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INTERNATIONAL

ENERGY AGENCY

PROMOTINGENERGY

efficiencyINVESTMENTSCase studies

in the residential sector

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Existing buildings are responsible for over 40% of the worlds total primaryenergy consumption. An impressive amount of energy could be saved simplyby applying energy-efficient technologies.

Yet, various market barriers inhibit energy efficiency improvements inexisting buildings and result in energy savings that are significantly lowerthan potentials. Financial barriers including the initial cost barrier, riskexposure, discount-factor issues and the inadequacy of traditional financingmechanisms for energy-efficient projects play a major role. Policies that mayhelp to overcome financial barriers to improving energy efficiency in existingresidential buildings are the focus of this study.

The publication provides illustrations of policies and measures implementedin five IEA member countries and the European Union. Each case includesrelevant background and contextual information, as well as a detailedevaluation of each policy according to five pre-defined criteria: relevance,effectiveness, flexibility, clarity and sustainability.

Promoting Energy Efficiency Investments aims to inform policy makersand offers ideas on the most effective policies, programmes and measuresavailable to improve energy efficiency in existing residential buildings.

-:HSTCQE=UYWVY]:(61 2008 03 1 P1) 100 ISBN 978-92-64-04214-8

PROMOTINGENERGY




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INTERNATIONAL

ENERGY AGENCY

PROMOTINGENERGY




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INTERNATIONAL ENERGY AGENCY

The International Energy Agency (IEA) is an autonomous body which was established inNovember 1974 within the framework of the Organisation for Economic Co-operation andDevelopment (OECD) to implement an international energy programme.

It carries out a comprehensive programme of energy co-operation among twenty-seven ofthe OECD thirty member countries. The basic aims of the IEA are:

To maintain and improve systems for coping with oil supply disruptions. To promote rational energy policies in a global context through co-operative relations

with non-member countries, industry and international organisations.

To operate a permanent information system on the international oil market.

To improve the worlds energy supply and demand structure by developing alternativeenergy sources and increasing the efficiency of energy use.

To promote international collaboration on energy technology.

To assist in the integration of environmental and energy policies.The IEA member countries are: Australia, Austria, Belgium, Canada, Czech Republic,Denmark, Finland, France, Germany, Greece, Hungary, Ireland, Italy, Japan, Republic of Korea,Luxembourg, Netherlands, New Zealand, Norway, Portugal, Slovak Republic, Spain, Sweden,Switzerland, Turkey, United Kingdom and United States. Poland is expected to become amember in 2008. The European Commission also participates in the work of the IEA.

ORGANISATION FOR ECONOMIC CO-OPERATION AND DEVELOPMENT

The OECD is a unique forum where the governments of thirty democracies work togetherto address the economic, social and environmental challenges of globalisation. The OECDis also at the forefront of efforts to understand and to help governments respond to newdevelopments and concerns, such as corporate governance, the information economyand the challenges of an ageing population. The Organisation provides a setting wheregovernments can compare policy experiences, seek answers to common problems, identifygood practice and work to co-ordinate domestic and international policies.

The OECD member countries are: Australia, Austria, Belgium, Canada, Czech Republic,Denmark, Finland, France, Germany, Greece, Hungary, Iceland, Ireland, Italy, Japan, Republicof Korea, Luxembourg, Mexico, Netherlands, New Zealand, Norway, Poland, Portugal, SlovakRepublic, Spain, Sweden, Switzerland, Turkey, United Kingdom and United States.

The European Commission takes part in the work of the OECD.

OECD/IEA and AFD, 2008

International Energy Agency (IEA),Head of Communication and Information Office,

9 rue de la Fdration, 75739 Paris Cedex 15, France.

Please note that this publication is subjectto specific restrictions that limit its use and distribution.

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ACKNOWLEDGEMENTS

This book was initiated, designed, and coordinated by Philippine de TSerclaes (IEA) and NilsDevernois (AFD), under the supervision and guidance of Richard Bradley (Head of the Energy

Efficiency & Environment Division of the IEA) and Robert Peccoud (Head of the ResearchDepartment of AFD).

The Introduction, Chapters 1, 2, 8, and the Conclusion were drafted by Philippine de TSerclaeswith help from Sara Moarif (IEA). Chapter 3 was drafted by Satoru Koizumi (IEA). Chapter 4 wasdrafted by Martin Jakob (ETH), Marion Aubourg (AFD), Ingrid Barnsley (IEA), Sara Moarif, andPhilippine de TSerclaes. Chapter 5 was drafted by Wolfgang Eichhammer (ISI) and Martin Jakob.Chapter 6 was drafted by Martin Jakob, Andrea Honegger-Ott (ETH) and Marion Aubourg, Chapter7 by Jrgen Reichert (ISI) and Martin Jakob. Chapter 8 was drafted by Philippine de TSerclaesand Paul Waide.

