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ENERGY EFFICIENCYINSTITUTIONAL AND FINANCIAL FRAMEWORK

WEBINAR 8 MARCH 2012

Pierre BaillargeonVice-President - Econoler

Course on Regulation and Sustainable Energy in Developing Countries –Session 7

www.leonardo-energy.org/course-regulation-and-sustainable-energy-developing-countries

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INSTITUTIONAL AND FINANCIAL FRAMEWORKBy Pierre BaillargeonVice-PresidentEconoler

Webinar – March 8, 2012

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PRESENTATION STRUCTURE

1. Institutional Framework for EE Implementation

2. Financial Sources

3. Support schemeWhite Certificates vs. Measure-Specific Incentives

Others scheme

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1. Institutional Framework for EE Implementation

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INSTITUTIONAL FRAMEWORK

› Energy agency

› Utility-based demand-side management (DSM)

› Private sector support

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1.1 Energy Agency

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INSTITUTIONAL FRAMEWORKENERGY AGENCY

Government agency› A recent survey (IEA, 2010)

concluded that 60% of world countries have a government energy agency• The percentage is in the range of 40-

50% of countries in South America, the Middle East and Non-OECD Asia

• 65% of African countries

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INSTITUTIONAL FRAMEWORKENERGY AGENCY

Government agency› Government agency or department within a ministry

• Mandate can be broad (energy security, energy supply, etc.) or focused on EE and RE

• Morocco: L’Agence Nationale pour le Développement des Energies Renouvelables et de l’Efficacité Energétique (ADEREE)

• Slovakia Energy Agency (broad mandate)• Mexico CONUEE (focused)

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INSTITUTIONAL FRAMEWORKENERGY AGENCY

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INSTITUTIONAL FRAMEWORKENERGY AGENCYEntity created by the government› Independent statutory authority (IEA)

• Board of directors supervises the agency• Flexibility in decision making and strategy• Sustainable Energy Ireland• UK Energy Saving Trust

› Independent corporation• Status of a legal corporation• Korean Energy Management Corporation• South Africa NEEA (inside CEF)

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INSTITUTIONAL FRAMEWORKENERGY AGENCY

› Research institution/NGO• Not a government body but could be established by government

decree within a research institution• Jordan: National Energy Research Center (NERC)

› Public-private partnership• Owned partly by the government and partly by the private sector• With government officials on the board of directors• Agencia Chilena de Eficiencia Energética (AChEE)

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INSTITUTIONAL FRAMEWORKENERGY AGENCYResponsibilities vary according to the mandate of the agency

• Energy efficiency, renewable energy, or both

› High-level policy support/elaboration• Research, benchmarking• Support policy development (reports to regulators, legislators and

advisory groups)• Policy paper elaboration

› Laws and regulations• Regulation and law preparation (links with ministries)• Implementation

- Building code, building labeling and certification- Standards and labeling of equipment and appliances

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INSTITUTIONAL FRAMEWORKENERGY AGENCY› Awareness and communication

• Information, awareness- Media campaigns, printed material, trade fairs

• Education- Kids and school programs, social, professional, construction industry

• Training and conferences, etc.• Promote public recognition activities for EE & RE actions

› Technology deployment• Identification of new advanced technologies• Demonstration projects• R&D support

Magnetic bearing compressor, Danfoss

AchEE kid education program

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INSTITUTIONAL FRAMEWORKENERGY AGENCY› Program management

• Budget management• Resource acquisition = financial incentives• Market transformation = barrier removal

› Program stage• Planning• Design and development• Operation, management and monitoring

- Can be in-house or outsourced to contractors• Evaluation (in-house or independent evaluator)

› Manage collaboration and partnerships with all stakeholders

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INSTITUTIONAL FRAMEWORKENERGY AGENCYLarge agency with mandate broader than EE and RE – Is it better than focused agency?› Advantages

• Better visibility and credibility• Easier networking with stakeholders• Better opportunity through parent organization for accessibility to

government funds- If the top management support EE of course

• Facilitate fund development and establishment for EE & RE programs

• Main channel for international donors and EE/RE-related cooperation programs

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INSTITUTIONAL FRAMEWORKENERGY AGENCY

Disadvantages› If EE or RE tasks are a small part of the agency’s overall

responsibilities, it might have limitations:• Possibility that fund and resources be diverted to other priorities

(depends on top management, changes with time)• Decision-making process more complex• Attract skilled experts and resources in EE instead of more

important areas covered by the agency

Reference for other institutional arrangement analyses: An analytical compendium of the Institutional Framework for Energy Efficiency Implementation, World Bank, ESMAP 2008.

