Informational Barriers to Energy Efficiency - Theory and European Policies. Bruges European Economic Research (BEER) Papers 15/2009

This BEER addresses informational barriers to energy efficiency. It is a widely acknowledged result that an energy efficiency gap exists implying that the level of energy efficiency is at an inefficiently low level. Several barriers to energy efficiency create this gap and the presence of asymmetric information is likely to be one such barrier. In this article a theoretical framework is presented addressing the issues of moral hazard and adverse selection related to energy efficiency. Based on the theoretical framework, European policies on energy efficiency are evaluated. The article is divided into two main parts. The first part presents the theory on information asymmetries and its consequences on energy efficiency focusing on the problems of moral hazard and adverse selection. Having established a theoretical framework to understand the agency barriers to energy efficiency, the second part evaluates the policies of the European Union on energy efficiency. The BEER finds that problems of moral hazard and adverse selection indeed can help explain the seemingly low levels of energy. In both presented models the cost to the principal from implementing high energy efficiency outcome is increased with the informational asymmetries. The theory reveals two implications to policies on energy efficiency. First, the development of measures to enable contractual parties to base remuneration on energy performance must be enhanced, and second, the information on technologies and the education of consumers and installers on energy efficiency must be increased. This could be complemented with certification of installers and energy efficiency advisors to enable consumers to select good agents. Finally, it is found that the preferred EU policy instrument on energy efficiency, so far, seems to be the use of minimum requirements. Less used in EU legislation is the use of measuring and verification as well as the use of certifications. Therefore, it is concluded that the EU should consider an increased use of these instruments, and in particular focus on a further development of standards on measurability and verification as well as an increased focus on education of consumers as well as installers and advisors on energy efficiency.

Energy Efficiency: Trends and Perspectives in the Southern Mediterranean. MEDPRO Technical Report No. 21/December 2012

This paper has two objectives. First, it attempts to establish the potential of policies on energy efficiency and energy demand-side management in the southern Mediterranean region. Second, by examining past trends in energy intensity and trends up to 2030, it analyses the prospects and costs of such policies, compared with expected developments in the price of energy resources. Based on both analyses (MEDPRO WP4) and on prospects for growth (MEDPRO WP8), it seems that energy intensity in the Mediterranean should fall perceptibly by approximately 13% in the next 20 years. But given the programmed energy mix, this will not limit emissions of CO2, which are likely to increase by more than 90%. The paper first presents the rationale for demand-side management (DSM) policies. After a general discussion of concepts, it tackles the question of instruments and measures for implementing such policies, before posing the question of the cost-efficiency approach for monitoring the measures the authorities introduce. Secondly, the paper assesses energy consumption and energy efficiency in the countries of the southern Mediterranean and the ways in which their main economic sectors have changed in recent decades. The third section outlines the demand management measures introduced and, taking Tunisia and Egypt as examples, estimates the cost of such policies. The fourth and last section offers a forecast analysis of energy consumption in the Mediterranean up to 2030, highlighting probable trends in terms of final consumption, energy intensity, energy mix and emissions of CO2. The section concludes with estimates in terms of cost, comparing objectives for lower intensity, results in terms of resource savings and the types of costs this approach represents.

Energy efficiency: the ever neglected priority of the European energy strategy. Egmont Paper No. 66, June 2014