The authors would like to thank their colleagues Richard Baron, Ingrid Barnsley, Nigel Jollands,Jens Lausten, Jenny Gell, Rebecca Gaghen, Muriel Custodio, Bertrand Sadin, Corinne Hayworth,and Sophie Schlndorff for their advice and key input throughout the project.

This project would not have reached its term without the support of AFD.

Acknowledgements 3


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Foreword 5

FOREWORD

The imperative to improve energy efficiency is stronger than ever. The willingness of politicalleaders to tackle this problem has been reaffirmed through Head of State meetings such as the

G8 Summits at Gleneagles in 2005, Saint Petersburg in 2006, and Heiligendamm in 2007. Morerecently, the December 2007 UN Climate Change Conference in Bali reiterated the urgencyof countries need to cut their greenhouse gas emissions in a significant way. Energy efficiencymust be one of the strategies employed to address the challenges of energy security, climatechange and economic development.

On this road to a sustainable energy future, actions in the building sector can play a key role.Existing buildings are responsible for over 40% of the worlds total primary energy consumption,and account for 24% of world CO2emissions. Yet, despite the proven cost-effective opportunitiesfor reducing energy consumption through energy-efficient technologies, a large portion of thepotential in the existing residential building sector remains untapped.

Numerous barriers are responsible for this persistent energy efficiency gap. Market barriers takemany forms, including low priority of energy issues, difficulties in accessing capital, the presenceof information asymmetries, and principal-agent problems (or split incentives). Financial barriersare also decisive in inhibiting progress towards more energy efficient buildings. Such barriersencapsulate a wide range of obstacles, including the initial cost barrier, risk exposure, discountfactor issues, and the inadequacy of traditional financing mechanisms for energy efficiencyprojects.

This book provides policy makers illustrations of available policies and measures currentlybeing applied in IEA member countries. It concentrates on policies which in their application

have helped overcome financial barriers, using examples from the European Union (EU) andfive International Energy Agency (IEA) member states: Japan, the United States (US), Germany,France and the United Kingdom (UK).

The study shows that policies to help overcome financial barriers to increased energy efficiencyin buildings do exist, and that more systematic ex-post data collection should be encouraged tohelp policy makers design the most appropriate policy packages to tackle these issues.

We extend our thanks to the Agence Franaise de Dveloppement, without whom this studywould not have happened.

Nobuo TanakaExecutive Director


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Table of Contents 7

TABLE OF CONTENTS

Acknowledgements ............................................................................................................ 3

Foreword ............................................................................................................................ 5

List of tables ....................................................................................................................... 8

List of figures .................................................................................................................... 10

Executive Summary .......................................................................................................... 15

Introduction ..................................................................................................................... 19

Section I KEY CONCEPTS

Chapter 1 Energy effi ciency potential in existing residential buildings ...................................25

Chapter 2 Market barriers to more energy effi cient buildings.................................................... 33

Section II CASE STUDIES

Chapter 3 Japan........................................................................................................................................ 47

Chapter 4 United States of America.................................................................................................... 75

Chapter 5 The European Union .......................................................................................................... 111

Chapter 6 France .................................................................................................................................... 145

Chapter 7 Germany................................................................................................................................ 183

Chapter 8 The United Kingdom..........................................................................................................223

Section III CONCLUSIONS

Conclusion ...................................................................................................................................................255

Annex I Summary Table of US Policies .............................................................................................263

Annex II France........................................................................................................................................283

Annex III Germany..................................................................................................................................289

Bibliography and data sources..............................................................................................................291


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8 Promoting energy efficiency investments Case studies in the residential sector

LIST OF TABLES

Table 1 Energy consumption of three different houses in a moderate climate .............. 27

Table 2 Insulation materials in decreasing order of efficiency ..................................... 28

Table 3 Cost-effectiveness of insulation measures in different climate zones ............... 30Table 4 Overview of the stock of residential buildings in Japan ................................... 51

Table 5 Change of ownership status of houses in Japan (million households) .............. 51

Table 6 Kyoto Protocol targets of CO2emission and absorption .................................. 55

Table 7 Residential energy efficiency policy targets corresponding

to the Kyoto Protocol targets ........................................................................... 56

Table 8 Coverage of Top Runner programme............................................................... 61

Table 9 Target fiscal year and effects of the Top Runner programme ............................ 71Table 10 Selected housing facts in the US ..................................................................... 77

Table 11 Possible tax credits for energy-efficient home improvements

(as of November 2005) ................................................................................... 89

Table 12 Weatherisation timeline .................................................................................. 91

Table 13 Overview of the park of residential buildings in the EU ................................ 115

