Energy efficiency policy as a multi-level governance task

eceee 2014 Industrial Summer Study on energy efficiency

Arnhem, October 2 to 5, 2014

Eberhard Jochem Fraunhofer Institute for Systems and Innovation Research (Fh-ISI) and Centre for Energy Policy and Economics (CEPE), ETH Zurich

§  Theoretical potentials of energy efficiency - how close to thermo-dynamic limits? stair case effect?

§  Present economic efficiency potentials – a snap-shot of present technology and energy price levels

§  Major obstacles and unused constructive factors (within the energy using company)

- the focus on risk, “robust” management rules (80/20%) , procurement by insufficiently specified tenders; motivation and responsibilities of machine/plant operators or apprentices

§ 

§  Energy efficiency policy strategies – remind the innovation system (all actors)

- along the supply chain for obstacles and motivations - decisions in Brussels and in capitals of Member Countries

§  the implications for policy portfolios of energy efficiency policy

Overview

Theoretical potentials of energy efficiency - The vision of the Board of Swiss Institutes of Technology of a

"2'000 Watt/cap Society" – the long term efficiency potential in 2070

From 6*000 Watt (190 GJ/a) today in Europe to

- 2*000 Watt (65 GJ/a) per capita in 2070

- despite of an increase of income of 70% in 2070?

2000

2070

A few hints for the factor 5 „efficiency“ potential of the 2000 Watt society

§  Reservations and solutions

- close to thermo-dynamic limits? yes, often the process of basic materials; however : - waste heat (e.g. 80 MW of a refinery) ? Changing the process (e.g. membrane technology) - more material efficiency or material substitution with less specific energy demand - unavoidable stair case effect? Yes, sometimes for particular processes, however: - see above: rarely a limitation - new technological solutions by research and development (e.g. recovery of braking energy) - decreasing investment cost by mass production (e.g. measurement & communication tec) - unavoidable rebound effect? The richer the more wasteful consumption, but also production? - companies - not private consumers - are competing on markets surviving at lowest costs ;

Profitable energy efficiency potentials of industry and services until 2020

The case - Germany:

§  Economic potential 2014 to 2020 : 500 PJ (- 2.2% per year)

§  Reduced energy cost: 11 Billion € in 2020 (-12%)

§  reduction of CO2 emissions : around 45 Mill. Tonnes (-5% of Germany‘s GHG)

§  additional net 45.000 new jobs (0.1%, induced by a 30 Billion € investment)

§  slight net increase in gross domestic product (+ 3 Billion € in 2020)

§  smaller capital losses to energy producers by reduced energy imports

Can these potentials be realised?

Source : Jochem u.a. energiewirtschaftliche Tagesfragen, 64(2014)1/2, S.81-85

A selection of existing obstacles – the traditional view

•  lack of knowledge and sufficient market survey of energy managers, particularly in SMCs, consulting engineers, architects, installers, bankers

•  high transaction cost of the energy manager (for searching solutions, tendering, decision making, installation)

•  lack of own capital, fear of lending more capital for investments of off-sites

•  technology producers or whole sale often pursue their own interests opposing the possible innovation steps of efficient solutions

•  80% of companies using only risk measures (payback period), but not profitability indicators (e.g. internal interest rate) for their decisions

Why are present profitable efficiency potentials not fully realised?

The traditional textbook energy efficiency policy: choosing an instrument that alleviates the obstacle, mostly focused on the investor

•  not sufficient information

•  not sufficient knowledge

•  lacking own capital

•  biased decision criteria

•  flyers, subsidised initial consulting, technical standards

•  subsidised consulting or/and professional training

•  subsidy to the investment

•  information (written or oral)

Selected obstacles and related instruments - this energy efficiency policy is not effective and efficient

Payback Internal  rate  of  return  in  %  per  year1)

timerequirement Useful  life  of  plant(in  years) (in  years)

3 4 5 6 7 10 12 152 24% 35% 41% 45% 47% 49% 49,5% 50%3 0% 13% 20% 25% 27% 31% 32% 33%4 0% 8% 13% 17% 22% 23% 24%5 0% 6% 10% 16% 17% 18,5%6 unprofitable 0% 4% 10,5% 12,5% 14,5%8 4,5% 7% 9%

