Feed-in-tariff for certified energy savings

A FIT for certified energy savings aims at incentivising providers of standard energy efficiency programmes, or of large energy efficiency projects, by offering them a fixed remuneration for every certified unit of energy saved vs. a technology- or action-specific baseline. In general, energy companies or energy service companies (ESCOs) or large energy consumers fund energy efficiency programmes and projects, and sell the certified energy savings to the energy companies designated by law, just as with FITs for renewable energy. The designated energy companies recover their costs from the energy prices or tariffs paid by their customers.

Worldwide implementation status
It was initially developed by regulators in the USA to encourage utilities to promote Demand Side Management activities and has also been practiced in Australia, India, and other countries. In the USA, SOPs have been instituted, in widely varied forms, in many states successfully to achieve their energy efficiency goals. They have been administrated by utilities, governmental agencies, or quasi-governmental agencies and have geared towards different customers (industrial, commercial, or residential customers). SOPs either permit (e.g., in California, New York) or require (e.g., in New Jersey, Texas) customers to work through an ESCO or other intermediaries, which plan and execute the installation of energy efficiency options. The eligibility of the projects also varies. For example, the retrofits must reduce a building’s energy consumption by at least 15% in New Jersey, while there is no specific saving requirement in other states like Texas. In general, the costs of these energy efficiency projects funded by utilities are recovered from their customers (ESMAP & CF-Assist 2011).
In 2010, the South Africa National Energy Regulator also set up a standard offer programme. Any energy user (utility customer) or ESCOs can be paid with a fixed amount per kWh or kW after the completion of the energy efficiency project and certification of the achieved savings by an authorized M&V organization. To be eligible for the payments, the technologies deployed in the project must be pre-approved by the energy supply company Eskom. The pre-approved list is not static. Technology and appliance manufacturers and suppliers are invited by Eskom to propose innovative technologies. If appropriate, these technologies will be added to the pre-approved list (ESMAP & CF-Assist 2011). The cost recovery is done through the Energy Efficiency Demand Side Management allowance that corresponds to a public benefit charge (de la Rue du Can et al. 2011).
In addition, competitive bidding schemes for energy saving have also been implemented in a number of countries. For example, in the USA, utilities that are required to achieve demand side management look for energy service companies to provide innovative solutions, with the lowest costs, through a bidding process (NRDC 2003).

Governance level
A FIT for certified energy savings can be implemented at a national, regional, or local level. Until now, no countries have implemented energy efficiency FITs. However, some countries have implemented, or plan to introduce, similar schemes at least for larger consumers, e.g. standard offer programmes (SOP). This approach provides performance-based incentives to larger customers, paying them a certain amount per estimated kWh or kW saved through the installation of energy saving equipment in a specific programme.

Related sectors

• services
• residential
• industrial

In principle the technological focus is unlimited

Some appliance examples
• Refrigerators and freezers
• Cooking Stoves
• Washing machines
• Clothes driers
• Televisions
• Office equipment

Related target groups

• Investor: Large Investors, who implement energy efficiency projects on their own and receive the FIT.
• Energy Service Company: ESCOs (Energy Service Companies) or EESCs (Energy Efficiency Service Companies), who implement energy efficiency projects for their customers and receive the FIT.
• Utility: Energy suppliers and distribution network operators: these can be both (1) the energy company designated by law to buy the certified energy savings at the fixed FIT, and (2) providers of energy efficiency programmes and services that receive the FIT.

Direct beneficiaries

• Investor

  Investors directly benefit from the FITs for certified energy savings, because financial support is directed to the energy savings they deliver.

• Energy Service Company

  ESCOs directly benefit from the FITs for certified energy savings, because financial support is directed to the energy savings they deliver (either directly to the FIT scheme or with technical and financial support from an energy company, ESCO or other actor operating an energy efficiency programme or service).

Indirect beneficiaries

• Manufacturer

  They indirectly benefit from the FITs for certified energy savings as the FIT can increase the demand for their products and services.