Table 14 Characterisation of the building stock in the EU15 by climatic zone,

by building age and by type of building (in million m2) ................................ 116

Table 15 Overview on recent energy policy measures regarding the case

of the European Union from the MURE database ......................................... 124

Table 16 Minimum levels of taxation applicable to heating fuels and electricity

for non-business use ..................................................................................... 129

Table 17 Budget and objectives of the Structural Funds .............................................. 131

Table 18 Overview of energy policy measures in the residential sector of France........ 156

Table 19 Tax credit rates for existing buildings (older than 2 years) valid in 2005

and 2006 (primary residence) ....................................................................... 162Table 20 Overview of EE subsidy programmes targeting the existing residential

building sector ............................................................................................. 166

Table 21 Extra bonus of ANAH subsidies for energy efficiency improvements ............. 167

Table 22 Global energy efficiency goal and its breakdown to the different energy

types (residential and tertiary sectors) ........................................................... 171

Table 23 Break down of the number and the amount of grants regarding owner type

and energy efficiency category ..................................................................... 175


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Table of Contents 9

Table 24 Final energy consumption 2004 (all sectors) ................................................. 186

Table 25 Age structure of dwellings in residential buildings in Germany 2002............ 187

Table 26 Home ownership rate 1993-2002 ................................................................. 189

Table 27 Investments in products in residential buildings, 2004 .................................. 190

Table 28 Research, development and testing facilities ................................................. 198

Table 29 Overview on energy policy measures regarding the case of Germany .......... 200

Table 30 Maximal U-values for construction elements of existing residential

buildings (mandatory if at least 20% of an exterior structural element

of the same orientation is renovated) ............................................................ 204

Table 31 Energy tax income between 1999 and 2005 (million EUR) ........................... 208

Table 32 Impact of energy policy measures: savings in terms of reduced annual

energy demand at the end of the respective evaluation period

(savings of different measures are not cumulative) ........................................ 215

Table 33 Loan approvals between 2002 and 2005 of various programmes

of the KfW Frderbankfor existing buildings in million current EUR ............ 218

Table 34 Cumulative space of living with energy efficiency improvement

promoted by the KfW Frderbank, in million m2.......................................... 219

Table 35 Number of applications between 2002 and 2005 for various programmes

of the KfW Frderbank................................................................................. 219

Table 36 Decrease in energy intensity measured as TPES/GDP

(toe per thousand 2000 USD) ....................................................................... 226

Table 37 Measurements of energy use by sector for UK and other IEA countries ......... 226

Table 38 Measurements of energy intensity by sector for UK

and other OECD countries ........................................................................... 227

Table 39 Comparison of outputs against targets for phase I of the Community

Energy programme ....................................................................................... 242

Table 40 Summary of energy savings resulting from various policy measures .............. 251

Table 41 Summary table of policy evaluation .............................................................. 258Table 42 Overview on the stock of residential buildings and its energy

consumption in France ................................................................................. 284

Table 43 Current and investment housing expenditures in France

(billion EUR, current prices) ......................................................................... 284

Table 44 Technical energy efficiency requirements for tax credit in the case

of existing buildings ..................................................................................... 285

Table 45 Development of building codes in France .................................................... 285


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Table 46 Responsible ministries for the building sector in the German Lnder............ 289

Table 47 Maximal U Values (W/m2K) for construction elements of existing

residential buildings ..................................................................................... 290

Table 48 Mean consumption of new residential buildings, constructed

in compliance with the regulations ............................................................... 290

LIST OF FIGURES

Figure 1 Energy savings due to energy efficiency since 1973 ....................................... 19

Figure 2 Average household energy consumption by use in a moderate climate ......... 26

Figure 3 Example of project finance structure .............................................................. 42

Figure 4 Final energy demand for each sector in Japan ................................................ 48

Figure 5 CO2emissions by sector in Japan .................................................................. 48

Figure 6 Residential energy demand by end-use in Japan ............................................ 49

Figure 7 Residential energy source consumption ......................................................... 50

Figure 8 Changes in residential sector energy consumption and number

of households ................................................................................................ 50

Figure 9 Renovation in the Japanese housing market ................................................... 52

Figure 10 New construction in the Japanese housing market ......................................... 52

Figure 11 Long-term average heating degree days in Japan............................................ 53

Figure 12 Structure of the Energy Conservation Law for the residential sector ............... 59

Figure 13 Organisation of NEDO subsidies to home efficiency ..................................... 62

Figure 14 Amount of subsidies offered to all houses and renovated houses ................... 63

Figure 15 Expected energy savings for all houses and renovated houses........................ 63

Figure 16 Cost-effectiveness of subsidies (annual savings per subsidy amount) .............. 64

Figure 17 Ratio of houses with performance evaluation performed ............................... 65Figure 18 Schematic drawing of direct housing loans .................................................... 66

