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Overestimation of savings in energy efficiency obligation schemes
Energy 121 (2017) 599e605
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Overestimation of savings in energy efficiency obligation schemes Simon Moser Department of Energy Economics, Energy Institute at the Johannes Kepler University Linz, Austria
a r t i c l e i n f o
a b s t r a c t
Article history: Received 2 November 2016 Received in revised form 2 January 2017 Accepted 6 January 2017 Available online 11 January 2017
In energy efficiency obligation schemes, energy savings are accredited for implementing energy efficiency measures. Individual measures need to add up to the cumulative savings target. With regard to the savings accredited in energy efficiency obligation schemes that existed when the EU’s Energy Efficiency Directive entered into force, economic literature attests this policy instrument to effectively deliver additional savings at low costs. This paper relativizes these optimistic results and shows that accredited energy savings are likely to be significantly overestimated compared to the real savings achieved in course of the scheme. First, bargaining processes increase accredited savings per measure. These include bargaining on the volume of the savings target, standardised saving values, discount rates, and the lifetimes of measures. Second, arbitrary methods of measurement are an integrated element of obligation schemes to minimise excessive administrative costs. However, it is shown that arbitrary methods of measurement incentivize overestimation of real savings. Both aspects imply that real savings are lower than accredited savings, querying the policy instrument’s actual effectiveness and efficiency. © 2017 Elsevier Ltd. All rights reserved.
Keywords: Energy efficiency obligation schemes White certificates Policy evaluation Measurement & verification Bargaining
1. Introduction While the ongoing transition to carbon-free sources of energy [13] faces not only economic, but also social challenges [7], energy efficiency improvements are commonly accepted as they deliver the same energy service and are often accompanied by improvements in comfort [2]. Energy efficiency supports a decrease in energy intensity and is often stimulated by regulation or incentives like subsidies and taxes [10]. Energy efficiency obligation schemes are an innovative policy instrument primarily aiming to increase end-use energy efficiency. The government obliges energy suppliers (retailers or distribution system operators) to deliver a certain volume of energy savings. These energy savings need to be achieved on the end-users’ property, e.g. by exchanging inefficient appliances. Energy savings are measured bottom-up, implying that every single measure needs to be recorded and individual savings are accumulated until the obligation is complied with. For details on the basic functioning of energy efficiency obligation schemes see Ref. [4]. Energy efficiency obligation schemes have been applied since 1994, when Great Britain introduced this policy instrument. The obligation scheme proved to be highly effective, probably because no other instruments addressing energy efficiency had been in
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force. As an indirect regulation (suppliers are obliged to implement measures at a third party), the instrument operated outside the fiscal budget and both the use of capital (energy efficiency measures) and the source of financing (higher energy prices) support end-use energy efficiency. For details on the British scheme see Refs. [17,24]. Expert interviews conducted in course of the EnergieZer project suggest that the Danish, Italian and French scheme were installed based on the positive British experiences [17]. Of course, policy installation was affected by existing national energy legislation and framework conditions, which led to some variations in scheme design. For details on these schemes see Ref. [5]. Before the EU’s Energy Efficiency Directive (2012/27/EU) entered into force in December 2012, about 40% of the EU population had already been subject to energy efficiency obligation schemes. Additionally, due to the EU’s Energy Service Directive [8] (2006/32/EC), voluntary schemes existed in Austria and Finland. Poland planned to start an obligation scheme then [17]. According to the Directive’s article 7, Member States shall install energy efficiency obligation schemes on a national level. Energy distributors and/or retail energy sales companies shall be obliged to save 1.5% of the energy delivered to final customers excluding energy for transport purposes. However, article 7 also lists alternative policy instruments the member states may use to comply with the 1.5% target.
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1.1. Advantages of energy efficiency obligation schemes Why does the Directive enforce this specific policy instrument so prominently, compared to alternative policies? Extensive research has been conducted on energy efficiency obligation schemes. In comparison to other policy instruments, research almost homogenously detected theoretic advantages and good policy performance in practice. 1.1.1. Increasing energy efficiency market activity According to recital 9 of Directive 2006/32/EC, the liberalisation of energy markets “has almost exclusively led to improved efficiency and lower costs on the energy generation, transformation and distribution side. This liberalisation has not led to significant competition in products and services which could have resulted in improved energy efficiency on the demand side.” Energy efficiency obligation schemes are expected to significantly increase energy efficiency market activity, by stimulating market turnover, the number of energy service companies acting on the market and supporting the marketability of new energy efficiency products.
period of the French scheme in operation from 2006 to 2009, it was a political consensus that obliged suppliers “market” the government’s subsidies, i.e. suppliers increase the additionality of another policy instrument in force, while they bear low costs [17]. For a detailed analysis of additionality see Ref. [5].
1.2. Disadvantages of energy efficiency obligation schemes
1.1.4. Additionality Those measures which would not have been implemented without the energy efficiency policy are called additional. The higher the share of additional measures is, the more effective the policy instrument is. Usual additionality of demand side management programs ranges from 10 to 50% [11]. Regarding energy efficiency obligation schemes, additionality is estimated 50% in the Danish scheme and 80% in the British scheme [14,27].1 For the first
Reviewed literature uniformly refers to transaction costs and administration costs as the most important disadvantages of energy efficiency obligation schemes. Transaction costs are defined as costs which do not directly contribute to the production of a good (here: an accredited energy efficiency measure). These include “search for information, persuasion of customers, negotiation with business partners, and measurement and verification activities” [20]. As every implemented measure needs to be documented, monitored and verified, these activities are identified as the main sources of transaction costs [5,22]. Additionally, governmental institutions also face high expenses for activities to control and review the measures and the measurement process of the savings. The costs associated with measurement and verification will be subsumed as administrative costs in this paper. One straightforward approach to reduce administrative costs is to standardise accredited savings for a certain type of measure. Using an average value, total savings expectedly are accurate while the deviation of individual measures can be neglected. For example, in Austria, 205 kWh are accredited for replacing an old refrigerator by an efficient one [1]. Standardised measurement is practically indispensable for bottom-up accreditation of savings in energy efficiency obligation schemes and constitutes an integrated part of this policy instrument. Without providing a standardised savings value the supplier would, to be accurate, need to measure the consumption of the old refrigerator on-site, measure the consumption of the new refrigerator on-site, and then calculate the difference. Existing literature concentrates on avoiding administrative costs by providing recommendations on how to standardise and process savings values [3e5,20e22]. If at all, literature hardly considers the consequences of (i) the real-life standardisation process and (ii) standardised measurement itself on the whole scheme’s performance. Based on the volume of savings accredited in existing schemes, research attests high efficiency (low costs of savings) and high effectiveness (high additionality). In the author’s opinion, economic efficiency of one obligation schemes is hardly comparable to other schemes or alternative policy instruments: parameters2 are not recorded uniformly in the various national schemes [16], vary between policy instruments in the same country, and depend heavily on the preconditions (instruments already in force, efficiency potentials, etc.) [17,26]. support this opinion by showing the complexities and the bulk of assumptions necessary in order to be able to compare the results of the national schemes. Concerning additionality, most stated numbers obviously are estimates [14,27]: generally, an obligation scheme first tends to absorb business-asusual measures (as suppliers’ costs are minimal if the customer would have implemented the efficiency measure anyhow). This is supported by the finding that there “appears to be” a trade-off between additionality and the capital levered by parties other than the obligated entities [23], i.e. the more money is spent by private investors, the higher the probability that the scheme accredits savings to measures implemented anyhow.
1 Remark: later analysis by Ref. [6] relativizes these figures by finding additionality of 10% in the Danish residential sector; note the low sample size of n ¼ 46.
2 Standardised saving values, inclusion of measures’ lifetimes, application of discount rates, acquisition of direct cost data, etc.
