Energy Efficiency Policies around the World: Review and Evaluation

3.9 Packages of Complementary Measures: Case of Solar Water heaters

This section describes the different instruments used to promote the diffusion of solar water heaters, with a specific focus on the way complementary measures have been implemented to create synergy between instruments ("package of measures)". The measures will be divided into three groups:

• economic incentives to lower the investment barrier and improve cost effectiveness (direct subsidies, low-interest loans, tax exemptions, third-party financing, etc);
• regulations requiring new or renovated apartment buildings to be equipped with solar energy systems; 
• strategies to improve the quality of equipment and installations through the use of technical standards and quality labels.

The most important packages of measures considered are:  

• direct subsidies and access to loans to improve cost-effectiveness while limiting investment constraints
• economic incentives contingent upon the use of products with quality labels to encourage the diffusion of high-performance installations
• special financing schemes or labels to complement
  regulations to limit impacts on the price of housing and prevent cost constraints from leading to a drop in housing quality.
  

State of the market and barriers to diffusion

China: the market leader

The market for solar collectors is dominated by China, which accounted for close to 80% of world annual sales of collectors for solar water heating or for heating buildings, ahead of Turkey and Germany. Sales in China are increasing by approximately 20% per annum, representing an additional collector area of 1.5 to 2.0 million m² every year .

A few countries such as Brazil, India, South Africa and Mexico already have significant cumulative collector area. Elsewhere, installed capacity is much lower but numerous markets seem to be emerging in the developing world in response to he growing demand for solar water heating.

Apart from a few exceptions, the per capita installed area of collectors is still very low in developing world. In the leading countries (Israel, Cyprus, Greece and Austria), per capita installed area varies between 250 and 700 m²/1000 inhabitant  but the market is gaining very slowly (Figure 3.17).

In Germany and Turkey, the installed area of solar collectors is well below these levels but the market is rapidly expanding with per capita installed areas increasing from 44 and 70 m² respectively in 2001 to 68 and 101 m² in 2004.

China, is still only in tenth position with a per capita equipment rate of 48m² but this figure is increasing rapidly (the equipment rate was expected to reach 80m²/inhabitant in 2006, i.e. a 4-fold increase between 2000 and 2006).

Principal barriers to diffusion and cost considerations

with 200 - 300 €/m² in India, China, Greece Turkey and Israel.  There are several explanations for the large difference in systems costs: the level of sunshine (lower cost in countries with more sunshine as simpler technologies can be used), the size of the market (economies of series, such as in Turkey or in China) , quality and standards of the systems and, finally, labour costs.  The two last factors explain a lower cost in developing countries 

In Europe, solar water heating systems are not, at present-day prices, generally competitive with conventional water heating technologies (gas or electricity) . The situation is better in Mediterranean countries, where the climate is more favourable and where less sophisticated technologies are used.

Individual thermosiphon systems can be a viable alternative to conventional water heaters in the developing world (e.g. unit payback of 2 years in Barbados or between 3.5 and 6 years in Mexico, a country with relatively low energy prices).  In some countries however, the subsidised energy prices may create market distortions and prevent the dissemination of solar water heating systems (e.g. Algeria). When the payback period is acceptable, the initial investment, compared to standard water heater may nevertheless be a big constraint for consumers.

The cost of a solar water heating system varies considerably. It can be as low as 300 - 400€ in China and India and as high as 5,000 - 7,000 € in the countries of Northern Europe. The differences in cost can be explained by the differences in installed surface area (from 2 m² to 6 m² per installation), which will depend on hot water needs and hours of sunshine. But there are also significant differences in the cost per unit of area (Figure 3.18).

In Europe, a solar water heating system costs on average between 600 and 900 €/m², compared

3.9.2 Measures and packages of measures

In most countries, solar water heating is a mature technology but its diffusion is still severely limited by economic constraints. The main economic barriers are the excessively high initial outlay and long payback periods for investors (residential or tertiary) who expect a return on their investment after no more than a few years (typically 2 to 3 years). For this reason, measures to support the development of solar water heating technologies are based principally on economic instruments (subsidies, low interest loans, tax relief). Regulatory approaches have also started to appear in recent years. Regulations make the use of solar energy compulsory in situations where economic incentives have not been sufficient to overcome existing barriers. In addition, other measures to provide information and enhance awareness, and to improve quality in general, are used to help overcome the non-economic barriers and identify other factors that influence consumer motivation.

Subisidies

Subsidies are intended to reduce the capital cost at the time of purchase and shorten the payback time. They can also be used to promote quality if they are granted on condition that the equipment or the contractors comply with certain quality criteria. Finally, subsidies provide the public authorities with the opportunity to show their interest in solar technologies. Combined with a clear and policy to develop solar technologies, this can help mobilise professionals in the sector and build consumer confidence in the reliability of solar water heating equipment.

Numerous examples of policies to support the development of solar collectors show that subsidies are an effective way of boosting sales. In Europe, financial incentives are seen as a key factor for developing the market for solar water heating systems and almost all member states provide financial incentives for their installation.

