The Macroeconomic Benefits of Energy Efficiency
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The Macroeconomic Benefits of Energy Efficiency The case for public action Ingrid Holmes and Rohan Mohanty April 2012
Transcript of The Macroeconomic Benefits of Energy Efficiency
The Macroeconomic Benefits of Energy Efficiency The case for public action
Ingrid Holmes and Rohan Mohanty
April 2012
About E3G E3G is an independent, non‐profit European organisation operating in the public interest
to accelerate the global transition to sustainable development.
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Contents
Executive summary ....................................................................................................................... 4
1. Introduction............................................................................................................................... 7
2. The energy efficiency gap........................................................................................................ 10
3. The case for Government intervention: why the MAC curve is not the whole story …......... 12
3a. The below market cost of energy and cost of carbon........................................................... 13
3b. Discount rates ....................................................................................................................... 14
4. The role of the EU and Member State governments in scaling energy efficiency investment19
5. The macroeconomic case........................................................................................................ 21
5a. Energy security and economic resilience .............................................................................. 22
5b. Employment creation............................................................................................................ 24
5c. Improvements in living standards ......................................................................................... 31
6. Conclusions.............................................................................................................................. 34
Acknowledgements
Sincere thanks to Alex Bowen (Grantham Research Institute on Climate Change and the
Environment, London School of Economics and Political Science), Walt Patterson (Chatham
House), Prashant Vaze (Consumer Focus) and Dimitri Zenghelis (Cisco Climate Change
Practice) who helped with the development of this analysis.
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Executive summary
The current focus of much of Europe’s response to the Euro crisis is austerity combined
with structural reforms. However important such structural reforms may be in the longer
term, alone they will not drive economic recovery in the short term. European Union (EU)
output is still ~2 percent lower than pre‐crisis levels and even the German economy grew
by only 0.4 percent between Q1 2008 and Q4 2011.
By withdrawing demand from economies at a time of pronounced private sector weakness,
governments risk lock‐in to a deficit cycle. Supporting demand requires more expansionary
macroeconomic policies. Without them the European economy faces economic stagnation.
A second round of stimulus packages will be vital to supporting demand. But such
packages should focus on the most beneficial investments in terms of providing resilience
against systemic macroeconomic risks and provide a foundation for future productivity and
growth.
An energy efficiency‐focused stimulus is a strong candidate on both counts. A study
looking at US data estimated that a 1 per cent improvement in total useful work in the
economy − a proxy for energy efficiency − results in a 0.18 percent increase in long‐run
GDP. This is equivalent to US$23.8 billion − more than Slovenia’s en re consolidated
gross debt in 2011. Quantitative analysis undertaken by Cambridge Econometrics found
that the UK’s energy efficiency policies between 2000 and 2010 increased real annual GDP
by 0.1 percent − equivalent to 150 percent of Estonia’s consolidated gross debt in 2011, or
£1.29 billion.
Increased energy efficiency investment can act as a key ‘hedge’ against fossil fuel price
spikes, delivering increased energy security and economic resilience. Further compelling
macroeconomic arguments for focusing on energy efficiency include the creation of
employment opportunities to utilise spare capacity in the labour market, reduce several
direct costs on the European economy and enhance living standards. Moreover there is a
clear need for governments to help kick‐start scaled energy efficiency markets. Although
investors have woken up to the investment potential, tangible project‐based large‐scale
investment opportunities are limited. Of the $260 billion spent globally on clean energy in
2011, less than 7 percent ($19.2 billion) went to energy efficiency. In addition, investment
was focused on corporate research and development (R&D), venture capital and private
equity, indicating that investment in retrofit projects in the real economy were limited.
The abundance of the investment potential (estimated by DG Clima to be €4.25 trillion
across the economy between 2011 and 2050) and the supposed modest costs of energy
efficiency investments compared to power generation investments indicate that there are
very significant barriers to realising the potential of energy efficiency. The barriers are
well‐documented and include access to capital, split incentives, lack of information and so
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on. Significantly energy efficiency improvements are often a ‘hidden’ opportunity −
particularly so in the case of retrofitted investments.
Realising the potential will require enhanced efforts both from Europe and from Member
State governments to create the incentive frameworks to overcome market inertia, secure
demand and facilitate private capital provision. There is currently a European debate
about whether a top‐down binding target‐led approach or bottom up binding measures‐
based approach is preferable. A top‐down binding target‐led approach is preferable for
securing investment for two reasons. First, binding targets have a track record of being
more effective at creating the political will needed to drive environmental policy
outcomes. Second, a focus at the European level on outcomes rather than prescription of
method will enable greater freedom for Member States governments to select appropriate
policy instruments. This is critical because such instruments must be suitable for local
conditions if they are to be effective at incentivising local investment.
At EU level the focus should be on securing the ambition of the European market;
removing conflicting energy price signals; requiring Member States to scale up their
institutional response; and kick‐starting Member State markets with EU public financing.
Specific measures include:
Setting clear long‐term binding targets for energy efficiency improvements.
Requiring the phase out of artificially low energy prices that weaken the economic
case for energy efficiency and encourage wasteful energy use.
Progressive tightening of EU emissions trading scheme (EUETS) caps to support the
carbon price.
Continuing to drive up minimum standards in new assets through existing initiatives
including the Ecodesign Directive; Energy Performance in Buildings Directive; CO2 in
Cars Regulation; and supporting measures such as the Labelling Directive.
Requiring the creation of institutional capacity, where needed, to coordinate, facilitate
and verify the deployment of energy efficiency measures.
Earmarking an increased proportion of EU Budget funds to kick‐start long‐term
Member State‐based energy efficiency programmes. Adoption of the European
Commission’s proposal for a climate‐themed concentration within the European
Regional Development Fund amounting to 25 percent for developed and transition
regions and 15 percent for less developed regions would be a substantive step toward
this.
Scaling up the role of the European Investment Bank in providing public financing for
energy efficiency projects.
At Member State level the focus should be on the design of long‐term regulatory
frameworks focused where possible on outcomes rather prescription, again, to enable
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innovation. Additional institutional capacity will undoubtedly be needed − and should be
focused on addressing the specific needs of each sector. Measures include:
Undertaking reform of electricity market arrangements to ensure that the best value
investments are made across the electricity system. This will require governments to
put in place market arrangements that ensure demand side resources (including
demand management, demand response and distributed generation) are empowered
to compete as low cost alternatives to supply side investment.
o This could be unpinned by innovative instruments such as demand‐side feed‐in
tariffs that create a more certain revenue stream.
Increasing demand among industrial and retail customers through using time‐limited
incentives and regulation to change behavioural attitudes to energy efficiency.
Putting in place measures that create greater certainty and confidence in energy
savings and a robust form of cashflow:
o At an investment level through mandating public financing institutions to back
national energy efficiency programmes − thus building a visible track record of
successful investments in energy efficiency.
o At an informational level accelerating smart meter and smart grid roll out and
running national energy saving education campaigns.
Creating the institutional capacity, where needed, to coordinate, facilitate and verify
deployment of energy efficiency measures.
Energy efficient upgrade of the EU’s infrastructure − kick‐started by targeted fiscal stimulus
and set up to complement wider structural reforms − could provide a convincing routemap to
European recovery.
However it is only likely to happen if the EU and Member State governments start to regard
identification and delivery of energy efficient projects as being on a par with delivery of other
major infrastructure projects − and provide fair and equivalent treatment to supply and
demand side solutions.
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1. Introduction
In the struggle to address the ongoing eurozone crisis, Europe’s narrative is shifting from
austerity to a focus on growth. However, EU output is still ~2 percent lower than pre‐crisis
levels and even the German economy grew by only 0.4 percent between Q1 2008 and Q4
2011. The Spanish and UK economies are still 4 percent lower than their pre‐crisis level,
the Italian economy nearly 5 percent and Greek and Irish economies somewhere between
10 and 15 percent1. The OECD and International Monetary Fund both expect the EU
economy to stagnate at best in 20122.
The reason is weakness in household consumption and business investment − the la er is
down 14 percent in the eurozone compared with 4 years ago, with a similar picture across
the EU as a whole. This lack of investment is most obvious in counties such as Greece
Ireland, Spain and Portugal. But investment has also been hit in Italy and the UK − and
even the German economy is yet to return to pre‐crisis levels, with January 2012 data
show new manufacturing orders have fallen for 5 out of the last 7 months3. Household
spending fell less steeply than investment but has not yet fully recovered.
In the early stages of the financial crisis, fiscal policy across the EU was centred on stimulus
measures. The major economies accepted the need stimulate demand and put in place
short‐term fiscal stimulus packages focused on creating financial stability, many of which
included a low carbon element4. However, the stimulus necessitated further borrowing,
expanding public deficits − and policies since have become focused on austerity measures.
