficiency is not self-sustaining, does that not prove that energy efficiency is not as cheap as it looks? That the real explanation for the ‘energy efficiency gap’, to use the framework set out in the previous chapter, lies in the hidden costs associated with actually trying to get it to happen? As ever, reality is more complex. Anyone interested in the pragmatic question of what more we have learned about delivering energy efficiency should read on.

11.4: Standards Information alone has not in the past been sufficient to move the market towards the desired level of energy efficiency. It is sometimes ignored by consumers, there is a transaction cost associated with collecting the correct information, or consumers are bombarded with too much conflicting information. One pragmatic solution is therefore simply to set energy efficiency standards. Rather than millions of private consumers having to obtain, understand and decide on the best energy buys, governments can cut through the swathe of these transaction costs by mandating a minimum level of performance. The need for Building and other safety codes is universally accepted, and the extension to building energy performance standards has been long established in many countries.

Ironically it was the US, the paragon of free market liberalism, that became the first major battleground for other energy efficiency standards. Individual States argued they had a right to impose standards, and California – unencumbered by domestic manufacturing industry – led

the charge in the 1980s with strong standards on refrigerators. The Federal administration had no jurisdiction to prevent this, and efforts by the Reagan administration to impose a Federal “zero level standard” were rebuffed. Faced with a potential proliferation of different State standards, the industry caved in and started lobbying for a Federal standard. [Figure showing US impacts]

In the case of magnetic ballsats used for fluorescent lighting, adoption of this highly efficient method of lighting was very slow in the US throughout the 1980s, and only occurring at a rate contingent with state regulation, outlawing the lesser efficient substitute. The Lighting Trade Association testified that they could not understand why the more efficient product was not chosen by consumers. After a national standard was enforced in 1988, cost-benefit analysis of 5000 commercial buildings, indicated a 100% cost effectiveness (Koomey, Sanstad, & Shown, 1996). The transaction cost to consumers, inherent in understanding which technology they should purchase, was automatically eliminated, and no negative externalities ensued.

Standards may be imposed as a minimum performance criteria, or as a corporate average – that is requiring that the average efficiency of a product line reach a minimum level. They have been very popular in the building industry where perfect information has not managed to transfuse downstream, and where infrastructural lock-in impedes action even if people are armed with the correct knowledge. The complimentary action of standards and labels raise the average efficiency level of the market, reduce the cost to the consumer, and increase overall awareness of efficiency in investment criteria. It is widely supported that standards do not apply further costs on the market. Experience with standards and labels globally has proven that despite fears of raised costs, manufacturers or builders have not suffered profit loss or had to reduce the service provided to meet regulation, (WEC, 2008).

A balance between labeling requirements and standards has had a major role in the success of the Japanese ‘Top Runner’ programme. According to this approach the most efficient products on the market determine future standards. This eliminates the slow and often inefficient process of negotiating and enforcing new targets, and ensures that advances in energy efficiency do not plateau. The Top-Runner programme covers 18 energy intensive products, from household appliances or passenger cars. This has been considered a highly effective regulatory measure, leading to an increasing in efficiency of air conditioners by 68%, fridges by 55%, and televisions by 25% between the years 1997-2003.

Text Box: 11.1: Regulation of Buildings

Buildings

The European directive on the energy performance of buildings has harmonised standards for new building across europe and put mandatory certificates in place, outlining the efficiency of a building, for all those bought or rented. Cumulative average energy savings of 60% for new buildigs in Europe, compared to those before the fist oil. Certification of buildings has proven very popluar internationally, but mandatory and voluntary programmes have sprung up in equal proportion.