The experience of Tunisia and Taiwan among other countries shows that if subsidies are discontinued prematurely, it is quite possible for sales to plummet .  However, once the critical mass has been reached economic incentives can be reduced and even stopped without slowing down the diffusion dynamics (e.g. Greece).

But direct subsidies are not without a certain number of drawbacks, the main one being the cost for public budget if the financial incentives concern a large volume of equipment over a long period of time. Furthermore, direct subsidies can involve very high transaction costs, in particular when they are granted for individual systems. Finally, as discussed above, subsidies may also have negative impacts on markets for a number of reasons:

• negative impact on demand, on networks of contractors and on manufacturers and importers if subsidies are withdrawn too rapidly in markets that are not sufficiently prepared (cf supra);
• effects of the market anticipating the withdrawal or introduction of subsidies, leading respectively to a rush to buy or to a waiting game;
• the cost of equipment might increase if manufacturers or contractors raise their prices in anticipation of the rebates that purchasers will be granted.

To limit these drawbacks, it is first of all necessary to avoid changing the subsidy schemes too often and in an inconsistent way.  Subsidies could also be reduced progressively as the market develops and actors can anticipate their phase out.

Tax credits / tax incentives

There are various types of tax incentive: tax reductions (lower VAT for example) applicable to equipment or installation costs, reduced tax rates on imported equipment where applicable, tax credits, accelerated depreciation, etc.

Several European countries have lowered their VAT rates on solar equipment (e.g. Spain and Austria with full exemption from VAT).  Tunisia has also introduced a reduced VAT rate in its incentive programme financed by the GEF (1997-2004). Several countries have implemented tax credit schemes, where households can deduct part of the purchase cost of the solar water heating equipment from their income tax .

The aim of tax incentives is much the same as that of direct subsidies: they reduce the investment cost and therefore improve the return on this investment. For public authorities, they represent a loss in tax revenue rather than an additional expenditure. However, unlike subsidies, tax credits do not lower the barrier of the initial upfront payment, and therefore do not help low-income households.

Low-interest loans / third-party financing

Providing access to credit is another way of lowering the initial cost barrier as long as the interest rates are lower than those generally applicable to consumer loans. Loan facilities are often set up as a complement to direct subsidies to help cover the remaining cost that has to be paid by the investor.

In Spain, the possibility of obtaining low interest loans has greatly facilitated implementation of legislation on solar installations . India has also adopted a strategy based on low-interest loans to help consumers to invest in solar water heating systems.

It is possible to go even further by adjusting loan repayments according to the energy savings produced by the solar water heating system. This is the principle of third party financing where the party paying for the equipment, usually an ESCO (energy services company), is reimbursed from the savings made . This type of arrangement has been used to finance solar installations in the hotel sector in Spain. However, this method of financing is still not very widespread.

Regulations

Even in fairly mature markets, solar water heating systems are not used in all situations where they would be justifiable from a financial point of view.

The reasons are numerous and include: lack of trust in new technologies, long payback times and preference for immediate savings, insufficient visibility and information, lack of motivation and awareness on the part of decision-makers, high transaction costs, problems with owners / tenants, and so on. In such circumstances, regulations making the use of renewable energy sources mandatory provide a way of expanding deployment and benefiting from increasing returns to adoption.

 Israel was the first country to make the use of solar water heaters mandatory in 1980, followed recently by Spain (first in 1999 in Barcelona City and in March 2006 in the rest of the country with a new Building Code).

In Spain, the purpose of the new Building Code is to promote the use of solar water heating systems in all new or renovated buildings. It stipulates that in these buildings 60% of hot water demand must be met by solar. The results achieved by Barcelona demonstrate the effectiveness of this approach, since the average surface area of collectors installed each year increased by 1.1 m²/1000 inhabitants before the Ordinance to 13 m² in 2004

The additional investment cost was finally kept within 0.5 and 1% of total construction costs and was covered by no-interest loans offered by the Instituto de Crédito Official.

Regulatory measures result in a much larger market for the technology and can thereby help improve performance (reliability/cost) and enhance the visibility of the technology, as well as set in motion a virtuous spiral that will lead to greater diffusion. Nevertheless, minimum quality levels must be imposed to prevent the solar energy obligation from encouraging the use of inexpensive but inefficient equipment. Standards and quality labels can ensure that such minimum requirements are met.

Improving quality: standards and labels

The real or perceived quality of systems is an important driver or obstacle to further dissemination of solar water heating. In several countries, the low quality of equipment and installation, and the lack of adequate maintenance is a clear barrier to the development of solar water heating. At the opposite, the high perceived quality of solar products and installations can be a key element for consumer confidence and an important driver for the dissemination of solar water heating (e.g. in Austria). The quality issue does not concern the manufacturer alone but also the installer and often first the after sales and maintenance network.