• Engineering consultant

For the energy companies as a main target group, the FIT scheme addresses the barrier created by conventional price and market regulation, that they earn more from increased energy consumption so that there are no recovery of energy efficiency programme costs or no reward for energy savings. However, depending on the level of remuneration, the financial incentive may be sufficient or not to break even, and regulators should monitor this and use complementary regulatory instruments to set the incentives right.
For ESCOs, the scheme addresses their barriers of uncertainty of demand, risk of business development, and availability of financing.
For the beneficiaries in the energy efficiency markets, since energy companies or ESCOs usually assist their customers with energy efficiency programmes combining information and financial incentives or with energy efficiency services, these mainly address the following barriers. The FIT scheme directly addresses them for large energy consumers participating with their own projects.

Relevant barriers

• Knowledge and information barriers: Particularly Unavailability of information and Information and Search Costs The information component of the programmes will reduce or overcome these important barriers for potential investors but also some suppliers.
• Economic and financial barriers: Especially access to financing / Lack of capital and Risk exposure, irreversibility, discount rate required Financial incentives or financing are direct means to overcome such economic or financial barriers for potential investors in energy efficiency. The signal to the market will also reduce risk and uncertainty for (potential) providers of energy-efficient technologies and solutions that they will find a market.
• Lack of interest and motivation in energy efficiency-improvement: In particular: Transaction costs or hassle/inconvenience (in combination with) Time constraints, focus on core activities and small size, low priority The financial incentives, as well as the information will motivate investors and suppliers to consider the energy-efficient technologies and solutions supported by the programmes. The programmes should make it easy to actually implement energy efficiency.

Relevant incentives

• Directly increasing earnings or profits for actors on the supply side: Particularly if all three regulatory actions (recovery of programme costs; bonus for energy savings; and decoupling of revenues from energy volume) are implemented, energy companies will have a good incentive to run energy efficiency programmes, as this will increase their profits. The programmes will then also increase profits of suppliers of energy-efficient technologies and solutions to final consumers.
• Improved reputation: Assisting their customers to save energy and costs will increase the reputation of energy companies and may induce them to such programmes, even if the regulator does not offer a bonus payment. However, this is usually a much weaker incentive than the bonus.
• Saved energy costs: These are a major incentive for energy company customers to participate in the programmes and invest in energy efficiency.

The FIT for certified energy savings can be more effective when being supported by provision of information about the FIT scheme as well as energy efficiency technologies and their costs and benefits.
Other policies, such as minimum energy performance standards (MEPS) and mandatory comparative energy labels or Energy performance certificates, or RD&D funding can provide an important basis for the energy companies and ESCOs in terms of deciding which programmes/ measures to promote. Programmes implemented for a FIT should target solutions exceeding MEPS in energy efficiency by far, such as super-efficient appliances. They can thus prepare the next revision of MEPS.
In general, governments need to assess and decide which energy efficiency potentials and end-use actions they want to address through a FIT for certified energy savings and the corresponding programmes and services by the energy companies and ESCOs or alternatively through an energy efficiency fund or through programmes directly offered and funded by the government (see detail on this option of government agencies and budget. This will also depend on the general performance of energy companies, ESCOs and the regulator.
FITs and Energy efficiency funds can also be used complementary to each other. For example, the fund can address fields of action that cannot be or are not addressed by the standardised energy efficiency programmes typical for a FIT scheme. E.g.: Energy companies will run standard financial incentive programmes, while funds will run motivation and information campaigns, promote innovative technologies and techniques, address behaviour, etc.
Furthermore, an Energy efficiency fund can include a smaller FIT or Standard offer programme for ESCOs and large energy consumers in its programme portfolio, as is the case with Efficiency Vermont (RAP 2012). In this case, the savings are not sold to energy companies but receive a standard remuneration from the fund.