Figure 19 Number of houses with GHLC loans ............................................................. 66

Figure 20 Framework of mortgage-backed securities: Flat 35 ..................................... 67

Figure 21 Number of houses applying for Flat 35 .......................................................... 68

Figure 22 Evaluation method of CASBEE ....................................................................... 69

Figure 23 Transition of energy consumption by households .......................................... 70


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Table of Contents 11

Figure 24 US energy use by end-use sector, 2006 ......................................................... 76

Figure 25 US residential energy sources 2005 ............................................................... 77

Figure 26 Cooling degree days and heating degree days by census division 2005 ......... 78

Figure 27 Evolution of State Energy Programs ................................................................ 86

Figure 28 Funding for state-specific energy programs from different federal sources

(without weatherisation and without federal residential tax credits) ............... 87

Figure 29 Funding for weatherisation programmes between 1977 and 2006

(current million USD) .................................................................................... 92

Figure 30 Final energy demand per sector in the EU25 (corrected for yearly

climate variations) ....................................................................................... 112

Figure 31 Final energy consumption for space heating in the EU25 1990-2004

(by fuel) ....................................................................................................... 113

Figure 32 Major driving forces for energy consumption in the building sector

of the EU25 ................................................................................................. 114

Figure 33 Net impact of driving forces, energy efficiency and behaviour

on the variation of space heating energy consumption per dwelling

in the EU15 (% change per year) ................................................................. 115

Figure 34 Long-term average heating degree days in the EU25 .................................... 117

Figure 35 Examples of national energy performance certificates .................................. 127

Figure 36 Costs for energy performance certificates in Germany ................................. 128

Figure 37 Impact evaluation of residential sector energy efficiency policies

with the ODEX (heating and electric appliances) ......................................... 137

Figure 38 Ex-postevaluation of energy efficiency measures in the EU15

in the period 1990-2000 ............................................................................. 138

Figure 39 Ex-anteevaluations of economic energy efficiency measures

in the EU15 2000-2025 ............................................................................... 139

Figure 40 Diffusion of low emission glazing and condensing boilers in EU countries

(2004) .......................................................................................................... 139

Figure 41 Diffusion of insulation thickness (2004) ....................................................... 140

Figure 42 Final energy demand (numbers in Mtoe and graphical representation

in %) for space heating in the French residential sector ............................... 147

Figure 43 Final energy demand (ktoe) per sector in France between 1990

and 2005 ..................................................................................................... 148

Figure 44 Selected drivers of household energy demand in France .............................. 148


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Figure 45 Annual intervention budget of ADEME and its predecessors

in Euro 2004................................................................................................ 154

Figure 46 Two indicators of the intensity of the French energy efficiency policy .......... 155

Figure 47 Development of the French tax scheme for principal residences:

upper limits for tax deductions or tax credits for a couple

with two children in EUR/2004 (left axis) and tax reduction

or tax credit rates (right axis) ........................................................................ 161

Figure 48 Development of subsidy programmes for building improvement,

in EUR/2004 ................................................................................................ 165

Figure 49 Share of households that conducted energy-improvement work .................. 174

Figure 50 Market penetration rate of coated glazing following regulation in France,

Germany and the UK................................................................................... 175

Figure 51 Energy efficiency gains in the household sector in France between 1990and 2004, in %............................................................................................ 176

Figure 52 Final energy demand for space heating in the residential sector

in France ..................................................................................................... 177

Figure 53 Breakdown of public effort (forgone income taxes)

of building maintenance and retrofit tax schemes of principal residences

(Euro 2004).................................................................................................. 179

Figure 54 Breakdown of final energy consumption into sectors; figures

from 1970-1989 for the former FRG (tertiary sector and householdstogether), 1990-2005 for Germany .............................................................. 184

Figure 55 Total final energy consumption per capita and GDP per capita ................... 185

Figure 56 Consumption of final energy for space heating in residential buildings

and in the service sector, with and without adjustment

for climate influence.................................................................................... 185

Figure 57 Breakdown of space heating in residential buildings by type of energy

1990-2004 .................................................................................................. 187

Figure 58 Price for the kWh of final energy saved after the necessaryrefurbishment of a house and the base cost of refurbishment

separated from the additional cost of insulation ........................................... 189

Figure 59 Overview on energy policy measures regarding the case of Germany

from the MURE database ............................................................................. 199

Figure 60 Breakdown of sectorial final consumption by source in 1973 and 2004 ...... 224

Figure 61 Domestic energy consumption (per person, per household and per unit

of household income) .................................................................................. 225


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Table of Contents 13

Figure 62 Energy intensity in the UK and in other selected IEA countries,

1973 to 2010 (Toe per thousand USD/2000

and purchasing power parities) .................................................................... 225

