Course on Regulation and Sustainable Energy in Developing Countries - Session 7

ENERGY EFFICIENCY INSTITUTIONAL AND FINANCIAL FRAMEWORK WEBINAR 8 MARCH 2012 Pierre Baillargeon Vice-President - Econoler Course on Regulation and Sustainable Energy in Developing Countries – Session 7 www.leonardo-energy.org/course-regulation-and-sustainable-energy- developing-countrieswww.mc-group.com

INSTITUTIONAL AND FINANCIAL FRAMEWORK By Pierre Baillargeon Vice-President Econoler Webinar – March 8, 20122

PRESENTATION STRUCTURE 1. Institutional Framework for EE Implementation 2. Financial Sources 3. Support scheme White Certificates vs. Measure-Specific Incentives Others scheme3

1. Institutional Framework for EE Implementation4

INSTITUTIONAL FRAMEWORK › Energy agency › Utility-based demand-side management (DSM) › Private sector support5

1.1 Energy Agency6

INSTITUTIONAL FRAMEWORKENERGY AGENCYGovernment agency › A recent survey (IEA, 2010) concluded that 60% of world countries have a government energy agency • The percentage is in the range of 40- 50% of countries in South America, the Middle East and Non-OECD Asia • 65% of African countries7

INSTITUTIONAL FRAMEWORKENERGY AGENCYGovernment agency › Government agency or department within a ministry • Mandate can be broad (energy security, energy supply, etc.) or focused on EE and RE • Morocco: L’Agence Nationale pour le Développement des Energies Renouvelables et de l’Efficacité Energétique (ADEREE) • Slovakia Energy Agency (broad mandate) • Mexico CONUEE (focused)8

INSTITUTIONAL FRAMEWORK ENERGY AGENCY9

INSTITUTIONAL FRAMEWORKENERGY AGENCY Entity created by the government › Independent statutory authority (IEA) • Board of directors supervises the agency • Flexibility in decision making and strategy • Sustainable Energy Ireland • UK Energy Saving Trust › Independent corporation • Status of a legal corporation • Korean Energy Management Corporation • South Africa NEEA (inside CEF)10

INSTITUTIONAL FRAMEWORKENERGY AGENCY › Research institution/NGO • Not a government body but could be established by government decree within a research institution • Jordan: National Energy Research Center (NERC) › Public-private partnership • Owned partly by the government and partly by the private sector • With government officials on the board of directors • Agencia Chilena de Eficiencia Energética (AChEE)11

INSTITUTIONAL FRAMEWORKENERGY AGENCYResponsibilities vary according to the mandate ofthe agency • Energy efficiency, renewable energy, or both › High-level policy support/elaboration • Research, benchmarking • Support policy development (reports to regulators, legislators and advisory groups) • Policy paper elaboration › Laws and regulations • Regulation and law preparation (links with ministries) • Implementation - Building code, building labeling and certification - Standards and labeling of equipment and appliances12

INSTITUTIONAL FRAMEWORKENERGY AGENCY › Awareness and communication • Information, awareness - Media campaigns, printed material, trade fairs • Education AchEE kid education program - Kids and school programs, social, professional, construction industry • Training and conferences, etc. • Promote public recognition activities for EE & RE actions › Technology deployment • Identification of new advanced technologies • Demonstration projects • R&D support Magnetic bearing compressor, Danfoss13

INSTITUTIONAL FRAMEWORKENERGY AGENCY › Program management • Budget management • Resource acquisition = financial incentives • Market transformation = barrier removal › Program stage • Planning • Design and development • Operation, management and monitoring - Can be in-house or outsourced to contractors • Evaluation (in-house or independent evaluator) › Manage collaboration and partnerships with all stakeholders14

INSTITUTIONAL FRAMEWORKENERGY AGENCYLarge agency with mandate broader than EE andRE – Is it better than focused agency? › Advantages • Better visibility and credibility • Easier networking with stakeholders • Better opportunity through parent organization for accessibility to government funds - If the top management support EE of course • Facilitate fund development and establishment for EE & RE programs • Main channel for international donors and EE/RE-related cooperation programs15

INSTITUTIONAL FRAMEWORKENERGY AGENCYDisadvantages › If EE or RE tasks are a small part of the agency’s overall responsibilities, it might have limitations: • Possibility that fund and resources be diverted to other priorities (depends on top management, changes with time) • Decision-making process more complex • Attract skilled experts and resources in EE instead of more important areas covered by the agencyReference for other institutional arrangement analyses: An analyticalcompendium of the Institutional Framework for Energy EfficiencyImplementation, World Bank, ESMAP 2008.16

INSTITUTIONAL FRAMEWORKENERGY AGENCYImportant criteria to consider when establishing EEinstitutions: › Country environment (importance of EE, energy policy, etc.) › Current institutions’ managerial and technical capacities › Motivation of private sector for EE promotion › EE legal framework status › Work plan and programs for EE improvement › Other existing activities and objectives (RE, CO2 reduction, etc.) › Market requirement (simplicity, rapid adjustment, flexibility, etc.) › Funding mechanism both available and future17

