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Module 03Policy Instruments for Energy EfficiencyLesson 1Regulatory Instruments for Energy Efficiency

World BankInstitute

Energy Sector Strategies to Support Green Growth

Presentation Script

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Module 3: Lesson 1 – Regulatory Instruments for Energy Efficiency Presentation Script

About this Presentation

This lesson focuses on energy efficiency. We will first identify potential for profitable energy efficiency improvements around the world and the market barriers that require government intervention to overcome them. We then discuss national target setting and some regulatory policy instruments that can help achieve energy efficiency improvements, paying special attention to Building Energy Codes. Finally, we’ll discuss complementary policies. Other types of policy instruments will be addressed in lesson 2.

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Global Energy Savings Potential

Global energy demand will grow at an annual rate of more than 2%. Most of this growth will originate in large developing countries, such as China and India. However, profitable investments in existing technologies can substantially offset this increase in demand, cutting global energy demand growth from 2.2% down to 0.7%. These savings would be equivalent to 64 million barrels of oil per day. Let’s look at how these opportunities spread across sectors of the global economy. In the residential sector, there is profitable and accessible potential to save the equivalent of 15 million barrels of oil per day. Both the commercial sector and the transportation sector offer savings of equivalent to about 6 millions barrels of oil per day. Industrial energy efficiency improvements host potential savings of between 20 and 29 million barrels

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per day. Lastly, in the power generation and refining sectors, there is profitable potential to save the equivalent of 12 million barrels of oil per day.

Why aren’t these opportunities captured?

With such opportunity for cost-‐effective energy savings, a good question is why does so much potential go unrealized? The answer comes down to market failures, behavioral barriers, and government failures.

Government action is required to overcome these barriers to realizing energy efficiency potential. Click on each issue to learn more.

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Setting Energy Efficiency Targets

A first step in policy making can be to set Energy Efficiency Targets. Setting a national energy-‐efficiency target can set a direction for a country’s energy future and be an effective tool for increasing awareness of energy efficiency and energy-‐efficiency policies, for building political and public consensus around the country’s energy future, and for mobilizing stakeholders to participate in policy instruments deployed to achieve the target.

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Targets can be national, sub-‐national or sectoral, and they can be expressed in many ways. For example, the most prevalent targets specify a rate of energy savings for a period of time. Alternatively, a target can specify a volume of energy savings. Lastly, targets are sometimes expressed as a rate of decrease in energy intensity.

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How should policymakers determine appropriate targets? And what steps can be taken to facilitate progress toward targets? The first step to determining energy-‐efficiency targets is establishing a target-‐setting process underpinned by analysis and reliant upon consultation with experts, stakeholders, and implementing agencies. A good target also will balance stringency with achievability, be expressed in units that lend themselves to simple monitoring using existing data-‐collection infrastructure, and avoid overlapping or competing targets. For example, emissions targets should complement EE targets. Before targets are announced, it’s important to ensure that enabling frameworks are in place to support and monitor progress. It’s also important to adequately resource implementing agencies and government programs

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related to the targets. Finally, targets should be clearly documented and communicated.

Policy Instruments Overview

Once energy efficiency targets have been set, governments have several policy options to facilitate cost-‐effective energy-‐efficiency improvements. Policy instruments can be categorized as information and communication measures, regulatory instruments, and market-‐based instruments. The remainder of this lesson focuses on regulatory instruments and lesson 2 covers the other instruments.

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Regulatory Instruments

These are the four topics we will address in our discussion of regulatory instruments. Click each instrument to learn more

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Minimum Energy Performance Standards (MEPS)

Minimum Energy Performance Standards, or “MEPS,” are intended to force the worst-‐performing products and technologies off of the market. MEPS exist for appliances, lighting, vehicles, building materials, motors, boilers, and other industrial and power equipment. MEPS can be considered the logical next step after labeling. Labeling provides information, while MEPS force inefficient products and technology out of the market. MEPS can be implemented as a strict standard, where no products failing the MEPS are allowed onto the market; or, alternatively, MEPS can be implemented flexibly, such that manufacturers are required to keep their sales-‐weighted average efficiency above a certain level. As inefficient technologies are phased out, MEPS will cease to spur improvements unless they are ratcheted up over time. Hover over the link to read about Ghana’s experience with MEPS.

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Regulations for Designated Consumers

Regulations for designated consumers are a way for government to mandate that large energy consumers take steps to understand, monitor, and plan their energy use. Consumers may be designated by a consumption threshold or by sector. Regulations for designated consumers are process-‐oriented and readily complement other energy-‐efficiency programs that provide incentives to carry-‐out energy-‐efficient investment. Examples of common mandated practices for designated consumers include energy audits, energy consumption reporting, the appointment of an energy manager, and energy savings plans. These four regulations may be implemented as stand-‐alone approaches or as part of a comprehensive package. Take a moment to click on each option for more information.