Figure 63 Energy savings by measure type as a percentage of total savings

for EEC1 ...................................................................................................... 232

Figure 64 Comparison figures of energy consumption evolution

in the UK and OECD countries .................................................................... 249

Figure 65 Number of dwellings in single- and multi-family houses

in the French building stock (permanently occupied dwellings) ................... 283


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Executive summary 15

EXECUTIVE SUMMARY

Energy efficiency (EE) improves energy security, fosters economic gains, and helps to reduce

human-induced carbon dioxide (CO2) emissions. Policies designed to increase energy efficiency

have already delivered significant benefits. Worldwide energy consumption would be 56%higher today than it would have otherwise been without the various EE policies that have been

implemented since 1973 (IEA, 2007a). These three advantages and the general track record of

energy efficiency policies have made EE a policy priority in many countries.

Existing buildings are responsible for over 40% of the worlds total primary energy consumption,

and account for 24% of world CO2emissions (IEA, 2006). Yet, despite the proven cost-effective

opportunity to reduce energy consumption, a large portion of the potential for energy efficiency

in the existing residential building sector remains untapped.

Numerous barriers are responsible for this persistent energy efficiency gap (IEA, 2007b). Marketbarriers take many forms, including low priority of energy issues, difficulties in accessing capital,

the presence of information asymmetries, and principal-agent problems (or split incentives).

Financial barriers are also decisive in inhibiting progress towards more energy-efficient buildings.

Such barriers encapsulate a wide range of obstacles, including the initial cost barrier, risk

exposure, discount factor issues, and the inadequacy of traditional financing mechanisms for

energy efficiency projects.

Focus on nancial barriers

This study concentrates on financial barriers. It provides illustrations of policies and measures

which, when implemented, have helped overcome the financial barriers to energy efficiency in

existing residential buildings. The publication includes case studies from the European Union

(EU) and five International Energy Agency (IEA) member states: Japan, the United States (US),

Germany, France and the United Kingdom (UK). Each case presents the policy and institutional

framework within which policies are enacted. It then provides an overview of the policies and

measures implemented, followed by an evaluation of their strengths and weaknesses.

As such, this study seeks to offer policy makers ideas on policies, measures, and programmesavailable to overcome financial barriers to increased EE in existing residential buildings. The

main purpose is to inform policy makers of available options. Due to a lack of sufficient ex-post

data, systematic quantitative analysis was not possible in all cases. The study therefore provides

qualitative evaluation of each policy according to five pre-defined criteria (de TSerclaes, 2007):

i) relevance; ii) clarity; iii) flexibility; iv) impact; and v) sustainability. Moreover, for consistency

and to allow readers to make comparisons across the case studies, the policies have been

organised into four categories: regulatory measures; financial and incentive-based measures;

voluntary agreements and partnerships; and information and capacity-building measures.


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Lessons for policy makers

Although the purpose of the publication is mainly informational, five lessons can be drawn

from the cases studied.

No silver bullet

First, no single policy category or policy measure can overcome the financial barriers alone.

Policy packages that seek to address multiple financial barriers at the same time are likely to be

more relevant, have greater impact, and be more sustainable. The German case is an illustration

of the success of appropriate policy packages. The implementation of strong regulatory ordinance

since the late 1970s combined with public-private partnerships led to a decrease from an average

yearly household consumption of 280 kWh/m in 1970 to an average yearly consumption of 180

kWh/m in 2004. The US also offers an example of good policy package through a combination of

direct funding for weatherisation in low-income households, improved regulations, and supportfor demand-side management programmes implemented by utilities. Such policy packages

have been implemented successfully in certain states, such as California, where the states

energy consumption has remained relatively flat for the past 30 years. In Japan, the successful

combination of regulatory and awareness campaigns led to an overall improvement of 28% to

69% of households meeting EE standards.

Public-private partnerships

Second, public-private partnerships offer the best opportunity to meet the five evaluation criteria.

They allow different barriers to be addressed concurrently and increase the impact of a policy onmarket transformation. As such they allow more sustainable changes. An example is the efforts

of the French government, which offers fiscal incentives for the use of specific green savings

products. These have been used by banks such as the Banque Populaire to offer preferential

loans to customers putting in place EE refurbishment projects.

Creating a market

Related to this, the goal of market transformation is the third policy lesson: increasing the

energy efficiency of buildings in a sustainable manner requires the existence of a market for

energy efficiency. This market is currently weak and perceived as too risky. It will require

strengthening and increased certainty before private actors are willing to engage further.

Private actors are pivotal to the markets development. This circular dynamic underlies the

role played between public and private actors in market transformation. The EU is aiming to

trigger such market transformation, through policies which combine regulations to be met by

member states, as well as both voluntary agreements with manufacturers and regulations to

improve the EE standards of equipment and appliances. It also seeks to liberalise the energy

supply and services markets across the EU to encourage the creation of a market geared

towards increased EE.