But the subsequent cutbacks in public spending are reinforcing the downturn rather than
countering it − leading to further contrac ons and deepening the crisis. The pursuit of
unprecedented austerity across much of Europe has hit household and business
confidence hard, depressing economies and contributing to a rise in public debt. Weak
investment has further eroded growth potential and hence the sustainability of public
1 S. Tilford (2012) Needed: A growth strategy for Europe. Centre for European Reform 2 See http://www.oecd.org/document/47/0,3746,en_21571361_44315115_49095919_1_1_1_1,00.html and http://www.imf.org/external/pubs/ft/survey/so/2012/NEW012812A.htm 3 http://online.wsj.com/article/SB10001424052970204781804577266940858630900.html?mod=goo glenews_wsj 4 While the non‐European countries South Korea and China dedicated 80 percent and 37 percent, respectively, of stimulus spending to low carbon investments only France and Germany allocated over 10 per cent of their stimulus to low carbon investment. Europe as a whole invested just 5 percent of stimulus packages in its low carbon recovery. See N. Mabey (2009) Delivering a Sustainable Low Carbon Recovery. E3G. For the detail of EU packages see Saha and Von Weiszacker, Estimating the Size of the European Packages: an update; Breugal, Brussels, February 2009; EREF 2009, Economic Crisis, Rescue packages in the EU 27 and Renewable Energy, European Renewable Energy Federation, Brussels, February 2009
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finances. By withdrawing demand from economies at a time of pronounced private sector
weakness, governments risk lock‐in to a deficit cycle5.
As noted by the Centre for European Reform, to the extent that the EU has a growth
strategy, it relies heavily on the adoption of structural reforms in the crisis‐hit eurozone
economies. While they may be important over the long term, such reforms alone will not
drive economic recovery in the short term: demand is also crucial. Without a clear focus on
creating demand, the European economy faces economic stagnation, which threatens to
exacerbate fiscal pressures and discredit economic reforms. As the continuation of this
pure austerity stance becomes increasingly regarded as self‐defeating, discussion is now
turning to how to create growth through more balanced package of policies that may also
include a second stimulus package. In January 2012 the German Chancellor expressed
support for the use of unspent European funds for a fiscal stimulus aimed at small and
medium‐size enterprises (SMEs), entrepreneurs and R&D in struggling Member States6. In
March 2012 the UK’s Institute for Fiscal Studies stated “the case for a short‐term fiscal
stimulus package [for the UK] to boost the economy is stronger now than it was a year
ago”7. Also in March 2012 the Irish Congress of Trades Unions called for a fiscal stimulus
warning that EU austerity policy will push Ireland into a “decade of despondency”8.
A second round of stimulus packages is vital. But they should focus on the most beneficial
investments in terms of providing resilience against systemic macroeconomic risks and
provide a foundation for future productivity and growth9. An energy efficiency‐focused
stimulus is a strong candidate on both counts. Increased energy efficiency investment can
act as a key ‘hedge’ against fossil fuel price spikes, delivering increased energy security and
economic resilience. Further compelling macroeconomic arguments for focusing on energy
efficiency include the creation of employment to utilise spare capacity in the labour
market, the reduction of several direct costs on the European economy and enhanced
living standards.
Analysis of EU data by Ciscar et al. showed that every $10 rise in the price of oil per barrel,
leads to a 0.94 percent decline in GDP for those importing oil, and a $30 rise results in a
2.56 percent decline in GDP10. A separate study looking at US data estimated that a 1 per
cent improvement in total useful work in the economy − which could in turn be achieved
5 As Martin Wolf sets out (FT 6 March 2012) Spain’s fiscal difficulties are a consequence of the crisis, not a cause. The country experienced huge rises in private debt after 1990, particularly among non‐financial corporations. The overhang of residential construction also rules out substantial household borrowing. Given this, a sharp reduction in government borrowing is most unlikely to be offset by more private borrowing and spending. The result is more likely to be a far deeper recession, along with little progress in reducing actual fiscal deficits. At worst, a vicious downward spiral may occur. See http://www.ft.com/cms/s/0/f54332d2‐66dc‐11e1‐9e53‐00144feabdc0.html#axzz1oY6yqPG7 6 See http://www.economist.com/blogs/freeexchange/2012/01/euro‐crisis‐3 7 See http://www.ifs.org.uk/budgets/gb2012/gb2012.pdf 8 See http://www.irishtimes.com/newspaper/world/2012/0321/1224313642430.html 9 A. Bowen & N. Stern (2010) Environmental policy and the economic downturn. Oxford Review of Economic Policy 26, 137−163 10 J. C. Ciscar et al. (2004) Vulnerability of the EU Economy to Oil Shocks: a General Equilibrium Analysis with the GEM‐E3 Model. See http://www.e3mlab.ntua.gr/papers/Ciscar.pdf
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by increasing energy efficiency − results in a 0.18 percent increase in long‐run GDP11. This
is equivalent to US$23.8 billion − more than Slovenia’s en re consolidated gross debt in
201112. Finally, quantitative analysis undertaken by Cambridge Econometrics to determine
the impact of energy efficiency on GDP in the UK suggests that the UK’s energy efficiency
policies between 2000 and 2010 increased real annual GDP (i.e. annual GDP that is
adjusted for inflation) by 0.1 percent13 − equivalent to 150 percent of Estonia’s
consolidated gross debt in 2011, or £1.29 billion. They estimate that 40 percent of the
additional GDP was generated through investment while 60 percent resulted from the
rebound effect (discussed later).
To have sustained positive impacts on growth, however, any stimulus packages should be
targeted at deploying public finance instruments within regulatory and policy frameworks
that: (i) address the multiple market barriers faced by potential investors in energy
efficiency; and (ii) maximise leverage of private capital. Additionally, they should be
combined with maintaining a public investment focus on critical areas of R&D and
infrastructure that pay high dividends in terms of medium‐term productivity, growth and
competitiveness.
11 R. U. Ayres et al. (2009) Increase Supplies, Increase Efficiency: Evidence of Causality Between the Quantity and quality of Energy Consumption and Economic Growth. INSEAD Faculty Research Working Paper No. 2009/22/EPS/ISIC. See www.insead.edu/facultyresearch/research/doc.cfm?did=41726 This study uses an alternative measure of energy efficiency: ‘useful work’. However the GDP improvements could be achieved through producing more goods and services − which also increases useful work − rather than energy efficiency improvements. 12 Data taken from the Ameco EU database produced by Eurostat. 12http://ec.europa.eu/economy_finance/db_indicators/ameco/zipped_en.htm 13 T. B. Barker & T. Foxon (2008) The Macroeconomic Rebound Effect and the UK Economy, UKERC Research Report, p34. See www.ukerc.ac.uk/support/tiki‐download_file.php?fileId=157
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2. The energy efficiency gap
Addressing the gap between potential and realised energy efficiency investment
represents a key element of successfully risk managing the EU’s transition to a low carbon
economy. It is a core part of enabling the EU to meet its binding 2020 and indicative 2050
emission reduction targets in a cost‐effective and timely fashion. Failure to do this will
mean the gap must be filled instead with higher cost supply side solutions.
One of the difficulties in assessing the energy efficiency gap is that − unlike building power
stations − the opportuni es for efficiency improvements are fragmented and o en hidden.
That said, there is no doubt that energy efficiency represents the largest untapped
opportunity for emissions reduction in the EU and could deliver up to 33 percent emission
reductions across the EU economy by 202014. Buildings alone account for 40 percent of the
EU’s final energy consumption and have been identified by the European Commission as a
substantive opportunity to deliver greenhouse gas (GHG) cuts. Fraunhofer ISI and Ecofys
analysis indicates that up to €65 billion needs to be invested in building retrofits each year
to 2020 to meet the 20 percent energy efficiency target15. Looking beyond 2020, analysis
by DG Clima estimates €4.25 trillion is needed for energy efficiency investment across the
economy between 2011 and 2050 in order to meet an 80 percent EU greenhouse gas
reduction target16. DG Clima’s analysis states €759 billion needs to be invested between
2011 and 2020 − and a steady increase in investment is assumed over the following
decades to peak at €1.38 trillion between 2041 and 2050.
Yet despite the undoubted huge potential, energy efficiency continues to rank at the lower
end of the spectrum of realised sustainable energy investment opportunities. In 2011
‘energy smart technologies’, which include energy efficiency but also smart grid, power
14 A study by Fraunhofer et al estimated that the potential reduction from the EU27 versus existing policies, ranged from 15 percent to 22 percent depending on the level of policy intensity. 33 percent was estimated to be technically possible 15 Fraunhofer ISI and Ecofys (2011) The upfront investments required to double energy savings in the European Union in 2020 16 This DG Clima estimate is based on a scenario in which there is effective (scalable) and widely accepted (diffused) clean technology, fragmented global efforts to address climate change and are high fossil fuel prices. The report identifies that the majority of climate action in residential, services and transport sector of the EU will be in the form of energy efficiency improvements. In light of the lack of specific data on required investments in energy efficiency improvements in the EU and on the basis of the former statement, it is assumed that required investment in energy efficiency is equivalent to the required investment in the residential, services and transport sector of the EU i.e. €4.25 trillion between 2011 and 2050. European Commission (2011) A Roadmap for moving to a competitive low carbon economy in 2050: Impact Assessment, p120−124. See http://eur‐lex.europa.eu/LexUriServ/LexUriServ .do?uri =SEC:2011:0288:FIN:EN:PDF
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storage and advanced transport accounted for only 7 percent ($19.2 billion) of global clean
technology investment17.
The current incremental approach to deploying energy efficiency is not working. Although
commercial investors have woken up to the economic potential for energy efficiency18,
tangible project‐based large‐scale investment opportunities are limited. In addition, the
investment identified by Bloomberg New Energy Finance’s analysis was focused on
corporate research and development (R&D), venture capital and private equity, indicating
that investment in retrofit projects in the real economy were limited. The public sector has
done little better: nearly €8 billion of EU Cohesion Funds set aside for energy efficiency
was unspent as of December 201019.
