Energy and climate policy to unlock investments: an holistic strategy [2010]

Energy and climate policy to unlock investments: an holistic strategy [2010]

 ( to read footnotes refer to: Footnotes)

So far, energy efficiency potentials, drivers and barriers to investment in energy efficiency, and acceptability of policy instruments have been explained in the context of the energy intensive IChem-NL (Chapters II and III). By now, a general understanding of these elements has been provided quantitatively and qualitatively. To close this review about the energy intensive chemical industry in the Netherlands, it would only rest to discuss possible policy related actions needed to achieve further investments in energy efficiency improvement. Therefore, the next chapter will address the topic of energy and climate policy to unlock investments in energy efficiency improvement. The intention of the next chapter is to contribute informing about ways to enhance greater energy efficiency in the energy intensive IChem-NL. However, the following sections will not advocate specific policy recommendations; rather they attempt to provide some perspectives on possible approaches to overcome barriers to investment in energy savings and, subsequently, pursuing greater energy efficiency.

Based on the general findings of this research, the central conclusion of this work is that it is possible to achieve further energy efficiency improvement in the energy intensive IChem-NL, in a cost effective manner, if economic, socioeconomic and technological barriers to investment in energy savings are overcome. However, accomplishing such an increase will require continuing innovation in both public policies and business models. In view of the first one, a comprehensive plan for pursuing opportunities and an integral policy approach is mandatory; that is, in order to reach the full potential for energy savings at process level, implementing an integrated and holistic policy strategy is requisite. Such strategy should consider at least:

1)   Rising the economic attractiveness of energy efficiency;

2)   Increasing support to investments in energy efficiency;

3)   Reducing uncertainties behind energy saving technology; and,

4)   Enhancing institutional transparency.


Increasing the economic attractiveness of energy efficiency

Perhaps, the main challenge to improve energy efficiency is to find ways to make it more economic attractive. As presented in this study, the decision making process to invest in energy saving improvement, is highly shaped by the rules of procedure (viz. investment priorities and financial rules) and the business climate of a firm. In both cases, the concerns lay down over the economic impacts of prioritizing energy productivity and the risks associated to its investing. Generally, there is not enough economic attractiveness in investments exclusively related to energy efficiency as there is, in contrast, to other type of projects (e.g. increasing capacity projects). On top of that, in markets where increased energy costs can still be recovered in the product price or where growth is lacking and competitiveness is inefficient, firms do not have the motivation to invest in energy use improvement. For these reasons, increasing energy prices can have an important positive influence on the consumption of energy.

In principle, where an adequate legal framework exists and where perfect market conditions are present, the effects of energy consumption (i.e. pollution or climate change) could be equalized and capitalized as social or environmental costs. However, in reality, markets do not reflect such expenses due to their poorly functioning e.g. increase of transaction costs[1] . Nonetheless, governments can internalize such expenditure through environmental taxes. Then, energy taxation could represent a social optimum way of reducing the impacts of inefficient energy use. In other words, by making more expensive the cost of energy, the more economic benefits will be attained by reducing energy consumption; subsequently, the more economic attractiveness there will be in investing in energy efficiency.

In the Netherlands, environmental taxes over energy (viz. natural gas and electricity) obey different tariffs depending on the amount of energy consumed. For large consumers (as it would be the case of the energy intensive IChem-NL), the energy tax for natural gas is ¢€0.82 m3 whereas ¢€0.05 for the case of electricity[2] (Postbus 51 Rijksoverheid 2010); respectively, they account for 24% and 0.5% of the cost of gas and electricity[3]. Although in the Netherlands price of energy is already among the highest in Europe [Figure 4.1], increasing energy taxes and subsequently making the cost of energy more expensive,  could help the energy intensive IChem-NL to move in the direction of further energy efficiency improvement without loosing competitiveness within the European market[4].


Figure 4.1. Energy prices in EU industry: prices for consumption over 24000MWhe/year and 11.5GWhe/year.