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Executive summary 17

Strong political will

Such market transformation however will not take place without increased involvement from theprivate sector. Strong political will is required to trigger such increase in private participation.The fourth lesson drawn from the case studies, then, is the need for governments to create morefavourable conditions for public-private partnerships by increasing certainty through risk-sharing

instruments and the promotion of the systematic application of an international framework ofmeasurement and verification protocol.

The importance of national context

Fifth, it is important to note the role of national contexts in determining the success and/or failureof any given policy. The specificities of the buildings stock i.e.whether it is largely inhabitedby owners or renters as well as the energy profile or political structure of a country, are allkey features to be considered when designing policy packages. Typically, an energy-dependentnation tends to need less information and capacity-building programmes. For example, the UK

has certain policies which are implemented across regions, such as white certificate schemes,information programmes and voluntary agreements with manufacturers. Other policies are leftto devolved administrations, such as those targeting EE improvements in low-income householdsas well as building regulations, to allow for social, economic, and physical differences to beaccounted for. The success of the combination of different policies in Japan and the US forinstance, shows the importance of adapting to national contexts.

Overall, the study highlights the crucial need for policy makers to collect data in a systematicway at the end of each policy programme. Adequate ex-postdata is still very scarce and renderscomparison between measures and countries much more difficult. Such systematic data collection

would enrich future policy analysis.


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Introduction 19

INTRODUCTION

Energy Efficiency (EE) means greater energy services such as production, transport and heat per unit of energy (i.e.coal, gas, electricity). Advantages associated with energy efficiency

improvements include increased energy security particularly with regard to reducingdependence on risk-prone fossil fuel energy sources enhanced environmental protection,and reduced costs for energy services and other financial benefits. Further, through reducingenergy use, EE also presents a viable option for the mitigation of carbon dioxide (CO2) emissions.Although the initial cost of energy-efficient technologies can be higher than their less efficientcounterparts, the majority of these technologies make economic sense when analysed on a life-cycle cost basis (IEA, 2003). The growing consensus on the need to mitigate human-induced

CO2emissions (IPCC, 2007), as well as rising concern about high fuel prices has promptedincreased willingness on the part of policy makers to promote EE.

Energy efficiency policies have enabled the achievement of important energy savings. Since the

1973 oil crisis, energy efficiency measures have led to a significant reduction of actual energyconsumption (Figure 1).

Figure 1 Energy savings due to energy efficiency since 1973

56%Exajoules

Estimated energy usewithout efficiency improvements

Actual Energy Use

0

20

40

60

80

100

120

140

160

Energy Savings

180

1973 1980 1990 2000 2004

Source: IEA (2007a), Energy Use in the New Millennium: Trends in IEA Countries,OECD/IEA, Paris.

Energy-efficient technologies exist and are cost-effective. The building sector in particular presentsone of the biggest opportunities for cost-effective energy consumption reduction. In cold climateswhere most of the energy consumed in the buildings sector is for heating, energy use can bereduced significantly by improved insulation reducing draughts and leakages and moreefficient heating systems (especially boilers). In hot climates, on the other hand, properly designedventilation, adequate solar protection or building inertia and insulation can reduce the need touse air conditioning, thereby prompting energy savings.1

1. For a more detailed discussion of existing technologies, see Chapter 1.


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Despite this proven cost-effective opportunity to reduce energy consumption, a large portion of

the potential for energy efficiency in the existing residential building sector remains untapped.2

Numerous barriers are responsible for this persistent energy efficiency gap. Market barriers

include, for example, difficulty in accessing capital, the presence of information asymmetries, and

principal-agent problems, also referred to as split incentives. Financial barriers are also decisive

in inhibiting progress towards more energy efficient buildings. Such barriers encapsulate a widerange of issues, including the initial cost barrier, risk exposure, discount factor issues, and the

inadequacy of traditional financing mechanisms for energy efficiency projects.

The aim of this publication is to provide a detailed overview of policies which have contributed

to counter these financial barriers in five different countries. The absence of much literature on

such barriers despite their paramount role in hindering progress in energy efficiency, justifies

focusing on this issue. Although a brief qualitative evaluation of each policy tool will be provided

through a set of five pre-defined criteria,3the main purpose of the publication is to present

policy makers with a catalogue of existing instruments, policy types and programmes4to address

financial barriers to EE in their countries.

The first section of the book provides background information on EE potentials in existing

residential buildings, as well as existing technologies to meet those potentials. Chapter 2 consists

of a brief summary of market barriers preventing the optimal deployment of these technologies,

with a particular focus on financial barriers.