• Establishing the rules and procedures of the FIT scheme
• Setting up and approving the payment level
• Issuing the list of pre-approved technologies 
• Developing the M&V protocols and authorizing M&V organisations (ESMAP & CF-Assist 2011)
• Certification of energy savings

In addition, independent organisations responsible for Measurement and Verification (M&V) of energy saving of a specific programme or project not using standardised should be in place.
Furthermore, programme operators or project aggregators such as energy companies and ESCOs are essential for the participation of residential and small commercial customers, due to the non-trivial transaction costs (Bertoldi et al. 2009; Neme et al. 2012).

Funding
As with Feed-in-tariffs for renewable energy, the law can provide that energy grid companies must purchase certified energy savings at the fixed FIT and then distribute the costs evenly to all energy consumers in the country, who pay a certain share of their energy price to fund the costs.
A FIT scheme can also be funded by a public benefit charge, i.e. a charge added ex ante to all customers on energy consumption that is intended to cover costs related to services that an energy company provides in the public interest (Bertoldi et al. 2009).

Test procedures
The FIT scheme needs test procedures for energy efficiency in two ways: for the definition of calculation methods for the proof of energy savings achieved, and for setting and communicating energy efficiency requirements for the actions promoted in the programmes and services that the energy companies, ENCOs and others implement to achieve their targets.
The ESO will, therefore, first rely on test procedures that were generated, e.g., in the preparation of MEPS and energy labels for both purposes. However, to the extent that such procedures do not (yet) exist for some types of action, specific test procedures for energy efficiency will need to be developed for the FIT scheme.

Others
An easy-to-monitor, consistent, and unequivocal set of calculation methods for the proof of energy savings achieved needs to be developed. It must cover all energy efficiency actions eligible for the scheme.
The FIT agency and the energy companies, ESCOs and other actors need highly qualified staff with knowledge of energy efficiency solutions and potentials as well as programme design, implementation, and evaluation.

• Establishing the rules and procedures of the FIT scheme
• Setting up and approving the payment level
• Issuing the list of pre-approved technologies for standard energy efficiency programmes and larger projects
• Developing the M&V protocols, including the standard methods for calculating certified energy savings with deemed savings or full M&V, and authorizing M&V organisations (ESMAP & CF-Assist 2011)
• Implementation of energy efficiency programmes and projects
• Certification of energy savings
• Sale of certified energy savings to the FIT scheme operator
• Distribution of costs to all energy suppliers and ultimately their customers, or funding of costs from a fixed Public benefits charge

Quantified target
It is advisable to set an energy savings target for the FIT scheme as a whole, as a part of the government’s overall energy efficiency policy portfolio. The FIT scope and levels may then need to be adapted from time to time in order to ensure target achievement.
A specific standard energy efficiency programme eligible for the FIT does not need a quantitative energy savings target but we recommend it.

Co-operation of countries
International co-operations that share best practices of the design and implementation of the FIT scheme for certified energy saving can help policy-makers at national, regional/local level to improve their policies.

Monitoring
Different Measurement and Verification (M&V) approaches exist. The simplest way is to stipulate deemed saving assumptions for certain energy efficiency options before its installation. For example, many jurisdictions in the USA have technical reference manuals documenting these savings. A more complex way is to conduct short-term tests to obtain inputs for saving calculation. A complete M&V can include whole building analysis, such as calibrated simulation modelling, or extensive metering of end-use equipment or systems. Which approach to be chosen depends on data availability, the predictability of equipment operation, and/or the trade-offs between M&V precision and cost (Neme et al. 2012).
In addition, an ex-post evaluation for the perspectives of consumers and society will require the following data to be provided by programme and project implementers. For evaluation of energy savings, the documentation should cover the number of participants or beneficiaries, the energy efficiency actions they have taken (e.g., purchase of energy-efficient refrigerators), and the unitary gross energy savings achieved by each action (either via agreed deemed savings or ex ante agreed calculations, or via ex-post evaluations) (cf also Staniaszek & Lees 2012). To ensure that sufficient and useful monitoring and evaluation data will be provided by the programmes or projects, the provision of this data should be part of the funding requirements to direct FIT beneficiaries.
For evaluating economic benefits and costs, energy companies and direct FIT beneficiaries need to provide evidence of their costs incurred, separately for the programme design, administration, communication and evaluation costs and for any financial incentives or project investments; confidentiality needs to be guaranteed. They must also provide the incremental part of the energy or power (kW) prices that the participants/beneficiaries would have paid for the energy or power they saved. Furthermore, incremental costs by the customers to invest in energy efficiency or operate their premises and equipment in an energy-efficient way need to be estimated via market monitoring or ex-post evaluation.