1.1.2. Polluter-pays-principle Neglecting administration and transaction costs, an obligation should ideally be imposed on the “polluter”, i.e. the energy end-user. In order to limit the scheme to a manageable number of obliged parties, energy retailers and/or distributors should be obliged, as they are the penultimate actor in the supply chain [4]. Moreover [28], identify further arguments in favour of obliging energy retailers and/ or distributors: most of them have sufficient financial and human resources, direct customer contact and knowledge about the consumption, have knowledge on savings potentials and are competent in marketing and implementing measures. 1.1.3. Cost minimisation Energy efficiency obligation schemes are a market-based instrument, constituting a “floor” of savings. Based on the axiom of economic theory, profit-maximising companies minimise their costs. As the obligation represents a burden to the suppliers, they minimise the costs of compliance (i.e. minimise the costs of implementation of measures) [12]. An ideal-theoretic scheme allows for full flexibility, meaning that there are no restrictions concerning the type of energy efficiency measures, saved energy carriers, customer groups, purchase of savings achieved by third parties, etc. For a detailed illustration of flexibilities see Ref. [21]. This means, for example, that gas retailers could support electric cars or that petrol station operators could give away LEDs to comply with their obligations. Suppliers socialise the costs by passing them on to their customers or by receiving public refunds. Thus, suppliers’ cost minimisation theoretically guarantees minimal costs for the society when a certain savings target is to be achieved. However, energy suppliers supporting end-use energy efficiency remains a paradox and needs regulatory constraints [25].
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1.3. Aim of this paper Based on scientifically recorded practical experiences and basic math, it will be shown that real savings are lower than accredited savings. (And, moreover, accredited savings are lower than envisaged savings.) This is due to an overestimation of standardised savings and due to bargaining in the course of the policy implementation process. However, accredited (not real) savings are the basis for the policy’s performance indicators presented in other literature on this policy instrument. Thus, this paper identifies some aspects which demonstrate that energy efficiency obligation schemes are less effective and less efficient than expected. 2. Methodology For the analysis conducted in this paper, the following assumptions are required. Although these assumptions simplify the complex designs of energy efficiency obligation schemes and the variation of designs in the existing schemes, they are sufficient and suitable to generalise the results. The theoretic and practical basis for the analysis is provided by literature research and expert interviews conducted in course of the EnergieZer project (for details see Ref. [17]). 2.1. Assumptions “Energy supplier” subsumes any energy retailer or distributions system operator obliged in an energy efficiency obligation scheme. Although the recovery of costs differs significantly between retailers and system operators, and may entail some limitations on the particular aspects analysed in the following, penalties for noncompliance lead to similar incentives. An energy efficiency obligation scheme is to be installed by the government. Energy suppliers will be the obliged parties. The government proposes an optimal volume of savings to be achieved in the scheme (“envisaged savings”). It is not necessary to define more details like allocation of the obligation, timeframe, etc. The government fixes penalties or cost recovery procedures so that obliged energy suppliers definitely comply with their individual obligation. In this paper, it is assumed that the supplier passes on the costs to its customers. For simplicity, it is assumed that energy efficiency measures are exclusively implemented by obliged suppliers, neglecting any complexities concerning the trade of savings with third parties, for example energy service companies. Obliged energy suppliers are profit-maximising and cost-minimising companies. All potential types of energy efficiency measures (insulation, efficient appliances, efficient mobility, etc.) are subsumed in one representative measure. Suppliers are obliged to report the energy savings (i.e. the measures) they achieved to the government. 3. Bargaining accompanies policy implementation Literature hardly takes into account negotiations and stakeholders’ interests in energy efficiency obligation schemes: in Ref. [3] the importance of including stakeholders into the process of policy implementation is briefly mentioned. However, the obligation scheme implies significant challenges affecting suppliers’ cash flows, staff requirements and organisational structures [19]. Based on the basic assumption made (profit-maximising suppliers intend to minimise their costs), suppliers comply with the obligation at the lowest cost possible. As the obligation imposes costs on the suppliers, they may use their bargaining power to influence the pending legal requirements. Of course, depending on the country, suppliers have varying bargaining powers as they face
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heterogeneous economic environments and prevailing public opinions. Expert interviews conducted with researchers, suppliers and government representatives in course of the EnergieZer project (c.f. [17] suggest that energy suppliers hold strong bargaining powers in regard to policy implementation. This notion will be supported below by some indication. In the following it is shown that many scheme design elements (not only the volume of the obligation) are to be negotiated. Note that for every aspect described, successful supplier bargaining would lead to an overestimation of real savings. The following basic assumptions are made to show the incentives and results of bargaining: it is assumed that supplier i is confronted with its saving obligation with a volume of Oi . For simplification, the energy supplier bears the remaining costs for the implementation of a representative measure, which are c. This representative measure delivers standardised (“deemed”) savings of S.3 Consequently, the number of measures necessary in order to comply is determined by Oi =S. Supplier’s total costs to comply with the obligation are
TC ¼ ðOi =SÞ*c
(1)
Given fixed market prices for the representative measure’s costs c, suppliers will bargain about the size of their obligation and the savings achievable by implementing one measure.
3.1. Bargaining on the scheme’s savings volume When suppliers implement energy efficiency measures, they first bear the residual costs of implementing the energy efficiency measure which were not borne by the benefitting customer or the government. In order to refund these costs, they pass them on to their customers by increasing the energy price/tariff. Depending on actual price elasticities and competition, higher prices decrease turnover. Moreover, suppliers face penalties or a bad public image if they cannot or do not comply with their obligation. As a first step of policy implementation, the government sets the total volume of the obligation, and suppliers face strong incentives to bargain for a reduction of the envisaged total obligation volume, and/or of their final individual obligation Oi .
3.2. Bargaining on a measure’s standardised savings value The more savings the representative energy efficiency measure generates, the less the number of measures which is necessary to fulfil the obligation. Deemed savings values are not a “law of nature” and can thus be negotiated. The deemed savings value S is defined as the difference between (i) the initial baseline consumption and (ii) the new efficient consumption of the appliance. Depending on the scheme’s specifications, the savings value also accounts for (iii) the lifetime of the measure and/or (iv) discount rates. Discount rates decrease the net present value of future consumption and accounts for hypothetical interest rates on future expenditures, and ongoing technical innovation which decreases additionality of future savings. Practical experiences with the standardisation of measures in the Danish, French, Italian and Austrian schemes show intensive negotiation activity concerning the baseline and efficient consumption. Indication from the British scheme supports the proposition of bargaining concerning discount rates (see below) [17].
3
c.f. on the “deemed” approach in chapter “arbitrary methods of measurement”.