1.2 – Utility-Based Demand-Side Management18

INSTITUTIONAL FRAMEWORKUTILITY-BASED DEMAND-SIDE MANAGEMENTWhat is DSM? › DSM is the process of managing the consumption and demand of energy • To optimize available and planned generation resources › The term was coined in reaction to the traditional supply-side management strategy • Basically plant addition › In the 1980s, the term referred mainly to utility- based demand-side management • Nowadays, used as a generic term even for government or agency-based programs19

INSTITUTIONAL FRAMEWORKUTILITY-BASED DEMAND-SIDE MANAGEMENTUtility-based DSM refers to energy efficiencyprograms managed by energy utilities › Generally, the government policy/regulation dictates the enrolment of the utilities in DSM › Government also fixes the savings target to achieve › DSM means the implementation of programs or measures to shift or reduce the consumption/demand of energy • Electricity, gas • Applied mainly when a physical connection exists between the supplier and the customer › Part of a power planning strategy to alter the mix, timing and location of capacity additions20

INSTITUTIONAL FRAMEWORK UTILITY-BASED DEMAND-SIDE MANAGEMENT› DSM advantages: • Postpones/avoids infrastructure development costs • Achieves limited, but beneficial, results in a short time frame • Customers manage and reduce their energy costs› DSM reduces: • Growth in energy demand • Greenhouse gas emissions 21

INSTITUTIONAL FRAMEWORKUTILITY-BASED DEMAND-SIDE MANAGEMENT › DSM benefits: • Improves competitiveness of domestic industry • Improves energy security • Energy export/import balance • Acts as a hedge against shortages • Cheaper than adding new capacity, especially peaking capacityBut: Reduces distributor profit, disincentive modelunless compensation is incorporated22

DSM Process (1) Establish load shape objectives Conduct market researchSimilar to the activities that - Audits - Meteringcould be conducted by a - Surveys - Focus groupsgovernment agencyLet’s see in more details Identify measures Screen measures Formulate program concepts23

DSM Process (2) Asses program costs/benefits and select program portfolio Prepare detailed program design Implement program pilot then full-scale monitoring and tracking Evaluate program process/market/impact24

DSM CASE STUDY25

DECOUPLINGReduced sales of energy means reduced profitabilityfor distributors.The recovery of lost income or "decoupling" is tolimit this negative impact.Widely used in the context of EEprograms conducted by public utilities, particularly inthe US and Canada.26

DECOUPLING › Advantage • Powerful incentive to utilities to take EE activities seriously. › Disadvantage • Some observers consider that this mechanism is creating market distortion since it guarantees a profitability threshold to energy distributors.27

DECOUPLING Not yet popular in emerging and development countries. But it may well be the next step ! Example: NY state bill28

INCENTIVES OR PENALTIES › Incentive • Going beyond the decoupling scheme to offer a performance premium in a utility - California CPUC, several states in the US › Penalties • Utilities that do not deliver the savings have to pay a penalty. • The penalty fixes a cap on the value of savings in the market.29

INSTITUTIONAL FRAMEWORKFINANCIAL SUPPORT: ON-BILL FINANCING › Thinking outside the box (beyond incentives) • Innovative approach – utilities facilitate investments in energy efficiency • Utility (or partner) provides energy customers with low or interest- free financing for the project • Simpler administrative procedures • Utility (or partner) finances the project’s upfront capital costs • The loan is then repaid through extra monthly installments on the customer’s bill.30

INSTITUTIONAL FRAMEWORKFINANCIAL SUPPORT: ON-BILL FINANCING › Advantages: • One bill, one payment: easy, convenient, less paperwork • Constant payment amounts and interest rates • Usually interest lower than market rate • No down payment and easier to qualify • Can see energy savings on bill each month › Disadvantages: • Requires one payment on the same date, not flexible, cannot delay payments • Not negotiable: fixed monthly payment • Accounting complexity, tax issues, depreciation31

1.3 - Private Sector Support32

INSTITUTIONAL FRAMEWORKPRIVATE SECTOR SUPPORT › Incentives and financial support stimulate the market for EE › In several countries, the government decided to support the development of commercial services that go beyond business as usual › Often the support of energy service companies (ESCOs) • Brazil, China, Thailand, etc. › The idea is to facilitate the emergence of actors who will carry out energy efficiency activities on a commercial basis • Helps structure the market. Allows reducing subsidies or financial assistance in the medium term.33

INSTITUTIONAL FRAMEWORKPRIVATE SECTOR SUPPORTExamples of government support: Tunisia › Support of ESCO establishment through the Energy Conservation Agency (ANME) by: • Legal framework – ESCO accreditation • Capacity building of financiers, engineers, promoters, customers • Guarantee fund for ESCO projects › Other examples: • Template contract, investment grade audit content, M&V procedures • Large bid for government building projects • Changing bidding procedures • Changing accounting rules to allow for energy service invoices More on that in a future Webinar34