In the UK building regulation has proven the most popular means of addressing the in-efficiencies from the principal-agent asymmetry. Part L of the Building Regulations stipulates that all new homes in the UK should be zero carbon by 2016, with staggered targets along the way, (UK energy efficiency action plan, 2007). The investor user problem is not only a barrier in private households, but also in the commercial, and some private and public service organizations. Effective policy would have to reduce the transaction costs for the principal in order to allow them maximize the benefits, (Schleich & Gruber, 2008). Strict criteria has not however been applied to non-domestic buildings, advances here rely upon consumer rationale with the provision of the mandatory energy performance certs as part of the EU Directive on the Energy Performance of Buildings (European Parliament and Council 2003).

The cost of new codes to the consumer, if at all, comes to no more than a few percentage points. Codes are a useful regulatory option for long term mitigation, however in the short term energy efficiency certificates play a greater role. Energy Performance Certificates have been used in the UK to breach the information barrier to home buyers, and erode the inefficiencies brought about by landlord-tenant split incentives. These are designed to provide energy performance information of new and existing buildings, sold or rented. They rank buildings according to their efficiency level, ranging from A to G, and outline steps that can be taken to improve on a particular building. Energy Performance Certificates support the work of the Energy Saving Trust, an independant organisation who provide households with advice on energy efficiency and carbon emission reductions (UK Energy Efficiency Action Plan, 2007).

Regualtion of building performance may range from thermal building codes for a variety of components, to more sophisticated all inclusive ‘performance standards’. This more encompassing one has proven most popular in California, Germany, France, and at an EU level. These are often implemented with complementary technology specific standards. This kind of policy approach prevents poor appliances from bringing down the performance of a building, while on the surface it appears to reach a high standard. The notion of including appliances in the infrastructure of a building has been suggested as a necessary turn of perspective if we are to approach energy consumeption from the most efficient and braodest base line, (Patterson, 2007).

Standards been applied across the motor industry, with fuel efficiency standards for new cars and vans in the EU requiring that the average for every fleet reach 130 grams per kilometer by 2015, and the Corporate Average Fuel Economy (CAFE) standard in the US requiring that the average fuel efficiency of a fleet of vehicles reach 27.5 mpg for passenger cars and 23.5 for light trucks. It has been put forward that the CAFÉ standard has led to an 18% reduction in fuel use, compared with what might have been without any fuel efficiency requirements, since it was initiated in 1975, (Calwell, 2010).

Standards are a useful tool to raise the efficiency level of a targeted product, however they do not necessarily raise the standard of the entire sector. They force products to reach a minimum level of efficiency, and must be revised frequently to continue to promote improvements.

Figure 11.7: Countires with Building standards

Source: WEC (2008)

Though building codes imply advances in efficiency level, they have not always been realised. Few countries perform evaluations to assure that regulatory standards are being met, and even in countries where evaluations do take place, many buildings are found to be below the target. In germany for example according to the most recent target for building energy performance, there should be a 70% increase on energy savings in homes since the last regualtion, however the the reality is only a 35% saving, (WEC, 2009). Building standards, if adhered to may offer a strong long term instrument to lower enrgy intensity in the economy, but in the short term, while the infrastructural lock-in still prevails, certification and a realiance on the market to respond optimally to information is the sole mechanism.

Coupled with labels they are a powerful mechanism, protecting consumers from the poorest performing investments, saving transaction costs, and driving innovation forward.

11.5: Fiscal Measures Investing in new technologies, and the most innovative ones on the market bears a high up-front cost. Even without the investor user split, this is off putting for the consumer who do not want to invest a large sum now, only to wait a few years before enjoying a payback. High discount rates are not always an irrational motive driving consumer behaviour, in chapter 10 we outlined how the individual may in fact be privately optimizing employing this heuristic. It may also be the case that upfront costs pose an insurmountable barrier, so that regardless of a consumers’ preference they cannot finance the more sensible long term investment optimum.

Preferential loans are one type of financial mechanism employed in Germany, Austria, Finland, the Netherland, and the Slovak Republic, (Uihlein & Eder, 2009). Preferential loans offer a zero or low interest rate loan for specific investments, such as those in energy efficiency.