The second section of the book comprises case studies of Japan, the United States (US), the

European Union (EU), France, Germany, and the United Kingdom (UK). For each case study, an

overview of the legal, administrative and institutional conditions that may impact on the financing

of EE improvements is provided. Policy goals, strategies and measures are then discussed and

where possible, a summary of existing literature on the evaluation of such policies is provided.

Finally, examples of particularly successful programmes and instruments in each case are

highlighted according to a pre-defined list of criteria, described below. Each chapter presents one

case study. Japan and the US are presented first, followed by the three cases from the European

Union in alphabetical order. Each chapter follows the same three-part structure.

Categorisation of the policies

Policies which may help address financial barriers to improved energy efficiency in existing

residential buildings can be classified in four categories:

2. Hereafter, reference to buildings relates to household buildings.

3. As explained here-below.

4. As such the publication builds on a previous paper on Policy Responses to the Financial Barrier, providing a more detailedand systematic overview of the national contexts, energy profile and institutional frame work of each country.


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Introduction 21

Regulatory measures

These measures are government-created instruments that regulate actors behaviours, generallyby requiring performance of pre-defined standards or by commanding particular behaviours,

such as reports on specific information. Such measures may indirectly address financial barriersby providing information useful for market creation and enhancement. They also make energy

efficient choices mandatory. They include:

building codes and standards;

appliance and equipment standards; mandatory energy performance certificates; and other building sector regulations, such as technical regulations.

Financial and incentive-based measures

This category includes grants and subsidies, which are generally applied when governmentsconsider that the market will not provide the optimal level of energy-efficient investments

because of restricted access to capital. Fiscal cuts and credits also belong in this category andare similarly used to encourage actors to implement more EE investments. Examples of suchmeasures include:

income or other tax credits or reductions, VAT reductions on retrofitting investment orequipment, and pricing measures;

grants and subsidies; and weatherisation programmes.

Voluntary agreements and partnerships

This category may include public-private partnerships, private sector agreements and preferentialloans.

Preferential loans are generally initiated to attract customers to a particular scheme; these are

often built through public-private partnerships where the government provides a fiscal incentiveto the bank, which in turn offers a preferential interest rate to its customers.

Information and capacity-building measures

Such measures are generally non-regulatory and less interventionist. They may address financial

barriers by building awareness and managing demand. They aim to foster demand for energyefficient products, and manage energy demand by providing services that enable EE improvementsto be made. Examples of these measures include:

auditing and information programmes; voluntary labelling programmes;

research and development activities; demand-side management programmes.

In some instances, it may be difficult to place a policy in a single category, as the policy may

include various measures with multiple underlying objectives. Governments may combine


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different policies that fall across multiple categories in seeking to promote, for example,specific technologies aimed at improving EE in existing buildings. Moreover, similar policieswill not necessarily fall under the same category depending on the manner in which they areapproached. For example, in the UK, demand-side management programmes take the form ofwhite certificates, or government-determined energy savings obligations that must be met. Theseare included under regulatory measures. However, in California energy savings targets are not

mandated. Rather demand-side management programmes are encouraged through state levelfinancing and as such are classified as capacity-building measures.

Methodology

Due to a lack of ex-postdata, systematic quantitative analysis of the impacts of policies was notpossible in all instances. Nonetheless, qualitative observations are provided for each case studybased on the following list of five pre-defined criteria (de TSerclaes, 2007):

Relevance: The extent to which the policies address financial barriers to energyefficiency.

Clarity:The ease with which the policy is understood by actors, which affects the likelihoodof effective implementation.

Flexibility:The extent and ease with which the policy can be altered after its initialintroduction, and therefore be adaptable to changing circumstances.

Impact and effectiveness:The positive and negative changes produced by a policy measure,directly or indirectly, intended or unintended, and the success of the policy in increasingawareness and changing behaviours among different actors.

Sustainability:The degree to which the benefits of the policy are likely to continue after

the policy has ended; whether implementation of the policy or programme can help themarket to evolve.

Some of the policies discussed are not solely aimed at addressing financial barriers to energyefficiency in the existing residential building sector. Responding to financial barriers may in factcomprise only one aspect of a policys underlying objective. The scope of the policy evaluation isnonetheless placed on the impact on the energy consumption of the residential sector. Flexibilityand clarity are important to ensure that the policy i) remains relevant and ii) is feasible. Unclearor overly complex policies increase the transaction costs for all actors involved, renderingtheir implementation less effective. Striking a balance between flexibility and clarity is oftena challenge, as policies that change too frequently may become difficult to understand and

implement. Meanwhile sustainability is important as it means the policy can integrate EE intomarkets relevant to financing energy efficiency in existing residential buildings. The effect ofthe policies will thus continue even after changes to regulation and government, since they willhave succeeded in triggering market transformation. The sustainability of a policy can sometimesdepend on the length of time it is implemented; a short-term policy, no matter how effective,may not be able to instigate the necessary market changes.

