Energy Efficiency Investments Research Articles

The Role of Structural Context in Making Business Sense of Investments for Sustainability–A Case Study

Energy efficiency is an important means for sustainable manufacturing. One action for manufacturing companies to improve energy efficiency is through investments. While these investments often are profitable, opportunities remain unexploited. This paper explores the structural context of the investment decision-making process by examining the associated activities, procedures, and the role of information. While the structural context may limit complex investments that do not fit predefined rules and controls, such as energy efficiency and other sustainability-related investments, it remains a scarcely studied aspect of investment decision-making for energy efficiency investments. Method-wise, the paper is based on a case study of a major investment at a pulp and paper company, motivated and justified based on productivity, strategic, energy, and sustainability rationales. The paper contributes with illustrating how configurations of internal investment activities and procedures may be crucial for sustainability-related investments to pass through the investment process. Moreover, the configuration of activities and procedures is also indicated as influential for the way in which an investment is executed. Hence, for energy efficiency and other sustainability-related investments to make business sense constitutes more than achieving desirable payback periods; the structural context should be considered.

What did infrastructure ever do for us?

What did infrastructure ever do for us?

Building Energy Retrofit Hurdle Rates and Risk Arbitrage in Energy Efficiency Investments

Despite extensive empirical evidence of the economic and financial benefits of green buildings, energy retrofit investments in existing buildings have not reached widespread adoption.This paper empirically estimate returns to energy retrofit investments for multifamily and commercial buildings in New York City, using a novel database of actual audit report recommendations and permitted renovation work extracted using natural language processing. By modeling the estimated rate of return for energy retrofit investments, we generate a more comprehensive understanding of the perceived risk of these investments and the market and regulatory mechanisms that can overcome financial and informational barriers to investment in energy conservation measures (ECMs). Based on auditor costs and savings estimates, the median internal rate of return (IRR) for adopted ECMs is found to be 21% for multifamily buildings and 25% for office properties. Adoption rates are higher for office buildings than multifamily, and in both cases adopter buildings tend to be larger, higher value, and less efficient at the time of implementation. The economically significant magnitudes of returns to adopted ECMs raise important questions about why many property owners choose not to adopt. As such, we discuss incentive and regulatory mechanisms that can overcome financial and informational barriers to the adoption of energy efficiency measures.

Assessing Short-Term and Long-Term Economic and Environmental Effects of the COVID-19 Crisis in France.

In response to the COVID-19 health crisis, the French government has imposed drastic lockdown measures for a period of 55 days. This paper provides a quantitative assessment of the economic and environmental impacts of these measures in the short and long term. We use a Computable General Equilibrium model designed to assess environmental and energy policies impacts at the macroeconomic and sectoral levels. We find that the lockdown has led to a significant decrease in economic output of 5% of GDP, but a positive environmental impact with a 6.6% reduction in CO2 emissions in 2020. Both decreases are temporary: economic and environmental indicators return to their baseline trajectory after a few years. CO2 emissions even end up significantly higher after the COVID-19 crisis when we account for persistently low oil prices. We then investigate whether implementing carbon pricing can still yield positive macroeconomic dividends in the post-COVID recovery. We find that implementing ambitious carbon pricing speeds up economic recovery while significantly reducing CO2 emissions. By maintaining high fossil fuel prices, carbon taxation reduces the imports of fossil energy and stimulates energy efficiency investments while the full redistribution of tax proceeds does not hamper the recovery.Electronic supplementary materialThe online version of this article (10.1007/s10640-020-00488-z) contains supplementary material, which is available to authorized users.

Energy Performance Contracting and Public-Private Partnership: How to Share Risks and Balance Benefits

Public private partnerships (PPPs) are a well-known instrument used worldwide by public administration (PA) to build public infrastructure using private knowhow and financial resources, and sharing risks. In recent years, PPPs have been widely adopted to develop energy efficiency projects between public and private sectors. In this context, a successful project requires a contractual arrangement based on energy performance contracting (EPC) that balances the interests of the two parties. This paper aims to answer two questions: how to share the benefits between the contractual parties and reach an optimal long-term contractual agreement; and which type of contract ensures a consistent risk transfer to the private partner, allowing the PA an “off balance” accounting treatment. The research questions are answered through the development of a mathematical equation able to calculate the optimal percentage of benefits sharing between partners in a long-term contractual agreement. The results are tested with a simulation based on a case study about the energy efficiency project of an Italian hospital. The paper is innovative because it provides suggestions to improve the EPC-PPP contractual structure and realize a balanced agreement between the public and private partners. Moreover, it analyzes the different allocation of risks in EPC contracts to identify the implication for the PA in terms of on-off balance accounting treatment in energy efficiency investment. We show how a successful long-term EPC-PPP can benefit from a mixed contractual structure in which profit-sharing percentage changes during the contract’s life to ensure the same net present value (NPV) to both public and private partners. This paper supports public decision making in order to choose contracts that are able to transfer energy and management risks. Moreover, it helps to understand the balance between public and private interests in a long-term EPC-PPP contract.