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INSTITUTIONAL FRAMEWORKENERGY AGENCYImportant criteria to consider when establishing EE institutions:› Country environment (importance of EE, energy policy, etc.)› Current institutions’ managerial and technical capacities› Motivation of private sector for EE promotion› EE legal framework status › Work plan and programs for EE improvement› Other existing activities and objectives (RE, CO2 reduction,

etc.) › Market requirement (simplicity, rapid adjustment, flexibility,

etc.) › Funding mechanism both available and future

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1.2 – Utility-BasedDemand-Side Management

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INSTITUTIONAL FRAMEWORKUTILITY-BASED DEMAND-SIDE MANAGEMENT

What is DSM? › DSM is the process of managing the

consumption and demand of energy• To optimize available and planned generation

resources› The term was coined in reaction to the traditional

supply-side management strategy• Basically plant addition

› In the 1980s, the term referred mainly to utility-based demand-side management• Nowadays, used as a generic term even for

government or agency-based programs

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INSTITUTIONAL FRAMEWORKUTILITY-BASED DEMAND-SIDE MANAGEMENT

Utility-based DSM refers to energy efficiency programs managed by energy utilities› Generally, the government policy/regulation dictates the

enrolment of the utilities in DSM› Government also fixes the savings target to achieve› DSM means the implementation of programs or measures

to shift or reduce the consumption/demand of energy• Electricity, gas• Applied mainly when a physical connection exists between the

supplier and the customer

› Part of a power planning strategy to alter the mix, timing and location of capacity additions

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INSTITUTIONAL FRAMEWORKUTILITY-BASED DEMAND-SIDE MANAGEMENT

› DSM advantages:

• Postpones/avoids infrastructure development costs • Achieves limited, but beneficial, results in a short time frame• Customers manage and reduce their energy costs

› DSM reduces:

• Growth in energy demand• Greenhouse gas emissions

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INSTITUTIONAL FRAMEWORKUTILITY-BASED DEMAND-SIDE MANAGEMENT

› DSM benefits:• Improves competitiveness of domestic industry

• Improves energy security

• Energy export/import balance

• Acts as a hedge against shortages

• Cheaper than adding new capacity, especially peaking capacity

But: Reduces distributor profit, disincentive model unless compensation is incorporated

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DSM Process (1)Establish load shape

objectives

Conduct market research- Audits - Metering- Surveys - Focus groups

Identify measures

Screen measures

Formulate program concepts

Similar to the activities that could be conducted by agovernment agency

Let’s see in more details

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Asses program costs/benefits and select

program portfolio

Prepare detailed program design

Implement programpilot then full-scale

monitoring and tracking

Evaluate programprocess/market/impact

DSM Process (2)

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DSM CASE STUDY

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DECOUPLING

Reduced sales of energy means reduced profitability for distributors.

The recovery of lost income or "decoupling" is to limit this negative impact.

Widely used in the context of EE programs conducted by public utilities, particularly in the US and Canada.

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DECOUPLING

› Advantage

• Powerful incentive to utilities to take EE activities seriously.

› Disadvantage

• Some observers consider that this mechanism is creating market distortion since it guarantees a profitability threshold to energy distributors.

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DECOUPLING

Not yet popular in emerging and development countries.

But it may well be the next step !

Example: NY state bill

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INCENTIVES OR PENALTIES

› Incentive• Going beyond the decoupling scheme to offer a performance

premium in a utility- California CPUC, several states in the US

› Penalties• Utilities that do not deliver the savings have to pay a penalty.• The penalty fixes a cap on the value of savings in the market.

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INSTITUTIONAL FRAMEWORKFINANCIAL SUPPORT: ON-BILL FINANCING

› Thinking outside the box (beyond incentives)• Innovative approach – utilities facilitate investments in energy

efficiency

• Utility (or partner) provides energy customers with low or interest-free financing for the project

• Simpler administrative procedures

• Utility (or partner) finances the project’s upfront capital costs

• The loan is then repaid through extra monthly installments on the customer’s bill.

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INSTITUTIONAL FRAMEWORKFINANCIAL SUPPORT: ON-BILL FINANCING

› Advantages:• One bill, one payment: easy, convenient, less paperwork• Constant payment amounts and interest rates• Usually interest lower than market rate• No down payment and easier to qualify• Can see energy savings on bill each month

› Disadvantages:• Requires one payment on the same date, not flexible, cannot

delay payments• Not negotiable: fixed monthly payment • Accounting complexity, tax issues, depreciation

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1.3 - Private Sector Support

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INSTITUTIONAL FRAMEWORKPRIVATE SECTOR SUPPORT

› Incentives and financial support stimulate the market for EE

› In several countries, the government decided to support the development of commercial services that go beyond business as usual

› Often the support of energy service companies (ESCOs)• Brazil, China, Thailand, etc.

› The idea is to facilitate the emergence of actors who will carry out energy efficiency activities on a commercial basis• Helps structure the market. Allows reducing subsidies or financial

assistance in the medium term.

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Examples of government support: Tunisia› Support of ESCO establishment through the Energy Conservation

Agency (ANME) by:• Legal framework – ESCO accreditation• Capacity building of financiers, engineers, promoters, customers• Guarantee fund for ESCO projects

› Other examples:• Template contract, investment grade audit content, M&V procedures• Large bid for government building projects• Changing bidding procedures• Changing accounting rules to allow for energy service invoices

More on that in a future Webinar

INSTITUTIONAL FRAMEWORKPRIVATE SECTOR SUPPORT

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2. Financial Sources

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FINANCIAL SOURCES

Government or Agency

Energy Supplier

Tariffs Charge

Mandatory Voluntary

Green energyCompensated energy EECompensated energy CO2

Contractors

Commercial

ESCO Supplier / Manuf.

