Energy Efficiency Policies around the World: Review and Evaluation

3.5 Mandatory energy audits

Energy audits, either walk-through  or detailed energy audits, are essential for all sectors of the economy (including residential/tertiary sector buildings as well as industrial sector and transport companies) to promote a better understanding of the current status of end-use energy efficiency. The audits, which are usually coordinated by engineering or facility departments, will not only create awareness among those who are functionally involved in the management of energy but also justify the necessity for the implementation of energy efficiency activities. Detailed audits are required to verify the identified opportunities.

Energy audits exist in a mandatory form in all sectors, although much less frequently than audits on a voluntary basis (except in the building sector where mandatory audits are more often used). Although this chapter includes mandatory audits for the building sector, the main focus will be on the industrial sector and to a smaller degree on the transport sector because in these sectors mandatory audits are less common.

The evaluation of mandatory energy audits covers the following issues and questions:

• Are all sectors (industrial consumers, tertiary sector, transport sector, residential energy consumers) equally concerned by mandatory instruments and what are typical mandatory elements?
• Why is there a mandatory instrument chosen rather than a voluntary one? What the specific advantages of this approach may be?
• How is the instrument implemented in the different countries and what is the result from ex-post or ex-ante evaluations?
• What supporting measures are taken for mandatory energy audits and what is the interaction with other policy instruments of the sector (package of measures)?

3.5.1 Sector coverage and mandatory elements

Mandatory requirements for energy audits range from an obligation to carry out audits if a threshold of energy consumption is passed, to mandatory reporting, mandatory implementation of certain types of measures, to mandatory standards, including these industrial processes which need to be reached (Table 3.1). All of these elements have been implemented fairly often. Mandatory standards for industrial processes are, however, not implemented frequently and relatively new (except for industrial cross-cutting technologies such as industrial steam boilers or electric motors).

The mandatory elements mentioned in this section will be reviewed further when describing the audits in the different countries.

3.5.2 Advantage/disadvantage of mandatory audits/benchmarks

One important question to be raised about mandatory audits why is a mandatory instrument preferable to a voluntary one? What are the specific advantages of the mandatory approach?

Advantages of mandatory energy audits are numerous.  It is possible to reach right from the beginning a substantial number of consumers, thereby achieving a major reduction in energy consumption in a relatively short period of time. In addition, such an instrument can be used to react rapidly in a case of urgency such as shortfall in energy supply (e.g. case in India), negative impacts of high energy prices on the economy etc.

Disadvantages of mandatory audits include consumers' perceptions of the mandatory nature of instruments as an administrative burden rather than a process helping them to reduce their costs or to become more competitive. They will intend not to comply with the regulation, or worse, they will comply formally but will not integrate the basic idea of energy audits in the company culture. Finally, in case the audits are coupled with mandatory benchmarks, compliance becomes difficult to prove, given the complexity of industrial processes.

Given these different aspects, it is difficult to judge on theoretical grounds whether the regulatory nature of the instrument improves or hampers efficiency. Much depends, the same as for voluntary audits, on the implementation, and in particular also on accompanying measures such as the qualification of the auditors. Naturally, this is also an issue for voluntary energy audits but the requirements are more important, when suddenly a larger number of companies have to be audited.

3.5.3 Impact evaluations available for selected cases

Mandatory audits in nine countries are characterised according to the following elements (Table 3.2):

• Implementation date
• Sectors concerned by the legislation
• Main mandatory features
• Threshold for mandatory participation
• Period for a renewal of the audits
• Sanctions for non-compliance
• Availability of subsidies for saving measures
• Establishment of a central database 
• Quality control of reports
• Information about the impacts of the audits

Most countries have implemented audits only recently, which confirms that a number of countries consider this instrument as new.  A strong increase in energy prices over the last years has possibly triggered this but there are others reasons.  The economic boom in large developing countries such as India or China is hampered by the shortfall of energy supply.

Frequently, legislation for mandatory audits covers all sectors, including transport, although there are also examples where only commercial entities from industry and the tertiary sector are subject to audits.

There is a wide variety of mandatory features reaching from the soft approach in Australia, which aims at business culture changes, to strong regulatory approaches in Taiwan, India or Bulgaria, which include mandatory standards for industrial processes. Energy-use benchmarking - comparing the specific energy consumption (SEC) of a particular sector or sub sector with its rivals in the country or at international level - is also used quite frequently.

