An Board Snip, Energy Savings and Market Failure

Now we can’t waste energy because it’s bad for the climate, and there isn’t much left anyway because fossil fuels are becoming increasingly scarce. We can’t even buy the lights we want anymore, let alone leave them on all night!

Governments across the EU are being asked nicely by Brussels to increase their energy efficiency by 20% by 2020. This is part of an overall strategy to reduce emissions which also includes legally binding targets for renewables and transport fuels.

Somewhat inexplicably, the efficiency target was left “indicative”, and Member States were only required to come up with plans explaining how the targets were to be delivered. Ireland’s plan was published in April. But unlike the other targets, there is a legal obligation to deliver, despite the fact that asking nicely has never been too successful in the past.

Energy efficiency is a no-brainer. In the wonderfully simple phrasing of efficiency guru Amory Lovins this is because “it is cheaper to save energy than to buy it”. What he means is that it is cheaper to buy energy-saving lights from Tesco than oil from Norway. Ok, they may cost more than incandescent light-bulbs, but they use only a fraction of the energy and over the lifetime of the product, they repay the initial investment many times over. And lets face it – Ireland needs the money more than Norway right now.

When you buy the incandescent, what is not immediately obvious is you are committing to buy the oil from Norway too.

And lighting is only the tip of the melting iceberg – energy efficient technologies and products abound. If installed in homes and businesses they could save billions on energy imports for this country and across the EU.

This is perhaps what prompted Energy Commissioner Andris Piebalgs to suggest that the Commission should table a proposal to make efficiency targets legally binding at a recent meeting of the Energy Council. Attempting to capture the political zeitgeist he stated that “the political temperature is right to consider it”.

Similar trends are emerging across the globe. For example, the US Energy Secretary Steve Chu for is known to be an advocate of state-sponsored energy efficiency efforts and the USA is moving fast in this space.

Is Ireland moving in the opposite direction? The recently published ‘An Bord Snip’ report recommended that government spending on energy efficiency programmes should be serious curtailed, finding that “in total, these [energy efficiency] schemes will cost €100m of capital expenditure in 2009, up from €44m in 2008.  In light of current economic circumstances, this large increase should be substantially unwound to realise Exchequer savings of at least €40m.”

It would be irresponsible not to recognize the enormous challenge presented by the current state of the exchequer finances. Indeed the substantial majority of the savings proposed, while unpalatable, are absolutely necessary.

Yet the group’s focus should be on wasteful spending. The efficiency schemes identified by the group, for the most part, provide grants to homeowners to improve the energy efficiency of their dwelling. These grants have in fact led to the creation of a whole new industry and thousands of jobs, leveraged hundreds of millions of private sector investment, not to mention save energy and emissions. The cost-benefit evaluation of the Home Energy Savings scheme, for example, shows an enormous benefit to society, and, in most scenarios, cost neutrality or better for the exchequer.

The report explains the logic somewhat when it proposes that “energy efficiency schemes should only be funded in the future if the cost of achieving the reduction in carbon output secured by them is equal to or less than the market price for carbon credits”. Presumably the logic is that the exchequer will have to buy credits if emissions are not reduced, and that this simplistic cost-benefit payoff is all that matters at this time of crisis.

This is an almost incredible argument. One wonders if this same logic should apply to all capital spending projects? Not too many roads would get built under such restrictive criteria. Surely investing in energy efficiency should be assessed like all other capital spending and not singled out?

A further insight into the authors’ logic is perhaps unintentionally provided further on, when they state that “furthermore, the introduction of a carbon tax, in due course, should obviate in economic terms the need for any such schemes”. Get it? Markets are perfect and once the correct price signal is provided any truly cost-efficient and sensible investments with reasonable pay-offs will be made. “Market failure” is seen as an oxymoron by the authors it seems.

The only problem with this logic is that it is nonsense. Markets consistently fail when it comes to energy efficiency and numerous well-understood and intractable market failures can be identified in the area of residential energy efficiency. There are split incentives, ill understood benefits, information deficits, lack of trust, uncertainty of payoffs, high up-front costs etc.

The swift withdrawal of funding from programmes proposed would pull the rug out from under an emerging industry which will likely be worth billions in years to come. While the suggestion “to transfer responsibility for appropriate schemes…to the energy companies” is probably a good idea in the medium term, this transition must be managed in a way that doesn’t strangle a vital and rapidly expanding sector of the construction industry.

 Saving energy makes sense and the government has a vital role to play in overcoming the market failures and reaping huge gains for society. If you don’t believe my, just ask my folks.