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Analysis: where is all the money for energy efficiency?

By Joseph Curtin

Ambitious energy efficiency policy makes sense.

Various assessments point to sufficient cost-effective energy savings potential in the EU to meet the EU’s 20 per cent target for energy savings. The benefits to society that arise from greater levels of energy efficiency, not least of which are reduced CO2 emissions and job creation, are legion.

But EU policy interventions and those in Member States – such as the UK Green Deal – often result in only slow or marginal behavioural change on the ground.

A cultural shift is required to facilitate the necessary levels of investment. Policy makers are learning all the time, and a decade of sustained experimentation and effort may be required before a tipping point is reached.

Selling the energy efficiency message is hard despite the financial logic (Source: Flickr/jeici1)

In 2008, the EU set itself an objective of achieving 20% primary energy savings in 2020. Member States took on non-binding targets, and set out plans to achieve the required savings accordingly.

Several EU regulatory initiatives have been introduced requiring increasing efficiency standards for electronic goods, cars and buildings. The Energy Efficiency Directive, agreed in 2012, further requires energy suppliers to deliver 1.5% annual savings among end users.

These initiatives have been complemented Member State initiatives to promote investment in efficiency, as set out in their National Action Plans. Measures such as tax breaks, grants, and advice and information programmes, were focused in particular in the building sector, but also on industrial and transport to a lesser extent.

Despite this frontal assault to promote investment in efficiency, current estimates indicate that Member States are not on track to achieve the 20 per cent target. They are projected to achieve 16% savings on business as usual if all plans to promote efficiency are implemented effectively.

Stakeholders argue that the EU and Member States could be doing more. The Coalition for Energy Savings, an EU-wide lobby group, have pointed out that many countries have set unambitious targets.

The subtext is that harder binding EU targets are required for Member States. This is part of an ongoing debate about EU energy and climate policy for 2030: are binding targets required for efficiency, renewables and CO2?

Grants to Financial Engineering

Arguably, more important than target setting, is coming to ever more nuanced understandings of why investors do not spend more on energy saving technologies, and to address these issues with discrete policy interventions.

A central issue surrounds the shortage of upfront investment cash, sometimes referred to as a financial barrier to energy efficiency investment. This barrier interacts with a number of complicating behavioural, cultural, social and informational barriers.

EU interventions to address this issue are discussed in an interesting recent report by the Commission. It has traditionally focused on providing grant support for investment projects under EU cohesion policy.

The extent to which it was effectively targeted at energy efficiency has been questioned. Nonetheless, grant-aided funding which targets energy efficiency will continue to grow in the coming budgetary period.

Grant-aided support has a number of limitations – not least the level of public funding available, the increased competition for increasingly scarce public resources, and the potential for grants to result in market distortions.

For these reasons, the European Commission is increasingly promoting measures that create value for energy savings through market mechanisms. So-called financial engineering instruments (FEIs) have the potential to put investments in energy efficiency on a more sustainable footing. These instruments can be particularly effective in promoting larger scale energy efficiency projects in the commercial and industrial sectors.

One example is the London Green Fund, which combines EU and City of London funding with finance from the private sector. It then lends money to urban retrofit projects within the greater London area.

Efforts by the Commission to promote these approaches in Member States have not always been entirely successful. Difficulties have included the complexity and financial engineering skills required to establish funds, the time they take to establish, and the unfamiliarity with funds compared to grants among potential clients (Member State authorities).

Due to this information and expertise deficit on the demand side, the supply or availability of funding alone is not a sufficient condition for overcoming the financial barrier to energy efficiency. The provision of information and development of expertise in relevant Member State authorities via the European Investment Bank and other institutions, is also of considerable importance.

It is likely that EU activity in promoting the use of FEIs will grow in the coming years, and this is arguably the correct focus in policy.

The UK Green Deal

For the residential building sector, however, FEIs are less appropriate. A more promising alternative is being trialled in the UK: the much-discussed Green Deal. The Green Deal attempts to address the financing barrier by providing up-front funding to interested homeowners who want to invest in efficiency. They repay the loan as they save money on energy bills over the years.

The slow start to the programme has led commentators to write it off.

Sounding the death knell for the Green Deal is premature. Nevertheless, there are real issues. Survey data published by the UK Department of Energy and Climate (DECC) shows that the most popular way of financing a refurbishment in the UK is still savings/regular income. Homeowners who have had a Green Deal assessment were still citing finance as the biggest barrier to follow through.

While homeowners will take time to get used to the Green Deal concept, the terms of the financing on offer has been widely criticized. Ensuring that funds available are attractive to early adopters is key, and subsidized money might initially be necessary. The boost to Government coffers should justify the expense, and assuming the market alone will deliver is naïve.

A tipping point will eventually be reached, where financing a deep retrofit will be as common as financing the purchase of a new vehicle. This may take a decade. Success is dependent on the continued and determined focus of policy makers, and the willingness to trial, test, and refine policy interventions.

A raft of supporting measures to overcome the inherent status quo bias among homeowners will likely be required. The Irish Government, who are also in the process of establishing a scheme similar to the Green Deal, recently published an excellent analysis of supporting measures which could be considered.

There are positive developments which can be leveraged. For example, homeowners and renters in the UK and Ireland are coming to increasingly value the energy efficiency of their properties, and to pay a premium for higher efficiency.

If the UK and Ireland can succeed, others will follow.

Joseph Curtin is Senior Research Associate with the Institute of International and European Affairs. He has worked for the OECD, NESC (an advisory body to the Irish Prime Minister), and the Sustainable Energy Authority of Ireland, on climate and energy policy-related issues.

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