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3.2.1. Bargaining on consumption Deemed savings are primarily defined by average initial (inefficient or baseline) and final (efficient) consumption. Accredited savings inversely influence the supplier’s total costs (Formula (1)). The savings accredited for implementing the measure are S ¼ CBaseline Cefficient . Defining higher baseline consumption and/ or a lower energy consumption of an efficient appliance result in higher savings accredited for a certain measure and lower total costs. It is assumed that the institutions/authorities administering the energy efficiency obligation scheme would set the average savings for the deemed method accurately to Saccurate . Successful bargaining will lead to higher accredited savings Snegotiated > Saccurate . This implies that any supplier’s real savings (ðOi =Snegotiated Þ*Saccurate ) are lower than the savings accredited (even though the supplier fully complies with its obligation ðOi =Snegotiated Þ*Snegotiated ¼ Oi ). Expert interviews conducted by the author in course of the EnergieZer project (c.f [17]. identify negotiation processes concerning the standardisation in all countries regarded (Great Britain, France, Denmark, Italy, Austria). As interviewees were guaranteed to remain anonymous, the following generalisation can be made: While all suppliers state that they need to “ensure” the value of achieved savings, they follow country-dependent strategies. For some, manageability of standardised savings is more important than the height of savings. Governmental institutions see a “lively” consultation process indicating strong bargaining activity. Some governmental institutions “hold a strong position” on the accuracy of accredited savings values. Other experts remark that national governments may hold a weak position as the obligation is based on EU legislation and does not necessarily reflect the government’s own political interests. 3.2.2. Bargaining on discount rates From an economic point of view, the net present value of future savings is less than the current one. For this reason, a discount rate can also be applied to the amount of energy saved by a measure in future years. In addition to this economic perspective, a reduction in the savings value of a measure (deterioration) is expected over the course of life of a measure: first, behavior readjustments may decrease the savings; second, efficient exchanges of older appliances become more likely due to malfunction, decreasing attributable savings; third, ongoing development of even more efficient appliances decreases the baseline and thus attributable savings. There is some indication from Great Britain that suppliers indirectly bargain on the volume of the total obligation: If lifetimes and discount rates are accounted for, an increase in lifetimes and a decrease in discount rates increase the amount of savings S accredited for the same measure (and thus indirectly decrease necessary efforts to comply with the obligation). The British scheme has always accounted for the “full” lifetime of measures (which again is a to-be-defined value), but the discount rates have decreased steadily. The government significantly increased the nominal obligation (62 TWh in the 2002 to 2005 period, 130 TWh in the 2005 to 2008 period and 494 TWh in the third period) [24], letting the government appear successful in the bargaining processes. However, suppliers did not face the same real increase: The increases were accompanied by decreases in applied discount rates which dropped from 6% in the first to 3.5% in the second to 0% in the third period. For illustration, comparing a hypothetic measure with annual savings of 100 kWh and a lifetime of 40 years, accredited savings would be 1008 kWh in the first and 4000 kWh in the third period of the scheme (net present value method). A rough approximation based on [4] shows that savings of the second period would be only 99 TWh if discount rates of the first period are applied. Transferring this approximation to the third
period implies savings of 241 TWh.4 The nominal rise to a double or eightfold obligation would than equal about a half and a fourfold real increase, respectively. 4. Arbitrary methods of measurement In energy efficiency obligation schemes the savings of every single measure are summed up until the predefined savings volume is achieved. Thus, measurement and verification (M&V) of energy efficiency measures constitute a crucial and integrated part of the schemes [15]. In most economic models and calculations, the savings accredited for the implementation of a measure are assumed to be equal to the real savings of the measure. Irrespective of the overestimation caused by negotiations as described in the chapter above, also legal provisions may lead to overestimation: real savings are lower than accredited savings. 4.1. Better-than-average measures As defined in the chapter on assumptions, the suppliers’ efforts for measurement and verification are regarded as administrative costs. Moreover, suppliers face uncertainties about the feasibility of an individual measure and how its savings are to be calculated so that they are accredited. In order to decrease administrative costs and uncertainties, frequently implemented measures (so-called mass market measures) are standardised, i.e. the savings accredited become predefined. This method of measurement is also referred to as deemed method. For example, an Austrian supplier is accredited 205 kWh for replacing an old refrigerator by an efficient one [1]. For a single replacement, real savings may differ significantly due to differences in equipment, the appliance’s environment or usage patterns [5]. Concerning the effectiveness of the energy efficiency policy as a whole, individual deviation can be neglected if the average value has been defined accurately. As described above, standardisation of mass market measures drastically decreases administration costs. If there is no deemed method, the savings of a measure need to be individually estimated or measured. In this paper, these other methods of measurement (c.f. Annex V of Directive 2012/27/EU) are summarised as monitored method. Neglecting minor restrictions in some countries, the suppliers can freely decide on the method of measurement they apply for every single measure. In the following, it is shown that this freedom of choice will lead to an overestimation of savings, i.e. real savings are lower than accredited savings: It is assumed that a (frequently implemented) representative measure delivers real energy savings between an upper and a lower boundary SL Sreal SU kWh. The implementation causes costs c where c is the supplier’s residual costs after subtracting contributions from benefitting customers and subsidies. For simplification, real savings are assumed to be equally distributed between SL and SU . Thus, average savings are Saverage ¼ ðSU SL Þ=2 kWh and the standardised methods adequately defines Sstandard ¼ Saverage (Fig. 1). As the intention of the standardisation is to minimise the costs of measurement, costs of measurement are assumed zero. The monitored method entails costs as it may require monitoring equipment and physical presence, so a > 0 describes the costs of applying the monitored method.
4 Ref. [4] state that the surplus of the 2002e2005 scheme was 24.8 TWh. This surplus was transformed to 2005e2008 discount rates and accounts for one fourth of the 2005e2008 target. Concerning the conversion calculated, only a vague approximation is possible because, in practice, in the three periods different combinations of measures with different lifetimes and savings were implemented.
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Probability (Sreal) Deemed / standardised measurement
Monitored measurement Sreal
SL
Saverage
Sthreshold
SU
Fig. 1. When suppliers can decide on the method of measurement, and additional costs of the monitored method are low in relation to the additional savings accredited, total accredited savings exceed real savings.
For suppliers, savings of one kWh cost c=Sstandard when the standardised method of measurement is applied. Savings of one kWh cost ðc þ aÞ=Sreal when the monitored method is applied. Depending on the costs per kWh accredited, suppliers decide whether they apply the standardised or the monitored method (Formula (2)). Formula (3) follows from Formula (2).
cþa c < Sreal Sstandard
(2)
a c < Sreal Sstandard Sstandard
(3)
Formula (3) explains that the monitored method is applied when additional monitoring costs are lower than the monetary value of the additional savings accredited. In other words, the costs of the additional kWh accredited are lower than average costs in the standardised situation. Formula (3) also confirms that suppliers only apply the monitoring approach when real savings Sreal are higher than in the deemed approach Saverage . When real savings exceed a certain threshold Sthreshold , the monitored approach becomes cost-effective. Using Sthreshold for Sreal in Formula (3) and (4) is derived.
Sthreshold ¼ a*
Sstandard Sstandard c
(4)
If the costs c of the measure are low and monitoring costs a are high, Sthreshold may exceed the upper boundary SU and the monitored method will not be applied at all. In practice, this probably is true for cheap mass market products, e.g. LED lamps. Contrariwise, the monitored approach is likely to be applied more often for more expensive mass market measures, e.g. solid wall insulation. It is derived that measures which exceed the threshold Sthreshold (but are lower than SU ) are individually measured and thus are accredited their real savings Sreal . Measures implemented with real savings less than the threshold deliver accredited savings of Sstandard . However, Sstandard is equal to Saverage ¼ ðSU SL Þ=2, which is the average for all measures, including those with real savings higher than Sthreshold . Thus, the real average savings of measures accredited with the deemed method is lower than the applied average Sstandard (see Fig. 1). Consequently, the real savings of the measures with real savings less than Sthreshold are overestimated. For these measures, real savings are lower than accredited savings.5 Summing up, if an energy efficiency obligation scheme allows for the application of both, the deemed and the monitored method, it is likely that for some measures the threshold Sthreshold is smaller
5 As the accurate monitored method is exclusively applied for measures with real savings higher than the average, this finding is valid for any distribution of savings. The type of distribution only influences the share of monitored measures.
than SU . Then, it is cost-effective for suppliers to bear the additional administrative costs and monitor the accurate savings. The residual measures with real savings between SL and Sthreshold are accredited with the now excessive average. Total accredited savings will exceed the real savings achieved by this representative measure. This happens in conformity with scheme design and legal requirements. Due to the generalisation of the approach and the manifold assumptions, neither a quantification of the actual overestimation nor a numerical example seems appropriate. Even for the case of certain types of measures in existing schemes adequate data is not available: in order to determine the real savings of those measures accredited with the deemed method, the monitored method would have been needed to be applied. By definition, this data is not recorded. Moreover, market prices of accredited savings and (nonpublic) administrative costs of suppliers would be needed for calculation. 4.2. Particular measures: pursuit of other political targets Energy efficiency obligation schemes can be used to achieve other political targets than an increase in energy efficiency. Among these other targets, energy poverty has become the most prominent one, being the only other target mentioned in the EU’s Energy Efficiency Directive: “Within the energy efficiency obligation scheme, Member States may […] include requirements with a social aim in the saving obligations they impose, including by requiring a share of energy efficiency measures to be implemented as a priority in households affected by energy poverty or in social housing” (excerpt from Article 7 of [9]). This was the case for the three periods of the British obligation scheme in force between 2002 and 2012. With regard to the example of Great Britain [18], illustrates that these subtargets contradict the most prominent advantage of an energy efficiency obligation scheme which is minimisation of costs. This contradiction results from the implementation of measures in poor households which can contribute less and leave the costs to the scheme and, consequently, to all customers of the supplier. Other obligation schemes, e.g. the French or the now-in-force Austrian scheme, allow for the scale-up of savings achieved in energy poor households by applying a multiplier (e.g. 1.5 in Austria). For every kWh saved, 1.5 kWh are accredited. The more energy poor households are supported in the obligation scheme, the less real savings need to be achieved by the obliged suppliers. Ref. [11] show that energy efficiency obligation schemes hardly stimulate dynamic efficiency, i.e. technological innovation. Suppliers’ measures focus on efficiency products which are marketable or at the edge to marketability. Thus, a multiplier for technology demonstration projects was defined in the British schemes. Analogously, the pursuit of this alternative target decreases the real savings achieved within the scheme while accredited savings are
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satisfyingly demonstrated by obliged suppliers. The question whether the focus on energy poor households, technology innovation or other alternative targets is desirable, is normative and is to be left to political discussion. The author only wants to highlight accompanying overestimation.
