Energy Efficiency Policies around the World: Review and Evaluation

4.2 Evaluation of Energy Efficiency Policies and Measures

These trends in energy and CO2 indicators are the results of various factors, amongst which are changes in energy prices and the energy efficiency policy measures.

Appropriate pricing is a necessary condition for promoting energy efficiency. The first step of any energy efficiency policy should be to give correct price signals to consumers to give them incentives to change their behaviour or to acquire energy efficient equipment. Low price or inadequate tariffs may lead to very high pay back time and make energy efficiency equipment not cost effective at all.

Clear price signals alone are not enough to lead to a rationalisation of energy use: certain conditions are required to remove the usual barriers to energy efficiency and to develop and structure the market for efficient equipment and devices. Policy measures are therefore necessary to reinforce the role of energy prices.

The results of a comparison of the countries' experiences in the implementation of energy efficiency policies are presented in the report. This evaluation helps to draw conclusions and make recommendations as to the effectiveness of the policy measures implemented. It also shows the link between the various measures and their influence on the policy.

Almost all countries under review have set up specific institutions dealing with energy efficiency, such as energy efficiency agencies, either at the national level, or at regional levels or both, and more recently at local level. Although the legal status of these agencies is different from one country to another (e.g. public, public-private), their establishment almost everywhere, some quite recently, clearly indicates that all countries concerned with energy efficiency perceive such agencies as useful and that there is no contradiction between such agencies and the market.

The establishment of energy efficiency agencies is necessary, first of all, to design, coordinate/implement and evaluate programmes and measures since they have strong technical skills. These agencies can also be very useful to negotiate sectoral agreements with equipment producers (e.g. car manufacturers), national banks to implement financial packages for energy efficiency, or in developing countries with international banks or donors to act as the national counterpart with whom to negotiate loans for energy efficiency funds. A new trend is to enlarge the scope of such agencies and to transform them into environmental or sustainable energy agency.

A proper regulatory framework, with an energy efficiency law and/or national programmes with official quantitative targets of energy efficiency improvement, can provide a long lasting context for energy efficiency policies and avoid the negative effect of "stop and go" actions. Almost half of the surveyed countries have set up quantitative targets , with generally annual monitoring requirement .

Electrical appliances and buildings continue to be the main target of regulations, which are spreading to a larger number of emerging countries. In Europe, regulations represent about 40% of the measures implemented in the residential sector.  Regulations are also being extended to new equipment and new areas.  These include fuel efficiency of new cars, in China and very soon in the EU, mandatory use of solar water heaters, in Spain, mandatory certification (i.e. labelling) of existing buildings (e.g. EU countries), energy efficiency obligations for utilities, phase-out of use of incandescent lamps (e.g. Australia).

All European countries and most other OECD countries have energy efficiency standards for new dwellings and service sector buildings. Some non-OECD countries outside Europe have recently established standards for service buildings. Altogether, about 60% of the countries surveyed had mandatory or voluntary standards for new non-residential buildings.

Such a broad deployment indicates that policy-makers consider market signals alone are not enough to foster the right decisions by individuals, professionals or developers in regarding the thermal quality of buildings.

Thermal building codes have been changing over time from simple standards on building components to more complex standards, including for the most advanced countries, energy performance standards which cover the whole building system, including equipment (e.g. heating/cooling, hot water, lighting, motors/pumps, elevators).

Revisions in thermal building codes have become increasingly regular in EU countries: over the past 30 years, standards have been continuously tightened, independently of the oil price level (three to four times, including some very recent revisions). The new EU building directive has for the first time included provisions for a mandatory revision every five years to make such an updating more systematic.

The few evaluations studies of the savings achieved with building codes show that the actual savings for new buildings are lower than the theoretical savings resulting from the standards: non-compliance of standards and behaviours  explain such a situation.

Few countries have estimated the additional costs resulting from new building codes: from the evaluations available, the additional costs linked to the building standards are usually limited to a few percentages.

Measures for buildings focused so far on new buildings. As new buildings represent a small share of the existing stock , buildings standards can only have a slow impact on the short term, which is however significant on the long-term. A more recent trend is to extend regulations to existing buildings and impose energy efficiency certificates for existing buildings, each time there is a change of tenant or a sale . These certificates enable the buyer to obtain information about the energy consumption of the home that they are going to buy or rent. Furthermore these certificates could be an effective tool to implement incentives measures such as tax credit or low interest rate loans for owners who increase the performance of their building through refurbishment.