The abundance of the investment potential and − according to the Marginal Abatement
Cost (MAC) Curve by McKinsey & Co20 − the supposed modest costs of energy efficiency
compared to power generation investments indicates that there are very significant
barriers realising the potential of energy efficiency.
17 BNEF (2012) Solar surge drives record clean energy investment. Investment levels in this sector were down 17% on 2010. See http://bnef.com/PressReleases/view/180 18 Discussion with BNEF analysts 19 See http://www.euractiv.com/en/energy‐efficiency/nearly‐8billion‐eu‐energy‐savings‐fund‐lies‐unclaimed‐news‐500849?utm_source=EurActiv+Newsletter&utm_campaign=5ce8b77d29‐my_google_ analytics_key&utm_medium=email 20 See McKinsey & Co (2007) Reducing US greenhouse gas emissions: How much at what cost?, U.S. Greenhouse Gas Abatement Mapping Initiative Executive Report, p16. See http://www.mckinsey.com/ Client_Service/Sustainability/Latest_thinking/~/media/McKinsey/dotcom/client_service/Sustainability/PDFs/Reducing%20US%20Greenhouse%20Gas%20Emissions/US_ghg_final_report.ashx
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3. The case for Government intervention: why the MAC curve is not the whole story …
The MAC curve mainstreamed by McKinsey & Company in 200721 has been a key tool for
making a strong case for the cost‐effectiveness of achieving GHG reductions via energy
efficiency. It provides a snapshot illustration of the cost‐effectiveness of different
opportunities to reduce GHG emissions − and maps out the opportunity cost22 of each
emission reduction opportunity by treating each as mutually exclusive. In this way the
curve ranks each reduction opportunity according to its cost − demonstra ng clearly for
the first time the cost‐effectiveness of energy efficiency investments compared to supply
side solutions such as carbon capture and storage or renewables23.
The analysis also indicates that energy efficiency investments can be realised at net
negative cost i.e. saving more over their lifetime than they cost to deliver. This has been
interpreted by many policy makers as meaning that energy efficiency will ‘take care of
itself’ without the need for further significant interventions to drive this market.
As noted, data from the market tell a very different story however, with energy efficiency
making up less than 7 percent of global clean technology investment in 201124. This
indicates other significant constraints, not set out in the MAC Curve analysis, are at play.
These factor significantly impact on the uptake rate and include:
The below market cost of energy (and cost of carbon).
The discount rate applied by investors in retrofits, which in turn is informed by:
o The cost of capital;
21 See McKinsey & Co (2007) Reducing US greenhouse gas emissions: How much at what cost?, U.S. Greenhouse Gas Abatement Mapping Initiative Executive Report, p16. See http://www.mckinsey.com/ Client_Service/Sustainability/Latest_thinking/~/media/McKinsey/dotcom/client_service/Sustainability/PDFs/Reducing%20US%20Greenhouse%20Gas%20Emissions/US_ghg_final_report.ashx for an explanation of how to interpret the MAC curve 22 The opportunity cost is the value (monetary or non‐monetary) of the benefits that are foregone when opting against the next best alternative when making an economic decision. See http://www.investopedia.com/terms/o/opportunitycost.asp 23 We understand that within the original analysis interactions’− i.e. the impac ng of compe ng emission reduction opportunities such as microgeneration of heat which would partly displace the need for centralised generation from as nuclear, coal power with carbon capture and storage or onshore wind power, were corrected for in the final rankings 24 BNEF (2012) Solar surge drives record clean energy investment. See http://bnef.com/PressReleases/view/180
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o Transaction costs; and
o Behavioural attitudes.
We briefly discuss each of these in turn because understanding their role in creating barriers to
investment is important if policy frameworks that drive energy efficiency investment at scale
are to be created.
3a. The below market cost of energy and cost of carbon
It has been well documented that some EU countries subsidise fossil fuel energy
production and distribution25, although some efforts are being made across the EU to
phase them out. In March 2012 EU Climate Commissioner Connie Hedegaard joined a long
line of individuals and institutions calling for the phase out of such subsidies ahead of the
June 2012 Rio+20 Summit26. But in addition, in several Member States − for example Spain
and Estonia − consumer energy tariffs are set below the cost of production27. Artificially
low energy prices are a key driver for inaction on energy efficiency since they inherently
weaken the economic case for investment. They also undermine the prices signals that the
carbon price was meant to deliver to the market.
When the EUETS was introduced in 2005 it placed a price on carbon by setting a limit on
the amount that can be emitted within the traded sectors28. It was hoped that as well as
limiting future fossil fuel investments the carbon price would drive up electricity unit costs
and so incentivise investment in least‐cost energy efficiency reductions29. However, to date
it has not impacted sufficiently on energy prices to drive the scale of energy efficiency
investments that might have been expected in a rational market. In part this is because
carbon prices, and so fossil fuel‐generated energy prices, have been much lower than
expected. In turn this is due to the initial over‐allocation of permits but also the ongoing
economic recession, which has lowered output30. It is expected that more investment in
energy efficiency will occur as carbon prices rise in response to a tightened cap31.
25 OECD (2011) Inventory of Estimated Budgetary Support and Tax Expenditures for Fossil Fuels 26 See http://www.rtcc.org/energy/hedegaard‐phase‐out‐fossil‐fuel‐subsidies‐at‐rio20/ 27 I. Holmes & S. Davies (2011) European Perspectives on the Challenges of Financing Low Carbon Investment: Spain. 27 I. Holmes & S. Davies (2011) European Perspectives on the Challenges of Financing Low Carbon Investment: Estonia. See http://www.e3g.org/programmes/systems‐articles/european‐perspectives‐on‐the‐challenges‐of‐financing‐low‐carbon‐investment/ 28 Traded sectors include electricity production, industry including cement, aluminium and paper production. Note that although domestic electricity is covered by the EUETS, domestic gas is not currently. See http://ec.europa.eu/clima/policies/ets/index_en.htm 29 T. Harford (2007) The Undercover Economist. Little Brown & Company 30 As of 2 April 2012 the OTC price for an EUA was €7.03 and sCER €3.77. Source: Point Carbon 31 It is worth noting rising carbon prices may also incentivise hoarding of emissions permits in the short‐term to make more profit in the future. This would delay the uptake of least‐cost reduction
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The EU is currently discussing setting aside a proportion of permits from the EUETS
during Phase 3 (2013−2020) as a way to drive up carbon prices, which will support energy
efficiency investment and pave the way for a political commitment to delivering 30
percent emission reductions in the EU by 2020.
In addition, European governments will need to act to remove inappropriate energy
pricing signals through removing subsidies. However it should be done within the
context to enabling an energy efficiency investment to reduce the absolute units of
energy consumed, so limiting overall energy bill increases.
3b. Discount rates
The MAC curve demonstrates the cost‐effectiveness of emission reduction technologies for
those investors looking to cut their carbon emissions. For energy efficiency projects,
revenues are derived from savings on future energy costs (issues around this are discussed
in more detail later). When assessing the potential value of these savings investors
traditionally use a measure called the ‘net present value’, which gives a sense of the value
of these future streams of revenue in ‘today’s money’. The net present value is based upon
the principle that ‘today’s money’ is worth more than money in the future. It is a function
of the investors’ expected rate of return and rates of inflation, known as the ‘discount
rate’32. If the net present value is positive it means that there are financial gains
associated with an investment over its lifetime, making an investment more likely to
happen. Discount rates vary depending on who the potential investor is. They also vary
according to a number of behavioural factors; this is discussed later.
In general, the higher the discount rate, the lower the net present value of the investment,
and so the lower the likelihood of that investment going ahead. As shown by the discount
rates set out in Table 1, the rates vary with investor and with asset.
A consumer will tend to apply a much higher discount rate than an industrial company
when thinking about investing in energy efficiency. This means the returns (or payback)
required from the investment to ensure it has a positive net present value also tend be
much higher for a consumer compared to an industrial company.
technologies. Conversely, during unfavourable economic climates, businesses whose emissions are regulated under the ETS may face cash flow problems that prevent them from having the luxury of hoarding emissions permits. This would theoretically speed up the uptake of reduction technologies. 32 http://www.investopedia.com/terms/d/discountrate.asp#axzz1i1rCKuEW. Also see the NHS (2010) Save Money by Saving Carbon: Decision Making in the NHS using Marginal Abatement Cost Curves, NHS Sustainable Development Unit Publication, p12−13. See http://www.sdu.nhs.uk/documents/ publications/Savemoney1.1.pdf for a good explanation and example of the net present value of an investment
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Table 1: Discount rates used in the European PRIMES model
Discount rate
Public transport energy investment
8%
Trucks and inland navigation 12%
Industry 12%
Services and agriculture 12%
Households 17.5%
Private passenger transport 17.5%
In MAC curve‐based studies, a variety of discount rates have been used to calculate the
net present value of investments in various emission reduction technologies. In their
Roadmap 2050 analysis ECF used discount rates of 4 to 8 percent33, whereas Climate Works
used a discount rate of 8 to 14 percent34. This indicates that, particularly when considering
investment by homeowners, the discount rates applied in such MAC Curve analyses are
probably too low, and therefore overestimate the attractiveness of such investments
currently.
