Can energy efficiency be market-based?

Energy efficiency is widely recognised as the “first fuel” of decarbonised energy systems of the future, and is an unquestionable pillar of the EU’s ‘Energy Union’. It is one of the most cost-effective options to accelerate the transition to a low carbon economy and may enable achievement of other socioeconomic goals, such as boosting economic growth and employment, and reducing energy poverty. However, nowadays the current paradigm of European approach is aimed at removing market barriers and to make energy efficiency progress based on market instruments creating win-win opportunities for both supply and demand sides. Will this happen in the near future? Can we make energy efficiency a real energy resource in a competitive energy market?

The Role of Market-Based Instruments (MBI)

Historically, the adoption of energy efficiency technologies and practices has often required public subsidies. Out of the public eye, the number of energy efficiency obligation schemes around the world (including white certificate programmes) is growing. A similar trend can be observed for the second type of MBIs – auctions (including tendering programmes), where bids are collected for funds to deliver specific energy savings. According to a recent IEA report, the number of MBIs has quadrupled over the last decade, while the value of investments triggered by MBIs has increased six-fold over the same time. As a result, global energy consumption was approximately 0.4% lower than it would have been otherwise. The IEA further expects that by 2025, energy savings induced by auctions will double to more than the current energy consumption of Poland.

Speaking about Poland

The Energy Efficiency Obligation imposed by Article 7 of the Energy Efficiency Directive requires that Member States ensure that energy suppliers and distributors achieve energy savings of 1.5% per year. In Poland, the obligation has been implemented in the form of a white certificate scheme. Polish experiences with white certificates can serve as an example showing that learning a lesson and a proper (re)design of the obligation schemes by the government may bring promising results. The first version of the scheme was introduced in 2011 and turned out to be complicated, unclear and costly. After major changes introduced in 2016, the application as well as measurement and verification procedures were significantly simplified. As a result, it is expected that the market value of white certificates in Poland in the years 2016-2020 will be approximately 1 billion euro, leading to an electricity price increase of 1.3% in 2020.

But is it more cost-efficient than grants?

At first glance, the answer to this question is positive. However, according to IEA, there is not enough evidence which would prove that efficiency outcomes delivered by MBIs are always more cost-effective than energy savings reached through other means, such as grants. Still, existing data show that savings can be made at a low cost. These observations suggest that not only further research, but also longer timeframes of obligation schemes’ operation are needed to profoundly address this question and design future energy efficiency policies in an effective and efficient manner.

Future outlook: pink glasses of MBIs’ designers

Policy-makers are acknowledging the potential of MBIs. In November 2016, the European Commission announced its “Clean Energy for All Europeans” proposals, which set a 30% energy efficiency target for 2030, to be achieved largely through strengthening and extending existing policy mechanisms, including Energy Efficiency Obligation Schemes (EEOS). Hailed as a great success by the EC, Article 7 is being amended to extend the obligation period beyond 2020 to 2030. The EC expects EEOS to generate the highest amount of savings by 2020 of a single measure notified under Article 7 (86.1 Mtoe), with much smaller savings reached thanks to fiscal incentives (49.0 Mtoe), energy and CO2 tax measures (34.4 Mtoe) and regulations and voluntary agreements (27.1 Mtoe). Recently, the targets proposed by the Commission have been pushed even further by the European Parliament’s energy and industry committee (ITRE). On 28 November 2017, ITRE supported a 40% binding overall target for 2030, with binding national targets, as well as strong rules on annual energy savings. In sharing experiences and expertise with a smart MBI design across countries, interaction between policy makers and researchers will be essential in ensuring these targets are successfully achieved.

Written by Ewa Stefaniak, Maksymilian Kochański, and Katarzyna Korczak
Warsaw University of Technology