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Regulations for the Public Sector

In many developing countries, the private sector often has much greater financial capacity than the public sector to take the lead in energy efficiency initiatives. However, through public-‐sector regulations, governments can establish credibility and bring awareness to energy efficiency, as well as build governmental capacity to understand and manage energy-‐efficiency programs. There are a range of viable, short-‐term, cost-‐effective regulations that can save government resources and deliver co-‐benefits.

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For example, Uruguay has defined a mandatory public-‐sector phase out of incandescent lamps, while Mexico, Turkey, and the USA are requiring mandatory energy planning and reporting.

Building Energy Codes

Building energy codes are legal requirements regulating the energy performance of building designs and their compliance during construction. The enforcement of energy codes is an effective policy instrument to reduce energy waste over buildings’ life cycles. Most industrialized countries adopted building energy codes during the oil-‐price shocks of the 1970s and have since achieved broad-‐based enforcement. Since their inception, codes in Western Europe and the USA have facilitated a 60% improvement in building energy efficiency.

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Many developing countries began developing codes in the 1990s, although institutional and economic barriers have hindered enforcement and compliance. Given the building sector’s tremendous size and potential for efficiency gains, building energy codes are a critically important policy instrument for energy efficiency.


Buildings consume more energy than any other sector of the global economy. Globally, buildings constitute 34% of global final energy consumption, which is more than industry and transport. The IEA projects global building energy consumption to grow 30% by 2030. Most of that growth will originate in developing countries, where the urban building stock is expected to more than double by 2030. In India, 75% of buildings expected to exist in 2030 have yet to be built.

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However, opportunities available with existing technologies could deliver 30% energy savings in the building sector by 2030. The chart breaks down life-‐cycle energy use in residential buildings. The overwhelming share of energy use comes from powering the building’s systems for its lifetime. To avoid locking-‐in these costs for the 30-‐ or 40-‐year lifetime of new buildings, it is especially critical for developing countries to take advantage of cost-‐effective, energy-‐efficiency opportunities in new-‐building construction.


Building energy codes are intended to establish progressive standards for building practices, to encourage market innovation, and to achieve compliance through the supply of effective enforcement.

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In this section, you will review three aspects of building energy codes: technical requirements, issues concerning compliance and enforcement, and complementary policies which may serve as compliance tools. Click each aspect to learn more.

Technical Requirements

Maximizing the technical requirements of building energy codes typically include these issues. Click each option to learn more.

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Building energy codes target energy-‐efficiency improvements that reduce energy consumption in buildings. First, improvement can be made by reducing the energy demand, or the load, which includes reducing space heating, space cooling, and lighting loads. Second, using efficient systems to serve the load can save energy, including enhancing the energy-‐efficiency of space heating, space cooling, ventilation, water heating, appliances, and lighting.

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And lastly, substituting conventional fuels for renewable energy to provide building energy services can provide energy efficiency improvements.


The building envelope is the chief subject of most energy codes. It includes all the components of a building which enclose heated or cooled spaces. Many codes specify a maximum level of heat transparency allowed for the building envelope. Heating, ventilation, and air conditioning, or HVAC systems, govern a building’s indoor climate. Energy codes typically regulate the overall efficiency or component efficiencies of HVAC systems, although the demand for heating and cooling depends on the efficiency of the envelope.

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Codes sometimes also require a level of efficiency from other installed equipment, such as lighting systems, and/or require the incorporation of passive or active renewable energy systems.


Building energy codes can either be prescriptive or performance-‐based. Codes following a prescriptive approach regulate specific building components. These codes mandate minimum thermal performance for each component of the building envelope and mandate minimum energy efficiency requirements for HVAC systems, service water heaters, and lighting systems. The alternative is a performance-‐based approach which regulates buildings’ overall annual energy consumption and specifies the appropriate

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methodologies for calculating the energy consumption of component systems. A typical hybrid approach would include some performance requirements for specific building systems in the context of a prescriptive code.


Prescriptive approaches offer simplicity, and performance approaches offer compliance flexibility. For countries with relatively young building energy codes, a broadly prescriptive code may be more appropriate because prescriptive codes are relatively simple, clear, and make monitoring and enforcement fairly straightforward.

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For designers and builders, prescriptive requirements are simpler to understand and execute. For product manufacturers, clear requirements for specific components, such as windows, and equipment, such as furnaces, give clarity to product development. And for the enforcement system, checking prescriptive requirements establishes a compliance process. Over time, as public and private-‐sector capacity increases, the trade-‐off between simplicity and flexibility favors a transition to more performance-‐based compliance. Hover over the Example from Chile to learn more.


The process of developing a building energy code to be adopted as either voluntary or mandatory requires five steps.

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First, identifying and comparing relevant examples from other locations. Second, collecting information about the building stock to determine typical base-‐case buildings that can be used as benchmarks for developing and evaluating code requirements. Third, using detailed analyses, including computer simulations, to understand the energy savings and cost-‐effectiveness of proposed code requirements on base-‐case buildings. Fourth, code drafting with technical detail, explicit standards, compliance forms, and compliance options. And fifth, conducting public reviews with stakeholders. This development process for building energy codes may be a good opportunity to build domestic capacity through international partnerships.


