Can Competition Accelerate Energy Savings? Options and Challenges for Efficiency Feed-in Tariffs

Abstract

Numerous studies have documented the critical market barriers that suppress consumer investments in energy efficiency well below economically optimal levels. Meanwhile, the policy imperatives for increasing such investmentsparticularly the need to address global climate change -have never been more compelling. This paper examines how a new policy construct -an energy efficiency feed-in-tariff (EE FiT) -might be designed to address this problem. While an EE FiT will not always be the best approach, its potential benefits merit serious consideration where alternative programmatic routes to efficiency are not well-established. In particular, EE FiTs offer the potential to create new markets and enable new market entrants to uncover and deliver EE resources. This marketbased approach may also have advantages in jurisdictions facing political objections to other methods of funding efficiency initiatives. However, as the European experience with FiTs for renewable power reveals, any jurisdiction considering adoption of an EE FiT will need to consider a range of questions, both fundamental and practical. This paper identifies key policy issues and options for EE FiT design. No jurisdiction to date has created an explicit EE FiT; this paper draws on experience in Europe with white certificate programmes, and in the US with utility efficiency mandates and regional capacity markets, in particular the "standard offer" programmes that have been offered by obligated entities over the past two decades. The standard offer programmes differ from a pure efficiency FiT, as they have been offered as part of a portfolio of measures designed jointly to meet an energy savings obligation, not as the fundamental policy construct for achieving savings. Nevertheless, they offer valuable insights into the policy and implementation choices that would need to be made to enable an EE FiT to effectively deliver on its promise. Keywords:Energy efficiency, feed-in tariff, policy INTRODUCTIONIn October 2012, the European Parliament and Council adopted the Energy Efficiency Directive (EED) [1] to provide a stronger legal framework for Member States, energy companies, businesses and consumers to capture a growing fraction of the costeffective energy efficiency potential still untapped in European economies. Wellcrafted energy savings programmes and policies could provide substantial benefits across Europe: added employment and economic growth, improved energy security, and multiple environmental gains. A large portion of the energy savings sought in the EED will need to be delivered through Energy Efficiency Obligations (EEOs), or equivalent alternative measures, which Member States must create on terms set out in Article 7 of the Directive. In this setting, and in a period of seriously constrained public finances, policy-makers are rightly considering a range of techniques that could deliver the benefits of deep energy savings with only minimal reliance on public funding.Substantial global experience over at least three decades reveals th...

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