Five Steps to Scale-Up Energy Efficiency

Most experts agree that energy efficiency is a critical building block for sustainable development. This is because improvements in energy efficiency strengthen a country’s energy security, increase competitiveness, ease shortages in energy supply, and lower environmental impacts including local and greenhouse gas emissions.

Why doesn’t it happen then? 

A big reason is the hassle factor.  Some businesses have limitations on financing ability. Management attention is focused on the company’s priority—production.  There is often little space left over for energy efficiency.  For others, consumers don’t perceive that potential gains will offset the higher costs of energy efficient equipment.  There is also a fairness aspect: some people seeing energy efficiency as a public good, and don’t see why they should assume the burden of investment for benefits that many will enjoy—even if they did not contribute.   

Governments try to respond with regulations, incentives and subsidies, information and other mechanisms to change people’s and companies’ decision-making and behavior, but results generally lag behind the rhetoric.  So how can energy efficiency actually be scaled-up?  Here are five suggested steps:

First, focus initially on government action.  Countries in which governments took an active, leadership role in promoting energy efficiency—including seeking to achieve high efficiency levels within their own facilities—have generally performed better.  Examples of such countries include the U.S., Germany, Denmark, Japan and more recently China.  This can include a range of measures—from appointing energy managers and adopting energy management systems, to adjusting budgeting, public finance and procurement rules to favor energy efficient products/systems, to preparing case studies and best practice guides to acknowledge and reward good performers. 

Common ownership and similar building types (e.g., schools, hospitals) offer excellent opportunities to bundle projects or equipment purchases together, allowing significant economies of scale.  This allows governments to have a catalytic effect on local markets, attracting new service providers and equipment suppliers, increasing competition and driving down prices. 

Second, create budgetary space for energy efficiency.  Given the massive benefits that robust energy efficiency programs can deliver—the U.S. has saved some US$11.7 billion under its Federal Energy Management Program, Germany saves €40+ million each year from its public energy service company (ESCO) programs—governments must be urged to allocate substantial public funds to make them happen.  A large share of these funds can be provided on a revolving basis through energy efficiency funds and banking programs, guarantee schemes, and ESCO financing.  Public funds, if designed correctly, can “crowd in” rather than “crowd out” commercial financing.  Public budget support is also needed to create and maintain institutional structures—covering market analyses, data collection and analysis, program design, implementation, monitoring and evaluation, awareness campaigns, and training. Modest funds will also be required to support incentive schemes, particularly for low-income and other residential programs.

Third, stop doing pilot projects.  Pilot projects, as opposed to demonstration projects, are supposed to test implementation mechanisms on a small scale before expansion.  Unfortunately, most pilots are done without any plans or means for scaling-up successful schemes and the experience is lost soon after the pilot ends. 

Fourth, build markets for energy efficiency. Grants can, in some cases, remove the competitive market discipline that makes companies successful.  Energy efficiency programs are generally based on market-mature technologies and well-tested program models, so grant-funded pilots should not be necessary.  Governments, donors and partners should establish national programs for key sectors (e.g. industry, buildings, transport), with accompanying regulatory mechanisms, incentives, information and technical support to achieve the energy efficiency goals.  These programs should have national targets and mechanisms to monitor progress. They should allow for midcourse corrections, with accountability, if desired outcomes are not reached. 

Fifth, focus regulatory mechanisms on the nonperformers.  Developing countries often lack the capacity to enforce all the regulations, which can create huge liabilities for them.  For energy efficiency, efforts can be made to achieve regulatory compliance through programming, incentives and financing.  This leaves a smaller, more manageable slice of the market for regulatory enforcement.  Enforcement mechanisms can take many forms—from product bans to minimum standards and codes, to fines and revoking of business licenses.  China’s government closed some 2,000 energy-intensive factories (e.g., steel, cement) in 2010 that were unable to make the necessary energy efficiency improvements. It need not be that uncompromising, but the threat of regulatory action can help motivate those lagging businesses to take action.

None of these actions is easy.  But we know that energy efficiency is a powerful resource to be exploited and should be willing to make a collective commitment to making it happen.  So, let’s stop debating what should be done and get on with doing it—at scale.