Financial incentives

The aim of the policy is to foster the purchase of energy-efficient appliances. It can also be used to facilitate market penetration of innovative technologies or to accelerate the exchange of very inefficient old appliances.

Worldwide implementation status
Financial incentive schemes for energy efficient appliances are implemented in many countries worldwide.

Governance level
Usually, financial incentives are offered by national governments. Depending on the specific measure and legislative framework, it can be at the international, national, regional and local level and also be offered by energy companies as part of their measures to fulfil an energy efficiency obligation. It is essential to avoid competing schemes.

Related sectors

• services
• residential
• industrial

This policy is focused on appliances. It is especially appropriate for common appliances with a high spread of energy efficiency levels between the least and most energy-efficient models on offer and with high absolute energy savings, such as refrigerators and freezers, cooking stoves, clothes dryers, or televisions, and commercial food cooling and laundry equipment.

Appliances covered:

• Refrigerators and freezers
• Clothes Washers
• Clothes Dryers
• Kitchen stoves and ovens 
• Coffee machine
• Microwave
• Dishwasher
• Television
• Monitors
• Computer
• Office equipment (Copiers, Fax machines, Printer, Server etc.)
• Data centres
• Commercial Food Cooling Equipment
• Commercial Laundry equipment

Related target groups

• Manufacturer: Manufacturers need to produce and market the energy-efficient appliances eligible for the financial incentive
• Retail company: Retailers need to stock and market the energy-efficient appliances eligible for the financial incentive
• Investor: The target group are investor-users and investors. They get financial incentives when purchasing an energy-efficient appliance. Through financial incentives consumers are more likely to buy an energy-efficient product.

Consumer organisations, energy agencies, and energy companies are sometimes involved in the implementation of the policy and thus benefit from increasing service demand.

Direct beneficiaries

• Investor

  Investor-users and investors benefit directly from financial incentives when they purchase an energy efficient appliance. In addition, they save energy costs due to the higher energy efficiency of the appliances.

Indirect beneficiaries

• Manufacturer

  Actors on the supply side indirectly benefit from financial incentives, because they can sell more of their energy-efficient products, often at a higher price. Since the incentives are intended to accelerate the market penetration of BAT products, the investment in developing an energy-efficient innovation can become profitable more quickly.

• Retail company

  Retailers indirectly benefit from financial incentives too, because they can sell more energy-efficient appliances, often at a higher price than inefficient products.

• Consumer organisation

• Energy agency

  They are sometimes involved in the implementation of the policy and thus benefit from increasing service demand.

• Energy company

• Governmental actor

Relevant barriers

• Lack of interest and motivation in energy efficiency-improvement: If financial incentives raise the benefit to a level, where it becomes highly salient, less or no time has to be spent on information search – transaction costs are reduced. Even consumers not willing to spend time on comparison of appliances may now decide in favour of a highly energy-efficient appliance.
• Economic and financial barriers: The policy addresses the financial barrier that the more efficient appliances are often more expensive than other models and that the purchase of new appliances is often not made until the old (less energy efficient) appliance is broken. Through financial incentives consumers are more likely to buy energy efficient products and/or to replace old appliances faster.
• Knowledge and information barriers: Financial incentives can be seen as one of the best instruments to create awareness of energy-efficient products. They function as an endorsement label, informing consumers that there are energy-efficient products, and should be accompanied by information on what are the energy cost and overall life-cycle cost savings.

Relevant incentives

• Saved energy costs: With the acquisition of BAT, future energy costs over the life span of the appliance will be significantly lower.
• Directly increasing earnings or profits for actors on the supply side: Financial incentive programmes will also increase profits for suppliers of energy-efficient technologies and solutions to investors or final consumers.