The threshold for participation covers ranges from 260toe (3,000MWh) in Bulgaria to 30,000toe in India which reflects to a certain extent the size of the companies in a country. The thresholds also differentiate frequently between sectors or energy carriers. In the case of the Czech Republic, there is a much lower threshold for government facilities, for example.

The typical period for renewal of the audits is 3-5 years, but there are also cases of shorter periods (1-2 years in Romania) or the Czech Republic, where the audit requirement is a one-time obligation.

Sanctions for non-compliance, often fines, are foreseen in most cases. In Taiwan on the other hand, a restriction or suspension of energy supply can be among the sanctions.  However, there is no evidence so far that such sanctions are applied. In general, a consensus-oriented approach is preferred.

Despite the mandatory character of the instrument, quite frequently, the measures found in the audits, or even the mandatory audits themselves are financially supported in order to enhance compliance.  Often, a central body such as an energy agency collects the information on the audits in databases. The intention is to use this information for evaluation purposes to generate benchmarks and feedback to the participating companies

In most cases, there is quality control of the reports, or even of the audits themselves through control by a central body in charge of managing the audits.

In many countries, investigated mandatory audits are fairly new, the knowledge about their impacts is still fairly limited. From the information obtained so far it can be concluded that energy audits and the implementation of subsequent measures lead to savings of 5-10% for the participating companies. Equally important is the cultural change that mandatory audits can also initiate in companies by making energy efficiency a regular goal at all levels of the company. Experiences in Australia show that an "external view", implemented by an energy auditor on energy use in a company, often also brings additional value.

Although the country case studies have also been chosen to ensure a certain geographical coverage, the spread of this instrument is rather heterogeneous. While it receives strong interest in Asian and Eastern European countries, as well as in Northern Africa, it is absent from OECD countries, with the notable exception of Australia and OECD countries in Latin America and Sub-Saharan Africa.  However, countries that have no mandatory requirements for audits place stronger emphasis on voluntary or negotiated agreements .  This is mainly valid for the industrial sector. Larger residential or tertiary sector buildings are in these countries also subject to mandatory audits, for example in the frame of building certification in Europe (EPBD, 2002).  The larger spread of mandatory approaches in Asian and Eastern European countries may be explained by a more hierarchical society where regulation is accepted easier, or by the fact that command and control instruments were more familiar to the former planned economies.  However, these cultural factors are not enough to explain all of the renewed interest in this instrument. The pressure from the energy sources or stronger concerns about climate change also justify the introduction of mandatory instruments. Germany, for example, in its recent climate change plan envisages to couple, starting from 2013, energy audits for industrial companies with reductions in energy and electricity taxes (BMU, 2007). The audits have in this case not a mandatory character but there is a strong incentive to introduce them.

3.5.4 Supporting measures and interaction with other policy instruments

Energy audits in general are crosscutting measures which in itself do not lead to energy savings. They need to be followed by actions. Mandatory audits are no exception in this. For this reason, the introduction of mandatory audits is generally accompanied by a variety of measures.

The most important accompanying conditions are subsidies for energy efficiency measures recommended by the audits, or the audits themselves (e.g. in Thailand), even if they are mandatory. This is to improve the compliance. One way of providing subsidies for energy efficiency measures are revolving energy efficiency funds.

In developing countries, the mobilization of domestic and foreign funds is needed. Some of these international funds can be obtained through the Clean Development Mechanism (CDM), the Global Environment Facility (GEF) and other sources.  However, their support for energy efficiency investments in developing countries is still limited. For example CDM projects have mainly been taken up in other fields such as the reduction of methane from waste or the reduction of fluorinated non-CO2 gases from industrial processes.

Other supporting measures may include fiscal policies to provide incentives: import or sales tax exemptions for energy-efficient equipment and energy efficiency services, accelerated depreciation and the establishment of investment banks lending criteria for promoting energy efficiency. Such policies are effective at removing barriers to energy efficiency by reducing the investment payback periods and minimizing the perceived performance risks. Popular incentives are subsidies for the engagement of energy managers, tax bonuses, soft-loans, grants and credits for energy efficiency investments.

Subsidies that depress the price of energy can provide a significant disincentive for energy efficiency investments. Unfortunately, government controls on fixing energy tariffs and pricing often act as such disincentives, particularly in developing countries. If these government controls were more market-responsive, then a favourable investment climate could be created to the benefit of energy efficiency.

