7. Barriers and Instruments

7.1 Barriers

A consistent observation is that individuals and companies invest in more energy-intensive buildings, equipment and vehicles than appears cost-effective, either for them or for the economy as a whole. Reasons why this may hold are called "barriers (to EE)". Among the many barriers are: lack of information, lack of access to capital, misplaced incentives, flaws in market structure, performance uncertainties, decisions influenced by custom and habits, inseparability of features, heterogeneity of consumers, hidden costs, transaction costs, bounded rationality, product unavailability, externalities, lack of knowledge and imperfect competition.⁴⁹ The National Round Table on the Environment and the Economy identified the lack of a long-term signal of the value of GHG emission reductions as a key barrier to progress in improving energy efficiency and reducing those emissions. ⁵⁰

Some barriers are "market failures", wherein a condition required for economically efficient operation of markets is absent. The use of average costs for pricing electricity, or lack of information would be examples. Most commentators agree that market failures call for corrective policies. However, people do not base their decisions on economic factors alone. There are well-documented cases of energy efficient technologies that are commercially available, identical to inefficient technologies in the quality of service provided, highly cost effective and apparently free of any hidden costs, but are generally not adopted over less efficient versions.⁵¹

There have been debates over what constitutes a "real" barrier for more than twenty years. One school of thought argues that most barriers are simply "benign characteristics of well-functioning markets".⁵² That school would argue, for example, that consumers' high discount rates for EE represent economically rational concerns over risk, liquidity and irreversibility of the investment. The EEWG's view is that EE investments often do carry real, hidden costs, but there is a compelling case for the existence of real market barriers other than market failures.

Exhibit 7.1 provides a summary of the main categories. It should be noted that although many barriers may apply in a given situation, they are not necessarily additive. For example, overcoming the "price signal" barrier, may naturally lead to greater awareness, more availability and easier access to finance. Many barriers involve mandates and perceptions of mandates. For example utility regulators may not be under clear policy direction regarding DSM.

Exhibit 7.1: Barriers to Energy Efficiency

One important barrier is the complexity of the institutional landscape (see section 5). With a large number of players, each with complementary roles, how they work together is an important determinant of results. For example, the effectiveness of utility DSM programs depends to a significant degree on the existence and integration of complementary programs at the federal (e.g. Office of Energy Efficiency) and provincial levels.

In addition to the barriers to cost-effective decision-making listed above, there are also constraints that affect the timing of potential investments. Buildings, vehicles and equipment have life spans of many years. Although it is possible to retrofit them to a degree, early replacement is usually not cost-effective. Therefore the timing of stock turnover is a key consideration in planning energy efficiency investments. This has at least two implications: the costs of early retirement need to be considered carefully; and opportunities that occur at the time of stock turnover need to be seized (or otherwise lost for long periods).

7.2 Instruments

Governments have a range of policy instruments to overcome barriers. The main instrument types are: regulation (including mandatory standards and economic instruments such as tradable permits), program spending (including subsidies in the form of grants or preferential financing, and government operations), tax expenditures and tax instruments (such as fees, charges and rebates, ecological tax reform), and information and suasion. In the context of energy efficiency and climate change, the most economically-efficient instrument (provided it could be sustained in the long term) would be a broad carbon tax.

Different types of instruments may be appropriate, depending on the maturity of technologies and practices. For example:

• R&D stage: financial support (grants or preferential financing) to bring technology from concept to function and to pursue opportunities in the public interest.
• Demonstration and early commercialization stage: financial support and risk reduction assistance (such as loan guarantees) to help the transition to fully commercial financing
• Early adoption stage: green procurement and incentives to help establish a market presence.
• Market transformation stage: variety of educational, voluntary, regulatory and market-based approaches, including broad or targeted economic instruments that compensate for market failures or externalities.
• Late adoption stage: standards or regulations to ensure adoption and promote a level playing field.

Each instrument option has advantages and disadvantages. Furthermore, implementation considerations such as the adequacy of compliance mechanisms can play a determining role in the effectiveness of a given choice.

In addition to governments, utilities play a significant role in the implementation of programs to promote energy efficiency. Drivers include avoidance of higher-cost supply, public mandates, response to regulatory incentives, and government funding opportunities. Demand-Side Management (DSM) programs typically include information and education initiatives, low-interest loans or subsidies for the installation of energy-efficient technologies, direct or free installation of energy-efficient technologies, performance contracting, and market transformation initiatives.

There is extensive literature on the cost-effectiveness of utility DSM programs and on various types of government interventions. In general, studies have tended to support most investments as being cost effective. For example, BC Hydro evaluations have indicated costs for DSM in the range of 3-5 cents per kilowatt-hour compared to 6-8 cents for the most common sources of new generation.⁵³

At the same time, there is also criticism that much of the evaluation work has been sponsored by utilities or governments themselves and that, as a result, the results have been biased. Some of the most common criticisms are:

• The rebound effect will erode most or all energy savings.
• Most energy savings would happen anyway due to ongoing technological advances or rising energy prices.
• The discount rates used to justify energy efficiency policies and programs are too low.
• Ratepayer- or taxpayer-funded energy efficiency programs are an unfair subsidy that hurts non-participants and low-income households.
• Energy efficiency policies and programs are less effective than their proponents claim.
• The market barriers frequently used to justify energy efficiency policies and programmes are not "real".
• Energy savings are impossible to meter and too difficult or costly to estimate accurately.

A recent International Energy Agency paper compiles and evaluates these criticisms.⁵⁴ The authors conclude that although some of the issues and concerns are relevant, the case for energy efficiency policies and programmes remains strong and there is no evidence of inherent flaws.

Many of the concerns that have been raised translate to important design considerations. For example, free ridership can often be reduced by targeting market segments that are more price sensitive (e.g. low-income ratepayers).