Based on (Europe’s Energy Portal February 25th 2010)


Besides taxes, tradable permits are also a type of instrument that could enlarge the economic attractiveness of energy saving projects. With tradable permits energy use can be exchanged, indirectly through a market mechanism[5], for capital gains. Indeed, like taxes, they work as an economic incentive to move towards a less environmentally harmful behaviour (Common, Stagl 2007). Tradable permits can origin a direct positive impact in firms by allowing them to vary an originally attributed fixed number of licences, by buying or selling such permits at a variable price. That is, within the context of energy use, tradable permits allow an exchange of rights to discharge CO2 emissions linked to energy consumption at an economic benefit. In this way, costs of energy efficiency improvement can be offset and reversed (i.e. make them profitable) by economic settlements gained by selling rights (of avoided emissions) in the market.

In Europe, the Emissions Trading Scheme (EU ETS) is the market for the exchange of CO2 permits; the energy intensive IChem-NL has many of its constituting firms participating in the EU ETS. Inside the EU ETS, firms are exposed to clear incentives to invest in energy efficiency and clean technologies (European Commission 2010). Certainly, at an optimal performance[6], EU ETS will play a major role in making more attractive investments in energy efficiency improvement; especially, if a fix carbon price can be ensure –consistently and continuously e.g. over 40 €/tonne of CO2 for 10 years (sic.)[7] .

Finally, other instruments that could make energy efficiency more economic attractive are financial incentives such as subsidies or taxes rebates. Even if interesting, however, these types of instruments are rather limited to address economic and socioeconomic barriers such as high discount rates or access to capital. Nonetheless, if effectively approached and matured, incentives can also contribute to energy savings (especially, by helping launching energy saving technologies in the market). With some experience in the field, in the Netherlands economic incentives have been utilized to encourage firms investing in energy savings improvement (e.g. the MIA and the VAMIL)[8]. As part of any policy strategy, it should be ensured however that such incentives are achieving optimal results. Therefore, such fiscal incentive schemes most be reviewed to guarantee the most favourable grounds for private investments in energy efficiency.


Increasing support to investments in energy efficiency

Another important aspect to take into consideration when designing an holistic policy strategy towards energy efficiency improvement is recognizing the methods to provide significant upfront funding required by firms to capture energy efficiency. Certainly, identifying and resolving appropriate and sufficient funding to finance upfront investments is a particular challenge. Moreover, when there are failures in capital and financial markets as well as policy preventing the achievement of economic and socioeconomic potentials (Sathaye, Bouille 2003). Yet, there are ways to facilitate and support effectively the further development of investments in energy efficiency in the energy intensive IChem-NL. For example by (International Energy Agency (IAE) 2009):

1)            Adopting, and publicizing, common protocols for the accurate verification and measurement of energy savings potentials, in order to reduce uncertainties in quantifying benefits from investing in energy savings;

2)            Heartening financial institutions (e.g. commercial banks, green financial institutions, investors and insurance firms) to develop evaluation criteria and financial tools for energy efficiency projects in order to enhance: (1) collateral value of energy efficiency projects, (2) knowledge of likely performance of energy saving investments, and (3) convincement of the good financial contribution of environmental performance (in this case CO2 abatement) to project appraisals; and,

3)            Collaborating with the private financial sector to establish public-private tools to assist energy efficiency financing such as energy service companies (ESCO’s)[9].


Reducing uncertainties behind energy saving technology

From a technological perspective, reducing uncertainties regarding energy saving technology can play a large role in future energy use abatement in the Netherlands. While policy makers and firms may know about the possible benefits of a defined energy saving technology, if they cannot attribute probabilities to such technology to be effective in specific (e.g. at process level) they are facing uncertainty. In this case, fostering R&D can lead to reducing uncertainties in innovation and technological development. Therefore R&D, must be an element included in any policy strategy.

Funding R&D is likely to be a cost effective and large impacting measure towards energy efficiency improvement in the energy intensive IChem-NL. In the Netherlands, R&D funding and international collaboration have been well acknowledged. However, R&D funding has been directed mostly towards long-term research (International Energy Agency (IEA) 2009). Then, to successfully start achieving energy efficiency improvement in the near future, R&D policies may need to be engaged in more short term perspectives. For such purposes it is crucial for technological related policies to enhance funding deployment in early demonstration and large scale demonstration projects, while ensuring consistency with a long term technology strategy towards energy efficiency.

