Co-operative procurement

Co-operative procurement aims at the introduction of innovative energy-efficient products into commercial use, opening up new choices for investors and users (ten Cate et al. 1998). The objective can either be to increase the production and market volumes of highly energy-efficient appliances (best available technologies—BAT) or to bring new, even more energy-efficient appliances (best not yet available technologies—BNAT) to the market. Co-operative procurement aims to use the market influence of a group of large buyers to stimulate the production of, and to establish a significant demand for energy-efficient products. This type of policy holds significant promise to introduce, accelerate, and expand the market for very energy-efficient appliances.

Worldwide implementation status
One of the first technology projects was a refrigerator/freezer programme from Sweden, which started in 1989. A group was created, consisting of leading buyers. They represented about 40 per cent of the market for combined refrigerators/freezers. Purchase of a symbolic first series of 500-1,000 units of a frequently used model was guaranteed. The goal was formulated in the functional term of kWh per equivalent volume in litres and year. The newly developed refrigerator/freezers used a third less energy than the best ones available on the market before (Westling 1999). Sweden has implemented more than 50 different technology procurement projects between 1990 and 2005 (in the buildings, industry and traffic sector) (Stigh 2007).

Several other programmes followed the Swedish example. Another example is the successful Energy+ project (2006-2009). It contributed to creating a first market for the new generation of highly energy-efficient heating and hot water system circulators. Circulators in the EU have a very large energy saving potential of more than 30 TWh/year of the total electricity consumption. The IEA ran a number of multinational pilot schemes for technology procurement too, including one on electric motors.

Governance level
The policy can be implemented on a regional, national and trans-national level. Most of the time the policy was implemented on national level. At this level, a large enough buyer group may be more easily gathered than at a regional level only, while there are no problems with different languages or procurement rules between countries that may arise in a transnational approach.

Related sectors

• residential
• services
• industrial

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

In principle the type of appliance is unlimited.

Related target groups

• Manufacturer: The policy stimulates manufacturers into developing and marketing new, more energy-efficient and innovative solutions. The aggregation of demand can increase the production of very energy efficient appliances.
• Retail company: In markets with few bulk purchasers (such as for residential appliances in most countries), retailers may act as bulk purchasers in a co-operative procurement. This was the case, e.g. in the Energy+ project.
• Investor: The target group are predominantly large buyers (or a merger between different buyers). Co-operative procurement programmes stimulate procurers to buy innovative energy-efficient (BAT or not yet available—BNAT) products and to increase the demand.
• Consumer organisation: Consumer organisations can act as supporters to the co-operative procurement programme by informing residential consumers as final purchasers of the energy-efficient appliances offered by manufacturers and retail. This was the case, e.g. in the Energy+ project.
• Energy agency: Energy agencies too can act as supporters to the co-operative procurement programme by informing residential consumers as final purchasers of the energy-efficient appliances offered by manufacturers and retail.

Direct beneficiaries

• Manufacturer

  Co-operative procurement programmes guarantee a sufficiently high demand for innovative products. Manufacturers can increase their development activities and start up production and sale of energy-efficient products, and win a first market and/or a prize for themselves (depending on the policy design). The risk involved in the development of new products can be reduced and products are more quickly accepted on the market (IEA 2000). The co-operation between large buyers and manufacturers can be intensified.

• Retail company

  If retail companies act as buyers in a co-operative procurement, the publicity by the facilitator, potential supporters, and the manufacturers will reduce the risk in stocking and marketing the energy-efficient appliances, qualifying for or winning the co-operative procurement scheme. Retailer also benefit indirectly: Even if they are not participating in the buyers group, retailers are likely to benefit from the increased demand for energy-efficient appliances, which are also likely to be sold at a slightly higher price.

• Investor

  Investors can benefit from lower product prices through economies of scale as well as from high energy cost savings. Further savings will arise in later purchases, if the co-operative procurement shifts the market towards the production of more energy-efficient products (Irrek & Jarczynski 2007). Investors can also co-operate with manufacturers and influence the development of energy efficient products.

Indirect beneficiaries

• Wholesale company

  Wholesale companies too are likely to benefit from the increased demand for energy-efficient appliances, which are likely to be sold at a slightly higher price as well.

• User

  The general public has an advantage. More efficient products, realised by economies of scale, can enter the market more rapidly and reduce the energy costs of individual end-users.

