Funding for research, development and demonstration (RD&D) projects

RD&D efforts try to improve energy efficiency by ensuring that energy-efficient and low greenhouse gas emitting building designs and technologies will be available in the future.
RD&D funding can be a key driver of innovative ideas, can assist the accelerated market introduction, and reduce the incremental costs of energy efficient building solutions.

Most countries have some sort of RD&D funding but the procedure, the financing and the organisation of the RD&D efforts and the funding schemes are diverse. While many countries fund research on energy efficiency, much fewer countries probably fund RD&D projects on raising building energy efficiency. Demonstration projects are also frequently used throughout the world in order to show feasibility of energy-efficient building designs and technologies.
In most cases research, development and demonstration funding schemes were introduced at national level. In some cases, research, development and demonstration funding was realised in a group of several countries (e.g. the European Union includes 27 countries).

Research, development and demonstration funding on energy efficiency in buildings can be realised with a residential, industrial, commercial or public sector focus. It depends on the focus of the RD&D programme. In principle the sectoral focus is unlimited.

Related sectors

• services
• residential
• industrial

In recent years energy efficiency and energy efficient buildings are getting more attention. RD&D funding aims to improve the energy efficiency of buildings through design and technology development and realising the innovation potential. In this context the identification of the best domestically available building designs and technologies is the start, and the development and demonstration of best not yet available building designs (such as Low-Energy Buildings, Ultra-Low-Energy Buildings, and nearly Zero Energy or Plus-Energy Buildings) and the related technologies and their potentials are the main research fields.

Related target groups

• Architect
• Manufacturer
• Research institution and university

Direct beneficiaries

• Architect

  They have the chance to increase their research activities by receiving financial incentives and support.

• Manufacturer

  They have the chance to increase their research activities by receiving financial incentives and support.

• Research institution and university

  They have the chance to increase their research activities by receiving financial incentives and support.

Indirect beneficiaries

• User

  End-users indirectly benefit after the commercialisation of new developed building technologies. They have the chance to buy a highly energy efficient building and to save money.

Relevant barriers

• Knowledge and information barriers: Actors may not be informed about possibilities for energy efficiency improvement. RD&D can lead to identifying new leapfrogging building solutions to energy efficiency. However, there is also uncertainty for manufacturers and developers whether there will be a market for energy-efficient buildings and thus a risk to invest in their research and development. RD&D funding will reduce this risk.
• Lack of interest and motivation in energy efficiency-improvement: The private sector tends to focus its RD&D investments on short-term changes for obtaining a quick financial return. This may result in sacrificing environmental and energy efficiency criteria. Governments therefore have to intervene in order to support energy efficiency RD&D activities (OECD 2004; Jefferson 2000). New building technologies realised through RD&D funding can help raise the productivity and competitiveness of companies and create employment by producing new products as well as improving production process (IEA 2007).

Relevant incentives

• Improved reputation: New building technologies developed through RD&D can create a significant competitive advantage (early leadership) for the company and signal the interest in broad policy goals.
• Contribution to protection of the environment: Research, development and demonstration (RD&D) is critical to drive the development of innovative technologies to contribute to mid-term and longer-term policy goals.

As funding for energy efficiency RD&D is an instrument to achieve policy targets, a clear link to other relevant policies should be established to maximise the impact and efficiency of the RD&D activities (IEA 2007). Therefore RD&D efforts can and should be part of an effective policy package. Market breakthrough of very energy-efficient building designs and technologies is often hindered by a plethora of market barriers and thus likely to need further policy support.
Concrete policy instruments that should be integrated into an effective policy package are education and training, provision of information, energy labels, minimum energy performance standards (MEPS) and, where appropriate, financial incentives. To be effective it is essential to establish RD&D in accordance with these instruments.
Demonstration projects are particularly important in the building sector. They provide proof that very low levels of energy consumption can be achieved in reality and can also be cost-effective, if the demonstration is well-designed. Such proof in reality is an essential argument to convince investors and supply-chain actors alike. It is therefore an important basis for the provision of information, for advice and assistance during design and construction, as well as for education and training of supply-side actors such as architects, developers, construction companies and installation contractors.
Once a certain market share of highly energy efficient building technologies above a specific performance level is reached, MEPS can secure this level and the requirements for getting into the next market stage should be prepared by RD&D activities.