Standards for new buildings may also have an indirect impact on the technologies, material and practices used in retrofitting old buildings.

Labelling programmes and efficiency standards are an effective method of transforming the market and slowing the electricity demand growth. However, none of the programmes introduced has been able to reverse or stop the increase in electricity consumption in the domestic appliance sector.  This is essentially because of increased ownership levels, especially in emerging countries, and the spread of new equipment (air conditioning, ICT's) and functions (e.g. standby), that often have not yet been targeted by the measures.

Energy labels and standards are complementary tools. Labelling acts as an incentive for manufacturers to differentiate themselves from their competitors and stimulates the introduction of new, more efficient models.  Standards remove from the market the less efficient appliances.

To be effective, labelling programmes and performance standards must be regularly updated. Indeed, there is no incentive for manufacturers to go beyond what is required if no stricter standards have been planned for the future or when most of the models on the market are in the best efficiency classes. It is therefore essential to review and reinforce standards at regular intervals as a way to stimulate technical progress and to ensure a steady improvement in energy efficiency. In this respect, the "Top Runner" programme in Japan has the particular advantage of making easier the definition of new targets, as the most efficient appliances on the market at a given time are used to set the future standards.

In certain conditions , voluntary agreements can be an effective alternative to mandatory minimum energy efficiency standards, as they have the support of manufacturers and can be implemented more rapidly than regulations. Nevertheless, their effectiveness is still conditioned by the possibility of imposing performance requirements corresponding to genuine additional efforts from industry.

The diffusion of more efficient appliances did not result in a price increase for these appliances, as manufacturers were able to adapt and benefited of an increased market ("learning effect").

Direct subsidies to energy efficiency investments remain popular. As they have often been considered as costly and questionable , they are now better targeted to limit the number of consumers that can benefit from them (e.g. low income households, tenants).  In addition, they are also restricted to certain types of investment (from a selected list of equipment), with a long payback time but high efficiency gains (e.g. renewables, co-generation) or to innovative technologies (demonstration or pilot investments).

Subsidies are usually viewed as a temporary measure to mobilise consumers, to prepare for new regulations, or to promote energy efficient technologies by creating a larger market than would exist otherwise, with the objective of a cost reduction for the subsidised energy efficient technologies.

Subsidies can be used to promote quality of energy efficiency equipment and services: in that case, subsidies are only given to products and services that have been certified or accredited by a public authority, generally the energy efficiency agency.

Subsidies can also be given to producers to improve the quality and reduce the cost of production. In some cases the producer approach may lead to better results.

Very often, direct subsidy schemes are supported by energy efficiency funds. Because of the pressures on public finance, new innovative financial schemes have been recently designed to attract private funds into energy efficiency programmes. These innovative funds use tools traditionally used by the private sector (e.g. loans, equity participation, venture capital) and seek a partnership between public institutions and private investors, such as banks or private companies (ESCOs) . These funds will attract private investors, only if there are opportunities of profit and will therefore be restricted to countries, with high-energy efficiency potential and incentive prices. They will also prioritise operations with high investment costs. These innovative funds should help developing a market for energy efficiency that would be "self-sustaining", without public intervention. Guarantee funds and revolving funds are examples of innovative approaches that have been developed in different parts of the world.  New funds targeted at sustainable development can channel untaxed domestic savings.

Innovative ways of motivating the consumers to use such funds can be found in schemes where a loan is reimbursed through the electricity bill, as in the fund used to finance solar water heaters in Tunisia.

Fiscal incentives, such as tax credits, tax reductions and accelerated depreciation, are usually considered as less costly than direct subsidies for the public budget, especially for households, as they have lower transaction costs. They can work well if the tax collection rate is sufficiently high.  Such measures usually have a poor performance in an economy in recession or in transition. They are more adapted to well-developed countries: in fact, mainly OECD countries have implemented such fiscal measures.

Tax reductions for energy efficient equipment or investments have been introduced in many countries and almost equally in all regions: they are in place in about 30% of the countries  surveyed. The compact fluorescent lamp is the most common equipment  to which this measure applies outside the OECD. In some European countries, lower VAT levels exist for labour costs to reduce the investment costs of building renovation (e.g. France, Sweden, and Switzerland). Another innovative way to promote investment in energy efficiency and CO2 reduction is to offer tax concessions to companies that make concrete commitments for energy efficiency gains/CO2 reduction, and meet their target (e.g. Denmark or the UK).