Summary. Energy saving has been a stated policy objective of the EU since the 1970s. Presently, the 2020 target is a 20% reduction of EU energy consumption in comparison with current projections for 2020. This is one of the headline targets of the European Energy Strategy 2020 but efforts to achieve it remain slow and insufficient. The aim of this paper is to understand why this is happening. Firstly, this paper examines the reasons why public measures promoting energy efficiency are needed and what form these measures should optimally take (§ 1). Fortunately, over the last 20 years, much research has been done into the famous ‘energy efficiency gap’ (or ‘the energy efficiency paradox’), even if more remains to be done. Multiple explanations have been given: market failures, modelling flaws and behavioural obstacles. Each encompasses many complex aspects. Several types of instruments can be adopted to encourage energy efficiency: measures guaranteeing the correct pricing of energy are preferred, followed by taxes or tradable white certificates which in turn are preferred to standards or subsidies. Information programmes are also necessary. Secondly, the paper analyzes the evolution of the different programmes from 2000 onwards (§ 2). This reveals the extreme complexity of the subject. It deals with quite diverse topics: buildings, appliances, public sector, industry and transport. The market for energy efficiency is as diffuse as energy consumption patterns themselves. It is composed of many market actors who demand more efficient provision of energy services, and that suppliers of the necessary goods and know-how deliver this greater efficiency. Consumers in this market include individuals, businesses and governments, and market activities cover all energy-consuming sectors of the economy. Additionally, energy efficiency is the perfect example of a shared competence between the EU and the Member States. Lastly, the legal framework has steadily increased in complexity, and despite the successive energy efficiency programmes used to build this framework, it has become clear that the gap between the target and the results remains. The paper then examines whether the 2012/27/EU Directive adopted to improve the situation could bring better results. It briefly describes the content of this framework Directive, which accompanies and implements the latest energy efficiency programme (§ 3). Although the Directive is technically complex and maintains nonbinding energy efficiency targets, it certainly represents an improvement in several aspects. However, it is also saddled with a multiplicity of exemption clauses and interpretative documents (with no binding value) which weaken its provisions. Furthermore, alone, it will allow the achievement of only about 17.7% of final energy savings by 2020. The implementation process, which is essential, also remains fairly weak. The paper also gives a glimpse of the various EU instruments for financing energy efficiency projects (§ 4). Though useful, they do not indicate a strong priority. Fourthly, the paper tries to analyze the EU’s limited progress so far and gather a few suggestions for improvement. One thing seems to remain useful: targets which can be defined in various ways (§ 5). Basically, all this indicates that the EU energy efficiency strategy has so far failed to reach its targets, lacks coherence and remains ambiguous. In the new Commission’s proposals of 22 January 2014 – intended to define a new climate/energy package in the period from 2020 to 2030 – the approach to energy efficiency remains unclear. This is regrettable. Energy efficiency is the only instrument which allows the EU to reach simultaneously its three targets: sustainability, competitiveness and security. The final conclusion appears thus paradoxical. On the one hand, all existing studies indicate that the decarbonization of the EU economy will be absolutely impossible without some very serious improvements in energy efficiency. On the other hand, in reality energy efficiency has always been treated as a second zone priority. It is imperative to eliminate this contradiction.

Germany's energy transformation: difficult beginnings. OSW Report, March 2013

Initiated in May 2011, several months after the Fukushima nuclear disaster, Germany’s energy transformation (Energiewende) has been presented as an irrevocable plan, and – due to the speed of change required – it represents a new quality in Germany’s energy strategy. Its main objectives include: nuclear energy being phased out by 2022, the development of renewable energy sources (OZE), the expansion of transmission networks, the construction of new conventional power plants and an improvement in energy efficiency.The cornerstone of the strategy is the development of renewable energy. Under Germany's amended renewable energy law, the proportion of renewable energy in electricity generation is supposed to increase steadily from the current level of around 20% to approximately 38% in 2020. In 2030, renewable energy is expected to account for 50% of electricity generation. This is expected to increase to 65% in 2040 and to as much as 80% in 2050. The impact of the Energiewende is not limited to the sphere of energy supplies. In the medium and long term, it will change not only to the way the German economy operates, but also the functioning of German society and the state. Facing difficulties with the expansion of transmission networks, the excessive cost of building wind farms, and problems with the stability of electricity supplies, especially during particularly cold winters, the federal government has so far tended to centralise power and limit the independence of the German federal states with regard to their respective energy policies, justifying this with the need for greater co-ordination. The Energiewende may also become the beginning of a "third industrial revolution", i.e. a transition to a green economy and a society based on sustainable development. This will require a new "social contract" that will redefine the relations between the state, society and the economy. Negotiating such a contract will be one of the greatest challenges for German policy in the coming years.

A New Euro-Mediterranean Energy Roadmap for a Sustainable Energy Transition in the Region. MEDPRO Policy Paper No. 3, February 2013

This paper addresses the urgent need for a sustainable energy transition in the southern and eastern Mediterranean region. It analyses the unsustainable burden of universal energy subsidies and calls for new development paths unlocking the huge potential for low-cost energy efficiency and demand-side management as well as for renewable energy. It argues that a new structure of regional and interconnected energy markets is needed. It then proposes some original approaches regarding the financing of this sustainable energy transition and finally calls for an ambitious, Euro-Mediterranean Energy Roadmap, which should contribute not only to the economic and environmental development of the region, but also to its social and political stability.