3ai. Cost of capital Discount rates, as stated above, are a function of cost of capital. For consumers this will
tend to mean simply the cost of borrowing bank debt. For companies, a measure called the
weighted average cost of capital (WACC) − debt and equity. Debt is generally cheaper than
equity and is calculated as the cost of bank borrowing (less any tax relief on debt). Equity
is more complicated to calculate but, as an example, one way to do this for a public
company is as a function of the performance of that company in comparison to the yield of
a risk‐free government bond and average market yield (for an energy utility this might be
around 8 percent currently)35. WACC represents the minimum return a company must
make before an investment will go ahead.
Because many energy efficiency retrofit investments require quite high upfront capital
investments36, investors will tend to prefer to borrow − i.e. use debt capital − to finance
them. It is well documented that these capital constraints are a strong non‐price‐related
33 ECF (2010) Roadmap 2050 uses a discount rate of 4%−8% except for industry, for which a 30% discount rate is used in the low policy intensity scenario 34 ClimateWorks (2011) Low Carbon Growth Plan for Australia: Impact of the carbon price package. See http://www.climateworksaustralia.com/LCGP_Impact_of_the_carbon_price_package_Aug_2011_revised_edition.pdf 35 This is the Capital Asset Pricing Model used for publicly listed companies. For estimates of current cost of capital see Eurelectric (April 2012) The Financial Situation and Investment Climate of the Electricity Industry – Economic and Financial Update. See www.eurelectric.org/Download/Download.aspx?DocumentID=29659 36 P. Bertoldi & S. Rezessy (2010) Financing Energy Efficiency: Forging the link between financing and project implementation, Joint Research Centre of the European Commission Report, p2‐3. See http://ec.europa.eu/energy/efficiency/doc/financing_energy_efficiency.pdf
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barrier to the uptake of a wide range of reduction technologies37. In order to be
comfortable offering financing, providers such as banks need to have a reasonable degree
of confidence that the expected cost‐savings will be delivered − and many are unfamiliar
with energy saving as a revenue stream against which loans can be secured. In addition,
with the introduction of Basel III regulation on banks, many are deleveraging and so are
averse to providing the long term debt required to finance many of these loans. Thus the
generally unfavourable economic climate combined with uncertainty of energy savings will
tend to increase the cost of capital. In turn this pushes up the discount rate, again
reducing the attractiveness and uptake of such investments38. The higher cost of
borrowing, the higher the discount rate, which reduces the net present value of
investment, and will tend to slow down the rate of uptake of energy efficiency
improvements technologies39.
In the early stages of building a scaled market for energy efficiency investment, subsidies
sourced from both European and Member State Budgets and targeted to address very
specific market failures, according to sector, will be required in combination with
European Investment Bank and Member State public banks to help lower the cost of
capital for early project investors.
3bii. Transaction costs Transaction costs are the costs that arise from undertaking an investment in energy
efficiency. In textbook economic terms they include the costs of searching, bargaining,
negotiating, monitoring and enforcing40. For an industrial company seeking to make
energy efficiency improvements these costs (manifest as direct monetary or indirect time
costs) will include the costs of identifying and selecting an energy auditor; undertaking the
audit itself; researching and selecting a technology provider; sourcing finance; operational
interruption and so on.
Transaction costs, if they can be predicted, will be reflected as higher capital requirements
overall or, if they cannot be accurately be predicted, reflected in the application of a
37 ClimateWorks (2011) Low Carbon Growth Plan for Australia: Impact of the carbon price package, p8. See http://www.climateworksaustralia.com/LCGP_Impact_of_the_carbon_price_package_Aug_2011_ revised_edition.pdf, IEA (2008) Mind the Gap. See http://www.iea.org/textbase/nppdf/free/2007/ mind_the_gap.pdf 38 Energy Performance Contract and ESCO providers are pioneering new models of financing that address this issue but thus far they have failed to achieve significant scale discussed in more detail later 39 ECF (2010) Energy Savings 2020: How to triple the impact of energy saving policies in Europe, A contributing study to Roadmap 2050: A practical guide to a prosperous, low‐carbon Europe, p49. See http://roadmap2050.eu/attachments/files/1EnergySavings2020‐FullReport.pdf Note that the propensity to use debt or equity varies between individuals, companies and countries. A survey carried out in Germany for example found that 79 percent of German enterprises self‐financed their energy efficiency projects (see P. Bertoldi & S. Rezessy (2010) Financing Energy Efficiency: Forging the link between financing and project implementation, Joint Research Centre of the European Commission Report, p4. See http://ec.europa.eu/energy/efficiency/doc/financing_energy_efficiency.pdf ) 40 O. E. Williamson (1979) Transaction‐Cost Economics: The Governance of Contractual Relations, Journal of Law and Economics, Vol. 22(2):233‐61, JSTOR
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higher discount rate. The higher the transaction costs, the slower the uptake of such
emission reduction technologies.
Because transaction costs are highly variable depending on what is being invested in and
by whom, they were not included in the cost‐effectiveness calculations and so are not
reflected in the MAC curve. Again this means the MAC Curve analyses will tend to
overestimate the attractiveness of such investments currently in the real world.
Governments have a key role to play in scaling up supply chains to make investments
easier to transact, so reducing costs for consumers. This can in part be achieved by
defining the long‐term policy trajectory, introducing appropriate regulation and creating,
where needed, institutional capacity to facilitate delivery.
3biii. Behavioural attitudes The MAC Curve analysis in premised on the idea that individuals are ‘rational’. In
economics rationality implies that investors would respond to a particular investment
opportunity purely on the basis of price signals. In reality the uptake of such investment
opportunities depends on many other factors and is significantly affected by behavioural
attitudes41, which in turn are driven by social, cognitive and emotional factors. For
example investors can often make investment decisions based on approximate ‘rules of
thumb’ or based what their peers are doing rather than using strict logic. Similarly there
may be mental and emotional filters applied to the screening of investment opportunities
that skew consumer preferences and affect general market sentiment.
Such behavioural attitudes can have a significant impact on the uptake of a range of
emission reduction technologies, including energy efficiency. As an example the decision
by a householder about whether to retrofit their home to improve energy performance
may be driven by behavioural factors such as:
Low levels of confidence in the market to deliver high quality retrofits;
Uncertainty over the energy savings that might be achieved42;
41 IEA (2007) Mind the Gap: Quantifying Principal‐Agent Problems in Energy Efficiency. See http://www.iea.org/textbase/nppdf/free/2007/mind_the_gap.pdf; S. Darby (2006) Social Learning and Public Policy: Lessons from an energy‐conscious village, Energy Policy, Vol. 34:2929‐40, Elsevier. 42 This is a particularly difficult issue. When making any investment decision, an investor will take a calculated risk that future revenues streams will more than compensate for capital outlay and/or any financial liabilities taken on to finance the investment. Energy efficiency is an unusual type of investment in that the future cashflows are derived not from a stream of revenues but from future savings on energy bills (and saved carbon costs). While there is inherent unpredictability over most future revenue streams in the context of supply side energy investments developers have various means at their disposal for managing this risk. These include for large energy producers vertically integrated supply chains that mean they can pass on increased costs to their customer base and for small developers power purchase agreements that mean stable pricing structures can be put in place that last for the first few years of the investment. In the case of energy efficiency there are no such market‐based options the investor − big or small − can deploy to mitigate the effect of lower than expected energy savings (cashflows), so there can be a fear of ’taking a punt’ that the investment will work out.
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Aversion to taking on debt to finance the investment;
Unwillingness to live through the disruption caused by retrofit work;
The unappealing aesthetics of some retrofit technologies.
These behavioural factors can also be described as non‐monetary transaction costs. In the
real world they again have the effect of pushing up the discount rate, further reducing the
net present value of investments in emission reduction technologies that improve energy
efficiency.
Incentives and regulation alongside information campaigns are needed to change
attitudes, drive demand and provide the signals needed for the supply chain to scale up.
Innovative policies such as a demand side (energy efficiency) FiT could help create
certainty around revenue streams based on electricity savings. In addition, where they
are not already doing so, public banks based in Member States have a role to play in
making early stage investments in energy efficiency to visible build a track record.
Addressing it will require building up a track record in energy savings; relying on a change in cultural attitudes; or opting for interventions such as a demand side FiT
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4. The role of the EU and Member State governments in scaling energy efficiency investment
Energy efficiency investments are more diverse and diffuse than investment in centralised
infrastructure. Realising this potential will require much enhanced efforts both from
Europe and from Member State governments to create the incentive frameworks to drive
demand and facilitate private capital provision. This will enable businesses to build a
supply chain capable of effectively identifying and delivering investment opportunities at
scale. It will also require the retraining of the labour force − a key constraint that is
associated with higher initial costs in rolling out new large‐scale investment programmes.
There is currently a European debate about whether a top‐down binding target‐led
approach or bottom up binding measures‐based approach is preferable. A top‐down
binding target‐led approach is preferable for securing investment for two reasons. First,
binding targets have a track record of being more effective at creating the political will
needed to drive environmental policy outcomes. Second, a focus at the European level on
outcomes rather than prescription of method will enable greater freedom for Member
States governments to select appropriate policy instruments. This is critical because such
instruments must be suitable for local conditions if they are to be effective at incentivising
local investment.
