Bulk purchasing & 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 building equipment (best available technologies—BAT)—this is called market procurement—or to bring new, even more energy-efficient technology (best not yet available technologies—BNAT) to the market—technology procurement. 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 building equipment.

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).
In the EU-27, the Energy+ Pumps scheme (2006 to 2009) is regarded as a success. 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
Co-operative procurement measures can be implemented on the national, transnational, regional or local level. However, on the sub-national level it might be difficult to find enough large buyers. Transnational policy designs have to cope with different legal (procurement) frameworks and languages.
Barriers relevant to sub-national and transnational policy designs can be ruled out for the national setting, which may be the most preferable way to implement a co-operative procurement scheme.

Related sectors

• residential
• services
• industrial

Concepts
Low-Energy Buildings
Ultra-Low-Energy Buildings
nearly-Zero-Energy / Plus-Energy Buildings

• Building envelope
• Shading

• Mechanical ventilation
• Cooling
• Heating
• Domestic Hot Water
• Lighting
• Street Lighting/Traffic lights
• Building transportation
• Building integrated renewable energy systems

In principle, co-operative procurement schemes can be introduced for a wide range of building related technologies and even whole buildings following energy-efficient design concepts. It can of course also be used for energy-efficient appliances, cf. the policy file on co-operative procurement in the appliances section of the bigEE Policy Guide.

Related target groups

• Installation contractor: Installation contractors are an important stakeholder group, which will need to be engaged with if co-operative procurement schemes are developed.
• 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 building equipment.
• Investor: The target group are predominantly large buyers (or a co-operative 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: In the EU-27 Energy+ pumps scheme, consumer organisations acted as supporters and awareness-raising actors.
• Energy agency: Energy agencies may also play a supporting role in order to inform end-users about cost-efficient BAT or BNAT technology.

Direct beneficiaries

• Installation contractor

  Installation contractors may benefit from increased demand for their service.

• Manufacturer

  Co-operative procurement programmes ensure planning security to manufacturers by creating a demand side or entry market for energy-efficient products. The risk involved in the development of new products can be reduced and products are more quickly accepted on the market (IEA 2000).

• Investor

  Investors belong to the main beneficiaries of the policy because of lower product prices for BAT or BNAT. Secondly, 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

• User

  More efficient products, realised by economies of scale, can enter the market more rapidly and reduce the energy costs of individual end-users. Thus, the general public benefits indirectly.

Relevant barriers

• Economic and financial barriers: The development of new energy-efficient products, their production and sale is more expensive than that of less efficient products. This holds greater economic risks for manufacturers, because when there is a higher price, the most relevant purchasing criterion, may restrict large-scale demand. A co-operative procurement scheme gives manufacturers an end market of sufficient size. As large-scale demand decreases price for energy-efficient products, other end-users (e.g. households) may also be incentivised to invest in the respective technology.
• Knowledge and information barriers: Manufacturers often do not know the users' real needs, or whether or not they will actually buy the newly developed products (Westling 1999). This gap between the supply and demand side is narrowed by this policy.
• Organisational barriers: Different wishes of demand side actors for future products may be combined. Or as ten Cate et al. (1998, p. 7,327, referring to Sandberg 1998) note: “the most important motivator for prospective buyers of a new, energy-efficient technology is often not the energy savings themselves, but other, non-energy features” that may be included during stakeholder consultations.

Relevant incentives

• Directly increasing earnings or profits for actors on the supply side: If manufacturers of building technologies realise that there is demand for energy-efficient building products, they will attempt to reach out to this target group.
• 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 this equipment.
• Saved energy costs: Energy-efficient building technology is normally higher priced than comparable less-efficient building components. While the co-operative procurement scheme already reduces these higher upfront costs to some extent, lower running costs amortise higher prices completely after a certain period of time.

Although creating an entry market for building technologies through bulk purchasing and co-operative procurement is important, there must be sustainable demand for the time after the policy. A comprehensive awareness raising campaign to inform large buyers but also the public can be a valuable asset. At the minimum, information campaigns should provide information such as possible energy savings and cost-effectiveness. Local energy information centres - such as in France - can function as an important multiplier (Thomas & Barthel 2009, p. 18).
What also needs to be factored in is information and, if necessary, training and education measures for installation contractors. Firstly, installation contractors can promote energy efficient building technologies compared to conventional equipment. Second, if BAT or BNAT cannot be installed like their conventional counterparts, education and training courses or seminars are essential.
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 (revisions of) energy labels and minimum energy performance standards.
Ten Cate et al (1999, p. 7,329) consider the award scheme for technology procurement programmes as very important: “the main factor cited by manufacturers for participating in the competitive bidding process was not the promise of a financial incentive (totalling $30 M over several years) but rather the positive publicity
enjoyed by the ‘winner’.”
Financial support schemes should be considered too. In particular they may be necessary, if potential large buyers are hesitant to participate.

