Energy efficiency funds

Energy Efficiency Funds aim at increasing energy efficiency by implementing or supporting related programmes. They initiate programmes, implement programmes or allocate financial assets for external programmes.

Mostly national, maybe supra-national or trans-national (revolving funds created in Eastern Europe from development aid), may also be regional or local (e.g. ProKlima Fonds - Hannover).

Related sectors

• services
• residential
• industrial

In principle, an Energy Efficiency Fund can support the market introduction or breakthrough of the most energy-efficient appliances.

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

Through the support of different programmes, the Energy Efficiency Fund can and should address a very wide range of target groups:

Related target groups

• Retail company
• Engineering consultant
• Investor
• User
• Energy Service Company
• Bank
• Research institution and university

As the programmes usually combine information and financial incentives or financing, in most cases the direct beneficiaries will be investors and users of energy-efficient appliances.

The indirect beneficiaries of an Energy efficiency fund are numerous and vary depending on the supported programmes.

Direct beneficiaries

• Investor

• User

Relevant barriers

• Knowledge and information barriers: Particularly non-availability 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 the 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 priorities The financial incentives, but also 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 they 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.

Energy efficiency funds can be used alternatively or complementary to Energy saving obligations for energy companies or to relying on Government agencies and budget for programme implementation. When used complementarily, the fund can address fields of action that cannot be or are in reality not addressed by Energy saving obligations for energy companies. For example: Energy companies will run standard financial incentive programmes, while funds run motivation and information campaigns, promote innovative technologies and techniques, address behaviour, etc.
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 Fund in terms of deciding which programmes/measures to promote. Programmes implemented by Energy efficiency funds should target solutions exceeding MEPS in energy efficiency by far, such as super-efficient appliances. They can thus prepare the next revision of MEPS.

Agencies or other actors responsiblefor implementation
Energy efficiency funds are designed by governments and implemented as a newly founded entity, which can be affiliated to a private or public institution (e.g. Ministry) or form a new institution itself.

Funding
The fund needs to have sufficient resources that it can allocate to various programmes.

Test procedures
No specific test procedures for energy efficiency are needed for the fund itself, but the programmes it implements will rely on test procedures generated, e.g. in the preparation of MEPS and energy labels.

Others
The fund needs highly qualified staff with knowledge of energy efficiency solutions and potentials as well as programme design, implementation, and evaluation.

1. Setting of an overall aim/ guiding principle for the fund and setting of financial resources
2. Organisational concept (maybe allocation of financial assets to different activity sectors), funding sources, agency and procedures
3. Design of programmes (including issues such as subject, target group, elements, levels of and energy efficiency requirements for financial incentives, procedures of releasing incentives, and monitoring)
4. Tender for programmes to be supported by the fund
5. Complementary programmes and activities organised by the fund itself
6. Monitoring of the supported programmes
7. Re-allocation of assets

Quantified target
Energy efficiency funds can aim to achieve quantified energy savings targets (e.g. Danish Electricity Savings Trust, ENOVA, Efficiency Vermont)

Co-operation of countries
When setting up new Energy efficiency funds, countries can learn from the experiences of others. Existing funds can gain a lot from exchanging experiences on energy efficiency programme designs, processes and subjects: What has worked and what has not?

Monitoring
The impact of Energy efficiency funds needs to be measured indirectly by monitoring and evaluation of the supported programmes.
For evaluation of energy savings from the programmes, 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). To ensure sufficient and useful monitoring and evaluation data can be provided from the programmes, the provision of this data should be part of the funding requirements to programme beneficiaries.
For evaluating economic benefits and costs, Energy efficiency funds need to monitor their costs incurred, separately for the programme design, administration,communication and evaluation costs and for any financial incentives. They should also monitor 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 not by the Energy efficiency funds themselves.
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 (e.g. information only programmes are more difficult to evaluate than financial incentive programmes, 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

• Dynamic market transformation and/or innovation: Energy efficiency funds should aim at dynamic market transformation and or innovation in technologies, behavioural or organisational approaches through the programmes they implement.
• Avoiding lost opportunities: The programmes implemented by Energy efficiency funds should 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.
• Minimising rebound effects: Energy efficiency funds should try to design their programmes so that they minimise rebound effects. This can include absolute limits on the energy consumption of energy-efficient appliances promoted.
• Minimising snap-back effects: Snap-back effects can also be minimised through continuation of programmes as long as needed to mainstream energy-efficient technologies and solution. Securing these levels through legal minimum energy performance standards may reduce the need to continue information and incentive programmes.
• 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: In order to maximise spill-over effects, the programmes can be discontinued if the energy-efficient technologies and solutions have become the mainstream. However, care needs to be taken the markets don’t “snap back” to inefficient practices and technologies.

Sustainability aspects
Energy efficiency funds should design their programmes to promote sustainability aspects (like resource efficiency or health aspects.

Co-benefits
All kinds of co-benefits (i.e. “non-energy benefits” such as health improvement, labour market effects etc.) may arise from implementing these programmes, depending on their scope and design.

The following barriers are possible during the implementation of the policy:
The main challenges for successful Energy efficiency funds concern organisational and financial barriers. Existing institutional capacities may often not be sufficient to manage an Energy efficiency fund, so the fund needs to be well established and organised as a new entity in order to co-ordinate different programmes successfully. Moreover, it needs sufficient financial assets to support different programmes addressing various energy efficiency actions. Moreover, a lack of information and motivation to the beneficiaries may diminish the demand for the fund’s assets and thus hamper its success.

The following measures can be undertaken to overcome the barriers:
It is a matter of political will to provide sufficient resources for management and programme implementation to an Energy efficiency fund. A strong top management is also important. There must also be sufficient resources for communicating the fund’s programmes and their benefits to the target groups.

With a strong supporting framework for the organisation and funding of energy efficiency programmes, such as Energy efficiency funds, energy savings in addition to baseline efficiency trends that are equivalent to at least 1% to 1.5% of annual energy consumption can be achieved at net macroeconomic gain. This has been demonstrated by successful Energy efficiency funds like Efficiency Vermont from the USA or ENOVA from Norway, as well as others (Thomas 2007).

The costs of an Energy Efficiency Fund can be individually decided depending on the savings target and the range of addressed fields of action. However, it needs to be ensured and monitored that the financial resources are sufficient to reach the envisaged targets. Typical ranges are equivalent to between 0.1 and 0.4 Eurocents per kWh of energy consumed by the target groups, as seen for the examples of Efficiency Vermont from the USA or ENOVA from Norway.
Staff of Energy efficiency funds ranges from six in Denmark (Danish Electricity Savings Trust) to 60 in Norway (ENOVA) and the cost of managing the fund is usually only a few per cent of its total budget.

If well designed and implemented, the energy efficiency programmes will be cost-effective for consumers and society. This is very likely and is the case, among others, for the example of Efficiency Vermont, which has achieved net benefits for consumers worth 2.2 to 2.4 times its costs.