Besides technological uncertainties, it is essential to develop economic mechanisms that promote mitigation of uncertainties in investments in energy savings. Currently, financial institutions face high costs of developing green financial products (e.g. energy efficiency loans), certainly, due to uncertainties in policy and future market conditions. Under this perspective, in many situations, funding of relative low long-term cash flow projects (e.g. energy efficiency projects) is economical unattractive. A rather recent idea for a policy institution is that of environmental performance bonds (Common, Stagl 2007). In general terms, a performance bond is “…a promise to pay compensation in the event of non-fulfilment of a particular contract” (i.d.). Environmental bonds aim at providing further financial incentive to a firm to undertake a project under an uncertain economic scenario. The basic idea behind bonds is that, previous to a firm to introduce a new technology e.g. energy saving technology, a bond is fixed and set as equal to the economic value of the (best estimated proxy of the) largest potential economic loss e.g. loss of process disruption or failure. Then, the bond plus an interest, is returned if the investor proves that the potential damage did not occurred or certainly will not occur. Otherwise, the bond will be forfeited to a corresponding amount to the value allocated to the damage.  Given that bonds while being held generate interest, the part of it that is not returned to the investor can be allocated to the finance of administrative costs or further R&D in innovative technology. The applicability of environmental performance bonds is restricted by several factors[10]. Nonetheless, when designing integral policy instrumentation, environmental bonds can provide means to develop a more holistic energy saving strategy if used with caution.


Enhancing institutional transparency

Lastly, putting in place transparent institutional frameworks for the preparation and implementation of environmental policy instrumentation may also contribute to enhance investment in energy efficiency by creating a more confident understanding of the management of public investment programmes and government budgets (OECD 1998). That is, by building certainty (viz. consistency and continuity) about energy and climate policy in the long term in the Netherlands, public funds can be used more cost effectively (Lovei 1995) (e.g. be included in project appraisals) to influence private environmental investments (Cordukes 1994, United Nations Industrial Development Organisation (UNIDO) 1996, Gentry 1997, Peszko, Zylicz 1998). Consequently, institutional transparency at government level may foster the use of economic instruments to achieve energy efficiency goals while generating budgetary revenues (Herber 1997, Schlegelmich 1999).

Alternatively, transparency of consumption information and energy performance can also result in long term energy efficiency improvement. Given that consistent and reliable energy statistics are of vital importance for the adequate monitoring of policies aiming at improve energy efficiency, it is essential to ensure good reporting mechanisms, clear definitions and sound procedures for data checking (Neelis, Pouwelse 2008). Subsequently, and in specific for the energy intensive IChem-NL, for a consistent treatment of the energy use monitoring, it is essential (i.d.): (1) to define clearly the way conversion processes are included in energy statistics; (2) to clearly define system boundaries of energy statistics; and, (3) to acknowledge complexity of the sector by involving expert knowledge in statistical processes. Although this approach may represent a constraint to market interventionism, policy strategies should nonetheless aim at promoting means to ensure such prerequisites; for example, by supporting the development of control systems in the industry for real-time tracking of energy consumption in processes, or transparent and public available energy efficiency benchmarkings.


Industrial energy efficiency look ahead: conclusions


[To conclude] based on an open discussion founded on scientific literature, approaches to overcome the previous barriers were proposed from a policy perspective. To illustrate, it was anticipated that in order to increase energy efficiency in the energy intensive IChem-NL, it is essential to design and implement an holistic strategy that considers rising economic attractiveness of energy efficiency, increasing support to investments in energy efficiency, reducing uncertainties behind energy saving technologies, and enhancing institutional transparency as crucial prerequisites towards energy efficiency improvement.

It is expected that the conclusions achieved in this research have significance for energy and climate policy and modeling (e.g. energy use projections for the chemical industry in the Netherlands). Indeed, the overview projected in this study supports the argument that the energy intensive IChem-NL can make cost-effective energy efficiency improvements by overcoming barriers to investments when effective policy instrumentation is applied. Then, the findings of this research suggest that in order to achieve optimum energy efficiency level, it is a prerequisite to develop and perform a holistic policy strategy that focuses on the removal of the most influential barriers diminishing investments in energy savings.

This work could be usefully be extended in a number of ways[…] Finally, specific research about the practical implementation and ex post evaluation of energy and climate policies in the Netherlands could give stronger background for the formulation of a holistic policy strategy as proposed in this study. For instance, regarding the valuation of costs and benefits of energy and climate policy, and the assessment of the use of market based instruments for energy and climate (e.g. environmental bonds).




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