Preferential Loan Programmes have proven far more popular internationally than other fiscal incentives, e.g. tax deductions. However in times of low interest rates, such as the current situation they offer little incentive to industry.

Tax deductions have been used in the residential sector France and to a small degree in the UK in the building industry. However they have proven to be too inflexible, narrow ranging, and to lack clarity, (OECD/IEA, 2008). They are often unknown or poorly understood by the public, while others manage to free ride, (Uhlein & Eder, 2009). Accelerated depreciation and tax credits have similarly been incorporated in industry and the commercial sector.

Tax incentives remain popular however in the regulation of vehicle emissions. Currently the Vehicle Excise Duty (VED) in the UK requires a £950 rate for the most inefficient cars, category M, in the first year, and £430 annually thereafter. There is no charge on the most efficient A category cars. Other EU countries have adopted CO2 emissions into their vehicle tax formulas, including Germany, France, Italy, and Spain, showing a strong trend in this direction.

Investment subsidies were popular during the 1970 and 1980 to fund the retrofit of existing buildings and industrial equipment, (WED, 2009). Subsidies should reduce the investment cost for the consumer, making what was previously a sub-optimal investment decision a more favourable choice. Subsidies may be fixed, set as a percentage of the investment or proportional to the energy saved. Among producers they are intended to encourage the development and marketing of energy efficient technologies. However they are primarily targeted towards industry, and then households. In reality subsidy programmes have in the past tended to attract those who would have made the investment regardless, such as high income households, or energy intensive industry. Target consumers (small and medium industry and low income households) often do not know about what is available to them,

highlighting the difficulty with equal information distribution. Sometimes the procedures implied with obtaining a subsidy are too bureaucratic, involving complex forms and there may be a delay in the administration. This can impose a high transaction cost. Thus the use of subsidies must be considered carefully. Grants may be easier to distribute to the target people, and can be more investment specific. In Thailand for example the criterion for a grant is not even technology specific, but based on a criterion of cost-effectiveness. That is a grant will be allocated for an investment with an internal rate of return above 9%. Subsidies are used more often as a temporary measure, to incentivize consumer action in the short term or prepare them for regulatory change.

Another option is direct state funding, raising the combined challenges of agreeing the funding and developing a good way to deliver. The Carbon Trust is unusual in being state-funded, but run like a private company to deliver energy efficiency across UK business. It was initially resisted by the few established ESCOs in the UK, as a threat to their own operations, but in fact the scale of its operations meant that the Carbon Trust often ended up funding ESCOs to deliver, with a national network of contractors.

UK experience has pointed to the importance of understanding who does, and does not, need fiscal support. The Carbon Trust’s found that financing per se was not a barrier for large companies – the key challenge was motivating their interest – but it is a major concern for small and medium-sized enterprises. Consequently the Carbon Trust established a zero-interest loans scheme, offering four-year revolving loans for energy efficiency investments by this sector. This proved so popular– and so relevant to the perceived wider national challenge of fostering growth of small enterprises - that as part of the UK Stimulus Package the UK government awarded an additional £100m to massively expand the programme.

Some apparently ‘fiscal’ measures actually turn out to impact in unexpected ways. Notably, the UK operated an Enhanced Capital Allowances scheme, under which companies which bought from a government-approved list of efficient technologies could claim 100% tax depreciation on their purchase. It turned out that some companies bought from the list, but their finance department never even got round to claiming the credit. The market simply focused on the Technologies List as an indication of advanced, efficient technologies; manufacturers made sure that new products would qualify, and purchases used it as a reference point for good purchases. The tax allowance itself was probably of secondary importance.

Providing information on energy efficieny sounds like a small business with modest returns. Viewed nationally, it is not. The Carbon Trust budget rose from £50m/yr in 2002 to £100m/yr by 2008, with energy efficiency services accounting for more than half the total. After six year’s operation, it had spent a few hundred million pounds, and the cumulative value of energy

savings was evaluated at around a billion pounds. An assessment by the National Audit Office7 concluded that “The Carbon Trust’s advice for business has proved value for money”, and as the efficiency investments accumulated, the Carbon Trust’s strapline became that along with having cut 17 millions tonnes of CO2, it was saving British business more than a million pounds a day.

