Columnists: Hans Nilsson, Fourfact

Published on: 19 Jul 2011

Where is our Prince Charming?

Energy Efficiency is a sleeping beauty. Everyone praises her for her advantages in terms of least cost, reduced environmental impact, capacity to create jobs and ensure security of energy supply etc. How often have we heard the song “win- win-win”? And how seldom, if ever, have we seen the bold steps necessary to make energy efficiency happen on a big scale – in accordance with its implicit properties and potentials?

Why is this sleeping beauty so difficult to embrace? Why is she still sleeping after all these years? Where is our Prince Charming when we need him? There is a job for him to cut through the thorn hedge and give the kiss of life to energy efficiency!

A flawed directive

The draft Energy Efficiency directive from June (COM(2011)370) is a great disappointment, unfortunately in the same league as the poisoned apple that put sleeping beauty to sleep in the first place.  It gives no level of confidence that the important 2020 target for energy savings can be met.  It can be explained by some simple facts.  For example, In less than two months time the text in the March Energy Efficiency Plan (COM(2011)109) has been seriously devalued (and it was even considered lacking ambition from the outset).

  • Then the refurbishment of public buildings should “bring the building up to the best 10% of the public building stock” Now in the draft EED it should simply“ meet the minimum energy performance requirements”.
  • Then energy efficiency measures in end-use customers that should be part of the business model for utilities by a so-called supplier obligation,  so investments for energy services should be made on a level playing field for supply and demand. Now countries can opt out from the obligation, and apply for credit for virtually any energy savings programme or measure they think may have realised some o f the 1.5 % annual savings – thereby making financing a lot more uncertain and more hazardous, and missing an opportunity to develop the culture and business model through cooperation and ultimately the paradigm shift for energy suppliers sought in the Energy Services Directive.

On top of this there are numerous references to “cost efficiency” which effectively does not mean anything since anyone and any Member State can come up with a calculation (method) that suits themselves best. Cost efficiency for whom? The outcome of a cost-efficiency calculation will always depend on the chosen system boundary. Cost efficient in what time? Cost efficiency may work in a static calculation. A desirable technology not cost-efficient today may be cost efficient tomorrow – if learning investments are provided and properly included in the life cycle costs and benefits accrued through deployment in the energy system.

Instead of giving a clear direction ahead for the future, the Commission provides a sort of French system for road signs, i.e. you can end up anywhere following their sign.

Potentials

Strangely enough we have to reiterate over and over again that the potential is there even if they have been verified also by the organisations of the establishment, such as the IEA. So we know that there are huge potentials for savings, many with negative costs. This is also recognised by most of the neo-classical economists. The disagreement between “us” and “them” is primarily that they claim these gaps in efficiency are natural and only reveals that the market does not prefer more efficiency.

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The size of the potential is in the area of at least 50% seen over an investment cycle. Actually, it is in often in shorter time as have been proved using calculation methods that account for the buildings as a system and not as fragmented pieces, c.f. eceee “Cost optimal building performance requirements” .

Investment cycle (Buildings – long (decades); Industry – short (decade); Transport – medium)

• Benefit is normally underestimated (comfort, health, fuel poverty reduction, local employment creation, security of supply improvement, robustness – these are often not accounted for)

• Costs are normally overestimated (market learning, routine technological development and scale effects are seldom regarded in a comprehensive manner). This is important in developing the draft regulation for the cost-optimal methodology, but also in developing the calculation of savings potentials that will be used in future binding savings targets.

• Planning is normally absent (Building performance certification and the resulting recommendations, Energy Management Systems, etc.) since these are not fully required or stringently applied.

Why does it matter?

A decision that for the individual is sufficiently good even if not optimal is often so because of the lack of capability to deal with the decision in full (cognitive limitations). Life is full of such sub-optimalities and we have to live with most of them, but when it comes to energy (the waste of it) sufficiency for the individual is disastrous for the society as a whole because of the inability of private perspectives to capture the impact of aggregations at society level.

The barriers we face today cannot be cured by information that simply appeals to people’s good will since the complexity of the issue is still too big (the cognitive limitation remains). And secondly, the 2020 target is a societal target while the measures proposed are from a private perspective – if even that. The draft Cost-optimal Regulation must include mandatory sensitivity analysis that take into account societal benefits and cost. Otherwise, it is totally out of kilter with a dynamic, socially-driven process.

The thorny hedge requires sharp swords

Energy efficiency improvements is not a one-time quick fix. Capturing the savings potential requires the skill and competences of many sorts of experts among stakeholders that can be delivered from Energy Efficiency Companies representing several technological areas. They work with e.g. insulation, ventilation, cooling, heating, building, electricity, lighting, plumbing, solar shading, compressed air, control, ICT, etc.

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Capturing the potential requires focus and perseverance over a long time, up to and including 2050, and for individual industries and buildings should be based on an individual plan stemming from an energy audit (energy performance certificate or investment grade audit). Similar plans or roadmaps are necessary for long-term planning for municipalities, regions and Member States.

No lost opportunities

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Act with real people – not with fictional characters

The behavioural economists Thaler and Sunstein write in their book Nudge "If you look at economics textbooks, you will learn that homo economicus can think like Albert Einstein, store as much memory as IBM's Big Blue, and exercise the willpower of Mahatma Gandhi." Thereby they describe the fictional characters of mainstream economics and their unsuccessful advice to shape measures to change the markets.

Measures must be designed for people as they are, and not as they are supposed to be.

• Behavioural economics takes into consideration e.g. loss-averse attitudes, endowment effects, hyperbolic discounting, rebound effects, i.e., the way people actually think and act.

• Standard (neo-classical) economics assumes e.g. that preferences are fixed and knowledge is perfect, i.e. the way people not are and never can be.

Measures and prospects have to be framed according to modern economic science (the theoretical option for a perfect market is not a sufficient condition).


Other columns by Hans Nilsson