The aim of standards is to guarantee or improve quality. Technical standards are drawn up with reference to a given set of specifications and guarantee a specific level of quality. In addition to product standards, there are standards relating to the installation of equipment. In Europe, the Keymark certification scheme developed by European manufacturers with ESTIF is now recognised and facilitates the movement of products between countries by making it easier to get financial incentives (Figure 3.19) . China intends to develop its own national technical standards on the basis of this label. While the technical standards are restrictive, labels designed to achieve the same ends are, in theory, less restrictive.  In practice, labels may become restrictive if consumer access to subsidies or loans is conditional on certification of the product or contractor.
In addition to standards, special contractual approaches have also been developed aimed at guaranteeing or improving the quality of solar water heating systems.  For example, the Guarantee of Solar Results project has been implemented on an experimental basis in certain countries such as France and Spain. Applicable to large installations, its aim is to check that the real performance of a system corresponds to the advertised performance, and to compensate users if this is not the case. The risk related to poor performance is no longer borne by the user but by manufacturers and installation contractors, who are thus strongly encouraged to supply high quality equipment. 

Anyway, setting standards is not enough. It is also necessary to make sure that these standards are effectively enforced. Without certification facilities, it may be difficult or impossible for most countries to check the compliance of imported products with national standards; it may also be impossible to adapt or strengthen the national standards to follow the technical change in state of the art technology. A national or regional testing and certification centre that can verify the compliance of marketed products with the national law (technical standards) is a key element for the implementation of policies intended to promote de diffusion of solar water heating.

Complement of instruments

In reality the policy instruments presented above are seldom implemented alone and often used in combination to complement each other.  Therefore, the support to solar is often based on a package of complementary measures.

Subsidies at time of purchase / access to credit

Direct subsidies help address the problem of capital outlay but are not sufficient in themselves to help the lowest income families to purchase solar water heating equipment. Similarly, tax credits and tax rebates help improve the return on investment in solar water heating but do not help families with very limited financial means to purchase solar water heating systems. In this case, it is essential to provide complementary measures to facilitate access to credit, such as low-interest loans or schemes involving third party financing .

Energy and environmental taxes are other factors that determine the economic competitiveness of solar water heating systems. A number of European countries have introduced environmental taxes or adopted energy taxation systems that make fossil energy sources more expensive and improve the return on investment for solar installations. However, existing energy taxation is not always compatible with the objective of promoting renewable energy sources. In many developing countries, fossil fuel subsidies that are intended to facilitate access to energy for the poorest families have an adverse effect on sectoral policies aimed at promoting solar water heating.

Most of the time, direct subsidies must be combined with systems providing access to credit (in particular low-interest loans), especially in developing countries where the cost barrier is felt most strongly.

Economic incentives and quality labels

Economic incentives are almost always conditional upon certification as a way of promoting the use of high quality equipment. In practical terms, this means that economic incentives are granted only for equipment that has an approved quality label, in other words that meets stringent quality requirements. Economic incentives thus enhance the effectiveness of labels which themselves are designed to promote better quality equipment.

Subsidies can be granted to encourage the use not only of high quality products but also of qualified installation contractors and high-performance installations if they are awarded on the basis of minimum performance levels. For instance, in the Netherlands, the amount of the subsidy is determined by the performance of the installation. On the other hand, experience in Tunisia has shown that it is not enough to set up schemes to finance investment in solar water heating; they must be accompanied by measures to improve quality. In fact the market collapsed when subsidies were withdrawn because of insufficient quality control and a negative perception of the quality of solar equipment among consumers.

More generally, financial incentives and public information and awareness campaigns are complementary. Information campaigns are intended to stimulate public interest in solar water heating; to be effective, consumers need incentives to be able to purchase solar water heaters. In the same way, any economic incentive schemes must be promoted through public awareness campaigns if they are to be truly effective. Public information and awareness campaigns are thus a vital complement to economic incentive programmes.

Regulations / financial aid / quality labels

Where regulations have been introduced, additional economic incentives may be necessary to ensure that the initial extra costs involved (at least during the early stages) do not give rise to increased construction costs and make home ownership more difficult for lower-income families. At the same time, regulatory measures must be accompanied by equipment certification schemes to ensure that pressure on building costs does not lead to poorer quality installations and ultimately a decline in consumer confidence.

A regulatory approach, more than any other type of instrument, must be part of an overall strategy based on a wide variety of incentives. For reasons discussed above, financial incentives must be made available (subsidies and/or low-interest loans), and quality improvement measures should be introduced, such as product labels and special certification for installation contractors. Generally, when regulations are introduced making solar systems mandatory, additional support measures are necessary: information and awareness programmes, schemes to maintain or improve quality (standards / labels), training and certification schemes for installation contractors, special support measures on the supply side (R&D programmes, opportunities to achieve economies of scale), urban planning regulations that take into account solar water heating, and so on. More generally still, the motivation and involvement of all the players in the sector is needed to find the best solution for promoting the integration of solar water heating in buildings.