Economic incentives, either subsidies or fiscal measures, are often part of packages of measures: they are for instance combined with audit schemes or voluntary/negotiated agreements with energy consumers.

One of the main barriers to energy efficiency is the lack of information supplied to consumers about what they can do. To address this issue, a large range of tools has been designed: e.g. general information campaigns, labelling of appliances and even dwellings rating their energy performance, audits, local information centres, comparative information.

One relatively new approach to reach more directly the multitude of consumers with well-targeted information, beyond the reach of traditional information campaigns in the media, is to set up local energy information centres to be always as close as possible to the consumer. These local centres are focal points that offer impartial and personalised information on energy conservation and, usually, renewable energy, to the general public and specific target groups, including advice on useful contacts.

Comparative information enables consumers to understand in bills or by means of special support, the consumption levels in comparison to similar consumers (domestic) or companies (industry and services). One of the most famous programmes of this kind is the best practice programme introduced long time ago in UK and still widely used worldwide. More recently, comparison has extended to the best practice in the world for industrial production, e.g. in The Netherlands with the "Benchmarking Covenant". Energy performance certificates for buildings play the same role in many European Countries.

Audit schemes are useful ways to inform consumers about the possible actions to improve energy efficiency. They have been mainly developed in industry and in non-residential buildings and are increasingly made mandatory. Energy audits are usually partially funded by public agencies or by utilities in European countries and are more often free for consumers in the other regions to encourage participation. Evaluation of audit schemes shows that the degree of implementation of the suggested measures varies considerably, depending on the country .

Mandatory audits - like voluntary audits - need a certain quality of auditor as well as staff responsible for energy management in the companies (energy managers). This can be assured by the certification of auditors and by the training of energy managers. A capacity-building process of all participating organisations is a prerequisite for successful mandatory audits.

The main argument in favour of mandatory audits compared to voluntary schemes is that they allow to reach right from the beginning a substantial fraction of consumers. 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. Experiences in Australia show that an "external view" on energy use in a company from an energy auditor often also brings additional value.

Mandatory energy audits for buildings, especially in the residential sector, are wide 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 and Eastern European countries.

Mandatory energy audits in the transport sector are less common and aim at fleet owners.

In the case of mandatory audits, non-compliance with regulations may be sanctioned, although there was no evidence that sanctions were applied. In general, a co-operative approach was preferred.

The implementation of measures proposed during the audits is another critical point, unless there was a legal requirement to carry out the measures or unless they were convincing enough for energy users. Quite frequently, supporting measures such as subsidies for the audits or for all or certain types of investments therefore accompany the mandatory audits. Frequently the funds allocated may not be enough to carry out detailed audits, particularly in industrial companies where the processes are heterogeneous and complex. On average, energy audits and the introduction of recommended measures led to savings of 5-10% for participating companies.

ESCOs (Energy Service Companies) and EPC (Energy Performance Contracting) are very attractive mechanisms to capture cost-effective energy-efficiency potential worldwide, mainly because they do not involve either public expenditure or market intervention.  EPC can probably be considered among the most effective mechanisms for promoting energy efficiency in the public sector and, especially in developing countries, in the industrial sector.  EPC has been demonstrated to lead to energy savings between 20 and 40% in individual projects.

Although the EPC concept is very attractive to tap the significant potential of cost-effective energy efficiency options in all countries, numerous barriers hinder the development of the ESCO industry. Lack of incentive due for example to low energy prices, inadequate energy service levels and lack of access to finance are major barriers in all areas.  In the public sector, the lack of clarity in administrative and budgetary procedures concerning EPC, as well as unsupportive public procurement rules, are often additional barriers. In the residential sector, the lack of awareness and information, high transaction costs compared to the expected profits, and split incentives, limit the business opportunities for ESCOs.

Access to financing for ESCOs is often compromised by other problems including the lack of creditworthiness, and insufficient links between the lenders and ESCOs.  The financial industry itself can act as a promoter of EPC, but banks and financial institutions usually first need to be educated and convinced about the advantages of EPC through positive experiences.