5. Conclusion Up to now, evaluations of energy efficiency obligation schemes have focussed on administrative costs as the most relevant disadvantage of this policy instrument. Recommendations have focussed on how to avoid these costs. While efficiency (costs per kWh accredited) has been intensively discussed, effectiveness (real savings in comparison to envisaged or accredited savings) has been, if at all, investigated indirectly (with additionality being the main indicator). Aside of that, also political feasibility of the policy instrument has hardly been addressed [3]: briefly take note of the importance of negotiations in order to implement and run an energy efficiency scheme. Negotiations are an essential element during the implementation and during the operation of energy efficiency obligation schemes. This paper displayed the manifold policy design elements to be negotiated (volume of total savings, deemed savings, lifetimes, discount rates). During these negotiations, stakeholders bargain in order to minimise their costs related to the scheme. In practice, accredited savings in course of the scheme are likely to be higher than real savings achieved. Arbitrary methods of measurement are indispensable to decrease suppliers’ and institutions’ administrative costs, which nevertheless and definitely are to be regarded high in energy efficiency obligation schemes. So the deemed method is crucial for minimising suppliers’ administrative costs for mass market products. Meanwhile, the monitoring method allows for recording specific or extraordinary measures. In other words, arbitrary methods of measurement are an integrated part of energy efficiency obligation schemes’ practice. However, it was shown that this will definitely lead to an overestimation of savings. Again, as it was the case for the negotiation explained in the upper paragraph, it follows that the savings accredited in course of the scheme are likely to be higher than the real savings achieved. This paper investigates the relation of real energy savings to accredited savings (and envisaged savings; see Fig. 2). The analysis conducted shows that effectiveness and efficiency of obligation schemes are jeopardised by (i) a high number of negotiated policy design elements and (ii) the effects of legal concessions thought to decrease administrative burdens. For the case of energy efficiency
Envisaged savings volume
obligation schemes, the devil is in the details, and this paper shows that policy makers should be cautious when this policy’s advantages are presented to them. Concerning the quantification of the difference between actual savings and accredited savings, literature (see the subsection on additionality) investigated the difference between measures accounted for in the scheme (including those measures which would have been implemented without the scheme) and measures implemented due to the scheme. This paper focusses on the deviation from accredited (deemed, expected) savings due to erroneous determination incentivised by the policy’s design. For the quantification of this type of deviation, further research is needed. Due to the fact that negotiations and arbitrary methods of measurement are an integrated part of energy efficiency obligation schemes, hardly any recommendations can be derived on how to improve legal provisions. Concerning measurement, thresholds are an attempt to minimise overestimation: for example, the calculations of energy savings resulting from insulation could be conducted in a standardised manner up to a threshold of 200 square meter of floor space. This probably excludes those savings which are great enough to justify individual measurement. However, this would again incentivize suppliers to implement measures in buildings significantly smaller than the threshold, again resulting in lower savings. Another approach is to empirically evaluate the impact of implemented measures and rectify accredited savings to their real value. By doing so, uncertainties with regard to the compliance of suppliers with their obligations occur. Concerning negotiations, independency of the monitoring authority and its personnel resources in order not to rely on external inputs are crucial. However, both aspects are likely to increase administrative costs. Summing up, the policy makers’ opportunities to improve the effectiveness and efficiency of energy efficiency obligation schemes are limited. This is due to the fact that the problematic provisions are inherent design elements of this policy instrument. The last option for policy makers is to choose one or more alternative policy instruments. Although alternative policy instruments like energy efficiency standards, energy consumption taxes and subsidies for energy efficiency measures also entail (i) negotiations and (ii) administrative costs, both aspects appear much less complex and intervening, whereas in energy efficiency obligation schemes, they constitute an integrated part. Based on the qualitative analysis conducted in this paper, it is not possible to verify this comparison. In order to do so, further research is needed. Acknowledgements This paper resulted from a research project funded by the Austrian Climate and Energy Fund (‘EnergieZer’, FFG-number 822150) and co-funded by the Energy Institute at the Johannes Kepler University of Linz, Austria. References
Accredited savings volume Real savings volume
Fig. 2. In an energy efficiency obligation scheme, real savings are lower than the savings accredited. Due to the assumed compliance of suppliers, the volume of accredited savings equals the volume of negotiated savings. Accredited savings are lower than the savings volume envisaged by the government. Source: own figure based on the findings in this paper.
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obligations and white certificate schemes: comparative analysis of experiences in the European Union. 2010. p. 1455e69. Energy Policy 38/3. Bundgaard S. Spending to save: evaluation of the energy efficiency obligation in Denmark. 2013. eceee 2013 Summer Study. Web, http://www.eaenergianalyse.dk/presentations/1161_presentation_spendings_to_save_ energy_efficiency_obligation_denmark.pdf. DL: 2016-10-25. Cohen J, Reichl J, Schmidthaler M. Re-focussing research efforts on the public acceptance of energy infrastructure: a critical review. Energy 2014;76:4e9. European Union. Directive 2006/32/EC of the european parliament and of the council of 5 April 2006 on energy end-use efficiency and energy services and repealing council directive 93/76/EEC. 2006. European Union. Directive 2012/27/EU of the european parliament and of the council of 25 October 2012 on energy efficiency, amending directives 2009/ 125/EC and 2010/30/EU and repealing directives 2004/8/EC and 2006/32/EC. 2012. Filipovi ca S, Verbi cb M, Radovanovi c M. Determinants of energy intensity in the European Union: a panel data analysis. Energy 2015;92:547e55. Part 3. Giraudet L, Bodineau L, Finon D. The costs and benefits of white certificate schemes. In: CIRED working paper No. 29e2011; 2011. € Goers S, Lindorfer J, Moser S. Emissionszertifikate, Okostromzertifikate, energieeffizienzzertifikate… warum ausgerechnet Zertifikate?. Energie-Info 7/2010 des Energieinstituts an der Johannes Kepler. Linz: Universit€ at Linz; 2010. Hake J-F, Fischer W, Venghaus S, Weckenbrock C. The German Energiewende e history and status quo. Energy 2015;92:532e46. Part 3. Lees E. Evaluation of the energy efficiency commitment 2002e05. 2006. Report, Eoin Lees Energy, Wantage. Meyers S, Kromer S. Measurement and verification strategies for energy savings certificates: meeting the challenges of an uncertain world. Energy Effic 2008;1/4:313e21. € b K, Reichl J, Kollmann A. Making the results of bottom-up Moser S, Leutgo energy savings calculations comparable. Therm Sci 2012;16/3(2012): S687e702.
