Economic Incentives and Policy Design for Energy Efficiency and Savings

Abstract

Energy efficiency improvements and the resulting energy savings can help to reduce final energy demand. Energy demand reductions are needed to facilitate the transition to energy systems with net-zero CO2 emissions and to achieve the global climate targets set in the Paris Agreement from 2015. Various barriers, however, inhibit energy efficiency improvements and explain the existence of untapped energy efficiency potential. Realising this potential would be beneficial for energy end-users and society as a whole. This thesis focuses on how progress in energy efficiency policy can lead to an increase in energy efficiency improvements and energy savings at the end-use level. We specifically consider potential progress in the design and implementation of policy instruments that aim at increasing the adoption of energy efficiency measures in the residential sector. We analyse the determinants of households’ investments in energy efficiency measures and the practicality to design policies that target individual households based on the observable household characteristics income, age of the household head, education, household size and the home ownership status. Directly targeting households that fail to adopt energy efficiency measures would be more effective and efficient than broadly targeting all households. We find that only some of the analysed household characteristics have a significant effect on households’ investments in energy efficiency measures and the magnitude of effects is generally small. Income and home ownership status show the clearest trends in explaining households’ investment decisions. In a Danish energy-economy model, we simulate the effect of energy efficiency policies on households’ investment and energy demand behaviour. The simulation of household behaviour is required in ex-ante evaluations of energy efficiency policy instruments. We demonstrate a comprehensive methodology for ex-ante evaluations of energy efficiency policies with a focus on the modelling of end-user behaviour where we specifically simulate households’ investment decision for energy efficiency retrofits in Denmark. The model results suggest that if Denmark aims at achieving substantial energy savings in residential heating, it would likely require a broad mix of policy instruments, which ad-dress various barriers that keep households from investing in energy efficiency retrofits. With respect to energy efficiency policy mixes, we review the potential existence of interaction effects between instrument combinations, which can be mitigating and reinforcing. We find that the steering mechanism of a policy instrument, the scope and the timing of implementation determine the interaction outcome. These factors could be taken into account when designing and implementing combinations of policy instruments for energy efficiency improvements in order to avoid mitigating effects and optimise reinforcing effects. Furthermore, we assess the potential for Member States of the European Union to use their revenues from the auctioning of allowances in the European Emissions Trading System (EU ETS) to finance national energy efficiency policies, e.g. in the residential sector. Due to recent changes to the EU ETS framework, auctioning revenues are an increasing income stream for Member States. Strategically investing these revenues in energy efficiency policies could lead to various benefits such as additional and cost-effective reductions in greenhouse gas emissions and support for the political process to further tighten the cap-and-trade scheme in the future. The diverse research methods and research contributions of this thesis may provide relevant insights for energy efficiency policy-makers on how to increase the adoption of energy efficiency measures in the residential sector. It may thereby shed some light on the questions on how to support the transition of energy systems and to mitigate climate change.