Relevant barriers

• Economic and financial barriers: For manufacturers, the developing of new energy-efficient products, as well as the starting up their production and sales channels, can be very time-consuming and expensive, hence it holds an economic risk. The same is true for retailers with the stock age and sale of such appliances. Suppliers want to be assured of an end market of sufficient size to change this risk into an opportunity (ten Cate et al. 1998). Co-operative procurement aims to provide this security to suppliers. On the demand side, a main barrier to investing in energy efficient equipment is higher purchase prices for energy-efficient products. The more investors buy energy-efficient appliances, the more manufacturers invest in these products, resulting in dropping prices.
• Knowledge and information barriers: There is a gap between investors and users on the one hand, and manufacturers on the other. Manufacturers often do not know the users' real needs, nor whether or not they will actually buy the newly developed products (Westling 1999).
• Organisational barriers: In some areas, the market is out of balance. There are many buyers, but they are not united and they may have different ideas about future products (ten Cate et al. 1998).

Relevant incentives

• Increased (re-sale) value of the property: As soon as appliance manufacturers realise that there is a market for energy efficient products, they start reaching out to this target group. Due to the economics of scale this will gradually reduce the manufacturing costs, which, in turn, will reduce the unit sales price.
• Unique selling proposition for suppliers: Co-operative procurement means the development of very energy-efficient products. For innovative manufacturers it can be of importance to introduce these energy-efficient products and to reach the requirements of the potential buyers and to create a competitive advantage. The same may be the case for retailers actively marketing these appliances.
• Saved energy costs: After a certain period of time, the upfront costs for the buyers, which are normally higher for energy-efficient products compared to their less-efficient competition, are amortised due to lower running costs.

Co-operative procurement programmes perfectly and reciprocally reinforce with other policy instruments. An example for additional measures is the provision of information through buyer education elements for instance, retailer promotion, and information campaigns. These procurement and information activities work best if based on an energy label. Buyers and users can be informed about the energy and cost-effective alternatives and saving options during the use phase (Mäkinen & Neij 2010).
Labels and standards can also help to set energy performance requirements for the co-operative procurement and to identify the inefficient conventional technologies. Co-operative procurement programmes can in turn help laying the groundwork for future minimum energy performance standards.
An award for the winning appliance in a technology procurement, aiming at new products with higher energy efficiency than currently on the market, can also be a measure to underline the visibility of the manufacturer of the best product and to promote the programme. A market procurement too can be combined with an award competition, as the Energy+ project did for example. The difference to the bigEE policy type ‘Competitions & awards’ is that co-operative procurement gathers a group of active buyers complementarily to the competition.
In addition the effect of co-operative procurement programmes can be enhanced through co-ordinated rebate programmes. In the Swedish technology procurement programme, such rebates have been awarded e.g. to the buyers of a symbolic first series of 500-1,000 units in the project on very energy-efficient combined refrigerators/freezers, in that case, equivalent to ca. €100 (Westling 1999, converted to EUR(€) by bigEE team). The Netherlands provided special rebates for the refrigerators and freezers qualifying for the European Energy+ co-operative procurement project in 2002 and 2003 (read more in the bigEE good practice policy examples on Energy+ and the Dutch EnergiePremieRegeling).

The following pre-conditions are necessary to implement Co-operative procurement
Agencies or other actors responsible for implementation
Public agencies, authorities or energy companies can play the crucial role of the facilitator for the co-operative procurement or a supportive role such as providing information to the public. They should have appropriate expertise in energy efficiency. The authority must be able to establish and sustain an open communication among the different actors (buyers and manufacturers). It is important to understand and weigh the interests of all different actors and to find good reasons for all parties to participate (ten Cate et al. 1998). 

Funding
Funding is necessary for providing large buyers and manufacturers with information or technical assistance and to co-ordinate the programme (co-ordination of the different actors). If the programme is combined with a rebate programme, funding will be required for this financial incentive too.

Test procedures
A set of calculation methods to rate the innovative products and to identify the winner is required. It will be best if methods from an energy label can be used. Otherwise, the set of methods will need to be developed.

