- Buildings Guide
- Policy Guide
- Appliances Guide
Financing instruments target the barrier of insufficient availability of, or access to, capital for financing the incremental costs of energy-efficient appliances. This barrier is particularly an issue for low-income households that often cannot afford the additional cost to purchase and benefit from such equipment. Thus, in addition to enabling the realisation of untapped energy saving potentials, financing instruments also contribute to (energy) poverty alleviation and work towards the transformation of appliance markets. The most relevant instruments to tackle the financial barrier for very energy-efficient appliances are preferential loans or on-the-bill financing (OBF) schemes.
Difficulties of financing very energy-efficient appliances can prevent the realisation of energy saving potentials in private households but also in small and medium enterprises (SMEs) with limited capital funds. With regard to the former group, this issue particularly applies to low-income households that cannot afford the additional cost to purchase and benefit from such appliances. Financing instruments such as preferential loans or on-the-bill financing (OBF) schemes are suitable means to tackle the issue of incremental costs for state of the art equipment.
In preferential loan schemes, governments provide favourable loans, e.g. with low or even zero interest rates and/or prolonged payback periods, to private households or small businesses. These loans are to enable their users to purchase of energy efficient appliances and or increase the attractiveness of doing so. Governments can hand out the loans directly or via private financial institutions. Funding for such loan schemes may stem from a variety of sources, such as government budgets or an energy efficiency fund (see bigEE file on energy efficiency funds). OBF schemes are a special type of preferential loans: In OBF schemes, loans for energy efficiency improvements (here the purchase of very energy-efficient appliances) are repaid via an extra charge on monthly energy bills. Accordingly, OBF schemes are usually administered by electricity or gas companies (often state-owned). They can draw on information from their pre-existing customer relations and avoid additional administrative efforts by using already existing (re-)payment channels (cf. Kats et al. 2011). Funding may originate either from existing revenues, a new tariff collected from all of a energy company’s customers, or an external private or state source.
In preferential loan or OBF schemes the choice of appliance that meets the high energy efficiency requirements is usually left to the borrower. Alternatively, the choice and acquisition of very energy-efficient appliances may also be carried out by the respective scheme administrator. The latter approach has the advantage that quantity discounts associated with the bulk purchasing of appliances (see the bigEE file on this instrument) can be passed on to the borrower, thus decreasing their overall investment costs. Moreover, since the administrator takes on the task of selecting the appliances (portfolio) offered within the scheme, transaction costs for customers with regard to market screening and product comparison are reduced.
In addition to enabling the realisation of untapped energy saving potentials, financing instruments also contribute to (energy) poverty alleviation and work towards the transformation of appliance markets. In order for either financing approach to be effective with regard to energy saving targets, it is important that the approval of a loan request or the establishment of an OBF agreement is conditional on the disposal/recycling of the appliance to be replaced (cf. NRDC 2001). Moreover, across different financing schemes, it is crucial that payments are approximately offset by efficiency induced monetary savings in order to maintain their attractiveness to potential borrowers.
In order to further increase its impact, appliance financing schemes can be combined with additional financial incentives such as e.g. tax credits or direct grants for purchasing very energy efficient appliances and regulatory measures such as the introduction of Minimum Efficiency Performance Standards (MEPS) in order to achieve genuine and long-term market transformation. Moreover, information measures such as mandatory or voluntary labelling schemes and other activities to communicate the benefits of energy efficient appliance can considerably contribute to the success of financing schemes. Energy efficiency labels do not only serve as a quick visual decision aid for customers but may also guide the set-up of financing schemes with regard to which appliances should be targeted/promoted.
Due to the vast variety of existing financing schemes and the diverse institutional and economic contexts in which they operate, there is no global impact assessment available of respective policies to date. However, good practice examples such as the appliance replacement programme within the Cuban Revolución Energética show that considerable monetary and energy savings are possible. While energy-efficient fans and light bulbs were completely financed from public budgets, costs for new refrigerators have to be covered by individual households. To this end, low-income households are offered low-interest loans, whereas credit terms, such as the interest rate and the repayment period, were adjusted to the capacity of the borrower. For a monthly income of up to 225 Cuban pesos, an annual rate of 2% and a repayment period of 10 years were offered. The conditions for the borrower became less favourable as his income rises. According to Seifried (2013), so far 2.5 million energy-efficient refrigerators were distributed resulting in energy savings of 1,147,500 MWh/year or of 17,212,500 MWh accumulated over the individual life span. Based on these data, the loan scheme will achieve cost savings of EUR 3,443 million during the life span. This benefit is around 9 times the cost of the new refrigerators altogether.