Policies and incentives can be introduced to kick-start and catalyse the ESCO industry.  The examples of the most successful ESCO host countries e.g. China, the United States and Germany have shown that direct and indirect governmental support to EPC as well as the exemplary role of the public sector in initiating energy-efficiency change through ESCOs are crucial to kick-start a sustainable ESCO industry. Accommodating public procurement legislation, in addition to government initiatives, is also a must for the EPC concept to take a strong foothold. EPC in the public sector is especially important as it does not only help reduce energy costs in this sector, but also triggers the development of the ESCO-market and demonstrates the advantages of EPC to the economy in general.

ESCOs and EPC cannot be the panacea, even in the most fertile market and supportive policy environments, as they can only capture energy-efficiency potentials that are cost-effective under market conditions, and because ESCOs add their own costs through their operation and profits.   

The introduction of market based instruments, such as CO2 or energy efficiency certificates, create good opportunities for the development of ESCOs activities worldwide.

Policy instruments for cars include measures to improve the energy efficiency of vehicles as well as measures that influence the use of cars.  These include fiscal measures (taxes or subsidies) on car purchases, car ownership and motor fuels, road pricing, CO2-labelling of cars, incentives for car scrapping and subsidies for the use of bio-fuels.

As regards car purchase taxes, countries with high taxes (Denmark, Finland, Norway, the Netherlands, Ireland and Portugal) have lower rates of car ownership than the European average. However, high levels of taxes are not enough to influence the consumer towards more efficient cars. Several countries are now introducing a green tax, in which the amount of tax is a function of the CO2 emission or energy efficiency of the cars.

The annual tax on car ownership may play an additional role. Provided it is significant, this may orientate demand towards less powerful cars.  Here also, some countries relate the tax level to the CO2 emission or energy efficiency of the cars .

Fuel taxation plays a key role to orientate demand towards more efficient vehicles, to behaviours (e.g. driving style, driving less), even if tax increases are not always only motivated by energy efficiency. In some countries, however, specific CO2/environmental taxes have been set up for motor fuels (e.g. Norway, Sweden, Finland and Germany). Such, green taxes are better accepted by the population, especially if part of the revenue is recycled to support energy /CO2 efficiency measures. The taxation of fuel should follow an escalator approach with periodical growth rates planned in advance to give strong signals to the consumer as to the future price trends (e.g. Germany and UK).

Road pricing in its different forms shows an efficient way - comparable in its effects to fuel taxation - to enhance the energy efficiency in transport. The congestion charge in Inner London shows a reduction in fuel consumption (and CO2 emission) of about 10% and modal shifts towards more efficient transport modes (e.g. public transport or bicycle).

CO2/energy efficiency labelling is a practical method to inform consumers about the fuel economy of new cars. But as the buying decisions are strongly influenced by other factors (e.g. costs, size, power, brand and safety), the impact on the consumer populace is quite low. For this reason relative comparison methods on the labels are more favourable. Combined with tax incentives, they may help shifting consumer decisions to more environmentally friendly and efficient cars.

Scrapping programs do not seem to be a suitable instrument for energy savings and reducing CO2 emissions as there is a clear trend to heavier and more powerful new cars that are less energy efficient than the old cars scrapped. Inspection and maintenance is a much more generally applicable instrument to reduce the emissions from the existing car fleet. In developing countries, a scrapping scheme might show more positive effects as very old cars (20 years or more) still comprise a considerable share of the stock of vehicles in use.

Support policies for biofuels, such as lower taxation or support to production, will need to be co-ordinated and to address the various side effects (e.g. energy input in production, risk that large scale biofuels production might replace food production  and environmental impacts linked to intensive production).

In a long-term period, the accessibility through a reorganisation of spatial structures and through the introduction of new services in public transport might be a secondary effect of pricing the transport system (road pricing, fuel taxation, car taxation). Pricing policies need to be linked to a public transport policy as well as towards spatial planning.

Supporting measures of higher taxation are a precondition to reach the goal of higher energy efficiency. Efficient, high quality and reliable public transport is a condition to lead to significant modal shifts. If this is true for industrialised countries, where supporting measures have been undertaken parallel to the introduction of higher taxes, such as in London or Singapore, with high quality public transport, this is even at higher extent true for developing and emerging countries, where the motorization rate is substantially lower than in the industrialised countries.

Energy efficiency obligations have been a success in EU Member States and are expanding in those countries that have implemented them. They are also being adopted in new countries .