1) Continuous  energy  saving  is  assumed  over  the  whole  useful  life  of  the  plant

Profitable  investment  possibilities  eliminated  by  a  four-­‐year  payback  time  requir ement

Source:  FhG-­‐ISI

One of the major company-internal obstacles of resource efficiency

As long as 80% of technology producers and suppliers do not calculate internal interest rates and life cycle cost, most of the profitable efficiency investments will not be realised – an example how decision routines have to be changed

in addition – unused constructive factors looking after the motivations of the actors of the innovation system

§  Opportunities from the social science perspective: (not just “homo oeconomicus”) - first movers well informed, risk taking (as tec producers or tec users)

support of first movers (information, training, R&D&D, financially )

- social prestige of CEOs or companies (green image, member of the Green Dow Jones, leaders who are responsive to societal needs or regional chances)

establish efficiency awards, a selected company group of top efficient companies at the national level (e.g. Climate protection companies)

§ 

- professional career of energy managers and acknowledgement of workers by unexpected high savings of energy cost, by motivation, advice to the controller. etc. establish best practice information, local efficiency networks, ask your

supplier for carbon foot prints, etc.

Energy efficiency policy strategies – remind the innovation system

-  looking along the supply chain for obstacles and motivations - policy decisions in Brussels and in capitals of Member Countries - effective, if investment decisions have to be individually made by 100.000s of companies? - more effective by regional/ local governance? Does it make a difference ?

M ARK ETINGby m otor m anufacturers

BUYING

PR O DUC T-DEV ELO PM ENT USE

TRAININGOF SALESPERSO NNEL

VOLUNTARYAGREEM ENTS

STANDARDS

CAM PA IGNS REPLACINGINEFFICIENT A PPLIANCES

CO NSULTA NCY/ ADV ISERS

SUBSIDIESAN D DUTIES

LA BE LLING

INFORM ATION

IN FO R M A T IO N

CONSULTANCY/ ADVISERS

ENVIRONM ENTAL TAXESSUBSIDIES FOR

R & D

PROCUREM ENTPROGRAM M ES

BUYING & MARKETINGby OEMs

NEW PRODUCTCYCLE

STANDARDSLA BE LLING

VOLUNTARYAGREEM ENTS

Possible policy instruments reducing existing obstacles or supporting the motivations of actors in the product cycle –

"simultaneous policy measures"

EFFIENCY NETWORKS including - consultation, - group targets, - information, - exchange of experiences - monitoring between energy managers

The technology- or branch-specific efficiency policy bundle: determined by the mix of obstacles and unused motivations

TECHNICAL FORA with MANUFACTURERS, APPLICANTS, RESEARCHERS & CONSULTANTS

New understanding how to realise most effectively energy efficiency or renewable energy potentials

§  Avoid mechanistic single barrier perception alleviating it by a single measure, this will fail in most cases;

§  but identification of the obstacles along the value chain (product cycle) and also the opportunities and motivations of players in the companies (understanding the problem as a syndrome)

technology- or branch-specific bundles of measures considering simultaneously all major obstacles and motivations are likely to be most effective

§  The composition of the policy bundles also - depends on the company sizes (steel industry or food industries), - should integrate activities and policies by the relevant trade associations or other intermediates such as Chambers of Commerce or energy agencies, - may involve utilities or municipalities (e.g. contracting, efficiency networks, policies)

Model of the six Phases of the Innovation Cycle (schematic diagram)

• 1

• 2 • 3

• 4

• 5

• 6

Inven- tion

Disilliu- sion

New orien- tation

Rise Diffusion

Amplitude activities/ possibilities

Euphoria

Level of activity

Time

The energy solution should be at least in phase 5 still fighting with lack of learning and economy of scale effects

Examples of failures of market entries due to neglecting the position of the new technology in the innovation cycle

Difficult market entries of new energy efficient technologies (examples):

§  The heat pump in the late 1970s: due to - lack of reliability of the new technology and untrained installers, - neglecting the efficiency potentials of the competing technology (e.g. condensing boiler, electronic control strategies, high efficient burners)

§  The PEM fuel cell in the past, due to - maintenance intervals still too short, investment cost still high compared to technical competitors such as combustion engines or boilers

§  High cost of new products due to small scale production and lack of learning effects e.g. high efficiency illumination, control technology by electronics in the 1980s, presently: membrane technology, heat transformers, recovery of braking energy.