11.6: Funding and Delivery

Most fiscal measures fall on governments. The alternative:

11.6.1 Supplier Obligations

Market based policy enforcing the distribution of quantifiable energy efficiency measures has become popular more recently across EU member states, (Bertoldi, Rezessy, Lees, Baudy, Jeandel, & Labanca, 2009). This strategy obliges market players to deliver a target level of energy savings, commonly electricity and gas distributers and suppliers. They have been referred to as utility or supplier obligations, or energy efficiency resource standards. The target energy savings required from an agent is calculated from their energy market share, their percentage of annual shares, or the number of customers they have in the household sector. In Italy and France energy savings obligations have been imposed upon power distributers and suppliers respectively, accompanied with tradable energy certificates e.g. White Certificates. Energy efficiency obligations have been imposed upon energy companies in six European countries: Belgium (Flanders region), France, Italy, UK, Ireland, Denmark, the Netherlands, Portugal, and Poland. These come in may different forms, tailored for the specific market in which they are imposed. Their market influence maybe greater where there is a monopoly energy utility, rather than a liberalized system, (WED, 2009). In the UK CERT system, there are no formal certificates to be traded, however gas and electricity suppliers can trade certified energy savings, though this has not been popular. CERT, initiated in 2009 as a three year portfolio for energy savings, set a target of 185MtCO2 savings by 2012. Each supplier’s individual requirements are based upon the number of residential customers for whom they are providing a service. The EEC 1 and 2 before this had had great success, surpassing their targets in energy savings. However shortly after the initiation of the new CERT it was noticed that energy supplying companies were exploiting loopholes in the regulation. They were sending out far more energy efficient light bulbs to customers than required, in order to meet their minimum threshold of energy savings in the cheapest possible fashion. Customers were estimated to have an average of 6 unused low intensive light bulbs unused in their drawers (bbc.co.uk, 2010). At the same time, suppliers were falling short of the recommended installations of cavity wall insulation. Ofgem later found that utilities had been double counting on insulations, so that the real number was even smaller than reported. The initial

7 Exact NAO refernece

requirements for energy saving obligations have thus been criticized for being too broad and lax on adherence stipulations (bbc.co.uk, 2010). These have since been tightened up.

Overall supplier obligations have been successful in reducing energy usage, and in the UK and Flanders region they have also been useful in ensuring savings in low income households. However, they are not conducive to the innovation of new technologies. They do not increase the information in the market, nor stimulate a new market demand for low intensity technologies. They are an effective distribution mechanism. Technologies are diffused to all residences equally.

With such a mix of policy now in the market, promoting energy efficiency innovation and up-take, there are likely to be complications (e.g. market players counting savings for energy efficiency performance while adhering to minimum performance standards).

To pre-empt leaks in regulatory activity, in the UK the only eligible energy savings are those above the amount required by legislation. For an appliance, only an energy saving is allowed for those that are above the market average for that product, (WEC, 2008).

Whether it is more effective to impose an obligation on a supplier or a distributer may depend on the structure of the specific market. The supplier is closer to the consumer and hence would have greater marketing power. A distributer might be more stable, they are often regional monopolies, and already regulated. However levies to a distributer would incur a government cost, as it is through wires and pipes that the distributer and the customer are connected. Both work, but it may be the case that a closer relationship with the consumer gives the supplier a greater incentive to promote energy savings, (WEC, 2008).

Thus far, energy saving obligations have been successful in that all companies in the UK, Italy and Flanders have met their targets easily. Whether they are effective in promoting market transformation has yet to be seen.