Financial incentives are an important and effective policy instrument. However, it is important that they be embedded in an efficiency policy package:

1. Financial incentives can be well combined with labelling schemes, because the label makes definition of energy-efficient appliances eligible for the incentive a lot easier. For example, products obtaining a high energy-efficiency label (at BAT level) or reaching the top category on an energy efficiency class-label may be incentivised. Consumers will then also easily identify these appliances in the shop. 
2. Financial incentives may also be combined with regulations. For example, a regulation prescribing minimum efficiency in several upcoming tiers may incentivise manufacturers to improve appliances that reach the latest tier already in earlier periods.

Additionally, financial incentives may be accompanied by information programmes which can be implemented via energy agencies, consumer associations, or energy companies. In order to avoid rebound effects it is important to influence consumer behaviour in the use of the energy-efficient appliances too, in order to realise the full energy savings. In order to avoid dumping of—possibly hazardous—waste refrigerants that may emit powerful greenhouse gases to the atmosphere, it can be useful to combine the financial incentives with recycling programmes.

The following pre-conditions are necessary to implement financial incentives:

Agencies or other actors responsible for implementation
As financial incentive schemes often involve the review and administration of funding applications by customers and finally the payment, they are usually not handled by ministries but rather implemented by Energy Agencies, energy companies, or retailers directly. Consumer and producer associations may be partners to implement the policy.

Funding
Funding can be provided via the energy prices and tariffs, since it will also be the energy consumers benefiting from the energy savings. This will be the usual source in case of energy companies implementing the programme to fulfil an Energy Saving Obligation. Creating a special levy on energy prices to provide the funding is another possibility.
Cross-financing from government budgets (taxes) is possible too, e.g. for efficiency funds. Market-based financing includes, in addition to Energy Saving Obligation schemes, Emission Certificates auctioning funds or, an alternative source for developing countries and emerging economies, climate finance, such as Programmes of Activities (PoA) under the Clean Development Mechanism (CDM) or Nationally Appropriate Mitigation Actions (NAMAs). 

Test procedures
An agreed test procedure for measuring the standard energy consumption of an appliance is the precondition for deciding whether the appliance is energy-efficient enough to qualify for the financial incentive. If there is an energy label for the type of appliance, there will be a test procedure underlying this label, and so normally this test procedure or the label will be used directly.
In addition, in order to prove that the programmes are effective in saving energy and reaching defined efficiency standards, agreed, reliable, and standardised methods for calculating savings, economic benefits, and costs need to be developed and used.

For this policy, not all stakeholders need to be consulted, but for the institutional design, consultation of the target group (including appliance retail trade and manufacturers/importers) may be sensible to secure optimal functioning and public awareness of the programme. The first step is an encompassing market study. If other policies (regulation/labelling) have already been carried out, respective studies may be used and synergies realised.
The second step involves the identification of possible target BAT appliances, and the respective energy performance levels, which may be incentivised and involves also the consideration of different incentive amounts and types (grant, tax deduction etc.). At this stage, scenario modelling of the effects for setting different policies are recommended.
In a final step, the incentive scheme needs to be set up preferably at an existing institution experienced in consumer consultation and public relations. It is important to design a scheme that is as easily accessible as possible, e.g., cooperating with retailers for payment of the incentive.
A thorough monitoring and evaluation system should be set up in order to identify real effects.

Quantified target
The policy can quantify targets (number of units, number of participants, targeted energy savings). 

International co-operations
Countries can co-operate by exchanging information and experience on principles as well as practical details, problems, and solutions of problems encountered when implementing such incentive programmes. Example can be how to make participation as easy as possible, or how to minimise free-rider effects.
Providing climate finance to developing and emerging countries for funding financial incentive programmes is another potential way of co-operation.

Monitoring
The implementing institutions need to set up a monitoring system covering data on individual cases: the appliances receiving a financial incentive and their energy performance or energy label classes, the amount of energy saved (kWh/yr per appliance), the total cost of the appliances, the amount of grants or tax credits and the programme administration and communication costs. In order to verify office book-keeping, sample checks in the field are useful.

