Energy Efficiency Policies around the World: Review and Evaluation

1.4 Energy Efficiency Policies and Measures

Any cost related decision concerning energy efficiency, at the individual level, is based, more or less, on a trade-off between the immediate cost and the future decrease in energy expenses expected from increased efficiency. The higher the energy price, observed or expected, the more attractive are the energy efficient solutions.

Making a "good" investment decision, for domestic appliances or industrial devices, from the energy efficiency viewpoint, certainly relies on a sound economic rationale. Good price signals are necessary.

In market economies, where most energy prices to final consumers are deregulated, prices should normally reflect fairly accurately the supply costs. However, for several reasons, they often reflect only a part of the overall costs of fuels and electricity. They include none, or just a few, environmental externalities and long run marginal development costs.

As a result, decisions made by final consumers when purchasing equipment or making an energy efficient investment (e.g. retrofitting of dwelling) often do not reflect the drive towards global economic optimisation, creating a gap between the actual achievements in energy efficiency and what could be achieved through an accurate price system accounting for all costs involved.

Taxation is the usual means used by governments to reduce or suppress price distortions at the consumer level. In that sense, taxation is always complementary to energy efficiency policies and measures. It is hardly just a component of these policies and measures because of its much broader socio-economic aspects, but it certainly determines the effectiveness of policies and measures.

Clear price signals alone are not enough to achieve a rationalisation of energy use. Indeed certain conditions are required to remove the usual barriers to energy efficiency and to develop and structure the market for efficient equipment and devices:

The availability of efficient appliances and production devices;
The availability of good information for consumers about such equipment and devices; and,
The availability of technical, commercial and financial services when necessary.

Policy measures are therefore necessary in market economies to reinforce the role of energy prices, firstly to create the appropriate market conditions for efficient equipment, secondly to drive consumer choice towards the most cost effective solutions. They also aim at alleviating the recognised failures in market mechanisms.

Three major sources of failures in market mechanisms are often pinpointed to justify the implementation of policy measures:

The information is either missing or partial, and cannot be improved at acceptable cost;
Decision-makers for energy efficiency investments (in buildings, appliances, equipment, etc.) are not always the final users who have to pay the heating or cooling bills: the overall cost of energy service is not transparent to the market;
Financial constraints faced by individual consumers are often more severe than what is actually revealed by national discount rates or long term interest rates, resulting in a preference for short term profitability. This often leads consumers to over-emphasise the immediate cost of equipment and devices, which usually does not benefit the selection of efficient equipment or devices. Implicit discount rates in industry are over 20% compared to less than 10% for public discount rates, and 4-6% for long-term interest rates.

Energy efficiency policy and measures ("non-price measures") are therefore necessary to complement the role of prices. The main objective of measures is to create the necessary conditions to speed up the development and the deployment of market efficient equipment, through:

Information for and communication with final consumers;
Risk sharing with producers and distributors;
R&D and dissemination of expertise in the field of energy efficiency;
Deployment of specific financing mechanisms;
Regulation of appliances and equipment, or for consumers.

Energy efficiency policy is therefore considered here in a broad sense. It includes all public interventions ("policy measures") aiming at improving the energy efficiency of a country, through adequate pricing, institutional setting, regulation and economic or fiscal incentives.

Information and communication measures have two main targets:

To increase the awareness of final consumers about the individual and national benefits of energy efficiency;
To open the range of possible options for technical decisions to be made by final consumers and make the overall costs of all options transparent.

Sharing the economic risk with the producers and distributors of energy efficient equipment and devices can take several forms: loans, subsidies, tax credits, etc. The main objective is to overcome the commercial barriers raised by the developers of efficient equipment and devices.

Supporting R&D and dissemination costs from public funds and channelling any government set price created by advanced energy efficient technologies, equipment and devices to the private sector, aims at speeding up the penetration of efficient equipment and devices and decreasing their costs on the market.

Introducing specific financing mechanisms has two objectives:

For consumers, to reduce the market imbalance (due to financial constraints) between cost- effective solutions with high investment / low operating costs (energy efficient), on the one side, and low investment / high operating costs (less efficient) on the other side;
For suppliers, to help implement production or distribution activities in the field of energy efficient products and services.

Regulations aim at removing from the market the least efficient appliances, equipment and buildings and introduce mandatory actions for consumers that should indirectly improve energy efficiency (e.g. maintenance, reporting, auditing).

Chapter 3 reviews various types of measures and discusses conditions for their implementation, as well as their use in the various world regions.