The Energy Performance of Buildings: Promises Still Unfulfilled. Egmont Paper No. 78, May 2015

EXECUTIVE SUMMARY All observers agree that energy efficiency must be the cornerstone of any serious EU energy strategy. In this general context, the EU building sector is critical. It represents about 40% of EU final energy consumption (residential houses, public/private offices, commercial buildings, etc.) and approximately 36% of EU CO2 emissions. This is massive. The EU has certainly not been inactive in this field. The Energy Performance in Buildings Directive 2002/91/EC (EPBD) was the first and the main instrument to address the problem of the energy performance of buildings. It has established numerous principles: a reliable methodology which enables the calculation and rating of the energy performance of buildings; minimum energy performance standards for new buildings and existing buildings under major renovation; energy performance certificates; regular inspection of heating and air-conditioning systems; and, finally, quality standards for inspections and energy performance certificates. They were strengthened in 2010 by the recast Directive 2010/31/EU. This directive also introduces a decisive concept for the development of the building sector: ‘nearly zeroenergy buildings’. In 2012, the new Energy Efficiency Directive 2012/27/EU dealt with other aspects. In the building sector, three of them are particularly important. They concern: (1) the establishment of long-term strategies for mobilizing investment in the renovation of the national building stocks; (2) the introduction of energy saving schemes for ‘designated’ energy companies with a view to reducing consumption among ‘final consumers’ by 1.5% annually; and (3), as an option, the setting up of an Energy Efficiency National Fund to support energy efficiency initiatives. This paper also briefly examines the different instruments put in place to disseminate information and consultation, and the EU funding for energy efficiency in buildings. Results, however, have remained limited until now. The improvement of the energy performance of buildings and the rhythm of renovation remain extremely weak. Member States’ unwillingness to timely and properly transpose and implement the Directives continues despite the high degree of flexibility permitted. The decentralized approach chosen for some specific aspects and the differentiation in the application of EPBD standards between Member States do not appear optimal either. Adequate financial schemes remain rare. The permanent deficit of qualified and trained personnel and the inertia of public authorities to make the public understand the stakes in this domain remain problematic. Hence the need to take new initiatives to reap the benefits that the building sector is meant to bring.

Consensus, contradiction, and conciliation of interests: the geo-economics of the Energy Union. EPC Policy Brief, 8 July 2015

European Union energy policy calls for nothing less than a profound transformation of the EU's energy system: by 2050 decarbonised electricity generation with 80-95% fewer greenhouse gas emissions, increased use of renewables, more energy efficiency, a functioning energy market and increased security of supply are to be achieved. Different EU policies (e.g., EU climate and energy package for 2020) are intended to create the political and regulatory framework for this transformation. The sectorial dynamics resulting from these EU policies already affect the systems of electricity generation, transportation and storage in Europe, and the more effective the implementation of new measures the more the structure of Europe's power system will change in the years to come. Recent initiatives such as the 2030 climate/energy package and the Energy Union are supposed to keep this dynamic up. Setting new EU targets, however, is not necessarily the same as meeting them. The impact of EU energy policy is likely to have considerable geo-economic implications for individual member states: with increasing market integration come new competitors; coal and gas power plants face new renewable challengers domestically and abroad; and diversification towards new suppliers will result in new trade routes, entry points and infrastructure. Where these implications are at odds with powerful national interests, any member state may point to Article 194, 2 of the Lisbon Treaty and argue that the EU's energy policy agenda interferes with its given right to determine the conditions for exploiting its energy resources, the choice between different energy sources and the general structure of its energy supply. The implementation of new policy initiatives therefore involves intense negotiations to conciliate contradicting interests, something that traditionally has been far from easy to achieve. In areas where this process runs into difficulties, the transfer of sovereignty to the European level is usually to be found amongst the suggested solutions. Pooling sovereignty on a new level, however, does not automatically result in a consensus, i.e., conciliate contradicting interests. Rather than focussing on the right level of decision making, European policy makers need to face the (inconvenient truth of) geo-economical frictions within the Union that make it difficult to come to an arrangement. The reminder of this text explains these latter, more structural and sector-related challenges for European energy policy in more detail, and develops some concrete steps towards a political and regulatory framework necessary to overcome them.