At EU level the focus should be on securing the ambition of the European market;
removing conflicting energy price signals; requiring Member States to scale up their
institutional response; and kick‐starting Member State markets with EU public financing.
Specific measures include:
Setting clear long‐term binding targets for energy efficiency improvements.
Requiring the phase out of fossil fuel subsidies that weaken the economic case for
energy efficiency and encourage wasteful energy use.
Progressive tightening of EUETS caps to support the carbon price.
Continuing to drive up minimum standards in new assets through existing
initiatives including the Ecodesign Directive; Energy Performance in Buildings
Directive; CO2 in Cars Regulation; and supporting measures such as the Labelling
Directive.
Requiring the creation of institutional capacity, where needed, to coordinate,
facilitate and verify the deployment of energy efficiency measures.
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Earmarking an increased proportion of EU Budget funds to kick‐start long‐term
Member State‐based energy efficiency programmes. Adoption of the European
Commission’s proposal for a climate‐themed concentration within the European
Regional Development Fund amounting to 25 percent for developed and transition
regions and 15 percent for less developed regions would be a substantive step
toward this.
Scaling up the role of the European Investment Bank in providing public financing
for energy efficiency projects.
At Member State level the focus should be on the design of long‐term regulatory
frameworks focused where possible on outcomes rather prescription to enable innovation.
Additional institutional capacity will undoubtedly be needed − and should be focused on
addressing the specific needs of each sector. Measures include:
Undertaking reform of electricity market arrangements to ensure that the best value
investments are made across the electricity system. This will require governments to
put in place market arrangements that ensure demand side resources (including
demand management, demand response and distributed generation) are empowered
to compete as low cost alternatives to supply side investment.
o This could be unpinned by innovative instruments such as demand‐side FiTs
that create a more certain revenue stream.
Increasing demand among industrial and retail customers through using time‐limited
incentives and regulation to change behavioural attitudes to energy efficiency.
Putting in place measures that create greater certainty and confidence in energy
savings and a robust form of cashflow:
o At an investment level through mandating public financing institutions to back
national energy efficiency programmes − thus building a visible track record of
successful investments in energy efficiency.
o At an informational level accelerating smart meter and smart grid roll out and
running national energy saving education campaigns.
Creating the institutional capacity, where needed, to coordinate, facilitate and verify
deployment of energy efficiency measures.
Some suggestions for where the EU and Member State Government should focus policy
efforts are outlined in the Policy Annex. Drawing on international best practice they focus
on the top tier ‘game‐changing’ interventions for scaling investment.
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5. The macroeconomic case
There is no doubt that the driving large scale energy efficiency uptake across the European
economy is a complex task. However there are some compelling macroeconomic
arguments for why the effort should be undertaken. They broadly include short‐ and long‐
term energy security; economic resilience; employment opportunities in the real economy;
and progress in living standards that can alleviate pressure on public finances.
There are two main linkages between energy efficiency and GDP: increased investment
and increased consumption. The implementation of energy efficiency improvements
increases investment, which is a component of GDP. GDP is also generated by the impact
of energy efficiency improvements on increased consumption − known as the rebound
effect. The rebound effect can be separated into direct, indirect and economy‐wide
effects. The direct rebound effect occurs if energy efficiency improvements lead to a
reduction in the price of energy, which incentivises higher consumption of energy and
therefore increases GDP. The indirect rebound effect occurs if the savings from lower
energy bills, produced by energy efficiency improvements, is spent on non‐energy goods
and services that generate additional GDP but require additional energy to be produced.
The economy‐wide rebound effect occurs if energy efficiency improvements are made
throughout the economy, improving productivity, reducing price levels and stimulating an
increase in aggregate demand and therefore GDP43.
Cambridge Econometrics undertook quantitative analysis to determine the impact of
energy efficiency on GDP in the UK. Their findings suggest that the UK’s energy efficiency
policies between 2000 and 2010 produced additional real annual GDP (i.e. annual GDP that
is adjusted for inflation) that was 0.1 percent above that for a hypothetical reference
scenario in which no energy efficiency policies had been implemented44. They estimate
that 40 percent of the additional GDP was generated through investment while 60 percent
resulted from the rebound effect. It is important to note that the rebound effect will have
an impact on the net carbon savings that result from energy efficiency improvements.
Although the dynamics are too complex to discuss in full here, they are briefly summarised
later.
43 T. B. Barker and T. Foxon (2008) The Macroeconomic Rebound Effect and the UK Economy, UKERC Research Report. See www.ukerc.ac.uk/support/tiki‐download_file.php?fileId=157 44 T. B. Barker and T. Foxon (2008) The Macroeconomic Rebound Effect and the UK Economy, UKERC Research Report. See www.ukerc.ac.uk/support/tiki‐download_file.php?fileId=157. Cambridge Econometrics constructed a hypothetical reference scenario for the period 2000−2010 that excluded the impact of energy and carbon savings from the climate change agreements during this period but included the impact of the Climate Change Levy, Fuel Duty escalator to 1999, and the delivery of the 10 percent renewable electricity generation target by 2010. This reference scenario is similar to the baseline scenario used in the 2000 UK Climate Change Programme (Defra, 2000), the difference being that the impacts of the UK and EU Emissions Trading Schemes were included in the reference scenario.
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5a. Energy security and economic resilience
Energy security has been defined by the IEA as “the uninterrupted physical availability [of
energy] at a price which is affordable, while respecting environment concerns”45. Energy
efficiency improvements reduce demand for energy because the same level of and/or
more useful work can be produced using less primary or final energy46. In Europe, 83.5
percent of oil and 64.2 percent of gas consumed was imported in 2009/2010. In addition,
26 of 27 Member States consume more oil than they produce47.
In living memory, oil price spikes have generated systemic economic shocks with wide
economic and social repercussions. In the 1970s, real oil prices increased 500 percent and
caused stagnation of economic growth rates throughout Europe48. In the 1970s oil prices
were coupled to the price of gas49 (and this is still largely the case) so when oil prices
increased so did other fuel prices. Householders experienced increased energy bills, which
reduced their disposable incomes and restricted their ability to spend money in the
economy. At the same time, business costs increased: almost all products require energy
inputs at some point in their production/delivery process and so the increased energy
prices drove increased prices across the economy. Both of these impacts reduced
spending power and reduced consumer and producer confidence, ultimately decreasing
economic growth. It wasn’t until the mid‐1980s that EU economic growth rates recovered.
The shocks had profound impacts: France for example took a decision to diversify to
nuclear power generation as a direct result of these events. In addition, economies that
were net consumers of fossil fuels also experienced an increase in the cost of imports,
which led to greater financial outflows to oil providers and further negative impacts on
GDP.
According to the IEA, in 2010 the EU spent $280 billion on oil imports from outside the EU.
In 2011 this had jumped to $402 billion − or 3.3 percent of 2011 EU GDP50. Scenario
analysis undertaken by the European Climate Foundation found a doubling in oil prices for
3 years could cost the EU economy €300 billion over the same time period51.
45 See http://www.iea.org/subjectqueries/keyresult.asp?KEYWORD_ID=4103 46 S. Sorrell (2007) The Rebound Effect: an assessment of the evidence for economy‐wide energy savings from improved energy efficiency, p82. See http://www.ukerc.ac.uk/Downloads/PDF/07/0710Rebound Effect/0710ReboundEffectReport.pdf 47 European Environment Agency data. See http://www.eea.europa.eu/data‐and‐maps/figures/net‐imports‐of‐all‐fossil/ener12_fig_04_derived‐excel/at_download/file 48 IEA (2011) World Energy Outlook (2011),p77. J. D. Hamilton (2009) Causes and Consequences of the Oil Shock of 2007−2008: Comments and Discussion. Brookings Papers on Economic Ac vity 2000 No. 1, pp215−261. See http://www.ada.edu.az/uploads/file/Causes%20and%20Consequences%20of%20the %20Oil%20Shock.pdf 49 N. Stern (2009) Continental European Long‐term Gas Contracts: is a transition away from oil product‐linked pricing inevitable and imminent? Oxford Institute for Energy Studies 50 FT (27 November 2011) EU oil import costs soar above $400 billion. See http://www.ft.com/cms/s/0/106fbec2‐18fe‐11e1‐92d8‐00144feabdc0.html#axzz1ezdUU3s4 51 ECF (2010) Roadmap 2050: A Practical Guide to a Prosperous Low Carbon Europe: A − technical analysis
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While monetary policy will always have a strong impact on inflation, energy efficiency
improvements also have the potential to stabilise inflation rates52. Energy efficiency is an
important determinant of economic resilience because in a world where energy prices are
likely to rise further it can stabilise households’ final energy bills53, business costs54 and the
economy’s fossil fuel import bill55. Stable inflation rates are also vital for generating both
domestic and foreign direct investment in an economy, a key component of GDP.
Domestic investors need to know that the returns on their investment hold their value in
future. Foreign investors need to know that the returns on their investment will not be
subject to substantial exchange risk in the future56.
However, the ‘rebound effect’ − a combination of what in economics is known as the
‘income and substitution effect’ − may occur as a result of energy efficiency
improvements. The extent of the rebound effect will affect the long‐term energy security
and economic resilience of an economy. This makes it an important factor to consider.