Proper planning of the procurement process before the procurement is essential. This should include the consultation with stakeholders (large buyers) about what they want and need and the available budget. The creation of buyer groups and networks is the most important step (Westling 1999). Large buyers should be identified with common interests in purchasing very energy efficient products. To convince manufacturers that there is a demand, the project manager should work together will all relevant target groups. At the same time the market situation should be analysed including the best available technology on the market and the baseline.
Then the development of technical requirements (including additional performance features like noise, emissions but also timing, test methods etc.) and the bidding (in the case of technology procurement) or the listing of qualifying products (in the case of market procurement) follows. Energy efficiency must become a central criterion in the procurement process. After the definition of specifications it is important to guarantee a fair, open and transparent procurement process (OGC 2008). The product development needed in the case of technology procurement can vary in length, depending on the required technology developments.
For technology procurement, after a defined period of time the selection of one or more winners from the bid follows. The jury may announce one or multiple winners depending on the design of the policy (the winner can be the first manufacturer that developed the product with the defined criteria or multiple manufacturers who met the minimum requirements). The winner should receive a guaranteed initial order sufficient to begin the production of this new product (ten Cate et al. 1998). In market procurement, these steps are not necessary but there will be lists of qualifying products meeting the energy efficiency and other specifications as well as lists of interested buyers and possible lists of supporters. However, if there is an award competition as an element of the co-operative procurement scheme, there also has to be a selection of one or more winners.
An important step is the marketing and consumer education to maximise the purchase of the newly available appliances. The marketing step is the true test of a procurement programme’s success (ten Cate et al. 1998).
The policy should include a monitoring and evaluation process.

Quantified target
Co-operative procurement policies are more effective with quantified targets. Concrete targets, such as the number of appliances that the buyers commit to purchase, should be defined in order to calculate the energy saving potential and the achieved energy savings. “Goals and targets should also assign responsibility and timetables for data collection and progress reporting” (Harris et al. 2005).

International co-operations
Several countries worldwide have already introduced co-operative procurement programmes. Therefore co-operations are helpful for countries, which plan to implement similar measures. The co-operation can help policy makers to improve the design and implementation of specific policies.
Furthermore, in many cases manufacturers and large buyers are very fragmented in one country but markets may be international. Joint actions involving several countries can give stronger signals to develop energy-efficient products. Examples are the European Energy+ project (cf. the bigEE good practice policy example) and the IEA’s international co-operative procurement projects.

Monitoring
In order to be effective, the implementation of co-operative procurement programmes should be monitored and tracked. The number of winning or qualifying products purchased by the buyers group and the energy efficiency improvements achieved should be reported to responsible authorities.

Evaluation
Responsible authorities like energy agencies or research institutions should carry out an evaluation of the energy and cost savings and the cost-effectiveness of co-operative procurement programmes. Key information includes: an overview of the products purchased, the changes in the product range of suppliers and the resulting development of the market. Other factors are the number, variety and (additional) costs of energy-efficient appliances and the costs for all market actors.

Relevant individual dynamics and side-effects

• Dynamic market transformation and/or innovation: Co-operative procurement programmes provide the chance to stimulate innovation within the appliances industry with ambitious energy efficiency requirements. Long-term relationships can overcome initial scepticism and can encourage buyers to take an active role in defining new targets (ten Cate et al. 1998). Technology procurement can thus be the first step in dynamic market transformation, by bringing very energy-efficient best not yet available technologies (BNAT) to the market for the first time. Market procurement (also known as bulk purchasing) is one option for the second step—increasing the market share of best already available products (BAT).
• Avoiding lost opportunities: By promoting the most energy-efficient appliances on the market (BAT) or even BNAT, co-operative energy efficiency procurement programmes try to avoid that large private or public purchasers buy energy-wasting appliances, which would be a lost opportunity for saving energy. Co-operative procurement programmes should also aim to avoid lost opportunities by trying to maximise the participation rate.
• Minimising rebound effects: Co-operative procurement programmes can be designed to minimise rebound effects by providing users with information on the energy-efficient use of energy-efficient appliances.
• Minimising snap-back effects: Although co-operative procurement schemes are likely to be facilitated by a central energy agency, it should be safeguarded that procurement staff of rather “silent partners” engage in the process, as well. This will safeguard that energy-efficient procurement will endure in individual agencies, even if co-operative procurement breaks apart. It is likely, that purchase costs for energy-efficient appliances will be higher compared to less efficient products but life-cycle costs will be lower due to the energy savings. Thus, knowledge of procurement staff regarding life-cycle costs of products is generally important. Temporary financial incentives may also be an instrument to prevent snap-back effects. Eventually, a minimum energy performance standard may make the energy-efficient appliances the market default.
• Minimising free-rider effects: In order to prevent manufacturers free-riding on co-operative procurement measures, it is important to know which energy efficiency targets are attainable but demanding enough. For example, with regard to SERP, the Department of Energy investigated what is technologically feasible. Without such analysis, manufacturers can use technologies, which they envisaged anyway. For technology procurement, however, no free-rider effects on the demand side are to be expected: the new, even more energy-efficient products would simply not be on the market without the technology procurement. For market procurement targeting the most energy-efficient products already on the market, free-rider effects will also be small if the market share of these products is small without the scheme.
• Creating Spill-over effects: Co-operative procurement programmes can play a significant role in the market transformation process towards energy-efficient products. They enable a higher production volume, which will create economies of scale. This in turn will reduce the sales price, driving market shares and hence spill-over effects further up. The policy instrument and its energy efficiency requirements can also become the basis of other energy efficiency policies (Financial incentives, MEPS, voluntary agreements). These will secure and accelerate the market transformation and create further spill-over effects. Procurement may also influence manufacturer’s research decisions for other product types, anticipating future buyer demands (ten Cate et al. 1998).