Evaluation
It is important to evaluate this policy in order to find out if the incentive provided is adequate. In order to find out whether the funding is used effectively, the number of new appliances that are bought and how much more efficient they are compared to the inefficient appliances that would have been purchased without the programme, or to the old appliances that were replaced, could be assessed. The market share of the addressed energy-efficient appliances has to be monitored, so the incentive can be concluded when a certain market share (appr. 50%) is reached.
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 regulatory authority.
The evaluation should be done by independent institutes or consultants.

Relevant individual dynamics and side-effects

• Dynamic market transformation and/or innovation: The policy aims at a market transformation by facilitating market penetration for energy-efficient appliances. It indirectly motivates companies to develop and market more energy efficiency innovations. Through both ways of impact, financial incentives can be very effective in making markets move dynamically towards higher energy efficiency levels.
• Avoiding lost opportunities: If the scheme targets appliances with long life times and only BAT are incentivised, it helps to avoid lost opportunities by preventing investors from buying long-lasting low-efficiency appliances. If the scheme is badly designed and hands out grants to lower-efficiency appliances, it can contribute to creating lost opportunities.
• Minimising rebound effects: Rebound effects are possible: The use of more efficient appliances does not guarantee the full potential energy savings. Instead of fully harnessing the energy savings, consumers may invest in bigger capacities or higher usage rates. This can be addressed by information and awareness campaigns, or even by advice from specially trained sales persons in retail trade.
• Minimising snap-back effects: In principle, financial incentive programmes can be discontinued if the energy-efficient technologies and solutions have become the mainstream. However, care needs to be taken that the markets don’t “snap back” to inefficient practices and technologies.
• Minimising free-rider effects: In the final phase of the implementation period, when the market share of energy-efficient appliances is already high, free-rider effects are likely to occur: many customers would buy highly energy-efficient appliances anyway. This can be avoided by ending the incentive scheme (or reducing the incentives) at the appropriate time.
• Creating Spill-over effects: Usually the effect of financial incentives is limited to the type of appliance addressed. Spill-over effects will occur if the market for this appliance has been permanently changed so that only energy-efficient products are manufactured, marketed, and purchased. Further spill-over effects may be possible if the financial incentive is able to change a consumer’s behaviour in general.

Design for sustainability aspects
The policy can be complemented e.g. if a recycling programme is added to save resources and avoid harmful emissions to the environment. People who make use of the financial incentives then have to prove that the replaced appliance has been recycled.
Other sustainability aspects can be included in the definition of measures incentivised (health/environmental aspects).

Co-benefits
The co-benefit of this policy is that the demand for energy-efficient appliances that usually have a higher added value rises, which creates growth in retail and production of such appliances. Several energy efficiency market segments can be stimulated with labour market effects in these sectors.

The following barriers are possible during the implementation of the policy
The implementation of the policy can be hampered if not enough funding is provided and if the control system is not thorough enough to impede fraud.
Another typical barrier is low response and participation from the target groups. This may be due either to low awareness of the programme, uncertainty of the benefits of energy efficiency, financial incentives being too low, application procedures too cumbersome, or supply-side market actors not sufficiently skilled or unmotivated to market energy efficiency and the programme.

The following measures can be undertaken to overcome the barriers
The policy should be monitored and the use of financial incentives should be controlled at least through sample checks.
Funding for financial incentive programmes can be stabilised by delegating implementation to energy companies, e.g. as part of an energy saving obligation. Another option is a dedicated energy efficiency levy and funds, or using revenues from auctioning emission rights. For developing and emerging countries, climate finance is another potential way of funding financial incentive programmes.
Measures to increase participation will depend on the reasons identified for low programme uptake (see above for potential reasons). They can include better communication of the incentive programme and the benefits of energy-efficient appliances, easing application and participation, increasing the incentives for consumers and / or for retailers and sales staff, or offering training for sales persons.