The rebound effect is defined as the increase in demand for energy57 that may occur as the
fall in energy bills boost disposable income (the ‘income effect’) while lower prices prompt
a substitution into other energy‐consuming activities (the ‘substitution effect’). While the
income effect for energy efficiency is unambiguously welfare‐enhancing, boosting
consumer purchasing power, the phenomenon can lead to questions about the validity of
energy efficiency improvements in the context of economy‐wide GHG reduction. This
serves to underline the importance of pursuing wider energy system decarbonisation and
robust energy price signalling alongside energy efficiency programmes.
The extent of the rebound effect and circumstances under which it can occur are
extensively debated − and detailed informa on about the issues can be found in exis ng
literature58.
52 Eurostat (2011) Euro area annual inflation stable at 3.0%, EU stable at 3.4%. Eurostat News Release No. 189/2011: Euro Indicators. See http://epp.eurostat.ec.europa.eu/cache/ITY_PUBLIC/2‐15122011‐AP/EN/2‐15122011‐AP‐EN.PDF 53 European Climate Foundation (2010) Energy Savings 2020: How to triple the impact of energy saving policies in Europe. A contributing study to Roadmap 2050: A practical guide to a prosperous, low‐carbon Europe. See http://roadmap2050.eu/attachments/files/1Energy Savings2020‐FullReport.pdf 54 European Commission (2011) Energy Efficiency Plan 2011. Paper No. 109. See http://eur‐lex.europa.eu/LexUriServ/LexUriServ.do?uri= COM:2011:0109:FIN:EN:PDF 55 M. Levine et al. (2007) Residential and commercial buildings, quoted in D. Arena et al. (2011) Employment Impacts of a Large‐Scale Deep Building Energy Retrofit Programme in Hungary, p38. See http://3csep.ceu.hu/sites/default/files/field_attachment/ project/node‐6234/employment‐impactsof energyefficiencyretrofits.pdf 56 A. Wardlow (August 1994) Investment Appraisal Criteria and the Impact of Low Inflation. Bank of England Quarterly Bulletin 57 Energy refers to both primary and final energy forms unless otherwise stated 58 S. Sorrell (2007) The Rebound Effect: an assessment of the evidence for economy‐wide energy savings from improved energy efficiency, London: UK Energy Research Centre. See http://www.ukerc.ac.uk/Downloads/PDF/07/0710Rebound Effect/0710ReboundEffectReport.pdf
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5b. Employment creation
Energy efficiency improvements can be implemented wherever energy is consumed in the
production process. This can include energy efficiency improvements to major
infrastructure, residential and commercial buildings, equipment used in residential and
corporate buildings, and transport required for logistical purposes. Installation of energy
efficiency improvements tends to be implemented on a localised basis, by engineering,
construction and installation companies. This provides substantial and diverse job
creation potential.
Current unemployment rates are a major concern across many Member States59. Since
2009, unemployment rates have exceeded the 15‐year average up to 201160. In 2011,
unemployment rates in the EU increased to 9.7 percent of the labour force, compared to
7.1 percent in 200861. Youth unemployment rates – the proportion of those under the age
of 25 years that are actively looking for jobs – have increased drastically in many of the EU
economies, as shown in Table 2.
Table 2: Percentage unemployment rates in the European Union, ordered by youth unemployment levels. Non‐seasonally adjusted. (Source: Eurostat; * denotes 2010 data used as most recent data available)
Total Youth (15‐25
years)
Country
2007 2011 2007 2011
Spain 8.3 21.7 18.2 46.4
Latvia 6 18.7* 10.7 34.5*
Slovakia 11.1 13.4 20.3 33.6
Lithuania 4.3 15.4 8.2 32.9
Greece 8.3 12.6* 22.9 32.8*
Portugal 8.9 12.9 20.4 30.1
Ireland 4.6 14.4 8.9 29.2
Italy 6.1 8.4* 20.3 27.8*
Bulgaria 6.9 11.1 15.1 26
59 The European Commission’s definition of unemployment is used here, defined as the proportion of people among the labour force that are without a job but are actively seeking work. The labour force includes those people that are employed as well as those actively seeking employment. Discouraged workers are those that for reasons of ill‐health or responsible for young children etc have stopped actively seeking employment 60 Calculated from EU AMECO data. See http://ec.europa.eu/economy_finance/db_indicators/ameco/ zipped_en.htm 61 See http://ec.europa.eu/economy_finance/db_indicators/ameco/zipped_en.htm
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Hungary 7.4 10.9 18 25.9
Poland 9.6 9.7 21.7 25.8
Romania 6.4 7.4 20.1 23.7
France 8.4 9.7 19.8 23.2
Sweden 6.1 7.5 19.2 22.9
Cyprus 3.9 7.8 10.2 22.4
Estonia 4.7 12.5 10 22.3
Finland 6.9 7.8 16.5 20.1
Belgium 7.5 7.2 18.8 19.9
United Kingdom 5.3 8.1 14.3 19.6*
Czech Republic 5.3 6.8 10.7 18.2
Slovenia 4.9 8.1 10.1 15.3
Luxembourg 4.2 4.8 15.6 14.8
Denmark 3.8 7.6 7.5 14.2
Malta 6.5 6.4 13.9 13.6
Austria 4.4 4.4* 8.7 8.8*
Germany 8.7 5.9 11.9 8.5
Netherlands 3.6 4.4 7 7.6
EU27 Average 7.2 9.7 15.7 21.4
Out of 27 member states, 16 experienced a 5 per cent or more rise in their unemployment
rates between 2007 and 2011, four of which experienced greater than 20 per cent rises. This
has corresponded with lowered economic growth rates since the onset of the global financial
crisis in 2008. Both these factors suggest that the EU economy is performing sub‐optimally
and that further economic stimulus is needed.
Cyclical unemployment (which occurs in line with the business cycle, which in turn tends to go
through cycles of boom ‘low cyclical unemployment’ and bust ‘high cyclical unemployment’)
has risen since the onset of the global financial crisis. Using the crude proxy for the natural
rate of unemployment in the European economy, unemployment rates in the European
economy are currently above their estimated natural rate. Energy efficiency cannot reduce
the natural rate of unemployment but during economic busts governments often implement
economic stimuli is to increase economic growth and domestic employment. This can take the
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form of a monetary stimulus – reducing interest rates62 – or a fiscal stimulus – increasing
government spending and/or reducing tax. Traditionally, fiscal stimuli involve road‐building
programmes63 because the construction sector of most economies is the first and worst sector
to be hit by economic crises64. Instead of implementing a high‐carbon fiscal stimulus like road
building, a low‐carbon fiscal stimulus that is focused on improving economy‐wide energy
efficiency has the potential to create favourable conditions for more economically and
environmentally sustainable economic growth65,66.
In some cases jobs related to implementing energy efficiency improvements are more labour
intensive − i.e. less produc ve − than alterna ves and this might reduce whole economy
output. However, in the current demand‐deficit environment this is not an issue − and may
actually generate an advantage in terms of job creation and boosting income67. It should be
noted also that many jobs in this sector involve the deployment of innovative technologies −
including high‐tech industrial process technology; district heating and combined heat and
power systems; smart meters and smart grid; advanced heat pumps; laser measurement
technologies; and infrared technologies to asses thermal loss from buildings − that enhance
productivity and so should be encouraged. In parallel to running programmes focused on
retrofitting for energy efficiency improvement, therefore, EU economies should focus on
driving innovation and growth in higher productivity sectors to avoid low‐skill and low growth
lock‐in. The ability to retain such high productivity sectors within the economy depends on
successful industrial policy (see Box 1).
62 This also has the effect of devaluing the domestic currency to make exports cheaper and more attractive 63 J. Whitelegg (1994) Roads, Jobs and the Economy: A report for Greenpeace. See http://www.eco‐logica.co.uk/pdf/GPRo adsJobsEconomy.pdf 64 http://go.worldbank.org/9ZLKOLN0O0 65 R. Heilmayr et al. (2009) A Green Global Recovery? Assessing US Economic Stimulus and the Prospects for International Coordination, World Resources Institute Policy Brief No. PB09‐3. See http://wwww.iie.com/ publications/ pb/pb09‐3.pdf 66 It should be noted, however that as with almost all fiscal stimuli, there would be a lag between the establishment of a new policy and realised job creation. This is generally the time taken to scale‐up the financial, skills base (education and training) and institutional capacity and time for technology to diffuse through the economy. See I. Holmes (2012) Financing the Decarbonisation of European Infrastructure: 30 percent and beyond. See http://www.e3g.org/images/uploads/E3G_Financing_the_decarbonisation _of_Europe_February_2012.pdf. 67 D. Zenghelis (2011) A macroeconomic plan for a green recovery, Grantham Research Institute on Climate Change and the Environment Policy Paper
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Box 1. The role of industrial policy in driving longer term growth
There is no doubt that Member State‐led energy efficiency retrofitting
programmes will provide localised ‘low carbon jobs’. The labour‐intensive nature
of the work also means it has the potential to provide extensive employment − a
critical requirement in European economies that are operating under capacity.
However, over the medium term a stimulus programme focused on energy
efficiency retrofitting could start to have an adverse impact on growth because a
proportion of it is classed as low productivity work. Many of the technologies
needed − insula on, variable speed motors and so on − are mature and well
understood. But further innovations around smart technologies, energy storage
and retrofitted building insulation are needed to improve energy management
and increase productivity. So governments should also have a focus on driving
technological innovation, securing localised manufacturing bases and ensuring
that in the medium‐term higher growth levels are secured.