11.6.2 Publicly-Funded Delivery Organisations

The carbon Trust in the UK was set up as a private organization, funded by the government and private organizations, to lead the public sector and businesses on energy efficiency, and to develop a low carbon technology sector. They offer advice, energy management services, energy consulting, and generally try to remove barriers impeding the transition to a low carbon economy. They have achieved great success from offering an interest free loan scheme to small and medium size enterprises (SMEs), saving approximately 148,000 tones of CO2 annually.

[IEA, ADEME, EST]

11.7: Other Policy

11.7.1 Energy Consumption ReportingLarge energy consumers are required to monitor their energy consumption closely and repot it to a governing body. This has been popular among some OECD countries, but not outside of that. Within the EU monitoring and reporting has been 0065tended to CO2 emissions under the Emission Trading Directive. The new Carbon Reduction Commitment (CRC), imposing a cap and trade system on large energy consumers in the UK, includes a mandatory report on emissions. This is used to allocate adequate credits to the various agents, and also to rank and publicize performance to the public, intended to generate an added incentive for carbon reduction practices.

11.7.2 Mandatory Energy ManagersIn an attempt to force energy considerations at a high level within large companies, appointing an energy manager could draw greater attention to the electricity and gas expenditure and modes of reducing such overheads. This policy option has not been broadly applied, but is in place in such countries as Denmark, Japan, Romania, Portugal and more recently Singapore.

11.7.3 MaintenanceMaintenance has been incorporated into the European directive on buildings for heaters, boilers. Maintenance regulation exists in Italy and Romania for the transport sector. The up-keep of technologies, so-that they are in-fact performing at their maximum efficiency level is vital for energy conservation, and transparency of performance.

11.8 A measured (but inadequately measured) success

Energy efficiency policies have delivered a lot.

That is not to say that policy has been negligent in decreasing energy demand, it has had many successes. Labeling programmes have led to inreases in the market share of more efficient applainces and electronics, while standards have been effective in increasing the average efficiency of product lines. Fiscal measures (e.g. investment specific subsidies or tax deductions) have provided funds to stimmulate investments in energy efficiency and promote further innovations.

In order to assess gains in energy efficiency it is vital to understand how energy efficieny improvements have contributed to an economies decline in final energy intensity. Energy intensity itself is subject to far too many other factors (i.e. climate, industrialisation, geography, manufacturing structure, average home size, etc.) to use as a proxy for efficiency itself. Across 17 IEA countries, for which there is the statistical evidence, energy efficiency has been the primary cause for a decoupling of energy use and GDP, (IEA Scoreboard, 2009).

But the successes of energy efficiency policy have each fallen short of closing the gap between the market potential for energy and the acutal up-take (Morten-Andersen & Bleischwitz, 2009). Despite the presence of clear labels on products, some consumers continue to choose less efficient models. They lack the motivation to up-grade, or to perform the necessary research, or even fail to consider all the cost criteria when makeing an investmnet. Some inefficiencies and energy wasting are part of an infrastructural lock-in, so that regardless of preference consumers are powerless in chossing the performance of their energy stock. This is particularly prominant in the building sector, where the impact of codes will have a psitive but slow effect on market transformation. Standards are limited in their impact, and stringent regulatory measures such as cmpulsory audits, or required managerial structures, only go so far in destributing information, and may bear with them a stigma due to the command and control nature of the imposition on people.

Cost-benefit analysis has frequently been employed to justify government intervention in the market. If the benefits that seem to accrue from regulation outweigh the costs of implementation, it may be deemed a success. However, this method is not intuitive enough given the prevailing short comings of market up-take of energy efficiency measures. Employing a cost-benefit analysis omits the actual progress achieved in energy efficiency, does not take into consideration any nock off effects that may occur, and cannot tell us whether a policy was is in fact the best option. Neither does a cost benefit analysis address the equity of a policy option. How much autonomy do the public retain, to what extent is this a significant consideration in addressing a social problem? Does the outcome of a policy reflect the interests of the public, and how significant is this given the social nature of environmental regulation? Does it in fact address the social issue at heart?