The following pre-conditions are necessary to implement co-operative procurement:
Agencies or other actors responsible for implementation
A co-operative procurement scheme needs a co-ordinating agency identifying and approaching stakeholders (demand- and supply-side actors) and ensuring open communication between them. Moreover, it is important to understand and weigh the interests of all different actors and to find good reasons for all parties to participate. Obviously, the agency should have substantial expertise with regard to energy-efficient building technologies.
Ten Cate et al (1998) expect public agencies or energy companies to be able to live up to these expectations.

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. Ideally, methods from an energy label can be used, which is what happened in the Energy+ scheme for energy-efficient circulators (Thomas & Barthel 2009, p. 8). Otherwise, the set of methods will need to be developed (and financed), as well.

Ten Cate et al. (1998, p. 7,324) structure the design of technology procurement schemes into a four stage process. A modified scheme is shown in the following paragraphs for co-operative procurement programmes:
Firstly, in the preparation stage the central co-ordination body must identify stakeholders. These are manufacturers, and investors but installation contractors should also be considered. Stakeholders should discuss energy performance levels, further non-energy features of BAT or BNAT. The central co-ordination body, e.g. an energy agency, should mediate between the supply and the demand side.
In the procurement stage “the final product requirements, test guidelines and any other specifications are announced” and stakeholders are to discuss quantities purchased.
The product development stage should be guided by a timetable in order to give planning security to the demand side.
In the final stage, products are delivered to co-operating purchasers and general marketing then commences.

Quantified target
Co-operative procurement policies are more effective with quantified targets. Concrete targets, such as the quantity of equipment that the buyers commit to purchasing, 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 include: the European Energy+ Pumps project and the IEA’s international co-operative procurement project on electric motors.

Monitoring
In order to be effective, the implementation of co-operative procurement programmes should be monitored and tracked. The number of types of winning or qualifying products on offer, the concrete number of 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 building-related products purchased, the changes in the product range of suppliers as to the number, variety and (additional) costs of energy-efficient building technologies and the resulting development of the market. Other factors include: 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 building technology 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: Co-operative procurement programmes provide the chance to stimulate innovation within the building technology 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).
• Minimising rebound effects: Co-operative procurement should include additional measures in order to avoid rebound effects. For example, information on the efficient use of the equipment to avoid unnecessary energy consumption can help to minimise rebound effects.
• 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 equipment will be higher compared to less efficient products, but life-cycle costs will be lower due to the energy savings. Thus, the knowledge of the procurement staff regarding life-cycle costs of products is generally important. Temporary financial incentives may also be an instrument to increase market share and prevent snap-back effects. Eventually, a minimum energy performance standard (MEPS) may make the energy-efficient building technology the market default. For example, the highly energy-efficient heating system circulators promoted by the Energy+ Pumps project between 2007 and 2009 became the legal MEPS in the European Union as of January 2013.
• Minimising free-rider effects: The agency responsible for the stakeholder co-ordination must also analyse the degree of energy efficiency feasible for building-related products. Otherwise manufacturers can develop technologies that 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. For example, the highly energy-efficient heating system circulators promoted by the Energy+ Pumps project between 2007 and 2009 became the legal MEPS in the European Union as of January 2013.

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, productivity increased through high-quality, energy-efficient lighting or other resources such as; water and detergents. Other criteria are the consideration of SMEs, working conditions etc.

Co-benefits
Procurement programmes may create building technology 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 the associated 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 a good reputation among market actors can speed up the process but also have the necessary time and resources to carry it through 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).

Few co-operative procurement schemes for the building sector have been implemented so far. Thus, evaluations are somewhat short on the ground.
The Energy+ Pumps scheme in the European Union (EU) estimated that modern, energy-efficient circulators save up to 80% compared to conventional technology. “Implementing this new energy saving pump technology as a European standard for circulators could save more than 60% of the circulator annual electricity use, that is more than 30 TWh/yr (Wuppertal Institute 2010).
When the European Energy+ Pumps project ended in early 2009, the Energy+ circulators had already achieved more than 15 % of the market for small-scale circulators sold as stand-alone units (i.e. for installation with floor-standing boilers or for replacement), and between 5 and 10 % including those built into boilers (Thomas & Barthel 2009). However, the exact contribution of the Energy+ Pumps scheme to this result is unknown. From 2013, such circulators have been required by law in the EU.

Co-ordination costs incurred by the 10 partners for the Energy+ pumps scheme were €1.13 million. The costs of manufacturers, purchasers, and supporters are unknown.

The following figure shows large scale energy cost savings for building owners and tenants, as highly energy-efficient circulators became the European standard in 2013. These save between 50 and 80 % of electricity compared to conventional technology and were promoted by the European Energy+ Pumps co-operative procurement project in 2007 to 2009. In the long run, when all circulators in the EU have been exchanged, consumers and businesses will save more than 30 TWh/yr of electricity and several billion Euros per year in energy costs.