The case for Brussels: Mass-produced and mass-applied efficient solutions demand for regulation and dynamic technical standards

It is too costly (and inefficient): more than a million companies in OECD countries

decide individually on more or less efficient mass-produced energy-converting or using

technologies (e.g. electrical motors, pumps, compressors, ventilators, high efficient windows,

etc.),

therefore: §  International technical standards for electrical motors (e.g. the Eco design Dir.)

- electrical motors (implemented), companies have still to decide between two options - electrical motor systems, condensing boilers, heat pumps (to be negotiated)

§  Introduce dynamics to technical standards by top runner models (like in Japan in the case of some residential electric appliances)

The case for regions: ®LEEN - Local Energy Efficiency Networks – reducing the transaction cost by mutual exchange of experiences

§  How do the networks operate with 10 to 15 local companies ? - Phase 1. - energy review, a report, a joint efficiency and mitigation target - Phase 2: - four meetings per year, moderated, a site visit included - one technology each meeting,

- yearly monitoring, - hot line

§  Results : - doubling of efficiency progress compared to average of industry - 180.000 €/a energy cost savings per site and 10 to 20 €/t CO2 profits

§  Application so far: - CH: 85 networks; 50% of industrial CO2-emissions - D: 60 networks, more to come - A: 2 networks

Energy efficiency policy at the regional, local level

Intensify the activities of regional actors

§  Cities and regional government - giving examples of good and best practice in their own buildings and plants - supporting energy efficiency activities by awards, local fairs, - advising their companies (e.g. municipality, savings bank) to support by contracting, special fonds or bonds etc.

§  Chambers of commerce, chambers of crafts - offering special courses of professional training on topics of energy efficiency - checking the curricula of the apprentices - offering or recommendations of energy efficiency networks

§  Municipalities and utilities - offering energy reviews and contracting - offering financing options and consultation for funding - offering or recommendations of energy efficiency networks

The Innovation System – an integrative concept of the actors

Source: Technopolis 2000, modified and extended by S. Kuhlmann /

J.Edler, ISI

Demand Framework Conditions Financial environment;

- energy taxation and incentives; - regulation & standards, propensity to innovation and entrepreneurship;

Education and Research System

Professional education and

training Higher education

and research

Public sector research

Industrial System

Large companies - close to end

consumers

SMEs. OEMs - family owned

New, technology- based firms

Intermediaries - Research institutes - Brokers

Consumers and / or state (agencies) (final demand) Producers (intermediate demand)

Banking, - venture capital - fonds, bonds

media and information

- best practice

business support - associations

- chamber of commerce

Standards and norms

-eco design dir.

Infrastructure

Political System

Government - EU and national - provinces, cities

Governance

- RTD policies - efficiency policies

§  Selecting existing obstacles and picking policy instruments - the text book approach: not effective and inefficient in most cases

§  The adequate energy efficiency policy paradigm - first movers in industry and services (branches for final consumers, family owned companies) - consider the value chain, not just the energy using company - identify the role of governments at all levels : EU, national government , and local/regional - consider unused constructive factors (motivation, acknowledgment, responsibilities)

§  Policy strategies as multi-level governance task - mass-produced and mass-applied products – technical regulation at EU / national level - energy taxation and CO2 emission certificates

- individual decisions at corporate level to be based on better practice and to be intensified by - climate cities often lack activities in industry and the service sector - municipalities: offering more energy services (consulting, contracting, financing) - chambers of commerce and of crafts: more training courses/ improved education - reducing transaction cost in SMEs by learning energy efficiency networks - additional forms of financing (contracting, fonds, bonds)

Conclusions

Thanks for contributing to a

sustainable development in the global context ! ejochem@ethz.ch