In the case of energy efficiency, where a gap appears to remain between the technological availability and real up-take, it could be argued that in fact the policies pursued have not addressed the social problem. It is difficult to ascertain how much autonomy the public retain, and how great an issue it is where measures are aimed at increasing the diffusion of beneficial technologies. It is equally difficult to say for sure whether their interests are being pursued.

Numerous policies designed have left gaps behind or created their own negative impacts on society, while consumers are paying for their implication.

We do know that the policy has been designed to be largely invisible to consumers. While the ETS has applied a price to Carbon to large emitters in Europe, as this price feeds through to consumers they are unaware that they are paying extra for carbon content. Policy at the consumer level is only visible through labels, of which there are many, which do not compliment one another and certainly do not complement other policy. If there is a price on carbon in one sector, and an ambiguous label rating A-F or simply a status label in another, it is easily conceived that consumers will lack an understanding of their carbon impact across all their activities. Standards, supplier obligations, and fiscal measures fail to make carbon mitigation intuitive and simple for consumers to engage with. They are very specific to a corner of the market to which they apply, and given their invisible nature, may not offer the long term change in culture that is required with energy considerations. If peoples’ decisions are not incorporated into the process can we really assume that a social issue is being addressed, and that their values are being met?

11.9: Seeking SynergyThe policy initiatives addressed in this chapter have formed a very significant force in bringing energy efficiency forward, and further into the scope of consumer consideration. However estimates of the potential for energy efficiency savings, in the residential sector, in public organisatins, private business’ and industry, relative to what is currently maximised indicate that there are still many short-falls. It may be an error to pursue further command and control regulation, in an attempt to plug each and every leak.

It is worth considering that while we may be able to measure the reduction in consumption per unit as efficiency expands, it is dificult to ascertain whether it is in fact policy that has led to this outcome. There are a multitude of factors at play, and a ‘cotrollled’ experiment reflecting a ‘real world’ analysis is impossible. Taking into consideration the diagram in chapter 10, depicting consumers carbon impact as a feature of embedded emissions, implied emissions, and emissions from activity, policy has been directed almost uniquely at implied emissions, with information campaigns also targeting activity. In this context policy targeting implied emissions could again be split into three areas of consideration: the enfficiency gains per unit, efficiency gains of the entire consumption product or service, and the efficiency of the entire sector. ignores the efficiency of an entire system. Take for example transport, a more efficient car is an improvement to transport efficiency, however this may lead to increased car ownership. Is it efficient for the population to have more cars than are required to carry out their day to day activities? While if the infrastructure allowed for the car owner to travel via public transport, comfortably and quickly to their destination, the econmy wide efficiency may be greater. Thus while policy is quite narrowly directed, with specific standards and incentives or requirements for different goods, regard of the end needs of consumers rather than their current means, may allow for the development of fresh approaches.

However this is contingent on the measure used for efficiency. If we consider the fuel efficiency per unit alone, this may be a fair assessment. However it may also be argued that the reduction in price of miles per gallon that came with more efficient vehicles, contributed to the steady year on year increase in miles traveled per person, or cars owned, or both in the US, until 2008 when an oil price hike and recession broke the trend. Between 1975 and 2006 there was a rise of 42 billion gallons of fuel use in the US. Another means of measuring the efficiency of personal transportation would be to consider the entire infrastructure of the system in the US. The most fuel efficient means to travel is via public transport, however outside of the highly urbanized cities of the east coast and San Francisco there is little opportunity for shared transportation.

If we take a step back, and look at the bigger energy efficiency gap, rather than at the specific actions of all the players, there may be behavioural commonalities, consistant accross energy investment decisions. Taking it as a whole, unitary and blanket social issue, are there threads, not yet woven, to make energy efficiency a society wide norm – an every day automatic consideration? Chapter 12 will delve into the behavioural nuances, among individuals and in organisations, at the foot of energy efficiency uptake.