Design for sustainability aspects
Other sustainability aspects and environmental impacts can (and should) be part of an energy efficient procurement programme, e.g. health aspects or other resources such as water and detergents. Other criteria are the consideration of SMEs, working conditions etc.

Co-benefits
Procurement programmes may create appliances with better services and may improve the competitiveness of manufacturers and purchasers’ employee productivity.

• It can take a very long time to co-ordinate the participants and to define the targets.
• Co-ordinating a vast amount of actors is quite a challenge and time-consuming. Especially for multinational co-operative procurement programmes, country-specific procurement policies and language differences may contribute to delaying the procurement process (Local Authority Environmental Management Systems and Procurement 2006).
• Lack of monitoring and reporting may also be a problem.

• A strong facilitator with good reputation among market actors can speed up the process but also have the necessary time and resources to carry it through without any difficulties.
• Timeframes as well as roles need to be clearly defined between and within participating agencies in order to prevent delays.
• It is important to understand and weigh the interests of all different actors and to find good reasons for all parties to participate (ten Cate et al. 1998).

“Reduction of energy use by half, reduction of total costs almost by half, and/or speeding-up the development process and the realisation of individual projects are results achieved by using co-operative or technology procurement (Westling 1999)”. The table below presents some examples.

For the co-operative procurement scheme Energy+ (cf. the bigEE good practice policy example), which ran from 1999 to 2004, the project team estimated energy savings of between 9.3 to 15.5 GWh in EU-15 annually for the initial project phase (1999-2001). Including the second project phase (2002-2004), estimated cumulative energy savings that can be attributed to Energy+ amount to about 100 GWh (0.36 PJ) (Labanca 2006). Apart from showing that co-operative procurement on a transnational level is possible, Energy+ is considered to be part of the reason why “A+ and A++ appliances are f25% (up to 64%) more efficient than basic Class A models” (Nordic Council of Ministers 2008, p. 56).

Source: Westling 1999

• Feasibility Study: €161,000
• Aggregation of potential buyers: €301,000
• Compilation of technical specifications: €133,000
• European Award Competition organisation: €90,000
• Evaluation and selection of winners: €224,000
• Additional costs (national travels, publications, information, mailing): €90.000

Comparing the estimated cost of the Energy+ programme of 1.2 €cent/kWh (see Actual costs above) with EU electricity wholesale market prices of 4 to 6 €cent/kWh, the programme was clearly cost-effective. This is also very likely for most consumers who purchased Energy+ appliances. Their saved energy costs are much higher—between 10 and 25 €cent/kWh, yielding annual savings of €20 to €50 if an Energy+ refrigerator or freezer saved on average 200 kWh/year, as has been estimated (Labanca 2006). This is likely to be much higher during the estimated 15 years of lifetime compared to an estimated incremental purchase cost of 10 to 25 %, which might be a range between €50 and €250. In addition, the Dutch rebate scheme drove down the incremental cost of energy-efficient refrigerators and freezers (read more in the bigEE model example of good practice on the Dutch EnergiePremieRegeling).