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[17] Moser S. Energieeffizienz-Verpflichtungen für Energieversorger. Optimierung € sterreichischen Verpflichtungssystems der endkundenseitigen eines o Maßnahmensetzung. In: Priewasser R, Steinmüller H, editors. Energie- und Ressourcenmanagement, Band 1. Neuer Wissenschaftlicher Verlag, Wien und Graz; 2013a. ISBN 978-3-7083-0914-9. [18] Moser S. Poor energy poor: energy saving obligations, distributional effects, and the malfunction of the priority group. Energy Policy 2013b;61:1003e10. [19] Moser S. Der unumg€ angliche Wandel von Energieversorgern zu Energiedienstleistern. In: Steinmüller H, Hauer A, Schneider F, editors. Jahrbuch Energiewirtschaft. Neuer Wissenschaftlicher Verlag, Wien und Graz; 2015. ISBN 978-3-7083-1069-5. [20] Mundaca L. Transaction costs of tradable white certificate schemes: the energy efficiency commitment as case study. Energy Policy 2007;35/8:4340e54. [21] Mundaca L, Neij L, Labanca N, Duplessis B, Pagliano L. Market behavior and the to-trade-or-not-to-trade dilemma in ‘tradable white certificate’ schemes. Energy Effic 2008;1/4:323e47. [22] Mundaca L, Neij L. A multi-criteria evaluation framework for tradable white certificate schemes. Energy Policy 2009;37/11:4557e73. [23] Rhode C, Rosenow J, Giraudet L. Energy saving obligations e cutting the Gordian Knot of leverage? Energy Effic 2015;8:129e40. [24] Rosenow J. Energy savings obligations in the UK e a history of change. Energy Policy 2012;49:373e82. [25] Sousa JL, Martins AG, Jorge H. Dealing with the paradox of energy efficiency promotion by electric utilities. Energy 2013;57:251e8. [26] Suna D, Haas R. Vergleich der Energieeinsparungen und Kosten von Verpflichtungsregelungen für Energieversorgungsunternehmen, 8. Internationale Energiewirtschaftstagung, Vienna Technical University; 2013. Web, http:// eeg.tuwien.ac.at/eeg.tuwien.ac.at_pages/events/iewt/iewt2013/uploads/ presentation/Pr_224_Suna_Demet_21-Feb-2013_11-33.pdf. DL: 2016-10-31. [27] Togeby M, Dyhr-Mikkelsen K, James-Smitz E. Design of white certificates. Comparing UK, Italy, France and Denmark. 2007. Ea Energy Analysis. [28] Waide P, Buchner B. Utility energy efficiency schemes: savings obligations and trading. Energy Effic 2008;1/4:297e311.
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Overestimation of savings in energy efficiency obligation schemes Simon Moser Department of Energy Economics, Energy Institute at the Johannes Kepler University Linz, Austria
a r t i c l e i n f o
a b s t r a c t
Article history: Received 2 November 2016 Received in revised form 2 January 2017 Accepted 6 January 2017 Available online 11 January 2017
In energy efficiency obligation schemes, energy savings are accredited for implementing energy efficiency measures. Individual measures need to add up to the cumulative savings target. With regard to the savings accredited in energy efficiency obligation schemes that existed when the EU’s Energy Efficiency Directive entered into force, economic literature attests this policy instrument to effectively deliver additional savings at low costs. This paper relativizes these optimistic results and shows that accredited energy savings are likely to be significantly overestimated compared to the real savings achieved in course of the scheme. First, bargaining processes increase accredited savings per measure. These include bargaining on the volume of the savings target, standardised saving values, discount rates, and the lifetimes of measures. Second, arbitrary methods of measurement are an integrated element of obligation schemes to minimise excessive administrative costs. However, it is shown that arbitrary methods of measurement incentivize overestimation of real savings. Both aspects imply that real savings are lower than accredited savings, querying the policy instrument’s actual effectiveness and efficiency. © 2017 Elsevier Ltd. All rights reserved.
Keywords: Energy efficiency obligation schemes White certificates Policy evaluation Measurement & verification Bargaining
1. Introduction While the ongoing transition to carbon-free sources of energy [13] faces not only economic, but also social challenges [7], energy efficiency improvements are commonly accepted as they deliver the same energy service and are often accompanied by improvements in comfort [2]. Energy efficiency supports a decrease in energy intensity and is often stimulated by regulation or incentives like subsidies and taxes [10]. Energy efficiency obligation schemes are an innovative policy instrument primarily aiming to increase end-use energy efficiency. The government obliges energy suppliers (retailers or distribution system operators) to deliver a certain volume of energy savings. These energy savings need to be achieved on the end-users’ property, e.g. by exchanging inefficient appliances. Energy savings are measured bottom-up, implying that every single measure needs to be recorded and individual savings are accumulated until the obligation is complied with. For details on the basic functioning of energy efficiency obligation schemes see Ref. [4]. Energy efficiency obligation schemes have been applied since 1994, when Great Britain introduced this policy instrument. The obligation scheme proved to be highly effective, probably because no other instruments addressing energy efficiency had been in
E-mail address: [email protected]. http://dx.doi.org/10.1016/j.energy.2017.01.034 0360-5442/© 2017 Elsevier Ltd. All rights reserved.
force. As an indirect regulation (suppliers are obliged to implement measures at a third party), the instrument operated outside the fiscal budget and both the use of capital (energy efficiency measures) and the source of financing (higher energy prices) support end-use energy efficiency. For details on the British scheme see Refs. [17,24]. Expert interviews conducted in course of the EnergieZer project suggest that the Danish, Italian and French scheme were installed based on the positive British experiences [17]. Of course, policy installation was affected by existing national energy legislation and framework conditions, which led to some variations in scheme design. For details on these schemes see Ref. [5]. Before the EU’s Energy Efficiency Directive (2012/27/EU) entered into force in December 2012, about 40% of the EU population had already been subject to energy efficiency obligation schemes. Additionally, due to the EU’s Energy Service Directive [8] (2006/32/EC), voluntary schemes existed in Austria and Finland. Poland planned to start an obligation scheme then [17]. According to the Directive’s article 7, Member States shall install energy efficiency obligation schemes on a national level. Energy distributors and/or retail energy sales companies shall be obliged to save 1.5% of the energy delivered to final customers excluding energy for transport purposes. However, article 7 also lists alternative policy instruments the member states may use to comply with the 1.5% target.
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1.1. Advantages of energy efficiency obligation schemes Why does the Directive enforce this specific policy instrument so prominently, compared to alternative policies? Extensive research has been conducted on energy efficiency obligation schemes. In comparison to other policy instruments, research almost homogenously detected theoretic advantages and good policy performance in practice. 1.1.1. Increasing energy efficiency market activity According to recital 9 of Directive 2006/32/EC, the liberalisation of energy markets “has almost exclusively led to improved efficiency and lower costs on the energy generation, transformation and distribution side. This liberalisation has not led to significant competition in products and services which could have resulted in improved energy efficiency on the demand side.” Energy efficiency obligation schemes are expected to significantly increase energy efficiency market activity, by stimulating market turnover, the number of energy service companies acting on the market and supporting the marketability of new energy efficiency products.
period of the French scheme in operation from 2006 to 2009, it was a political consensus that obliged suppliers “market” the government’s subsidies, i.e. suppliers increase the additionality of another policy instrument in force, while they bear low costs [17]. For a detailed analysis of additionality see Ref. [5].