Pre-conditions for RD&D funding programmes are an agency or project authority and a funding scheme.

Agencies or other actors responsible for implementation
A public authority should be responsible for the assessment of RD&D proposals, their approval and for funding the research activities. It should also guarantee the financial issues and the monitoring/evaluation of the policy.

• The government can directly finance RD&D efforts in universities, research institutes, science parks etc.
• The government can directly fund RD&D efforts through providing financial grants also to manufacturers or mixed public-private consortia. 
• Tax incentives can indirectly support private RD&D activities by providing tax relief that lowers costs. 
• The government can install a fund for venture capital and to support inventions that overcome the so-called “valley of death”, i.e. the gap between public funding for invention and private commercialisation.

Test procedures
Testing the energy efficiency of newly developed very energy-efficient building designs or technologies in comparison with the existing ones needs calculation methods or test procedures for energy performance. Development of calculation methods and test procedures also needs funding and often involves R&D, e.g. for analysing accuracy of calculations and reproducibility of test results.

The existence of a national energy roadmap is the most important precondition for a long-term target-oriented RD&D strategy (IEA 2007). Next, a well-designed RD&D strategy with a portfolio of RD&D programmes to support energy efficiency follows. Moreover transparency and the involvement of stakeholders in defining an RD&D strategy is important (IEA 2007).
A main step is the prioritisation of different research targets and concepts. Limited resources and a multitude of opportunities requires careful attention to funding priorities harvesting comparative advantages of the specific national frame conditions and resources. The programmes should demonstrate relevance and consistency with national priorities. Innovative ideas that show promise should then be selected and funded. A monitoring of the programmes is essential to follow the development of the research activities. (IEA 2007).
Actors responsible for implementing the research, development and demonstration activities can be governmental departments, universities, research institutes, private companies, and non-governmental research bodies.

Quantified target
The policy can and should have a quantified target. The effectiveness can be evaluated through the degree to which the energy consumption of the efficient building designs and technologies subject to RD&D has been reduced by it and if they are commercialised, by the market development of the efficient building designs or technologies (number of units developed and sold).

Co-operation of countries
Enormous RD&D investments are needed to address the significant global energy challenges, while maintaining economic growth. This calls for international collaboration on RD&D.
Co-operation of countries has numerous advantages. Countries co-operate with other countries in order to “share costs, spread risks, avoid duplication, access facilities, enhance domestic capabilities, support specific economic and political objectives, harmonize standards, accelerate market learning and create goodwill” (IPCC 2007).
International collaborations can learn from an already established knowledge base and can make use of specialised expertise. Co-operations are especially helpful for countries with less experience. They have the chance to learn from other countries. In addition countries can co-operate and establish comprehensive funding schemes.
Two examples of multinational demonstration projects for energy-efficient buildings are MED-ENEC – Energy Efficiency in the Construction Sector in the Mediterranean and the demonstration programme on Zero Energy Housing by the Asia-Pacific Partnership on Clean Development and Climate.

Monitoring and evaluation of RD&D activities are essential to guarantee the success of each programme. Programmes must demonstrate importance, consistency with national priorities, and success (IEA 2007). More specific indicators of success can be whether the expected energy efficiency improvement has been achieved in an RD&D project, whether the results are reproducible by others, and whether the very energy-efficient building designs and technologies have been successfully commercialised.
Methods for evaluation are diverse and include self-evaluation as well as evaluations by external experts. Most evaluations use statistical data and interviews with stakeholders to evaluate the success of the programme and to develop recommendations for future activities (IEA 2007).