Evaluation
In order to be credible, evaluation should be done by independent institutes or consultants and costs should be carried by the government, e.g., the FIT agency.
The possibilities and formulas for evaluating energy savings will depend on the type of energy efficiency action supported as well as the type of energy efficiency programme or service (e.g., information only programmes are more difficult to evaluate than financial incentive programmes or energy efficiency services, see our detailed files on these types of policies and measures). The same holds for economic benefits and costs from either the customer/participant perspective or that of the national economy/society.
In addition to the data directly monitored for the energy efficiency programmes, evaluation of net energy savings compared to baseline trends should address side-effects such as rebound, multiplier, and free-rider effects, and the ‘lifetime’ and potential deterioration of energy savings.
For the economic benefits from the perspective of the national economy/society, standard values for the incremental energy supply costs that will be avoided in the long run for a kWh of energy or a kW of load should be developed by the government.

Relevant individual dynamics and side-effects

• Minimising snap-back effects: Snap-back effects can also be minimised through continuation of programmes, for as long as needed, to support mainstream energy-efficient technologies and solutions. Securing these levels through legal minimum energy performance standards may reduce the need to continue information and incentive programmes.
• Dynamic market transformation and/or innovation: The FIT scheme can generally foster a growth in the market of energy efficiency products and services and attract substantial private investment. In addition, the market of more effective and expensive technologies can be accelerated if they are included in the pre-approved list or are obligated for the energy efficiency programme (ESMAP & CF-Assist 2011). However, care needs to be taken to avoid “cherry-picking” or “cream-skimming”. This requires that the baselines and calculation methods for determining the energy savings are defined accordingly and are frequently updated so as to offer higher FIT levels for higher savings.
• Avoiding lost opportunities: As a FIT scheme tends to focus more on single measures than on comprehensive retrofits, some opportunities for achieving even higher savings through an integrated approach may be lost. Regulators should therefore take care that the energy efficiency programmes and services implemented and supported by the FIT scheme also aim to avoid lost opportunities by trying to maximise both participation rates and energy savings per participant or for the energy-efficient technologies and solutions promoted. Furthermore, in order to ensure that the market actors do not focus on one or only a few types of energy efficiency actions, but cover a broad range of potentials, the FIT levels need sufficient differentiation for the different sectors or types of action.
• Minimising rebound effects: Regulators should also survey the energy efficiency programmes and services so that they are designed to minimise rebound effects. This can include requiring absolute limits on the energy consumption of energy-efficient appliances promoted, as well as offering a bonus on the FIT level for educating consumers on energy-efficient use of appliances.
• Minimising free-rider effects: The programmes should also be designed to minimise free-rider effects, e.g., by promoting only technologies and solutions with high energy efficiency levels while maximising uptake of these at the expense of low-efficiency solutions.
• Creating Spill-over effects: A FIT scheme, also specifically targeting more effective and expensive technologies, can induce technology learning and thus reduce their costs. This helps the market transformation of these technologies and enhances the spill-over effect. Such spill-over effects may also be supported through the training of specialised contractors and energy consultants.