1.2. Disadvantages of energy efficiency obligation schemes
1.1.4. Additionality Those measures which would not have been implemented without the energy efficiency policy are called additional. The higher the share of additional measures is, the more effective the policy instrument is. Usual additionality of demand side management programs ranges from 10 to 50% [11]. Regarding energy efficiency obligation schemes, additionality is estimated 50% in the Danish scheme and 80% in the British scheme [14,27].1 For the first
Reviewed literature uniformly refers to transaction costs and administration costs as the most important disadvantages of energy efficiency obligation schemes. Transaction costs are defined as costs which do not directly contribute to the production of a good (here: an accredited energy efficiency measure). These include “search for information, persuasion of customers, negotiation with business partners, and measurement and verification activities” [20]. As every implemented measure needs to be documented, monitored and verified, these activities are identified as the main sources of transaction costs [5,22]. Additionally, governmental institutions also face high expenses for activities to control and review the measures and the measurement process of the savings. The costs associated with measurement and verification will be subsumed as administrative costs in this paper. One straightforward approach to reduce administrative costs is to standardise accredited savings for a certain type of measure. Using an average value, total savings expectedly are accurate while the deviation of individual measures can be neglected. For example, in Austria, 205 kWh are accredited for replacing an old refrigerator by an efficient one [1]. Standardised measurement is practically indispensable for bottom-up accreditation of savings in energy efficiency obligation schemes and constitutes an integrated part of this policy instrument. Without providing a standardised savings value the supplier would, to be accurate, need to measure the consumption of the old refrigerator on-site, measure the consumption of the new refrigerator on-site, and then calculate the difference. Existing literature concentrates on avoiding administrative costs by providing recommendations on how to standardise and process savings values [3e5,20e22]. If at all, literature hardly considers the consequences of (i) the real-life standardisation process and (ii) standardised measurement itself on the whole scheme’s performance. Based on the volume of savings accredited in existing schemes, research attests high efficiency (low costs of savings) and high effectiveness (high additionality). In the author’s opinion, economic efficiency of one obligation schemes is hardly comparable to other schemes or alternative policy instruments: parameters2 are not recorded uniformly in the various national schemes [16], vary between policy instruments in the same country, and depend heavily on the preconditions (instruments already in force, efficiency potentials, etc.) [17,26]. support this opinion by showing the complexities and the bulk of assumptions necessary in order to be able to compare the results of the national schemes. Concerning additionality, most stated numbers obviously are estimates [14,27]: generally, an obligation scheme first tends to absorb business-asusual measures (as suppliers’ costs are minimal if the customer would have implemented the efficiency measure anyhow). This is supported by the finding that there “appears to be” a trade-off between additionality and the capital levered by parties other than the obligated entities [23], i.e. the more money is spent by private investors, the higher the probability that the scheme accredits savings to measures implemented anyhow.
1 Remark: later analysis by Ref. [6] relativizes these figures by finding additionality of 10% in the Danish residential sector; note the low sample size of n ¼ 46.
2 Standardised saving values, inclusion of measures’ lifetimes, application of discount rates, acquisition of direct cost data, etc.
1.1.2. Polluter-pays-principle Neglecting administration and transaction costs, an obligation should ideally be imposed on the “polluter”, i.e. the energy end-user. In order to limit the scheme to a manageable number of obliged parties, energy retailers and/or distributors should be obliged, as they are the penultimate actor in the supply chain [4]. Moreover [28], identify further arguments in favour of obliging energy retailers and/ or distributors: most of them have sufficient financial and human resources, direct customer contact and knowledge about the consumption, have knowledge on savings potentials and are competent in marketing and implementing measures. 1.1.3. Cost minimisation Energy efficiency obligation schemes are a market-based instrument, constituting a “floor” of savings. Based on the axiom of economic theory, profit-maximising companies minimise their costs. As the obligation represents a burden to the suppliers, they minimise the costs of compliance (i.e. minimise the costs of implementation of measures) [12]. An ideal-theoretic scheme allows for full flexibility, meaning that there are no restrictions concerning the type of energy efficiency measures, saved energy carriers, customer groups, purchase of savings achieved by third parties, etc. For a detailed illustration of flexibilities see Ref. [21]. This means, for example, that gas retailers could support electric cars or that petrol station operators could give away LEDs to comply with their obligations. Suppliers socialise the costs by passing them on to their customers or by receiving public refunds. Thus, suppliers’ cost minimisation theoretically guarantees minimal costs for the society when a certain savings target is to be achieved. However, energy suppliers supporting end-use energy efficiency remains a paradox and needs regulatory constraints [25].
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1.3. Aim of this paper Based on scientifically recorded practical experiences and basic math, it will be shown that real savings are lower than accredited savings. (And, moreover, accredited savings are lower than envisaged savings.) This is due to an overestimation of standardised savings and due to bargaining in the course of the policy implementation process. However, accredited (not real) savings are the basis for the policy’s performance indicators presented in other literature on this policy instrument. Thus, this paper identifies some aspects which demonstrate that energy efficiency obligation schemes are less effective and less efficient than expected. 2. Methodology For the analysis conducted in this paper, the following assumptions are required. Although these assumptions simplify the complex designs of energy efficiency obligation schemes and the variation of designs in the existing schemes, they are sufficient and suitable to generalise the results. The theoretic and practical basis for the analysis is provided by literature research and expert interviews conducted in course of the EnergieZer project (for details see Ref. [17]). 2.1. Assumptions “Energy supplier” subsumes any energy retailer or distributions system operator obliged in an energy efficiency obligation scheme. Although the recovery of costs differs significantly between retailers and system operators, and may entail some limitations on the particular aspects analysed in the following, penalties for noncompliance lead to similar incentives. An energy efficiency obligation scheme is to be installed by the government. Energy suppliers will be the obliged parties. The government proposes an optimal volume of savings to be achieved in the scheme (“envisaged savings”). It is not necessary to define more details like allocation of the obligation, timeframe, etc. The government fixes penalties or cost recovery procedures so that obliged energy suppliers definitely comply with their individual obligation. In this paper, it is assumed that the supplier passes on the costs to its customers. For simplicity, it is assumed that energy efficiency measures are exclusively implemented by obliged suppliers, neglecting any complexities concerning the trade of savings with third parties, for example energy service companies. Obliged energy suppliers are profit-maximising and cost-minimising companies. All potential types of energy efficiency measures (insulation, efficient appliances, efficient mobility, etc.) are subsumed in one representative measure. Suppliers are obliged to report the energy savings (i.e. the measures) they achieved to the government. 3. Bargaining accompanies policy implementation Literature hardly takes into account negotiations and stakeholders’ interests in energy efficiency obligation schemes: in Ref. [3] the importance of including stakeholders into the process of policy implementation is briefly mentioned. However, the obligation scheme implies significant challenges affecting suppliers’ cash flows, staff requirements and organisational structures [19]. Based on the basic assumption made (profit-maximising suppliers intend to minimise their costs), suppliers comply with the obligation at the lowest cost possible. As the obligation imposes costs on the suppliers, they may use their bargaining power to influence the pending legal requirements. Of course, depending on the country, suppliers have varying bargaining powers as they face
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heterogeneous economic environments and prevailing public opinions. Expert interviews conducted with researchers, suppliers and government representatives in course of the EnergieZer project (c.f. [17] suggest that energy suppliers hold strong bargaining powers in regard to policy implementation. This notion will be supported below by some indication. In the following it is shown that many scheme design elements (not only the volume of the obligation) are to be negotiated. Note that for every aspect described, successful supplier bargaining would lead to an overestimation of real savings. The following basic assumptions are made to show the incentives and results of bargaining: it is assumed that supplier i is confronted with its saving obligation with a volume of Oi . For simplification, the energy supplier bears the remaining costs for the implementation of a representative measure, which are c. This representative measure delivers standardised (“deemed”) savings of S.3 Consequently, the number of measures necessary in order to comply is determined by Oi =S. Supplier’s total costs to comply with the obligation are
TC ¼ ðOi =SÞ*c
(1)
Given fixed market prices for the representative measure’s costs c, suppliers will bargain about the size of their obligation and the savings achievable by implementing one measure.
3.1. Bargaining on the scheme’s savings volume When suppliers implement energy efficiency measures, they first bear the residual costs of implementing the energy efficiency measure which were not borne by the benefitting customer or the government. In order to refund these costs, they pass them on to their customers by increasing the energy price/tariff. Depending on actual price elasticities and competition, higher prices decrease turnover. Moreover, suppliers face penalties or a bad public image if they cannot or do not comply with their obligation. As a first step of policy implementation, the government sets the total volume of the obligation, and suppliers face strong incentives to bargain for a reduction of the envisaged total obligation volume, and/or of their final individual obligation Oi .