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Here are four best-‐practice considerations with respect to the technical requirements of building energy codes. First, regular updates are important to ensure the code remains relevant and progressive. Second, codes encompassing the whole building, as opposed to only certain systems, are best able to capture efficiency opportunities. Hover over the Example from Singapore to learn more. Third, and similarly, coverage of both residential and commercial buildings is ideal, although regulations should be specifically tailored for sub-‐sets of each. And fourth, codes are most efficient if tailored to climatic zones. Hover over the Table link for a chart of building design features by climatic zone.


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Compliance & Enforcement

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Building energy codes achieve little if builders neglect, fail, or decide not to comply. Governments have several choices to make that can help prompt broad-‐based compliance, starting with the legal nature of the energy code. Click each option to learn more.


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Questions of capacity should govern the decision of whether to adopt mandatory or voluntary building energy codes. Mandatory codes are preferable if the capacity exists to enforce existing general buildings codes and the capacity also exists within the building supply chain to adapt to energy code requirements. Mandatory codes offer the advantage of a very clear path toward transformative energy-‐efficiency improvements in the building construction sector. However, many countries lack the institutional and supply-‐chain capacity to move immediately to mandatory building energy codes. Developing and implementing voluntary building energy codes helps build enforcement infrastructure and signal to the construction sector to prepare for mandatory energy codes in the future. Hover over the examples from India and Korea to learn more.

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Code implementation, like development, is an elaborate process with many key components and players. Several key components to successful implementation of building energy codes are shown here.


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Here are four best-‐practice considerations with respect to compliance and enforcement. First, mandatory compliance is the only approach available to realistically set a baseline for energy efficiency in new construction. Second, enforcement procedures are most effective if extended from design reviews, which facilitate low-‐cost corrections, to site inspections that check for quality of installation and follow-‐through on compliant designs. Thorough enforcement requires training for code inspectors and tools for demonstrating compliance. Hover over the Example from Singapore to learn more. Third, enforcement procedures should be backed up with real penalties for non-‐compliance. Fourth, compliance must be tracked to isolate problems and make improvements to the code and enforcement practices. Hover over the Example from China to learn more.

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Complementary Policies

Building energy codes do not affect demand for energy-‐efficient buildings or encourage the supply chain to do more than is necessary to comply with minimum requirements. Complementary instruments serve three purposes – all of which offer direct or indirect financial benefit. First, they can encourage commercial deployment and market recognition of energy-‐efficiency innovations that surpass building-‐code requirements. Second, they can help overcome the resistance to change in nascent markets due to lack of experience with new designs, technologies, and materials. Third, complementary policies may mitigate the financial risks associated with the higher construction costs incurred to comply with the building energy code. Click each option to learn more.

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Energy-‐efficiency certification and rating systems for buildings and building components are very useful informational instruments to assist with compliance. Certifications or ratings can be tied directly to a compliance pathway by, for example, requiring that buildings or components achieve a minimal energy rating. This arrangement makes the compliance tasks of designers, builders, and inspectors very straightforward. Certifications and rating systems also provide information to the public and offer recognition and marketing benefits for achieving efficiency beyond what’s required in the building energy code.


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Economic incentives, such as grants and subsidized loans, and fiscal incentives, such as tax benefits, are both compliance tools. They are especially effective at encouraging efficiency achievements above the code minimum and at encouraging the adoption and demonstration of voluntary building energy codes.


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Another option for enticing compliance with voluntary codes, or for encouraging firms to reach for efficiency improvements beyond the code, is to offer special treatment under regulation, such as expedited permits or exemptions from zoning regulations.

Status of Building Energy Codes in Low-‐ or Middle-‐Income Countries

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This table shows the regional status of building energy codes in low and middle income countries around the world. There is substantial activity in the development of building energy codes, but still a notable lack of implementation and/or compliance.

Challenges for Developing Countries

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Building energy codes are more likely to succeed in countries and localities that meet certain conditions. First, government oversight of the construction sector should be well established for enforcement of general building codes for safety and quality. Second, the building supply chain should have established technical and engineering capacity. Third, the market for commercially produced buildings should be well developed. Fourth, there should be political will to achieve energy-‐efficiency improvements. Creating those conditions is the challenge for developing countries. Hover over each short example from China and Mexico to learn more.

Key Messages

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This lesson should have conveyed these six takeaway messages: First, energy-‐efficiency is a tremendous opportunity, especially in the buildings sector and in low-‐income and emerging economies. Cost savings can go towards productive spending and investment. Second, government policies are needed to overcome failures and barriers. Third, among such government policies, regulatory instruments are important, and building energy codes are the most important. Fourth, many of the complex decisions required to develop and implement regulations are informed by the current oversight and enforcement capacity of the government. Fifth, complementary policies can entice compliance.

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Sixth, while developing countries face unique challenges developing and mainstreaming regulation, it is critical that progress is made in building energy codes to avoid locking-‐in inefficient systems and energy costs for the entire lifecycle of new buildings.

Key References

Visit these links for more information on regulatory instruments for promoting energy efficiency.

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Key References

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