Despite the apparent business case for energy efficiency, a significant share of the potential to improve energy efficiency remains untapped with global investments being generally low compared to policy ambition. This paper will discuss a variety of factors and considerations that policymakers should bear in mind while developing policy and market frameworks that promote investments in energy efficiency.
With a focus on the building sector, this policy statement examines barriers to the deployment and scaling up of energy efficiency measures, as well as measures to increase demand through long-term enabling policies combined with related business models and innovative financing schemes.
Barriers to energy efficiency investments are various and include for example high upfront and transaction costs, lack of delivery capabilities, low awareness or understanding, or structural problems such as the “principal-agent challenge”. In addition, recent research has shown corporations’ greatest concern is the lack of confidence over whether energy-efficient investments will deliver the promised savings in time.
One important step in scaling-up energy efficiency investments globally is to create and increase demand through long-term enabling policies and incentives combined with related business models. It is not only the availability of finance. Without large-scale demand for energy efficiency, all other elements of the puzzle (e.g. financing, technology, skills) are less effective. A combination of approaches will be needed. They include:
• Increasing demand through models that are linked to long-term compliance policies and/or voluntary approaches: Energy savings alone have so far not created the required demand to scale up energy efficiency investments. Long-term predictability of policies and incentives, cost-reflective pricing, and implementing skills are key success factors. A pioneering demand driven model is for example the so called ”Energy Service Company (ESCO)”: a specialized commercial business that provides the full range of services, including design, implementation, and financing for energy efficiency projects.
• Enabling innovative financing methods: If demand increases, the large upfront costs (mainly for retrofit) still need to be integrated in business models. Covering these costs through energy saving is possible, but further innovative business models need to be tested and supported to bring them to the market. In the context of energy efficiency, innovative financing comes mainly in the form of “performance contracting”. This method offsets the energy-efficiency investment cost against energy savings across the financing term, thus effectively providing a zero-net-cost investment technique. A recent avenue explored to support the growth of ESCOs is to leverage bond markets.