Energy Efficiency Policies and Indicators

Energy Efficiency Progress Achieved

Introduction

For the Tokyo and Houston Conference of the World Energy Council (WEC), ADEME was in
charge of the coordination of a study called "Energy Efficiency Policies". This study aimed at
describing energy efficiency trends through various indicators and evaluating efficiency policies.

For the Buenos Aires Congress, this study was updated and enlarged to a wider range of
countries. For that purpose, ADEME was associated to APERC, Asia and Pacific Energy
Research Centre, and more recently to OLADE, Latin American Energy Organisation. This study
was carried out during the last three years with the technical assistance of ENERDATA s.a. and
active contributions of more than 50 countries.

The first objective of that study is to describe and explain the trends in energy efficiency
performance in these countries. For that purpose a selection of indicators is analysed and
compared. The methodology used is directly adapted from the European project on energy
efficiency indicators, ODYSSEE (Ademe/EnR/SAVE Project).

The second objective is to describe and evaluate energy efficiency policies carried out in a
sample of countries all over the world. For that purpose, a survey was carried out in about 50
countries, representative of all world regions. The survey focused on six policy measures, whose
evaluation was completed by detailed and case studies prepared by selected experts. Beyond a
description of measures that have been implemented, the aim of that survey was to pinpoint the
most interesting experiences and to draw some conclusions on their advantages and drawbacks.
In particular, this study aims at identifying the policy measures, which have proven to be most
effective, so as to make recommendations for countries that are newly embarked in energy
demand management policies.

This report presents the results and conclusions of that study. It is made of two main parts: the
review of the energy efficiency progress achieved (chapter 1) and the evaluation of policies and
measures (chapter 2). In a last chapter, some recommendations are made, especially for
countries that want to learn from the experience of the most advanced countries in terms of
energy efficiency policies.

In introduction, it is useful to recall the overall framework of energy efficiency policies, to clarify
the definition used all along this report and, finally, to explain why evaluation of energy efficiency
is important.

Energy Efficiency Policies and Indicators

Energy Efficiency Progress Achieved

Definition and Scope of Energy Efficiency

The focus of this report is on the evaluation of energy efficiency policy and trends. What is the
precise meaning of the term "energy efficiency"?

Insulating a house makes it obviously more energy efficient from an engineering point of view:
less energy is consumed for the same comfort. But this technical improvement at the micro level
may be not visible at the macro-level - the whole stock of dwelling-, if, at the same time, more
houses are built and/or if the comfort is improved in dwellings.

The same can be said for industry: each factory individually can decrease its energy consumption
per unit of output with more energy efficient techniques, but this may be not visible at the level of
the overall industrial sector, because of an increase in the production or because of a larger share
of energy intensive industries in the production.

Energy efficiency is not just a technical matter, it is also a matter of efficient services: making a
phone call instead of a physical visit, recycling bottles, reducing heat at night, using wood instead
of concrete for houses, all result in a decrease in energy consumption for identical or very similar
services. Again, such improvements may exist at the micro-level but may not be directly visible at
the macro-level: assessing energy efficiency also means measuring the overall impacts of all the
improvements at the micro level on the evolution of the energy consumption.

In some cases, because of financial constraints due to high energy prices, consumers may
decrease their energy consumption through a reduction in welfare or production level. Such
reductions do not necessarily result in increased overall energy efficiency of the economy, and
are highly reversible. They should not be associated to energy efficiency.

Of course, assessing energy efficiency from a policy view point does not mean reviewing each
particular dwelling or factory; but certainly it means figuring out, or measuring, how far all these
improvements at the micro level did contribute to the actual evolution of the energy consumption
in the various sectors, and for the whole country.

Energy efficiency has, thus, a broader sense that what is usually understood with an implicit
reference to technological efficiency only: it encompasses all changes that result in decreasing
the amount of energy used to produce one unit of economic activity (e.g. the energy used per unit
of GDP or value added) or to meet the energy requirements for a given level of comfort. Energy
efficiency is associated to economic efficiency and includes technological, behavioural and
economic changes.