Energy efficiency obligations in Europe have been shown to work in both monopoly and fully liberalised environments and for supply and distribution companies.  The "rules of the game" need to be clear and transparent to all stakeholders and should not be changed to ensure regulatory certainty for the energy companies. Until now, energy efficiency obligations have largely operated without significant trading of energy savings certificates ("White Certificates"); nevertheless most countries remain convinced that in the long term this is the way forward, even if it requires more practical experience.

Energy efficiency obligations are attractive to governments, as they do not have to support the cost of obligations and are typically at around 1-2% of energy bills.  In addition, by using assumed or extant savings, the administration, monitoring and verification costs can be kept low (e.g. <1% of total energy supplier expenditure in the UK).

Energy efficiency obligations could be an important policy option for developing countries to save electricity, as they offer a way for governments to tackle energy efficiency at a fairly modest increase in electricity customers' bills. Two types of obligations could be explored: saving electricity if inefficient technology is already in use and encouraging energy efficient equipment (e.g. lighting, TV) for new electricity customers (e.g. for newly electrified households or in new buildings).

In most developing countries, electricity companies usually have the skilled personnel required to implement such energy saving initiatives.  There may be a need of some assistance in establishing expected levels of savings although many electrical appliances are global (e.g. CFLs), and that the experience of the other countries can be used. Trading of white certificates may be more difficult to implement, as it requires financial infrastructure and skilled market players; however, as shown by the experience in Flanders and UK, trading is not necessary in a first deployment stage.

Energy efficiency obligations change the business model of utilities from energy sellers to sellers of energy services. The adoption of a new directive in the EU, the energy service directive, aims in particular at fostering such a change .

Direct subsidies and tax credits are an effective way of stimulating the growth of the solar water-heating sector. These subsidies may however have negative impacts on emerging markets if they are applied without continuity  e.g. "stop and go" effects, depression of market if subsidies are withdrawn suddenly, impact on selling prices, etc.

In certain markets (e.g. Northern Europe), environmental considerations seem to be sufficiently motivating to minimise the need for subsidies for solar water heating. Conversely, subsidies may be required in countries with significant price distortions (low fossil energy prices) on the residential energy market.

Additional measures are still necessary to complement subsidies when solar water heating is approaching competitive levels.  These include suitable financing mechanisms to help overcome the investment barriers, (e.g. low interest loans, especially for low-income households), training of installers, quality labels or technical standards to ensure high performance levels of installations, or even regulatory measures.

Improvement of perceived quality by customers is absolutely necessary for a large dissemination of solar water heating systems. Quality labels and technical standards are effective tools for maintaining or improving quality, provided they are successfully enforced. The existence of independent certification centres is a key element to ensure that imported products are in compliance with national standards. The performance of the system is not only related to the installation of collectors but also to the quality of installation and the proper maintenance of the system. In this respect, the existence of skilled installers and appropriate networks for after sales services is essential for stimulating further deployment of solar water heating.

Regulations imposing the use of solar energy in new buildings are interesting steps to speed up the introduction of solar, such as in Israel in the 80's and more recently in Spain with the Solar Ordinance. The regulatory approach is the perfect example where the balance of policy instruments is vital. For regulations to work, they need to involve all stakeholders in the sector and must be accompanied by other measures: information and awareness programmes, measures to maintain or improve quality (standards / labels), training and certification of installation contractors, supply-side measures (R&D programmes, opportunities to achieve economies of scale), urban planning regulations (that take into account solar energy) etc.

Packages of measures that combine several instruments are more effective e.g. direct subsidies plus financing methods; economic incentives plus quality labels; regulations plus subsidies or financing mechanisms and quality labels, and so on.

Regulations for household appliances and buildings have proved to bring significant energy savings, even if their implementation can still be improved. Voluntary/negotiated agreements have also led to energy efficiency improvements, especially in energy intensive industrial branches, with cars and with some electrical appliances (e.g. washing machines in Europe), even if the results could have been more ambitious (e.g. cars in Europe).  Tax credits have also shown good results to stimulate the market for renewables and efficient appliances that would not have been purchased by consumers without financial incentives.

Market instruments are gaining in importance with white and carbon certificates, innovative funds and private stakeholders, such as ESCOs playing an increasing role in the promotion of energy efficiency and in the implementation of energy efficiency projects.