Residential energy efficiency investment and behavioural response under different electricity pricing schemes: a physical-microeconomic approach

ABSTRACT The purpose of this paper is to analyze the effects of electricity price changes and energy efficiency subsidy on household energy efficiency purchase and/or behavioural adjustment decisions. The analysis adds energy efficiency investment to a methodology that merges the physics of energy with microeconomic principles. The physical side informs the amount of electricity used to satisfy services that people desire, while the microeconomic side imposes a utility function that represents a household’s welfare. Several electricity pricing schemes and energy efficiency options are examined, with costs and benefits of each option explicitly modeled in the physical representation. Several insights are derived from performing an analysis for archetypical villas across Saudi Arabia. One, energy efficiency purchases lower the need for energy conservation. Households also lessen the extent to which they practice conservation as energy efficiency subsidies are raised. Additionally, as energy efficiency subsidies and electricity prices rise, the difference in household spending on other goods and services widens between the highest efficiency case and no added efficiency. This indirect rebound causes a situation where firms would increase their production, and thus energy use, to meet the additional demand by households for their goods.

Selling and Saving Energy: Energy Efficiency Obligations in Liberalized Energy Markets

In Europe, energy efficiency obligations are imposed on energy retailers competing in liberalized energy markets. They comply by subsidizing energy efficiency investments made by energy end-users from within or outside their customer base. We develop a model describing how competition in the energy market affects compliance strategies. We find that, instead of selecting the most cost-effective investments options, firms may either target their most elastic customers, which enables them to increase their retail price, or their competitor’s customers, which protects their sales. Allowing firms to trade obligations can restore cost-effectiveness, but reduces consumer surplus. Overall, the degree of flexibility that should be incorporated into such programs crucially depends on the degree of heterogeneity across investment costs and the relative weights governments assign to cost-effectiveness and consumer surplus.

An overview of global energy scenarios by 2040: identifying the driving forces using cross-impact analysis method

This study presents a novel comparative analysis on global energy scenarios in terms of main characteristics, scenario building frameworks and time frames. The study analyzes each energy scenario’s outputs and outlooks by 2040 such as gross domestic product growth, technology developments, primary energy demand by sector, energy supply by fuel, energy intensity and carbon emissions. Based on the foresight semiquantitative method, global energy driving forces which play significant roles in reshaping the world energy future by 2040 have been identified. The study applies mathematical principles to quantify the rational judgments of an expert panel in social, technological, economic, environmental and political framework through cross-impact analysis. Among the 10 global energy driving forces by 2040, population growth rate and climate change are identified as social and environmental driving forces, respectively. Investment in infrastructures, financial shocks, consumer behavior and energy efficiency are marked as economic driving forces, while global governance and geopolitical relationships are identified as the global energy market’s political driving force. And finally, technological development in renewable energies as well as in oil and gas upstream sector is recognized as a technological driving force.

The Climate Crisis and the Green New Deal: The Issue is the Issue, after All

The Green New Deal, an attractive agenda of increased investment in energy efficiency and renewable energy sources, is not remotely sufficient to stabilize global warming at a non-catastrophic level. Such a policy needs to be accompanied by direct measures to curtail the use of fossil fuels, although this may complicate the intended messaging.

Cost-effectiveness of energy efficiency investments for high renewable electricity systems

Although several studies have recognized the challenges brought about the high integration of Renewable Energy Sources (RES), research has yet to systematically investigate the effects of different levels of Energy Efficiency Measures (EEMs) on power systems with a high share of RES. The primary aim of this paper is to quantitatively evaluate the economic impact of different levels of energy efficiency investments in systems with a high share of RES, based on the case of Brazil. Our review analysis revealed a lack of understanding of how to calculate the Long-term Average Cost of Saved Electricity (LACoSE). Therefore, the methodological contribution of this research also lies in the proposition of a step-by-step procedure to estimate this variable. Findings of this study suggest that EEMs may result in a reduction in the expected new installed capacity between 1.9% and 10.3%, and from 0.4% to 4.3% for the total CO2 emissions (for reductions in the final electricity demand varying from 1% to 5% respectively). This comes with a decrease in the overall system costs between 1.9% and 7.7%. The results provide further support for the hypothesis that the economic impacts of energy efficiency investments and its cost-effectiveness are affected by the share of RES in the power system and these type of measures may provide holistic benefits including not only economic advantages but also environmental and social improvements. The proposed methodology largely extends beyond the case addressed as it may provide valuable lessons for other electricity systems.