2. Financial Sources35

FINANCIAL SOURCES Shareholders or cash flow › Operating budget › Loans Government Energy or Agency Supplier Commercial Public charge Tariffs ChargeUniversal Emission Supplier / Contractors ESCO tax allowances Manuf. Dedicated taxes Mandatory Voluntary CO2 Selling products and services Energy Green energy Energy-intensive products Compensated energy EE Compensated energy CO2 36

FINANCIAL SOURCES › Universal tax: can be applied in many ways • Corporate or personal income • Corporate profit • Value added tax on sales • Custom and import fees • Corporate tax on capital › All money collected goes to the government treasury • Can be used to finance energy efficiency initiatives • One of the oldest mechanisms • Does not target energy user specifically37

FINANCING FROM PUBLIC FUNDS › Public funding advantages and drawback › Advantages • Application relatively simple • A simple fund transfer from the government to an agency or utility will provide financing for programs › Drawback • General taxes do not target energy users (but some indirect taxes may)38

FINANCIAL SOURCES › Dedicated tax: targets the energy users • Energy purchase • Energy production • Extraction of mineral resources (e.g., coal) • Environmental taxes: CO2 emissions • Inefficient equipment • Luxury equipment (e.g., Tunisia, cars and AC units)Encourages energy efficiency and conservation, ordiscourages energy consumption39

FINANCIAL SOURCES › GHG emission allowances • Emission allowances can be given or sold, sometimes by auction. • Part or the totality of the income can be transfered to an agency or a distributor to fund programs.Regional Greenhouse Gas Initiative uses revenue to financethe NYSERDA program (State of New York – US). UE after201240

FINANCIAL SOURCES › Public charge (social levies) • A charge added to energy costs or energy-consuming equipment • Not so different from a tax from a customer point of view (they pay more for their energy or goods) • Name and regulatory basis are different • Sometimes integrated in the invoice (the customer cannot see the social levy details) • Sometimes added to the energy invoice (separate amount for the levy) - Collected amount could be remitted to an agency or managed by the utility41

FINANCIAL SOURCESMANDATORY ENERGY RATE INCREASES › Energy rate increases are also considered in the broad category of public service charges › Government or regulatory agency allows an increase in energy tariffs › This will finance EE › Cycle 1 to 3 years (sometimes 5) › Mechanism used extensively in North America › Also in Europe to finance the purchase of white certificates42

FINANCIAL SOURCESMANDATORY ENERGY RATE INCREASESTypes of rate increases › Uniform tariff increase › Differentiated rate increase • By sector or type of end-user › Inverted tariff (inverted block or progressive pricing)43

FINANCIAL SOURCESVOLUNTARY ENERGY RATE INCREASESThe consumer voluntarily agrees to pay for atraceable energy › Renewable energy • Traceable to the purchase of green certificates › Compensated in CO2 › Compensated in energy savings • White certificates • Program evaluation44

FINANCIAL SOURCESCARBON FINANCE › Carbon credit on CO2 emissions (e.g., POA – program of activity for CFL lamps, Uruguay) › Can be sold on the international market (community carbon fund, carbon finance group WB, various institutional carbon funds, brokers, etc.) › First Kyoto period extended › Contracts are usually for 7 years (renewable up to 3 times) or for a fixed 10-year period45

3. Support Scheme White Certificates vs. Measure-Specific Incentives46

WHITE CERTIFICATES VS. MEASURE-SPECIFIC INCENTIVESTwo main approaches to distribute funding in amarket › White certificates – the European way mainly › Also adopted by Uruguay › Utilities have EE targets to deliver • Broad term: ESO or Energy Saving Obligations › They purchase white certificates in the market › Economic theory – the cost of the certificate will reflect the lowest cost to implement measures in the market › In practice, not a real market as only a few actors purchase and the market is not following economic theory47

WHITE CERTIFICATES VS. MEASURE-SPECIFIC INCENTIVESUruguay scheme › 0.13% levy on total sales of energy › Creation of the Uruguayan Trust for Energy Efficiency (FUDAEE) › 60% of the fund is devoted to the purchase of energy efficiency certificates48

WHITE CERTIFICATES VS. MEASURE-SPECIFIC INCENTIVESMeasure-specific incentives – the North American way › Also adopted by several countries › Utilities have EE targets to deliver • EEPS – Energy Efficiency Portfolio Standards (or EERS) › The incentives to the market take the form of an incentive • Could be per unit (money per lighting fixture) • Could be per equipment size (money per kW nominal) • Could be in terms of deemed savings (money/kWh) • Could be in terms of M&V savings (money/kWh) › The market does not determine the level of incentive › The choice is made by program managers • Based on economic analysis • Typical customer case49

Other Support Schemes50

OTHER SUPPORT SCHEMESFiscal incentives › Rules provided by the government to promote energy- efficient technology • Custom rate reduction • Tax deduction on the value added tax • Tax deduction for home renovation (on the income tax) • Accelerated depreciation51

THANK YOU Pierre Baillargeon Vice-President Econoler pbaillargeon@econoler.com52

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