Relevant individual dynamics and side-effects

• Minimising snap-back effects: To avoid snap-back effects, RD&D funding schemes should be accompanied by a policy package to enable market mainstreaming of the energy-efficient buildings (components) being developed.
• Dynamic market transformation and/or innovation: RD&D funding will stimulate innovation towards improved energy efficiency of buildings. This is a precondition for starting their design, creation and sale, and thus making markets and policy dynamic towards higher levels of energy efficiency. However, if not enough policy support, including financial incentive schemes where needed, is provided for a fast market transformation, manufacturers cannot recover their RD&D investments timely enough to invest in still more energy-efficient building technologies (CECED 2006).
• Avoiding lost opportunities: By developing and promoting energy efficient designs and technologies, RD&D funding tries to induce architects, developers and manufacturers to develop more energy-efficient building designs and technologies and investors to invest in these buildings and products instead of other, inefficient ones (inefficient buildings and technologies would be a lost opportunity for saving energy).
• Minimising rebound effects: To minimise rebound effects (e.g. increasing room temperature in cold climates and seasons after implementing insulation measures) it is essential to accompany the commercialisation of the energy-efficient building technology with consumer-oriented instruments on their efficient use.
• Minimising free-rider effects: Manufacturers or research institutes may receive RD&D grants for projects that were planned anyway. This would be a free-rider effect. It is difficult to avoid but may be reduced by including independent experts in the evaluation of research proposals and by requiring a minimum percentage of energy efficiency improvement from the RD&D projects.
• Creating Spill-over effects: If the energy-efficient buildings / building components developed with the support of public RD&D funding are commercialised, this will create spill-over effects. In fact, this is the theory of the main impact of RD&D funding. Watanabe (1999) argues that government RD&D can play a role in achieving breakthroughs in some areas and also generates trans-sectoral spill over effects (cited from IPCC 2007).

Sustainability aspects
Public RD&D funding mechanisms can include sustainability criteria as a condition to receive the funding. These aspects can be water consumption, waste reduction, use of sustainable materials or general resource efficiency and other performance characteristics.

Co-benefits
The co-benefits from RD&D funding will then depend on such criteria.

The following barriers are possible during the implementation of the policy:
Barriers for implementation are the risk of high initial costs. Furthermore difficulties in prioritisation are possible. The combination of limited resources and a multitude of opportunities requires careful attention to funding priorities (IEA 2007).

The following measures can be undertaken to overcome the barriers:
Scoping studies can assess the state of energy efficiency in buildings and the potential for improval. Priorities can be set based on such studies.

The achievable energy savings depend on the technology and the innovation potential. Therefore it is difficult to make general statements about achievable energy savings.
The effectiveness depends on consistent funding, (when building designs and technologies are developed), and the commercialisation of these energy-efficient building designs and components. RD&D may have high benefits in the long term (IPCC 2007).

According to IEA (2010a), public energy RD&D declined over the last 35 years, though the total RD&D budgets rise steadily. “The relative share of energy in total RD&D has declined significantly, from 12% in 1981 to 4% in 2008” (IEA 2010a, p. 6).

For an overview about public funded energy RD&D expenditure by International Energy Agency member countries and concrete national energy RD&D expenditure see the following figures. 

As the first figure shows, energy efficiency RD&D is only a minor part of this expenditure, fluctuating around 10% of total energy RD&D, and RD&D funding for energy efficiency in buildings is about half of overall energy efficiency RD&D expenditure.

The following figure shows that countries spend very different amounts on energy RD&D and that the focus of investment is broad (IEA 2010a). “On a per-capita basis, Finland, Japan and Australia spend the highest proportion (between 0.07% and 0.08% of GDP in 2008) of all IEA countries for which information is available. Overall average expenditure on energy RD&D in IEA countries is about 0.03% of GDP” (IEA 2010a, p. 7).

According to IEA (2010a), public energy RD&D declined over the last 35 years, though the total RD&D budgets rise steadily. “The relative share of energy in total RD&D has declined significantly, from 12% in 1981 to 4% in 2008” (IEA 2010a, p. 6).