Selling products and services

Shareholders or cash flow› Operating budget› Loans

Public charge

Universal tax

Emission allowances

Dedicated taxes

CO2EnergyEnergy-intensive products

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FINANCIAL SOURCES

› Universal tax: can be applied in many ways• Corporate or personal income • Corporate profit• Value added tax on sales• Custom and import fees• Corporate tax on capital

› All money collected goes to the government treasury• Can be used to finance energy efficiency initiatives• One of the oldest mechanisms• Does not target energy user specifically

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FINANCING FROM PUBLIC FUNDS

› Public funding advantages and drawback

› Advantages• Application relatively simple• A simple fund transfer from the government to an agency or utility

will provide financing for programs

› Drawback• General taxes do not target energy users (but some indirect

taxes may)

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FINANCIAL SOURCES

› Dedicated tax: targets the energy users• Energy purchase• Energy production• Extraction of mineral resources (e.g., coal)• Environmental taxes: CO2 emissions• Inefficient equipment • Luxury equipment (e.g., Tunisia, cars and AC units)

Encourages energy efficiency and conservation, or discourages energy consumption

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FINANCIAL SOURCES

› GHG emission allowances

• Emission allowances can be given or sold, sometimes by auction.

• Part or the totality of the income can be transfered to an agency or a distributor to fund programs.

Regional Greenhouse Gas Initiative uses revenue to finance the NYSERDA program (State of New York – US). UE after 2012

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FINANCIAL SOURCES

› Public charge (social levies) • A charge added to energy costs or energy-consuming equipment• Not so different from a tax from a customer point of view (they

pay more for their energy or goods)• Name and regulatory basis are different• Sometimes integrated in the invoice (the customer cannot see

the social levy details)• Sometimes added to the energy invoice (separate amount for the

levy)- Collected amount could be remitted to an agency or managed by the

utility

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FINANCIAL SOURCESMANDATORY ENERGY RATE INCREASES

› Energy rate increases are also considered in the broad category of public service charges

› Government or regulatory agency allows an increase in energy tariffs

› This will finance EE› Cycle 1 to 3 years (sometimes 5)› Mechanism used extensively in North America› Also in Europe to finance the purchase of white

certificates

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FINANCIAL SOURCESMANDATORY ENERGY RATE INCREASES

Types of rate increases› Uniform tariff increase

› Differentiated rate increase• By sector or type of end-user

› Inverted tariff (inverted block or progressive pricing)

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FINANCIAL SOURCESVOLUNTARY ENERGY RATE INCREASES

The consumer voluntarily agrees to pay for a traceable energy› Renewable energy

• Traceable to the purchase of green certificates

› Compensated in CO2

› Compensated in energy savings• White certificates• Program evaluation

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FINANCIAL SOURCES CARBON FINANCE

› Carbon credit on CO2 emissions (e.g., POA – program of activity for CFL lamps, Uruguay)

› Can be sold on the international market (community carbon fund, carbon finance group WB, various institutional carbon funds, brokers, etc.)

› First Kyoto period extended› Contracts are usually for 7 years (renewable up to 3

times) or for a fixed 10-year period

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3. Support Scheme

White Certificates vs. Measure-Specific Incentives

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WHITE CERTIFICATES VS. MEASURE-SPECIFIC INCENTIVES

Two main approaches to distribute funding in a market› White certificates – the European way mainly › Also adopted by Uruguay› Utilities have EE targets to deliver

• Broad term: ESO or Energy Saving Obligations› They purchase white certificates in the market› Economic theory – the cost of the certificate will reflect

the lowest cost to implement measures in the market› In practice, not a real market as only a few actors

purchase and the market is not following economic theory

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WHITE CERTIFICATES VS. MEASURE-SPECIFIC INCENTIVES

Uruguay scheme› 0.13% levy on total sales of energy

› Creation of the Uruguayan Trust for Energy Efficiency (FUDAEE)

› 60% of the fund is devoted to the purchase of energy efficiency certificates

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WHITE CERTIFICATES VS. MEASURE-SPECIFIC INCENTIVES Measure-specific incentives – the North American way › Also adopted by several countries› Utilities have EE targets to deliver

• EEPS – Energy Efficiency Portfolio Standards (or EERS)› The incentives to the market take the form of an incentive

• Could be per unit (money per lighting fixture)• Could be per equipment size (money per kW nominal)• Could be in terms of deemed savings (money/kWh)• Could be in terms of M&V savings (money/kWh)

› The market does not determine the level of incentive› The choice is made by program managers

• Based on economic analysis• Typical customer case

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Other Support Schemes

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OTHER SUPPORT SCHEMES

Fiscal incentives› Rules provided by the government to promote energy-

efficient technology• Custom rate reduction• Tax deduction on the value added tax• Tax deduction for home renovation (on the income tax)• Accelerated depreciation

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THANK YOUPierre BaillargeonVice-PresidentEconoler

pbaillargeon@econoler.com