Within the cases discussed, even a policy measure that is considered successful rarely meets allfive criteria. The purpose of the criteria is to evaluate all policies discussed in an objective andconsistent manner, and shed light on their comparative strengths and weaknesses.


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Section I KEY CONCEPTS

Chapter 1 ENERGY EFFICIENCY

POTENTIAL IN EXISTING

RESIDENTIAL BUILDINGS

Chapter 2 MARKET BARRIERS

TO MORE ENERGY

EFFICIENT BUILDINGS


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Section I Key concepts Chapter 1 Energy efficiency potential in existing residential buildings 25

Chapter 1 ENERGY EFFICIENCY POTENTIAL

IN EXISTING RESIDENTIAL BUILDINGS

This chapter establishes the EE potential of existing residential houses and provides a short

description of factors influencing energy consumption, as well as existing technologies to decreasethis energy consumption. It provides some background information on energy consumptionof a household, the factors which can influence it (i.e.climate), and a description of existingtechnologies to decrease energy consumption.

Energy consumption in residential buildings

Household energy requirements are closely linked to climatic conditions. Climate affects theamount of energy consumed to achieve a comfortable indoor temperature, the building materials

used and the building design; for example, ventilation and insulation needs vary according toclimate. Consequently, EE improvements are undertaken differently in different climates. Inthis context, three broad climatic zones are relevant: cold, moderate, and warm. On averagea cold climatic zone experiences 4 500 heating degree days5(HDD) per year, a moderate one3 500 HDD and a warm one 1 800 (HDD) (Ecofys, 2005). As an example, Finland and Swedenfall within a cold climate zone, France and Germany within a moderate one, and Greece andSpain within a warm one. A considerable portion of the energy resources is consumed for heatingin order to achieve thermal comfort conditions in the buildings. As the energy demand increasesdue to thermal comfort requirements, energy conservation has been included on the agenda ofdeveloping countries. Buildings located in warm climate zones also expend energy for cooling

to achieve comfortable indoor temperatures. While a range of climatic zones can exist withina single country, the cases studied fall on average within a moderate climatic zone.

Figure 2 below provides an illustration of the average household consumption by use in amoderate climate.

The most important design parameters affecting indoor thermal comfort and energy conservationin building scale are orientation, building form and the optical and thermophysical properties ofthe building envelope. All of these parameters are related to each other and the optimum valuesof each parameter should be determined depending on their respective values. Building form isone of the most important components with respect to total heat loss of the whole building. The

overall heat transfer coefficient (U-value) determines heat loss through the building envelope.Thermal performance of the building envelope surrounding a building is also influenced by thebuilding form. Therefore, heat loss for different building forms should be determined related toU-value6of the building envelope.

5. Heating (or cooling) degree days refer to the difference between a reference value (18C), at which no heating or cooling isrequired for a comfortable indoor temperature, and the average outside temperature.

6. U-value describes how well a building material conducts heat. Methodologically, it measures the rate of heat transfer througha material of known thickness over a given area under standard conditions. The usual standard is at a temperature gradientof 24C at 50% humidity in no wind conditions. The U-value is the inverse of the R-value, described further below (U= 1/R).The lower the U-value, the higher the efficiency.


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Building form is based on the shape factor (the ratio of building length to building depth), heightand roof type. Different building forms may have the same volume, but different facade area.

Energy effi cient technologies

A range of cost-effective technologies exists that can improve the efficiency of energy consumptionin buildings, chiefly in relation to the buildings insulation, envelope and windows. An overview of

key technologies for each of these three areas and their cost-effectiveness is provided below.

Insulation

Insulation is a central aspect of managing a households overall energy consumption. Asshown in Table 1, different types of insulation materials and methods can make a differenceon the order of one-to-three in a households heating needs. More sophisticated changes couldeven take the difference from one-to-five. The table shows the impact of a range of measures,including insulation, ventilation, shutters, building orientation, and behavioural factors on energyconsumption. All three houses have the same size (100 m2) and same volume (250 m3). House 1

is a classical house. Its insulation is at a typical current building code minimum requirementlevel. EE is not at all factored in by its residents, or designers (i.e.no particular orientation orfenestration)7. House 2 is similar to the first one in all respects except for the orientation of thehouse and its use of shutters. In addition, some basic energy-efficient training has been givento its inhabitants (such as how to use shutters properly etc.). House 3 is a bio-climatic house.That is, it has proper ventilation, insulation, interior blinds, etc.

Space heating55%

Water heating19%

Cooking4%

Appliances19%

>

Promoting Ee 2008

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