3.2. Bargaining on a measure’s standardised savings value The more savings the representative energy efficiency measure generates, the less the number of measures which is necessary to fulfil the obligation. Deemed savings values are not a “law of nature” and can thus be negotiated. The deemed savings value S is defined as the difference between (i) the initial baseline consumption and (ii) the new efficient consumption of the appliance. Depending on the scheme’s specifications, the savings value also accounts for (iii) the lifetime of the measure and/or (iv) discount rates. Discount rates decrease the net present value of future consumption and accounts for hypothetical interest rates on future expenditures, and ongoing technical innovation which decreases additionality of future savings. Practical experiences with the standardisation of measures in the Danish, French, Italian and Austrian schemes show intensive negotiation activity concerning the baseline and efficient consumption. Indication from the British scheme supports the proposition of bargaining concerning discount rates (see below) [17].
3
c.f. on the “deemed” approach in chapter “arbitrary methods of measurement”.
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3.2.1. Bargaining on consumption Deemed savings are primarily defined by average initial (inefficient or baseline) and final (efficient) consumption. Accredited savings inversely influence the supplier’s total costs (Formula (1)). The savings accredited for implementing the measure are S ¼ CBaseline Cefficient . Defining higher baseline consumption and/ or a lower energy consumption of an efficient appliance result in higher savings accredited for a certain measure and lower total costs. It is assumed that the institutions/authorities administering the energy efficiency obligation scheme would set the average savings for the deemed method accurately to Saccurate . Successful bargaining will lead to higher accredited savings Snegotiated > Saccurate . This implies that any supplier’s real savings (ðOi =Snegotiated Þ*Saccurate ) are lower than the savings accredited (even though the supplier fully complies with its obligation ðOi =Snegotiated Þ*Snegotiated ¼ Oi ). Expert interviews conducted by the author in course of the EnergieZer project (c.f [17]. identify negotiation processes concerning the standardisation in all countries regarded (Great Britain, France, Denmark, Italy, Austria). As interviewees were guaranteed to remain anonymous, the following generalisation can be made: While all suppliers state that they need to “ensure” the value of achieved savings, they follow country-dependent strategies. For some, manageability of standardised savings is more important than the height of savings. Governmental institutions see a “lively” consultation process indicating strong bargaining activity. Some governmental institutions “hold a strong position” on the accuracy of accredited savings values. Other experts remark that national governments may hold a weak position as the obligation is based on EU legislation and does not necessarily reflect the government’s own political interests. 3.2.2. Bargaining on discount rates From an economic point of view, the net present value of future savings is less than the current one. For this reason, a discount rate can also be applied to the amount of energy saved by a measure in future years. In addition to this economic perspective, a reduction in the savings value of a measure (deterioration) is expected over the course of life of a measure: first, behavior readjustments may decrease the savings; second, efficient exchanges of older appliances become more likely due to malfunction, decreasing attributable savings; third, ongoing development of even more efficient appliances decreases the baseline and thus attributable savings. There is some indication from Great Britain that suppliers indirectly bargain on the volume of the total obligation: If lifetimes and discount rates are accounted for, an increase in lifetimes and a decrease in discount rates increase the amount of savings S accredited for the same measure (and thus indirectly decrease necessary efforts to comply with the obligation). The British scheme has always accounted for the “full” lifetime of measures (which again is a to-be-defined value), but the discount rates have decreased steadily. The government significantly increased the nominal obligation (62 TWh in the 2002 to 2005 period, 130 TWh in the 2005 to 2008 period and 494 TWh in the third period) [24], letting the government appear successful in the bargaining processes. However, suppliers did not face the same real increase: The increases were accompanied by decreases in applied discount rates which dropped from 6% in the first to 3.5% in the second to 0% in the third period. For illustration, comparing a hypothetic measure with annual savings of 100 kWh and a lifetime of 40 years, accredited savings would be 1008 kWh in the first and 4000 kWh in the third period of the scheme (net present value method). A rough approximation based on [4] shows that savings of the second period would be only 99 TWh if discount rates of the first period are applied. Transferring this approximation to the third
period implies savings of 241 TWh.4 The nominal rise to a double or eightfold obligation would than equal about a half and a fourfold real increase, respectively. 4. Arbitrary methods of measurement In energy efficiency obligation schemes the savings of every single measure are summed up until the predefined savings volume is achieved. Thus, measurement and verification (M&V) of energy efficiency measures constitute a crucial and integrated part of the schemes [15]. In most economic models and calculations, the savings accredited for the implementation of a measure are assumed to be equal to the real savings of the measure. Irrespective of the overestimation caused by negotiations as described in the chapter above, also legal provisions may lead to overestimation: real savings are lower than accredited savings. 4.1. Better-than-average measures As defined in the chapter on assumptions, the suppliers’ efforts for measurement and verification are regarded as administrative costs. Moreover, suppliers face uncertainties about the feasibility of an individual measure and how its savings are to be calculated so that they are accredited. In order to decrease administrative costs and uncertainties, frequently implemented measures (so-called mass market measures) are standardised, i.e. the savings accredited become predefined. This method of measurement is also referred to as deemed method. For example, an Austrian supplier is accredited 205 kWh for replacing an old refrigerator by an efficient one [1]. For a single replacement, real savings may differ significantly due to differences in equipment, the appliance’s environment or usage patterns [5]. Concerning the effectiveness of the energy efficiency policy as a whole, individual deviation can be neglected if the average value has been defined accurately. As described above, standardisation of mass market measures drastically decreases administration costs. If there is no deemed method, the savings of a measure need to be individually estimated or measured. In this paper, these other methods of measurement (c.f. Annex V of Directive 2012/27/EU) are summarised as monitored method. Neglecting minor restrictions in some countries, the suppliers can freely decide on the method of measurement they apply for every single measure. In the following, it is shown that this freedom of choice will lead to an overestimation of savings, i.e. real savings are lower than accredited savings: It is assumed that a (frequently implemented) representative measure delivers real energy savings between an upper and a lower boundary SL Sreal SU kWh. The implementation causes costs c where c is the supplier’s residual costs after subtracting contributions from benefitting customers and subsidies. For simplification, real savings are assumed to be equally distributed between SL and SU . Thus, average savings are Saverage ¼ ðSU SL Þ=2 kWh and the standardised methods adequately defines Sstandard ¼ Saverage (Fig. 1). As the intention of the standardisation is to minimise the costs of measurement, costs of measurement are assumed zero. The monitored method entails costs as it may require monitoring equipment and physical presence, so a > 0 describes the costs of applying the monitored method.
4 Ref. [4] state that the surplus of the 2002e2005 scheme was 24.8 TWh. This surplus was transformed to 2005e2008 discount rates and accounts for one fourth of the 2005e2008 target. Concerning the conversion calculated, only a vague approximation is possible because, in practice, in the three periods different combinations of measures with different lifetimes and savings were implemented.
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Probability (Sreal) Deemed / standardised measurement
Monitored measurement Sreal
SL
Saverage
Sthreshold
SU
Fig. 1. When suppliers can decide on the method of measurement, and additional costs of the monitored method are low in relation to the additional savings accredited, total accredited savings exceed real savings.
For suppliers, savings of one kWh cost c=Sstandard when the standardised method of measurement is applied. Savings of one kWh cost ðc þ aÞ=Sreal when the monitored method is applied. Depending on the costs per kWh accredited, suppliers decide whether they apply the standardised or the monitored method (Formula (2)). Formula (3) follows from Formula (2).
cþa c < Sreal Sstandard
(2)
a c < Sreal Sstandard Sstandard
(3)
Formula (3) explains that the monitored method is applied when additional monitoring costs are lower than the monetary value of the additional savings accredited. In other words, the costs of the additional kWh accredited are lower than average costs in the standardised situation. Formula (3) also confirms that suppliers only apply the monitoring approach when real savings Sreal are higher than in the deemed approach Saverage . When real savings exceed a certain threshold Sthreshold , the monitored approach becomes cost-effective. Using Sthreshold for Sreal in Formula (3) and (4) is derived.