Mixed-Method Research to Foster Energy Efficiency Investments by Small Private Landlords in Germany

The decarbonisation of the building stock is an important element for the success of the German Energiewende (energy transition). Despite some progress having been made, the rate of energy renovation falls below the level required to meet political commitments. This gives rise to the question: what deters property owners from making energy efficiency investments and how can the policy framework foster such investments? To answer this question, the paper focuses on a widely neglected property owner group: small private landlords (SPL). Although they manage 37% of all residential rental properties in Germany, very little is known about their decision-making processes for energy efficiency investments. We applied a mixed-method design to identify factors that hindered and supported their investments. In an explorative study, we initially conducted 18 problem-centred interviews. Subsequently, we carried out a postal survey and analysed the questionnaires using a hierarchical linear regression model. The results show that energy renovation is a multi-dimensional decision-making process, which can only be adequately addressed by a comprehensive policy package. To develop such a package, the author recommends that the specific investment behaviour of SPL must be better targeted, their knowledge about energy efficiency investments must be improved through exchange and networking, a sense of responsibility for the neighbourhood must be fostered, and greater focus must be placed on improving local framework conditions.

Impact of External Assistance Programs on Supply Chain Energy Efficiency: A Behavioral Investigation

Problem Definition: We take a behavioral perspective to examine the two-stage energy efficiency (EE) investment decision process that many small-and-medium-sized manufacturers (SMMs) face and the potential benefit that external assistance programs provide in both increasing the propensity to take on an assessment and choosing an appropriate EE investment level. Academic/Practical Relevance: A significant portion of energy efficiency improvement opportunities remain dormant at SMMs. External assistance programs are designed to help encourage SMMs to overcome the initial assessment hurdle. However, it is unclear if the source of such programs, whether offered by a downstream buyer or a third-party organization, results in different behavioral outcomes. This study provides insights for policymakers looking to design more effective external assistance programs. Methodology: We use analytical models and behavioral theory to develop a set of hypotheses concerning the impact of two types of external assistance programs. These hypotheses are further informed and tested through three sets of human experiments using participants from MTurk. Results: We confirm the anecdotal observation that, without any external intervention, a significant portion of profitable assessments remains dormant. Although third-party or buyer-offer assessment assistance programs perform equally well in increasing the propensity to conduct a profitable assessment, a buyer-offer program appears to be more efficient as it results in a higher portion of self-financed assessment, i.e., less free-riding. In the investment stage, we observed that investments are not influenced by the assessment cost. However, SMMs who self-finances or uses third-party assistance are prone to apply the representative heuristic and so, tend to under-invest (over-invest) when the assessment reveals highly (less) profitable EE opportunities. A buyer-offered assistance program could, interestingly, alleviate this behavioral bias, leading to investments that align better with the expected profit maximizing levels. Managerial Implications: Our results suggest that it can be more cost-efficient and effective for third-party organizations to collaborate with buyers in providing assistance and managing information instead of providing free assessments directly to SMMs, which is often the case in practice. This is because a buyer-offered assistance program could achieve the same supply chain EE results without having to inject extra cash to cover the assessment cost.

Energy efficiency as a credence good: A review of informational barriers to energy savings in the building sector

Abstract Information problems have early been suspected to be the main barrier to energy-efficiency investment. I review the vast yet piecemeal research that has been carried out since. Focusing on energy efficiency in buildings, I organize the review around the concept of credence good: just like that of auto repairs or taxi rides, the quality of energy-efficiency measures is never fully revealed to the buyer; as a result, it is subject to multiple information asymmetries. My first contribution is to distinguish symmetric-information problems from information asymmetries. The former arise when information is either incomplete or imperfect, but equally shared by contracting parties; as non-market failures, these can be addressed by technological progress and insurance markets. My second contribution is to give structure to the information asymmetries associated with energy efficiency by disentangling screening, signalling, moral hazard and price discrimination within a variety of contractual relationships involving buyers and sellers, owners and renters, borrowers and lenders, and regulators and policy stakeholders. I find evidence of information asymmetries to be compelling in utility-included rental contracts, unclear in home sales and rentals, and scarce in retrofit contracting and financing. I conclude by discussing the intricacies between informational and behavioural problems in energy-efficiency decisions.