Sustainability aspects
In a FIT scheme, bonus payments are also an option to promote sustainability aspects other than energy savings. This could include energy savings for low-income customer groups, so as to reduce fuel poverty and promote water savings, or efficient use of materials. The specific calculation methods for energy savings could also provide bonuses e.g. for water savings for clothes or dish washers, or limits on water consumption.

Co-benefits
It will depend on the scope and design of energy efficiency programmes implemented under a FIT scheme and on the incentives as mentioned here above, what kind of co-benefits (i.e. “non-energy benefits” such as health improvement, labour market effects etc.) may arise from implementing the FIT scheme. The increasing demand of energy efficiency products and services induced by the implementation of the FIT scheme may enhance the job market in these fields.

The following barriers are possible during the implementation of the policy:

• The FIT scheme may encourage the deployment of low-cost technologies, i.e. the “low hanging fruits”, if FIT tariffs are not sufficiently differentiated (Bertoldi et al. 2009; IFEU & Wuppertal Institute 2008).
• A great effort and a lot of time may be needed to develop standardised calculation methods and baselines for deemed energy savings as well as the appropriate FIT levels.
• Verification of energy savings for large individual projects is likely to be complicated and thus cause high transaction cost, which would impose another barrier to the FIT implementation (Neme et al. 2012; IFEU & Wuppertal Institute 2008).

Following measures can be undertaken to overcome the barriers:

• The FIT scheme should be differentiated according to technologies, market segment, the depth of saving, and end-use sector (Bertoldi et al. 2009; Neme et al. 2012 ).
• Balancing the precision and cost of Evaluation, Measurement & Verification (EM&V) is very important to ensure that its benefits are commensurate with its costs. This could be, for example, different EM&V requirements and methods chosen for particular investments and customer types, based on the availability of data from past studies on the usage data and/or savings, the predictability of equipment operation, etc. (Neme et al. 2012).

The potential energy savings from a FIT scheme will depend on its scope. In principle, a wide scheme implemented as the main mechanism for organisation and funding of energy efficiency programmes may achieve the same level of energy savings as has been demonstrated for Energy saving obligations for energy companies and for Energy efficiency funds. This would be equivalent to around 2 % per year of the energy consumption of the targeted energy end-use sectors.

A successful FIT scheme may hardly require public funding, which is one major advantage of the FIT mechanism it shares with Energy saving obligations for energy companies. It only needs an agency to develop FIT levels and MRV procedures as well as for certification of savings and regulatory oversight to implementation.
The costs borne by the actors implementing energy efficiency programmes and services and supported by the FIT are likely to be very similar to programme costs under Energy saving obligations for energy companies or for Energy efficiency funds. They are limited to the FIT level. Based on experience with effective an efficient programmes to date, the level of remuneration could be around 1.5 to 2 Eurocents/kWh of electricity saved, and between 0.5 Eurocents/kWh of natural gas or other heating fuel saved. However, the remuneration should differentiate between energy efficiency technologies and actions targeted, and also avoid “cherry-picking” or “cream-skimming” through increasing remuneration for higher levels of energy savings (Neme et al. 2012).
In this respect, a FIT scheme that is differentiated based on different factors (e.g. technologies, market segment, the depth of saving, and end-use sector) and decreases over time probably imposes lower costs for society, in comparison with more uniform supportive schemes (Ragwitz et al. 2006).

The FIT scheme can be very cost-effective for the government, given its small demand on public funding and its ability to attract substantial private investment in energy saving.
For t society as a whole, the benefits of energy saving include, avoided energy supply system costs, the improved reliability of the electricity network, postponement of the grid reinforcement, avoidance of black outs, avoidance of investments in reserve power in the case of electricity savings, and their external costs (e.g. environmental costs not covered by emission allowances) (Suerkemper & Irrek 2010; Green Alliance 2011). Thus, with a proper design, the FIT scheme can be cost-effective for the whole of society. Again, assuming similar results as for energy saving obligations for energy companies and for energy efficiency funds, it is very likely that FIT schemes will be highly cost-effective, with benefits as high as two to six times the costs.