Energy efficiency improvements refer to a reduction in the energy used for a given energy service
(heating, lighting...) or level of activity. This reduction in the energy consumption is not necessarily
associated to technical changes, since it can also result from a better organisation and
management (e.g. domotics) or improved economic efficiency in the sector (e.g. overall gains of
productivity).

Energy Efficiency Policies and Indicators

Energy Efficiency Progress Achieved

Energy Efficiency Policies in Market Economies

In market economies, energy efficiency is first of all a matter of individual behaviour and rationale
of energy consumers. Avoiding unnecessary consumption of energy, or choosing the most
appropriate equipment to reduce the cost of the energy contribute to decrease individual energy
consumption without decreasing individual welfare; it also contributes to increase the overall
energy efficiency of the national economy.

Avoiding unnecessary consumption is certainly a matter of individual behaviour, but it is also,

often, a matter of appropriate equipment : thermal regulation of room, or automatic switch off of
lights in unoccupied hotel rooms are good examples of how equipment can reduce the influence
of individual behaviour. Making the "good" investment decision, for domestic appliances or
industrial devices, from the energy efficiency view point, certainly relies on a sound economic
rationale. Good price signals are necessary, but they are not enough. Indeed certain conditions
are required to develop and structure the market for efficient equipment and devices:

- the availability of efficient appliances and production devices ;

- a good information of consumers about these equipment and devices ;
- and, finally, the availability of technical, commercial and financial services when necessary.

Any cost related decision concerning energy efficiency, at the individual level, is, more or less,
based on a trade-off between the immediate cost and the future decrease in energy expenses
expected from increased efficiency: the higher the energy price, observed or expected, the more
attractive are the energy efficient solutions.

Financial constraints, desire of immediate profit or attitude against uncertainty, often lead the final
consumers to overemphasise the immediate cost of equipment and devices in their economic
appraisal, which usually do not benefit to the selection of efficient equipment or devices.

Public measures are therefore necessary in market economies to reinforce the role of prices, first
of all to create the appropriate market conditions for efficient equipment, secondly to drive the
consumer choice towards the most cost effective solutions. They also aim at alleviating the
recognised failures in market mechanisms.

Three major sources of failures in market mechanisms are usually pinpointed to justify the
implementation of policy measures:

- the information is missing or partial, and cannot be improved with acceptable costs ;

- decision-makers for energy efficiency investments (in buildings, appliances, equipment...) are
not always the final users that have to pay the heating or cooling bill : the overall cost of energy
service is not revealed by the market ;

- financial constraints of individual consumers are often much more severe than what national
discount rate or long term interest rate do reveal, resulting in a preference to short term
profitability : implicit discount rates in industry are over 20% compared to less than 10% for public
discount rates, and 4-6% for long term interest rates.

Energy efficiency policy is therefore considered here with a broad sense. It includes all public
interventions (" policy measures ") aiming at improving the energy efficiency of a country, through
adequate pricing, institutional setting, regulations and economic or fiscal incentives.

Energy efficiency programmes refer to a combined set of policy measures.

Energy Efficiency Policies and Indicators

Energy Efficiency Progress Achieved

Energy Efficiency and Energy Pricing

In market economies, where most energy prices to final consumers are deregulated, prices
normally reflect accurately supply costs and thus participate to the macro-economic optimality.
But, for several reasons, prices often reflect only part of the overall costs, only the part that is
immediately supported by suppliers: no or partial internalisation of environmental externalities, no
or partial integration of long run marginal development costs, cross subsidies among consumers
etc...

As a result, decision made by final consumers are often far away from what the global economic
optimality would suggest, creating a gap between the actual achievements in energy efficiency
and what could be achieved in case of an accurate price system accounting for all costs involved.

Taxation is an usual mean used by governments to reduce or suppress such prices distortions at
the consumer level. In that sense, taxation is always complementary to energy efficiency policies
and measures. It is hardly just a component of these policies and measures because of its much
larger socio-economic aspects, but it certainly determines the effectiveness of such policies
measures.