Managing the risks of energy efficiency insurances in a portfolio context: An actuarial diversification approach

To achieve ambitious international climate goals, an increase of energy efficiency investments is necessary and, thus, a growing market potential arises. Concomitantly, the relevance of managing the risk of financing and insuring energy efficiency measures increases continuously. Energy Efficiency Insurances encourage investors by guaranteeing a predefined energy efficiency performance. However, literature on quantitative analysis of pricing and diversification effects of such novel insurance solutions is scarce. This paper provides a first approach for the analysis of diversification potential on three levels: collective risk diversification, cross product line diversification, and financial hedging. Based on an extensive real-world data set for German residential buildings, the analysis reveals that underwriting different Energy Efficiency Insurance types and constructing Markowitz Minimum Variance Portfolios halves overall risk in terms of standard deviation. We evince that Energy Efficiency Insurances can diversify property insurance portfolios and reduce regulatory capital for insurers under Solvency II constraints. Moreover, we show that Energy Efficiency Insurances potentially supersede financial market instruments such as weather derivatives in diversifying property insurance portfolios. In summary, these three levels of diversification effects constitute an additional benefit for the introduction of Energy Efficiency Insurances and may positively impact their market development.

Power markets in transition: Decarbonization, energy efficiency, and short-term demand response

Energy efficiency and short-term demand response are key issues in the decarbonization of power markets. However, their interaction and combined impact on market prices as well as on the supply side, is yet to be understood. We develop a framework to implement short-term demand response and investments in energy efficiency in detailed partial equilibrium power market models. We quantify our results using the EU-REGEN model for the European power market. Under an 80% emission reduction target, energy efficiency contributes only 11% of carbon emission reductions. Intermittent renewable energies such as wind and solar power account for the major share of 53%. In comparison to a scenario without short-term demand response and energy efficiency investments, 70 GW gas power is decommissioned immediately and 180 GW less gas capacity is needed in 2050, which underlines the need for immediate action by policy makers to avoid locking the EU power market into an inefficient path.

Estimating employment from energy-efficiency investments

We develop a methodology for estimating the number and types of jobs that would result from investments in energy efficiency in homes, businesses, and industry. The methodology involves the development of input-output (I-O) bills of goods that characterize how energy-efficiency funds would be spent across sectors of the economy. The methodology builds on and adds greater articulation to the research conducted in prior studies of U.S. energy-efficiency policies.•The first two steps involve estimating the magnitude of investments in energy-efficient technologies and systems required to produce a unit of energy consumption reduction, and then identifying how these investments are expensed across the broad investment categories, which creates the preliminary “bills of goods” for investments in energy efficiency in homes, businesses, and industry.•The third step involves soliciting feedback on the preliminary bills of goods from experts in delivering and evaluating energy-efficiency programs, and then making necessary modifications.•In the final step we apply the input-output coefficients representing the bills of goods to estimate the direct, indirect and induced employment per million dollars of investment in energy efficiency.

Limited Attention in the Housing Market: Threshold Effects of Energy-Performance Certificates on Property Prices and Energy-Efficiency Investments

We study the effects of limited attention on property prices and energy efficiency (EE) investments in the housing market. Using a novel dataset, we analyse over 5 million residential property sale transactions in England and Wales, each containing information about sale price, property and location characteristics, and a mandatory energy performance certificate (EPC). The EPC includes a continuous energy cost rating (SAP rating) which is mapped into seven colour-coded rating bands (ranging from green A to red G). Applying a Regression Discontinuity Design (RDD), we document significant price discontinuities at the rating band thresholds. We estimate that - holding the underlying SAP score equal - being in a higher rating band increases the final sale price of a property between 0.8% and 2.5% ($2,000 and $6,625 based on average sale prices) depending on the threshold crossed. The presence of price discontinuities suggests that individuals are attentive to the simpler colour-coded rating band and partially inattentive to the more precise SAP rating. We present a simple model for estimating the degree of inattention and show that, for a given level of attention, rating bands reduce attention to the SAP rating by 25% on average. Importantly, the detected price discontinuities appear to influence market behaviour: Sellers whose property receives an EPC rating just below a threshold to the next-higher rating band are between 0.4% and 11% more likely to make last-minute EE investments before placing their property on the market. We discuss a number of recommendations of how to best leverage these threshold effects to improve policy design, which can be extended to other settings where the provision of simplified information creates reference thresholds.