Public and public-private financing approaches such as preferential loans and OBF schemes aim at enabling low-income households and small and medium enterprises (SMEs) with limited capital funds to benefit from very energy-efficient appliances. By providing opportunities for these target groups to either get access to low interest loans and/or to benefit from innovative loan repayment mechanisms, they lower the financial barrier to and in consequence increase the attractiveness of purchasing very energy-efficient appliances. In this way, financing schemes can help to promote the dissemination of very energy-efficient appliances and contribute to the transformation of respective markets, decrease overall energy consumption and alleviate energy poverty among low-income households.
Worldwide implementation status
Financing schemes amongst others covering the promotion of very energy-efficient appliances are being implemented all over the globe (see for instance IEA 2007; Kats et al. 2012). A specific example is the Cuban appliance replacement programme (see the bigEE good practice policy file on the Revolución Energética). Loans for energy-efficient appliances are also a part of the Hipoteca Verde (Green Mortgage) in Mexico (see the related bigEE good practice policy file).
Existing financing schemes for very energy-efficient appliances can be found mostly on a national, regional or local level, but also on a trans-national level (e.g. the European Energy Efficiency Fund).
The main target group of financing instruments are investor-users on the demand side, such as private households and SMEs with limited capital funds. Through the provision of financial incentives inherent in different financing schemes, these actors shall be motivated to purchase very energy-efficient appliances.
Due to the availability of advantageous financing opportunities, purchases of very energy-efficient appliances are likely to increase, which translates into increased demand for related products and services from actors on the supply side including manufacturers, retail and wholesale companies and recyclers.
Although lack of or access to financing is a major barrier for low-income households and SME’s with limited funds with regard to the purchase of very energy-efficient appliances, the provision of advantageous financing opportunities alone may not be sufficient to trigger such decisions among the target groups. In order to further increase its impact, appliance financing schemes can be combined with additional financial incentives such as e.g. tax credits or direct grants for purchasing very energy efficient appliances and regulatory measures such as the introduction of Minimum Efficiency Performance Standards (MEPS) in order to achieve genuine and long-term market transformation. Moreover, information measures such as mandatory or voluntary labelling schemes and other activities to communicate the benefits of energy efficient appliances can considerably contribute to the success of financing schemes. Energy efficiency labels do not only serve as a quick visual decision aid for customers but may also guide the set-up of financing schemes with regard to which appliances should be targeted/promoted. This will raise awareness of the benefits of very energy-efficient appliances and further strengthen incentives for low-income households and SMEs to take advantage of financing schemes.
The following pre-conditions are necessary to implement Financing:
Agencies or other actors responsible for implementation
The implementation of financing instruments requires the nomination of an institution that is responsible for the coordination, oversight, potentially direct implementation, and evaluation of financing processes. This could for instance either be an energy agency, an (revolving) energy efficiency fund, or a public energy company or development bank.
Sufficient funding for financing schemes is needed in order to provide eligible target groups with the means to upgrade to very energy-efficient appliances. The funding could stem from different sources such as the revenues from an energy tax, electricity or gas tariff, or an emission trading scheme or earmarked government budget allocations.
Preferential loan as well as OBF schemes can have quantified targets related to different success/performance indicators. These may be the budget to be provided for direct lending or indirect lending support, ex-ante specified numbers of motivated credit users or appliance purchases induced or a combination thereof. Thinking further, these immediate indicators may then as well be translated into an estimate of achievable energy savings.
Co-operation between countries can include exchange of information and experience on principles as well as practical details, problems, and solution of implementing such financing schemes. Providing climate finance to developing and emerging countries for funding financing schemes is another potential way of co-operation.
Monitoring the performance of appliance financing schemes is essential in order to generate data on the measurable benefits of energy efficiency investments. A monitoring information system (MIS) should be an integral part of a financing scheme design and needs to establish clear specifications regarding data requirements for evaluation purposes (such as the number and types of appliances financed, their specific energy performance and the performance of the appliances to be replaced as well as behavioural aspects of appliance users if relevant) and provide guidelines to implementing actors on how to record the data and to assure loan recipients’ compliance with the scheme’s terms and conditions.
Time and effort required to obtain the data necessary to evaluate different aspects of appliance financing schemes vary. While information on the number and types of appliances financed/replaced can be simply recorded by programme staff throughout the financing process, data on achieved energy savings are more difficult to obtain. For this purpose, data on the energy performance of the appliance(s) to be replaced need to be gathered on-site at least for a sample of loan customers, which may entail additional costs for scheme operation. An alternative approach, though providing less accurate information, would be to monitor the overall energy consumption of a sample of end-users and a control group before and after appliance replacement.
With regard to the evaluation of the economic benefits and costs, information requirements for the latter include data on expenditure relating to the operation (i.e. administrative cost) of a scheme as well as data on loan performance (i.e. share of loan defaults). Equally important are the investments made by those who received the loans. With regard to the economic benefits of appliance financing schemes, monitoring mainly needs to capture data on changes in end users’ energy expenditures associated with the replacement of inefficient appliances with BAT. If energy savings are known, this just requires data on the energy prices. From a societal perspective, it may also be of interest to look at changes in public subsidies provided to support low-income households with their energy bill.