These technologies have a strong potential to contribute to growth both through
the learning effects of developing and diffusing new technology and through
further improved energy management. Switching to energy efficient technologies
through directed technical change can lead to dynamic gains in both carbon
savings and welfare gains that continue to accrue over time68. Early action by
Member States to develop expertise in the next generation of energy efficiency
technologies could allow them to ‘capture’ innovation clusters and high value R&D
and manufacturing jobs. The extent to which this happens locally will depend on
the successful design and implementation of Member State and European
industrial policy.
Overt industrial policy always raises questions of whether and when governments
can effectively sponsor the creation or competitiveness of new industrial sectors.
A 2011 paper by the think tank Bruegel tested one aspect of this using renewable
energy as a case study: whether state support for renewable energy can, on its
own, grow new 'green' industrial sectors, or whether those sectors emerge from
complex constellations of related industrial expertise. Their analysis found that
state support for renewable energy industries at home can develop export
competitiveness abroad, but that support appears to work best when the
domestic economy already has the constellation of skills, industries and
institutions that act as precursors to the creation of new 'green' industrial sectors.
Subsidising the expansion of renewable energy markets at home can help support
68 See http://blogs.worldbank.org/prospects/category/tags/endogenous‐growth
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the repurposing of these skills for renewable energy goods. But it does not
necessarily create these skills or capabilities anew.
Thus a 'green growth' programme focused on energy efficiency faces the same set
of challenges that industrial development has always faced. More important is
effective structuring of the skills base (education and training provision) and
provision of capital (through grants but also public financing institutions) through
the supply chain to provide durable comparative advantage in competitive world
markets69.
Theoretically, energy efficiency improvements have the potential to reduce ‘frictional
unemployment’ (i.e. temporary unemployment as workers move between jobs70) because
energy efficiency improvements can be implemented with a wide geographic spread and jobs
tend to be localised71. Given that one of the key factors determining the length of time that
people are between jobs is the ability/inability of individuals to search for jobs that match their
skills and geographic location72, energy efficiency improvement programmes increase the
likelihood that blue‐collar (construction/installation workers, electricians, plumbers and so on)
and white‐collar (engineers, surveyors and so on) workers will be able to find work.
There is a theoretical risk energy efficiency could create structural unemployment, reflecting a
mismatch of skills in a changing economy, because it represents a distinct shift in overall
employment demand in the economy − par cularly away from the fossil fuels sector73. In
economies operating near capacity economy‐wide this means jobs created through energy
efficiency policies will crowd out alternative jobs and investment through competitive
pressures for staff and capital in tight markets. However in the current demand‐deficit
environment this is not an issue because there is currently a high level of cyclical (i.e. demand‐
69 See http://www.bruegel.org/publications/publication‐detail/publication/556‐green‐exports‐and‐the‐global‐product‐space‐prospects‐for‐eu‐industrial‐policy/ 70 There are many reasons why workers may look for new jobs, including redundancy, the desire for higher wages, the desire to simply do something different. The length of time that people are between jobs is broadly a shaped by their ability to match their skills and geographic location to available jobs − but it can also be related to the amount of unemployment benefits that can be claimed, emotional or physical problems and so on 71 European Commission (2011) Energy Efficiency Plan. Paper No. 109, p5. See http://eur‐lex.europa.eu/LexUriServ/LexUriServ.do?uri= COM:2011:0109:FIN:EN:PDF. Greenpeace (2009) The Case for Including Energy Efficiency Investment in the Fiscal Stimulus Package, p5. See http://www.greenpeace.org.uk/files/EE_fiscal_stimulus_Impetus_ Report.pdf 72 Many European economies are extensively driven by the services sector – retail, financial, consultancy, management and so on – which are geographically concentrated within urban and semi‐urban areas. This can isolate employment opportunities in such sectors to urban‐ and semi‐urban‐dwelling segments of the population 73 Structural unemployment occurs as a result of shifts in overall demand in the economy. These could be driven by factors such as technological innovation attracts demand to new sectors or policy changes that demote attractiveness of particular sectors
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deficient) unemployment. In addition, the number of fossil fuel‐related jobs lost are likely to
have limited impact on European unemployment totals because only 16.5 percent of oil and
35.8 percent of gas consumed in the EU was actually produced within the EU in 200974. This
suggests that the majority of job losses in the fossil fuels industry will likely be borne by non‐
EU member states such as the OPEC nations, the Russian Federation and others. Regardless of
the crowding‐out effects, as finite fossil fuel stocks – notably that of oil but also gas in the
future − decline, job losses in the fossil fuels sector are inevitable.
There are several estimates of the employment creation potential of energy efficiency
investment programmes. The EU Energy Efficiency Plan states that 2 million jobs will be
created in the EU buildings sector by 2020 if EU targets are achieved75. An analysis by the
European Trade Union Confederation estimates that up to 2.59 million jobs could be created in
the EU buildings sector by 203076. These estimates include the direct employment effects −
those blue‐collar jobs created within the buildings retrofit installation sector − as well as the
indirect employment effects − those manufacturing and white‐collar jobs created along the
buildings retrofit supply chain. An illustration of potential job creation and loss in energy
efficiency improvements in the buildings sector is presented in Figure 1.
74 Derived from European Commission (2011) Key Figures: June 2011, Market Observatory for Energy, p6. See http://ec.europa.eu/energy/observatory/eu_27_info /doc/key_figures.pdf 75 European Commission (2011) Energy Efficiency Plan 2011. Paper No. 109, p3. See http://eur‐lex.europa.eu/LexUriServ/LexUriServ.do?uri= COM:2011:0109:FIN:EN:PDF 76 European Trade Union Confederation (2010) Climate Disturbances: The new industrial policies and ways out of the crisis, p61. See http://tradeunionpress.eu/Web/EN/Webclima/ EtudeBCCPen.pdf
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Figure 1. Job creation and loess from energy efficiency improvements in
buildings
Source: D. Arena et al. (2010) Employment Impacts of a Large‐Scale Deep Building Energy
Retrofit Programme in Hungary. Budapest: Central European University.
The creation of a new energy efficiency improvement installation sector also offers a new
source of tax revenue for governments. This includes revenue from direct taxes such as
corporation and income taxation but also indirect taxation such as value‐added tax (VAT) on
construction and installation services. Research by KfW Bankengruppe shows that for every €1
of public funds spent on its Energy‐efficient Construction and Refurbishment programme in
Germany in 2010, the Federal Government received €5 in tax revenue77. In total, the
programme produced €5.4 billion in direct tax revenue from companies and employees in
2010. Additionally, the 340,000 jobs created by the programme in the same year reduced
government spending on unemployment welfare payments, saving €1.8 billion in 2010. KfW
Bankengruppe’s Energy‐efficient Construction and Refurbishment programme offered €8.9
billion in promotional loans, which crowded‐in further private sector investments worth €21.5
billion in 2010. The programme achieved returns of 12.5 percent on investment, which
enabled KfW Bankengruppe to offer 1 percent subsidies on their loan interest rates.
77 KfW Bankengruppe (2011) KfW Programmes: Energy‐efficient Construction and Refurbishment. Public budgets benefit up to fivefold from “promotional euros”. Press Release No. 092. See http://www.kfw.de/kfw/en/KfW_Group/Press/Latest_News/ PressArchiv/PDF/2011/092_E_Juelich‐Studie.pdf
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This example illustrates the potential for energy efficiency programmes to generate substantial
revenue for governments − a par cularly a rac ve opportunity for economies that are
currently operating under capacity. However, it will be important to consider revenue losses
that may arise elsewhere as a result of structural change to the economy − an effect that is
likely to be more pronounced in economies running at near optimal capacity.
5c. Improvements in living standards
Energy efficiency improvements, combined where needed with training and information on
how to manage energy use, can stabilise or even reduce household energy bills, resulting in an
increase in disposable incomes. Higher disposable incomes are in turn associated with higher
living standards, especially for those that are that are unable to warm their homes affordably –
the ‘fuel‐poor’.
While the term ‘fuel poverty’ − where householders spend more than 10 percent of their
income on energy bills78 − is not recognised in all 27 Member States, the ability to heat homes
at affordable cost is becoming an increasingly important issue: it has been estimated that
between 50 million and 125 million people in Europe live in fuel poverty79. In the UK, 1:4
households spend more than 10 percent of their income on energy bills; this is projected to
rise to 1:3 in 201680. In Bulgaria the figure is much higher − at around 70 percent of
householders81. The fuel poor tend to suffer from health problems that arise from cold and
damp living conditions. Amid rapidly rising energy prices, the fuel poor are at risk of
accumulating unsustainable debt in an effort to keep warm or suffering prolonged health
problems due to chronic underheating of their homes. In the UK it has been estimated that the
annual cost to the National Health Service of treating winter‐related disease as a result of fuel
poverty is €990 million. Further, it was found that investing €1 in improving heating in
households saved €0.42 in health costs82.