Energy Efficiency Policies and Indicators

Energy Efficiency Progress Achieved

Energy Efficiency and Non Price Measures

The main role of non price measures is then to create the necessary conditions to speed up the
development and the structuration of the market of efficient equipment:

- information and communication towards final consumers,

- risk sharing with producers and distributors,
- R&D and dissemination in the field of energy efficiency,
- implementation of specific financing mechanisms.

Information and communication have two main targets:

- increase the awareness of final consumers about the individual and national benefits of energy
efficiency ;

- open the range of possibilities for the technical decisions to be made by the final consumers and
reveal the overall costs of all possibilities.

Sharing the economic risk with the producers and distributors of efficient equipment and devices
can take several forms: loan, subsidy, tax credit etc. The main target is to overcome the
commercial difficulty raised by the initial extra cost of efficient equipment and devices as
compared to less efficient ones.

Supporting R&D and dissemination costs by public funds, and letting the valorisation through
advanced energy efficient techniques, equipment and devices to private interests, aims at
speeding up the industrialisation of efficient equipment and devices and at decreasing their costs
on the market.

Implementing specific financing mechanisms has two targets:

- for consumers, to reduce the market unbalance (due to financial constraints) between cost
effective solutions with high investment-low operating costs (energy efficient), on the one side,
low investment-high operating costs (less efficient) on the other side.
- for suppliers, to help implementing production or distribution activities in the field of energy
efficient products and services.

Energy Efficiency Policies and Indicators

Energy Efficiency Progress Achieved

Energy Efficiency Policies Evaluation

Energy efficiency policies and measures are not free. Whatever is the organisation and
implementation scheme of the policy, whatever are the measures taken; there is a cost for the
taxpayer.

As a general statement, energy efficiency policies and measures are economically sound if the
macro-economic benefit of increased energy efficiency due to these policies and measures
overcome the overall cost for the taxpayers. And the bigger is the difference between the benefit
and the cost, the more attractive and effective are the policies and measures.

Evaluating energy efficiency policies and measures is therefore a necessity for two basic
reasons:

- rationale management of public budget,

- cost effectiveness of energy efficiency goals achievement.

Assuming that micro-decision related to energy efficiency are usually cost-effective at the
consumer level, the question of energy efficiency policy evaluation can be raised at two levels:

- from the taxpayer viewpoint, what is the public cost involved in the policies and measures ;

- from the macro-economic viewpoint, what is the benefit resulting from the actual progress in
energy efficiency achieved through the policies and measures.

Several difficulties rapidly emerge when one attempts to assess energy efficiency progress. First
of all, from a conceptual viewpoint, energy efficiency is at the same time a pure economic
concept (similar to that of productivity) and a political concept (the result of energy efficiency
policy); the boundary between these two concepts is never clear. Secondly, from a
methodological viewpoint, it is difficult to separate out the various causes behind actual energy
efficiency improvement observed: more energy efficient socio-economic structures, price
mechanism, results of sectoral policy measures; etc. A good illustration is the example of cars.
How to measure the energy efficiency of cars: in terms of technology, of drivers' behaviour, of
pattern of use...?

Energy efficiency indicators designed and calculated in this project aim at giving solutions to
these difficulties, in three ways:

Overall macro-economic indicators tend to reconcile the macro-economic and political

concepts of energy efficiency, measuring separately the main components of the overall
energy intensity of the GDP: those linked to the structure of the economy and those
linked to sectoral energy efficiencies.
Sectoral indicators aim first at reconciling the economic appraisal of energy efficiency in
the sectors with the technical appraisal of efficiency improvement of dwellings, vehicles,
 industrial process etc., second at relating these technical appraisals with the evaluation of
actual energy savings, from which economic benefits can be estimated.

Comparative indicators across countries, based on homogeneous data, aim at allowing

comparison across countries in order to mark out, in energy efficiency achievements,
what could be due to differences in policies and measures and to taxation and pricing
policies.