A complete analysis of appliance financing schemes would include evaluation of participation rates, loan performance (i.e. delinquency and default rates), the number and types of appliances that are financed/replaced with the loans and, most importantly, estimation of energy savings. If such data is available, the latter can be calculated by subtracting the amount of energy consumed by the purchased very energy-efficient appliance from that of the appliance to be replaced and sum up the difference over all loan cases. In cases where such data is (e.g. due to cost considerations) not collected, evaluation of achieved energy savings can be based on comparing participants’ energy consumption before and after appliance replacement. This proceeding however does not differentiate between behavioural factors shaping energy use (e.g. rebound effects) or other changes in equipment within households or premises and the original appliance replacement effect. Thus, proper attribution of changes in energy consumption may require further in-depth inquiry and a control group.
As regards the evaluation of economic costs and benefits of financing schemes, information requirements beyond the data monitored within the scheme as well as the chosen proceeding depend on the scope of the evaluation, e.g. employment induced by the financing scheme.
Design for sustainability aspects
In order to promote sustainability aspects, eligibility criteria for appliance financing offers can be designed to require the purchase of very energy-efficient appliances that also fulfil specific sustainability standards with regard to eco friendliness (e.g. a high level of recyclability). Moreover, in order to balance resource and energy efficiency targets decisions on appliance coverage within financing schemes should amongst others be based on life cycle analysis (LCA). Finally, requiring the disposal or recycling of the old appliance that gets replaced is an opportunity that should be used for ensuring disposal or recycling with high environmental quality and hence, low environmental impact.
The availability of advantageous financing opportunities enables low-income households and SMEs with limited capital funds to replace inefficient appliances with BAT, which contributes to alleviation of energy poverty. It also leads to an increased demand for products and services of manufacturers and retailers of very energy-efficient appliances as well as recyclers. Accordingly, depending on the scope of the scheme small to considerable positive labour market effects can be expected from establishing appliance financing schemes. Moreover, due to lower energy costs following the replacement of inefficient appliances, public expenditure in the form of transfer payments to low-income households may be reduced.
The following barriers are possible during the implementation of the policy
One of the most common barriers that may arise throughout the implementation of appliance financing schemes relates to limited participation through the target group(s). A good deal of uncertainty surrounds the payoffs from investments in new appliances and uncertainty about future energy prices exacerbates the problem. Consequently, many consumers do not have a good estimate of the energy savings that can be achieved and thus might be hesitant to engage in financing schemes. A lack of availment may also stem from insufficient knowledge of a scheme’s existence, low attractiveness of financing conditions or cumbersome application procedures.
The following measures can be undertaken to overcome the barriers
In order to address the issue of limited participation, a process evaluation can provide important insights regarding whether and how processes have an impeding effect on uptake within target groups. Based on the results, adjustments to the programme operation can then be made to improve the overall scheme performance. Information campaigns on the existence of financing opportunities as well as the economic benefits of appliance replacement (presenting good practice examples) can help to close the knowledge gap and reduce risk perception among target groups
The impact of appliance financing schemes may differ widely depending on prevalent appliance stock as well as available BAT on the respective local market and other scheme design specific factors. Nonetheless, evaluations of good practice cases show that considerable reductions in energy use are achievable. One example is the appliance replacement programme within the Cuban Revolución Energética. According to Seifried (2013), so far 2.5 million energy-efficient refrigerators were distributed resulting in energy savings of 1,147,500 MWh/year or of 17,212,500 MWh accumulated over the individual life span. Energy savings per year for refrigerators are 450 KWh, down from 800 KWh of annual consumption for the replaced, energy-inefficient average Cuban refrigerator (ibid.).
The costs of implementing appliance financing schemes may differ depending on the financial endowment of the scheme, the type of appliance financed, and the efficiency of the implementing authority to deliver the funds to the target group(s). In our good practice example of the appliance replacement programme within the Cuban Revolución Energética, Seifried, calculating with €180/appliance, estimates overall investment costs into new refrigerators to amount to €383 million.
As with potentially achievable energy savings and expected costs, cost savings and net benefits may differ depending on the properties and implementation effectiveness of appliance financing schemes. Also other factors such as e.g. appliance costs or user behaviour have an effect on actual outcomes. As an example, in our good practice example of the appliance replacement programme within the Cuban Revolución Energética cost savings are estimated to be €230 million/annually or €3,443 million over the refrigerators’ life span (set at 15 years). Based on these data and considering the estimated overall costs of €383 million for the refrigerator replacement, the benefit is much higher than the cost, being around 9 times as high as the cost.
Type: Financial incentives