78 On 15 March 2015 the ‘Hills Review’ was published. The report proposes a new way to define fuel poverty, separating the extent of the issue (the number of people affected) from its depth (how badly people are affected). However, this new definition has not yet officially been adopted by the UK Government 79 European Fuel Poverty and Energy Efficiency (2009) Tackling Fuel Poverty in Europe: Recommendations Guide for Policy Makers. See http://www.fuel‐poverty.org/files/WP5_D15_EN.pdf 80 P. Washan (2012) Energy Bill Revolution Campaign Report. Camco 81 Discussion with the Deputy Mayor of Sofia, Bulgaria. March 2012 82 Marmot Review (2011) The Health Impacts of Cold Homes and Fuel Poverty. See http://www.foe.co.uk/resource/reports/cold_homes_health.pdf. All figures quoted in £ are converted into € at the 2011/12 average exchange rate of £1 = 1.15296
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In a world where resource scarcity and carbon prices will drive up energy costs, energy
efficiency will offset rising prices that would otherwise exacerbate fuel poverty. Without a
focus on addressing fuel poverty at its core − by improving the thermal performance of homes
− increasing numbers of households will fall into fuel poverty. This is turn will lead to a
deterioration in health that will negatively impact the overall productivity of the labour force
and therefore economic growth83.
The final threat of rising fuel poverty is that it raises state welfare costs because numerous
Member States provide financial transfers for vulnerable or fuel poor groups. For example, in
the UK €1.5 billion per year is spent each year on winter fuel payments to help the vulnerable
and fuel poor meet their energy bills. In Germany, poor households receive a payment
supplement to help with extra energy costs during extreme weather84. Until 2009, Hungary
had similar government‐funded programmes to assist the fuel‐poor85. In Spain, the
government subsidises electricity to ensure that it is affordable for consumers − however, this
has resulted in the Spanish Government accumulating a €15 billion public debt, which owed to
Spanish energy companies86.
This handful of EU examples emphasises the importance of financial transfers as a short‐term
solution to addressing the problems associated with fuel poverty. However, in light of
burgeoning public expenditure, energy efficiency provides a more sustainable long‐term
solution in terms of economics, the environment and welfare. Germany87, Hungary88 and the
UK89 have committed to developing national energy efficiency programmes; however, Spain90
has not yet made a significant effort in this regard. Yet interventions that facilitate investment
83 M. Levine et al. (2007) Residential and commercial buildings, quoted in D. Arena et al. (2011:38) Employment Impacts of a Large‐Scale Deep Building Energy Retrofit Programme in Hungary. See http://3csep.ceu.hu/sites/default/files/field_attachment/ project/node‐6234/employment‐impactsof energyefficiencyretrofits.pdf 84 A. Power & M. Zulauf (2011) Cutting Carbon Costs: Learning from Germany’s Energy Saving Program, p68. See http://www.brookings.edu/~/media/Files/rc/papers/2011/0902_germany_energy_power_ zulauf/0902_energy_power_zulauf.pdf 85 D. Arena et al. (2010) Employment Impacts of a Large‐Scale Deep Building Energy Retrofit Programme in Hungary. Budapest: Central European University, pp32−33. See http://3csep.ceu.hu/sites/default/ files/field_attachment/project/node‐6234/employment‐impactsofenergyefficiencyretrofits.pdf 86 S. Davies & I. Holmes (2011) European Perspectives on the Challenges of Financing Low Carbon Investment: Spain, p14. See http://www.e3g.org/images/uploads/E3G_European%20Perspectives%20 on%20 the%20Challenges%20of%20Financing%20Low%20Carbon%20Investment_Spain.pdf 87 See http://www.iea.org/textbase/pm/?mode=pm&id=4443&action=detail 88 See http://www.iea.org/textbase/pm/?mode=pm&action=view&country=Hungary 89 P. Richards (2012) The Green Deal, House of Commons Library Standard Note SN/SC/5763. See www.parliament.uk/briefing‐papers/SN05763.pdf 90 S. Davies & I. Holmes (2011) European Perspectives on the Challenges of Financing Low Carbon Investment: Spain. See http://www.e3g.org/images/uploads/E3G_European%20Perspectives%20on%20 the%20Challenges%20of%20Financing%20Low%20Carbon%20Investment_Spain.pdf
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in improving the thermal performance and energy efficiency of homes should represent a ‘no‐
regrets’ policy effort for both the EU and for Governments. Even if assumptions about
underlying energy savings turn out to be overestimated European householders will benefits
from warmer homes and better health outcomes − and governments will reduce direct
financial transfers from Budgets to the fuel poor.
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6. Conclusions
Thus far the global recession and high prices have had only a relatively small impact on
reducing global demand for oil − and it is likely to be temporary91. As noted in a recent
speech by the European Commissioner for the Environment92, while the developed world is
focused on the economic downturn, much of the developing world − including the
emerging economies − are forging ahead with growth, and as a consequence are
consuming a far greater share of the world’s resources. For example Brazil’s consumption
of oil products has roughly doubled since 198593; China’s has roughly quadrupled over the
same time period94.
China in particular appears to have internalised the ongoing threat to competitiveness and
stability posed by rising energy demand and is taking significant action to address it. Its
12th Five‐Year Plan concentrates on energy efficiency − with a target to cut energy
consumption per unit GDP by 16 percent by 2015 − as well as the use of cleaner energy
sources − with a target to cut CO2 emissions per unit GDP by 17 percent by 201595.
Conversely, while there is an understanding of the long‐term economic impacts of these
‘headlines’ among European businesses and Governments, the policy response has been
inadequate. The political focus in the EU continues to be on supply side solutions;
insufficient effort continues to be applied to addressing the demand side opportunities
around cutting waste and managing resource scarcity to create resilient economies.
In addition, the huge uncertainty around future energy prices makes Europe vulnerable to
debilitating energy price spikes. Thus energy efficiency investment can act as a key ‘hedge’
against fossil fuel price spikes, delivering increased economic resilience, creating
opportunities to utilise spare capacity in the labour market and reduce several direct costs
on the European economy. However, the barriers to driving this investment at scale should
not be under‐estimated. Substantive initial public interventions will be required to catalyse
scaled private sector spending on this sector and deliver the social, environmental and
economic external benefits that arise as a result of investment in energy efficiency
improvements.
Energy efficiency improvements − par cularly those requiring retrofits − are o en a
‘hidden’ investment opportunity. Just like carbon emission reductions, upfront time and
effort need to be put into seeking many of the opportunities out. A complete energy
efficiency upgrade of the EU’s building and wider industrial and utility infrastructure is
therefore only likely to happen if governments start to regard identification and delivery of
91 IEA (2011) World Energy Outlook 92 See http://www.guardian.co.uk/world/2011/dec/29/eu‐environmental‐resources‐new‐recession 93OECD/IEA (2011) Consumption of Oil Products: Brazil, IEA Energy Statistics. See http://www.iea.org/stats/pdf_graphs/BROIL.pdf
94 OECD/IEA (2011) Consumption of Oil Products: China, IEA Energy Statistics. See http://www.iea.org/ stats/pdf_graphs/CNOIL.pdf 95 IEA (2011) World Energy Outlook
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energy efficiency as being on a par with other major infrastructure delivery − and provide
fair and equivalent treatment to supply and demand side solutions.
Successful delivery of large and complex retrofit programmes will require multi‐faceted
and sustained focus because, just like other critical infrastructure programmes and
projects, delivery will involve many major investment decisions and multiple stakeholders.
Issues affecting successful delivery will include those of a systemic nature such as planning
and in some countries energy pricing policy − which will affect programmes as a whole −
and project specific issues, such as the commercial arrangements between stakeholders.
Government action can help to remove barriers and open the way for the necessary
investments to be made, whether projects or programmes are being delivered by the
public or private sectors or both in partnership.
The UK’s ‘National Infrastructure Plan’ published in 2010 notes that for future
infrastructure investment in the UK the Government will:
Review and challenge progress on delivery – so that vital projects are suitably
prioritised, and time, cost and performance targets are maintained.
Facilitate the relationships between the Government and private investors,
developers and contractors to increase the understanding of the road blocks to
delivery.
Identify and address key areas of Government policy that need to be resolved,
developed and/or clarified to support the delivery of the priority investment
including those between different parts of the public sector.
Improve conditions for private investment in growth supporting projects,
recognising the trade‐offs between affordability, value for money and risk
allocation.
While such an approach won’t necessarily need to be applied in full to national efforts to
drive energy efficiency uptake, it does give a sense of the requirement from Governments
for programme oversight and active facilitation of investment if the energy efficiency
potential of the European economy is to be maximised.
The current focus of much of Europe’s growth strategy is austerity combined with
structural reforms. Such reforms alone will not drive economic recovery in the short term,
however important they may be in the longer term. Demand is also crucial and this
requires more expansionary macroeconomic policies. Without them the European
economy faces stagnation.
As the focus shifts from austerity to how to drive growth and boost flagging Member State
economies, the opportunities presented by energy efficiency improvements are
compelling. A new stimulus programme targeted to boosting demand for energy efficiency
through providing financial incentives to improve the economics of projects and combined
with regulation (including minimum standards on buildings) focused on ramping up
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standards will send a signal to supply chains to gear up and business to invest and create
jobs. The focus on regulation will be important to ensure long‐term costs to governments
are minimised, by ensuring there is a long‐term tangible financial value for energy
efficiency that can in time be financed solely by the private sector.
Such a programme, set up to complement wider structural reforms, could provide a
convincing routemap to European recovery. The first step will be for the European Council
and European Parliament to agree an ambitious Energy Efficiency Directive that includes at
the very least binding economy wide 2020 targets and requirements to create national
frameworks that drive demand at scale.