Fixing long-term price paths for fossil energy – the optimal incentive for limiting global warming

Neither a gradually rising carbon tax nor emission trading schemes can ensure that the costs of emitting greenhouse gases, in particular CO2, will steadily rise faster than the general price level. If, e.g., global fossil energy prices decline faster than a carbon tax or the emission permit price rises, then the final good and its use become cheaper. Since the prices of fossil energy as well as CO2 emission permit prices belong to the most unstable prices in the global economy, carbon taxes and trading schemes cannot anchor the long-term expectation that the effective emission costs for firms and households will rise continuously. Such an expectation, however, is a prerequisite for steadily growing investment in energy efficiency and/or renewable energy because the profits from such investments consist of the saved fossil energy costs (“opportunity profits”). This paper presents an alternative approach: The EU sets a path of steadily rising prices of crude oil, coal and natural gas by skimming off the difference between the EU target price and the respective world market price through a monthly adjusted quantity tax. Instead of the prices of fossil raw materials, the (implicit) quantity tax should fluctuate. In this way, the uncertainty about future price developments of crude oil, coal and natural gas and, hence, of the effective emission costs would be eliminated. Firms and households could calculate the profitability of investments in avoiding carbon emissions. At the same time, such a tax would ensure a uniform European carbon price in all sectors, provided the initial level of the price paths of crude oil, coal and natural gas account for the different CO2 intensities of these types of fossil energy. Given the size of the EU import bill for fossil energy, the amount of potential receipts of such an implicit and flexible CO2 tax would be (very) huge.

Cost and Benefits of Deep Decarbonization in Russia

With the new Paris climate agreement, 185 of 197 nations have committed to lower emissions of planet-warming greenhouse gases. The intent is to limit global temperature growth within 2 degrees Celsius (°C), with a hopeful target of 1.5°C. At the same time, a special report from the International Panel on Climate Change (IPCC) indicates that large emission reductions, in fact, must be achieved by 2030 if the temperature increase is to remain below 1.5°C. This goal requires every country to radically cut their greenhouse gas emissions by rebuilding both their energy supply and end-use sectors. Even bigger challenges confront those countries which export fossil fuel resources, as they must also find new sources of economic activity to replace revenues that will be lost from the significantly reduced energy sales. The overall economic impact of this transformation is hard to quantify. On the one hand, decarbonization requires an initial set of large-scale policy, program, and research and development expenditures. It will also entail higher upfront investments in energy efficiency and alternative energy resources. Based on conventional wisdom, these outlays will create an initial burden on the economy. On the other hand, the additional infrastructure investments will also stimulate economic activity, reduce future energy expenditures and also provide an array of other non-energy benefits. In this paper, we propose a thought experiment that explores the idea of prospective positive net economic impacts of decarbonization strategies for an energy-producing nation. Our results suggest that the positive productivity benefits of decarbonization strategies can overcome negative costs in both the short and long terms. We also note additional effects that are consistent with the officially announced long-term goals of modernization and reducing the Russian economy’s dependence on revenues from energy and raw material exports.

Multiple criteria decision analysis of public investment options: application to streetlighting renewal projects

The last global economic crisis set fiscal consolidation as one of the most relevant goals of economic policy. At the same time, efforts are necessary to increase economic growth rates, particularly by increasing quantity and quality of public investment. However, the lack of fiscal space and other impediments make these goals hard to attain. On the contrary, in many countries data show negative dynamics of quantity and quality of public investment. In terms of energy efficiency investment, trends are positive. However, the pace of investment significantly underperforms the goals set. We argue that one of the major reasons is the lack of financial innovation and project selection methodology. For this reason, projects have still been mainly financed under traditional procurement models. Surprisingly, most countries do not exploit the advantages of alternative models of financing which do not affect public debt level, significantly reduce fiscal deficits and reduce fiscal risks. This article argues that a multi-criteria approach used at the initial stages of project preparation increases the potential for project realisation and the overall quantity and quality. In order to provide empirical evidence, we use information on energy efficiency streetlighting projects and present a case of a traditional versus alternative financing models. Highlights a need for a systematic approach when selecting optimal financing model is a must; a lack of financial innovation is one of the most critical impediments to a higher level of investment in revenue-generating projects common for the energy efficiency sector; alternative models of financing enable public investment increase without harming the fiscal position; a new methodology for selecting the most preferable model is presented; a policy mix should take more comprehensive stance towards complexity of public investment projects.