Market-based Instruments for Energy Efficiency: Policy Choice and Design
Finding ways to unlock more energy efficiency is a priority for countries looking to meet their energy policy goals. Efficiency is central to making progress on decarbonisation and energy security, while also fostering economic and social development. At the same time, many market failures are preventing realisation of the full potential that energy efficiency offers. For these reasons, there is growing interest in the role that markets can play in delivering cost-effective efficiency gains and reducing the need for direct government expenditure. This report provides the first global overview by the International Energy Agency (IEA) of growth in the use of market-based instruments (MBIs), their impact, and the key policy design issues associated with their successful implementation.
MBIs offer the potential for policymakers to access more cost-effective efficiency gains. All energy efficiency policy instruments interact with the market to some extent, whether by influencing investment decisions or affecting the way in which we consume energy. What distinguishes MBIs from other instruments is that, by giving market actors the freedom to choose the measures and delivery routes that work best for them, the market as a whole is able to discover the most cost-effective way to achieve the outcomes set out by policymakers. That freedom puts a premium on good policy design and implementation, including strong monitoring, verification and evaluation.
Key policy design issues for MBIs include:
- MBIs must work within existing policy frameworks;
- Both obligations and auctions can be successful if the rules are well crafted;
- Flexible programme design that permits savings to be delivered across a broad range of customers and fuels has proven to be a sound approach;
- MBIs can be designed to achieve specific policy goals;
- Programme rules should be as simple as possible but as complex as necessary;
- Monitoring, verification, and evaluation are vital for the integrity of programmes;
- Trading adds an additional layer of complexity and sometimes extra cost to obligation programmes. These may exceed the benefits;
- Auctions can be structured to mitigate the risk of overpayment and reduce administration costs; and
- Capacity auctions reward energy efficiency for one of the multiple benefits it provides, but cannot be relied upon to drive the uptake of efficiency on their own.
The number of MBIs has quadrupled over the last ten years, while investment stimulated by them has risen six-fold, to USD 26 billion in 2015. The coverage and strength of MBIs is expected to grow, as more jurisdictions consider obligations and auctions as ways to engage markets to deliver the efficiency savings needed to meet policy goals, whether they are energy system adequacy requirements, climate commitments, energy poverty reduction, or industrial productivity. And, as this report shows, sharing knowledge across jurisdictions will be central to the success of the next wave of policymaking in this area.
Dr. Jan Rosenow of the Regulatory Assistance Project (RAP) was the lead researcher and principal author of the report, alongside Richard Cowart (RAP), Samuel Thomas (IEA), and Fabian Kreuzer (IEA).