Sthreshold ¼ a*
Sstandard Sstandard c
(4)
If the costs c of the measure are low and monitoring costs a are high, Sthreshold may exceed the upper boundary SU and the monitored method will not be applied at all. In practice, this probably is true for cheap mass market products, e.g. LED lamps. Contrariwise, the monitored approach is likely to be applied more often for more expensive mass market measures, e.g. solid wall insulation. It is derived that measures which exceed the threshold Sthreshold (but are lower than SU ) are individually measured and thus are accredited their real savings Sreal . Measures implemented with real savings less than the threshold deliver accredited savings of Sstandard . However, Sstandard is equal to Saverage ¼ ðSU SL Þ=2, which is the average for all measures, including those with real savings higher than Sthreshold . Thus, the real average savings of measures accredited with the deemed method is lower than the applied average Sstandard (see Fig. 1). Consequently, the real savings of the measures with real savings less than Sthreshold are overestimated. For these measures, real savings are lower than accredited savings.5 Summing up, if an energy efficiency obligation scheme allows for the application of both, the deemed and the monitored method, it is likely that for some measures the threshold Sthreshold is smaller
5 As the accurate monitored method is exclusively applied for measures with real savings higher than the average, this finding is valid for any distribution of savings. The type of distribution only influences the share of monitored measures.
than SU . Then, it is cost-effective for suppliers to bear the additional administrative costs and monitor the accurate savings. The residual measures with real savings between SL and Sthreshold are accredited with the now excessive average. Total accredited savings will exceed the real savings achieved by this representative measure. This happens in conformity with scheme design and legal requirements. Due to the generalisation of the approach and the manifold assumptions, neither a quantification of the actual overestimation nor a numerical example seems appropriate. Even for the case of certain types of measures in existing schemes adequate data is not available: in order to determine the real savings of those measures accredited with the deemed method, the monitored method would have been needed to be applied. By definition, this data is not recorded. Moreover, market prices of accredited savings and (nonpublic) administrative costs of suppliers would be needed for calculation. 4.2. Particular measures: pursuit of other political targets Energy efficiency obligation schemes can be used to achieve other political targets than an increase in energy efficiency. Among these other targets, energy poverty has become the most prominent one, being the only other target mentioned in the EU’s Energy Efficiency Directive: “Within the energy efficiency obligation scheme, Member States may […] include requirements with a social aim in the saving obligations they impose, including by requiring a share of energy efficiency measures to be implemented as a priority in households affected by energy poverty or in social housing” (excerpt from Article 7 of [9]). This was the case for the three periods of the British obligation scheme in force between 2002 and 2012. With regard to the example of Great Britain [18], illustrates that these subtargets contradict the most prominent advantage of an energy efficiency obligation scheme which is minimisation of costs. This contradiction results from the implementation of measures in poor households which can contribute less and leave the costs to the scheme and, consequently, to all customers of the supplier. Other obligation schemes, e.g. the French or the now-in-force Austrian scheme, allow for the scale-up of savings achieved in energy poor households by applying a multiplier (e.g. 1.5 in Austria). For every kWh saved, 1.5 kWh are accredited. The more energy poor households are supported in the obligation scheme, the less real savings need to be achieved by the obliged suppliers. Ref. [11] show that energy efficiency obligation schemes hardly stimulate dynamic efficiency, i.e. technological innovation. Suppliers’ measures focus on efficiency products which are marketable or at the edge to marketability. Thus, a multiplier for technology demonstration projects was defined in the British schemes. Analogously, the pursuit of this alternative target decreases the real savings achieved within the scheme while accredited savings are
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satisfyingly demonstrated by obliged suppliers. The question whether the focus on energy poor households, technology innovation or other alternative targets is desirable, is normative and is to be left to political discussion. The author only wants to highlight accompanying overestimation.
5. Conclusion Up to now, evaluations of energy efficiency obligation schemes have focussed on administrative costs as the most relevant disadvantage of this policy instrument. Recommendations have focussed on how to avoid these costs. While efficiency (costs per kWh accredited) has been intensively discussed, effectiveness (real savings in comparison to envisaged or accredited savings) has been, if at all, investigated indirectly (with additionality being the main indicator). Aside of that, also political feasibility of the policy instrument has hardly been addressed [3]: briefly take note of the importance of negotiations in order to implement and run an energy efficiency scheme. Negotiations are an essential element during the implementation and during the operation of energy efficiency obligation schemes. This paper displayed the manifold policy design elements to be negotiated (volume of total savings, deemed savings, lifetimes, discount rates). During these negotiations, stakeholders bargain in order to minimise their costs related to the scheme. In practice, accredited savings in course of the scheme are likely to be higher than real savings achieved. Arbitrary methods of measurement are indispensable to decrease suppliers’ and institutions’ administrative costs, which nevertheless and definitely are to be regarded high in energy efficiency obligation schemes. So the deemed method is crucial for minimising suppliers’ administrative costs for mass market products. Meanwhile, the monitoring method allows for recording specific or extraordinary measures. In other words, arbitrary methods of measurement are an integrated part of energy efficiency obligation schemes’ practice. However, it was shown that this will definitely lead to an overestimation of savings. Again, as it was the case for the negotiation explained in the upper paragraph, it follows that the savings accredited in course of the scheme are likely to be higher than the real savings achieved. This paper investigates the relation of real energy savings to accredited savings (and envisaged savings; see Fig. 2). The analysis conducted shows that effectiveness and efficiency of obligation schemes are jeopardised by (i) a high number of negotiated policy design elements and (ii) the effects of legal concessions thought to decrease administrative burdens. For the case of energy efficiency
Envisaged savings volume
obligation schemes, the devil is in the details, and this paper shows that policy makers should be cautious when this policy’s advantages are presented to them. Concerning the quantification of the difference between actual savings and accredited savings, literature (see the subsection on additionality) investigated the difference between measures accounted for in the scheme (including those measures which would have been implemented without the scheme) and measures implemented due to the scheme. This paper focusses on the deviation from accredited (deemed, expected) savings due to erroneous determination incentivised by the policy’s design. For the quantification of this type of deviation, further research is needed. Due to the fact that negotiations and arbitrary methods of measurement are an integrated part of energy efficiency obligation schemes, hardly any recommendations can be derived on how to improve legal provisions. Concerning measurement, thresholds are an attempt to minimise overestimation: for example, the calculations of energy savings resulting from insulation could be conducted in a standardised manner up to a threshold of 200 square meter of floor space. This probably excludes those savings which are great enough to justify individual measurement. However, this would again incentivize suppliers to implement measures in buildings significantly smaller than the threshold, again resulting in lower savings. Another approach is to empirically evaluate the impact of implemented measures and rectify accredited savings to their real value. By doing so, uncertainties with regard to the compliance of suppliers with their obligations occur. Concerning negotiations, independency of the monitoring authority and its personnel resources in order not to rely on external inputs are crucial. However, both aspects are likely to increase administrative costs. Summing up, the policy makers’ opportunities to improve the effectiveness and efficiency of energy efficiency obligation schemes are limited. This is due to the fact that the problematic provisions are inherent design elements of this policy instrument. The last option for policy makers is to choose one or more alternative policy instruments. Although alternative policy instruments like energy efficiency standards, energy consumption taxes and subsidies for energy efficiency measures also entail (i) negotiations and (ii) administrative costs, both aspects appear much less complex and intervening, whereas in energy efficiency obligation schemes, they constitute an integrated part. Based on the qualitative analysis conducted in this paper, it is not possible to verify this comparison. In order to do so, further research is needed. Acknowledgements This paper resulted from a research project funded by the Austrian Climate and Energy Fund (‘EnergieZer’, FFG-number 822150) and co-funded by the Energy Institute at the Johannes Kepler University of Linz, Austria. References
Accredited savings volume Real savings volume
Fig. 2. In an energy efficiency obligation scheme, real savings are lower than the savings accredited. Due to the assumed compliance of suppliers, the volume of accredited savings equals the volume of negotiated savings. Accredited savings are lower than the savings volume envisaged by the government. Source: own figure based on the findings in this paper.
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