Financial incentive programmes can be very powerful tools used to promote very energy-efficient appliances. The following bigEE model examples of good practice demonstrate the achievable energy savings:

Brazil’s Electric Utilities’ Refrigerator Programme
Between 2008 and 2010 45 utilities carried out refrigerator replacement programmes. In total,383,760 appliances were replaced from 2008 to 2010 which saved 186,294 MWh/year and reduced peak demand by 23,277 kW.
Energy saved in total electricity consumption for low-income households: Average total monthly consumption among a sample of customers of one utility fell from 167 kWh to 94 kWh after the replacement programme (a reduction of 44%) (Jannuzzi 2007).

The Dutch energy rebate scheme “EnergiePremieRegeling”
In November 2001, almost two years after the start of the EPR, one third of Dutch households had applied for the EPR rebates. Of this, around two thirds concerned domestic appliances. The introduction of the EPR has led to an enormous growth of the supply of A-labelled appliances.
The market share of A-labelled washing machines grew from 40 to 88% over the 1999-2001 period. For refrigerators this was from 26 to 67%. The proportion of A labelled appliances doubled. According to estimates by Wuppertal Institute, energy savings for household appliances of 300 GWh/year plus 500 GWh/year in heating energy for buildings and 0.3 million tons of CO₂ were realized with the programme (including the market transformation effect and other side effects).

The tax rebate scheme from Italy
BIO IS et al. (2008) estimate energy savings of 43.6GWh (9.6 ktoe) in the first 9 months and CO₂ reductions of 27.7 kt CO₂. In the first 9 months, 67% of the total sales were A+ or A++ appliances (Bio IS et al. 2008, p.99). The share of A+ and A++ labelled appliances increased by 28% compared to 2006.

The expected costs depend on the design of the programme, the duration and the rebate or incentive for each appliance. Some examples from three different incentive programmes are listed below (read more on these programmes in the bigEE good practice files):

Brazil’s Electric Utilities’ Refrigerator Programme
The new refrigerator is supposed to save at least the same amount of electricity as the difference between the subsidised tariff and the residential one → 53% (Jannuzzi 2007).

The Dutch energy rebate scheme “EnergiePremieRegeling”
In total, about 15% of the ecotax was used for the energy rebate scheme. The amount of funds available to the citizens for 2000 and 2001 was €158 million of which 97% was actually spent. The additional implementation costs (including information and awareness campaigns) by the utility companies were 20% of this expenditure (ca. €41 million). 42% was used to increase the demand for energy-efficient domestic appliances.
Joosen et al. (2004) estimated a cost of conserved energy of between 4 and 8 Eurocent/kWh for the programme costs (rebates plus administration). Due to the rebates, the actions were on average cost-effective for the consumers who took action.

Italian government’s tax rebate scheme
The costs for the government in the first nine months of 2007 were estimated to be between €90 million and €130 million (BIO IS et al. 2008, p.98).

Well-designed financial incentive schemes for energy-efficient appliances can be cost-effective for consumers and society. However, care must be taken to achieve high participation and energy savings, and low free-rider effects, as many evaluations show. Here are some examples from bigEE’s files.

Brazil’s Electric Utilities’ Refrigerator Programme
Only 26 of the 94 programmes have an expected cost-benefit ratio under 1.0; i.e., these are cost-effective. The rest are not cost-effective, but potentially have social and environment benefits. It has to be noted that these programmes cover the full cost of the new energy-efficient appliances, not just a rebate of 10 to 20 % on the purchase price as in most financial incentive programmes.

The Dutch energy rebate scheme “EnergiePremieRegeling”
Joosen et al. (2004) estimated a cost of conserved energy of between 4 and 8 Eurocent/kWh for the programme costs (rebates plus administration). This is about equal to long-run marginal costs of energy supply, so the programme was about cost-effective. Due to the rebates, the actions were on average cost-effective for the consumers who took action.
In addition, another benefit of the programme was that prices of A-labelled appliances decreased (up to 25%).