Hidden Barriers to Efficiency: The Treatment of Discount Rates and Energy Efficiency Costs in EU Policy Scenarios
In the energy field, we often face choices between, on the one hand, resources whose investment costs are largely known and fixed and whose running costs over time are low (e.g., solar photovoltaic (PV) panels or energy efficiency upgrades) and, on the other hand, those for which most of the costs will be paid out year-on-year into the future (e.g., fossil power generation). When comparing such options, the discount rates used in policy analysis can have a dramatic impact on the calculation of costs and benefits. In the case of energy efficiency, an inappropriately high discount rate can mislead decision-makers by undervaluing the future benefits of today’s efficiency investments, while discounting too heavily the future costs of fossil fuel and operations for supply-side alternatives. With particular reference to the European Commission’s January 2014 Impact Analysis Communication, this policy brief discusses the treatment of energy efficiency investment costs in the Communication, offers alternatives to the Commission’s treatment of energy efficiency in policy impact assessment modeling exercises, and provides examples of better approaches from other analyses.