 This approach would also strengthen the role of energy services companies (ESCOs) in the realisation of the measures recommended by audits. Taxation of energy may further contribute to internalizing the externalities (such as social cost, opportunity cost and scarcity cost) in the energy price, thus supporting the measures proposed in mandatory audits.

Information benchmarking tools on energy performance indicate the level of efficiency at which the various industrial sectors operate, at which tertiary sector or residential buildings are run, or transport fleets used. Other informational tools include award schemes that accompany the audits.

3.5.5 Observations and conclusions on mandatory audits

Mandatory audits - like voluntary audits - suppose a certain quality of the auditors as well as of the staff responsible for energy management in the companies (energy managers). This can be assured by the certification of the auditors and by the training of energy managers. In reality, however, especially in the early phases, too few qualified staff is available to handle the large number of units to be audited rapidly when the instrument is mandatory.

One possible solution is to include issues around audits in the curricula of the higher education levels to demonstrate that the planned rapid impact of mandatory audits may take time unless the qualification process is run at the same time. If the participation is voluntary the number of auditors will grow more slowly leaving more time for the establishment of qualified auditors.

In addition to the qualification problem, the financial means foreseen may frequently be sufficient for detailed audits, which is an obstacle in industrial companies where the processes are heterogeneous and complex.  Careful consideration is essential; the quantity of information from the audits is necessary and relevant .

Frequently, government agencies are involved in the administration of the process via a central database of the audits (such as the Bureau of Energy Efficiency BEE in India). The main obstacle is the insufficient response of administration to the information collected (feedback on the quality of the reports and on the results to the consumers) due to an understaffing of the involved government bodies or agencies.

In the introduction of mandatory audits, there is a very important "learning by doing" aspect, which deserves a lot of attention. As a consequence, capacity-building process of all participating organisations is a prerequisite for successful mandatory audits.
The main argument for mandatory instruments is that they allow to reach right from the beginning a substantial fraction of consumers (e.g. case of India). However, the mandatory nature of the instruments implies inherently that a variety of consumers are not yet convinced by the benefits and consider the procedure an administrative burden rather than a process that helps them to save costs or to make their company more competitive. This poses particular requirements on the quality of the process to convince the more reluctant participants.

Mandatory energy audits for the building sector, especially in the residential sector, are most widely spread and exist in many countries and regions. Mandatory energy audits in the industrial sector appear to be quite frequently used in Asian countries , in Australia, in North African countries (Algeria, Tunisia) and East European countries (Bulgaria, Romania, Czech Republic). Mandatory energy audits in the transport sector are less common and aim at fleet owners (e.g. Tunisia and Algeria). However, even in those countries mandatory audits in the transport sector are at a very early stage.

Non-compliance with the regulation may be sanctioned, although there was no evidence that sanctions were really applied. In general, a co-operative approach was preferred. The implementation of the measures recommended in the audits is most commonly not mandatory; however often they entitle to subsidies.

The implementation of the measures proposed during the audits is another critical point, unless there is a legal requirement to carry out such measures or unless they were convincing enough for the energy users.

Quite frequently, the mandatory audits are therefore accompanied by supporting measures such as subsidies for the audits or for all or certain types of investments ; training measures and seminars for the auditors and the staff of companies (both management and technical staff).

Measures to accompany the audits with the development of a market for energy service companies was also considered (e.g. in Taiwan) but not systematically undertaken. In the Ivory Coast, an Energy Efficiency Fund was set up with the aim to support the implementation of the measure proposed by audits (which were however, not mandatory).

Energy audits and the realisation of subsequent measures led to savings of 5-10% for the participating companies. Equally important is the cultural change that mandatory audits also try to initiate in companies by making energy efficiency a regular target at all levels of the company. Experiences in Australia show that an "external view" on energy use in a company from an energy auditor often also brings additional value .

In summary, there are various approaches also within the instrument of mandatory audits, reaching from the softer, process-based Australian approach to more regulative approaches with stronger requirements also on the results to be achieved such as in India, Taiwan or Bulgaria. Both approaches have attractive features which are not necessarily mutually excluding.

The comprehensive approach of "cultural change" in the attitude of companies towards energy efficiency and energy audits is fully compatible (and necessary) for a more regulatory approach.  It may however, depend on the culture of a country the numbers of mandatory elements on audits. In any case, the qualification of auditors, company and government staff as well as a suitable mix of accompanying measures including the development of a market for energy services appears as an important aspect in the realisation of the measures found in the audits.