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Transformation of the Energy System thanks to Home Appliances?


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White Paper presenting 10 reasons why home appliances and electronics are one of the greatest single opportunities to reduce German energy consumption cost-effectively, together with a concept for what a German program to transform the home appliance market could look like.

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Transformation of the Energy System thanks to Home Appliances?

  1. 1. White  Paper   Transformation  of  the  Energy  System  thanks  to  Home  Appliances?   ©2013  Anne  Arquit  Niederberger,  Samuel  Shiroff  and  Peter  Böhm     It  may  seem  far-­‐fetched  to  the  lay  person,  but  home  appliances  and  electronics  are  one   of  the  greatest  single  opportunities  to  reduce  German  energy  consumption  cost-­‐ effectively  –  and  therefore  a  critical  element  in  transforming  Germany’s  energy  system.   Below  we  present  10  reasons  why  this  is  the  case  and  suggest  what  a  German  program   to  transform  the  home  appliance  market  could  look  like.     1. The  main  shortfall  with  respect  to  Germany’s  Integrated  Energy  and  Climate   Program  is  with  respect  to  electrical  efficiency  –  and  households  use  a  lot  of   electricity   The  Federal  Environment  Agency  has  found  that  the  energy  efficiency  measures  taken   to  date,  including  in  the  residential  sector,  are  insufficient  for  Germany  to  reduce  its   greenhouse  gas  emissions  by  40%  by  2020  and  its  electricity  consumption  by  10%  in   2020  and  by  25%  in  20501.     According  to  the  Arbeitsgemeinschaft  Energiebilanzen,  final  energy  consumption  in   Germany  was  8744  PJ  in  2011,  with  21.6%  in  the  form  of  electricity  (524  TWh).   Households  consumed  25.1%  of  total  energy  and  27%  (i.e.,  140  billion  kWh)  in  the  case   of  electricity,  exceeding  nuclear  power  generation.     2. Every  household  has  appliances  –  and  they  account  for  half  of  residential   electricity  demand   Refrigerators  and  washing  machines  are  virtually  ubiquitous  in  Germany,  85%  of   households  have  freezers  and  a  large  and  growing  share  are  acquiring  clothes  dryers,  so   the  potential  target  population  is  immense  –  and  should  reduce  any  equity  concerns   associated  with  incentive  programs  funded  by  surcharges.     As  a  result  of  these  high  penetration  rates,  home  appliances  currently  account  for   roughly  50%  of  residential  sector  and  roughly  one-­‐eighth  of  total  electricity  demand.   Four-­‐fifths  of  appliance  demand  is  from  the  major  domestic  appliances  (refrigerators,   freezers,  electric  ranges,  washing  machines,  clothes  dryers,  dishwashers)  and  the   remainder  from  small  kitchen  appliances.       3. Super-­‐efficient  appliances  can  easily  use  50%  less  energy  than  a  typical  product  –   and  the  aggregate  energy  savings  reach  utility  scale   Figure  1  shows  the  share  of  appliance  sales  in  Germany  in  2012  by  energy  efficiency   label  class.  In  the  case  of  fridge-­‐freezers  and  freezers,  dishwashers,  and  clothes  washers,                                                                                                               1  The  reference  year  for  the  GHG  target  is  2006.  The  reference  year  for  the  electricity  target  is  2008,  in   line  with  the  government’s  Energy  Concept.  The  target  electricity  consumption  levels  are  553  TWh/y  in   2020  and  461  TWh/y  in  2050.    
  2. 2. A+++  appliances  must  be  at  least  50%  more  efficient  than  required  of  A+  appliances.  For   dryers,  new  requirements  will  go  into  effect  in  2013,  but  these  are  not  as  ambitious  as   they  could  be:  According  to,  Siemens,  BEKO  and  AEG  already  offer  A+++  heat   pump  dryers  that  are  over  70%  more  efficient  than  the  mandatory  energy  performance   standard  to  be  introduced  in  November  2013.  With  hundreds  of  thousands  to  several   million  of  each  type  of  appliance  sold  annually  in  Germany,  huge  savings  can  be   achieved,  if  consumers  purchase  the  best  products  instead  of  those  that  meet   mandatory  efficiency  requirements.     4. Investments  in  energy  efficiency  have  many  advantages  over  expansion  of   conventional  power  generation  capacity   • Significantly  lower  overall  cost  and  risk  (fuel  price,  siting,  technology,  compliance)  to   supply  energy  services  than  maintaining  and  supplying  new  generation  from   conventional  power  plants;   • Improved  viability  of  decentralized  renewable  solutions  with  lower  overall  and  peak   demand,  making  it  more  likely  that  fossil  generation  capacity  will  be  retired;   • Greater  customer  satisfaction  through  lower  energy  bills,  greater  end-­‐user  control   and  enhanced  productivity;   • Significant  (and  valuable)  national  economic  co-­‐benefits  (incl.  job  creation,  offsetting   impacts  of  regressive  energy  taxes  on  low-­‐income  households  and  avoidance  of   waste,  pollutant  and  greenhouse  gas  emissions);    
  3. 3. • Greater  energy  security  resulting  from  decreased  demand  for  fuel  and  electricity   imports;   • Transforming  appliance  markets  more  rapidly,  leading  to  economies  of  scale  and   rapid  price  decreases,  thus  reducing  future  costs  of  climate  mitigation  and  other   energy-­‐related  external  costs.   • Savings  are  modular,  scalable,  quick  to  deploy,  and  sustained  throughout  the   equipment  lifetime.     5. Super-­‐efficient  appliances  can  help  consumers  avoid  higher  energy  bills  as   residential  electricity  rates  continue  to  increase   The  nominal  price  that  a  German  household  pays  for  electricity  has  increased  by  50%   over  the  past  decade  (to  over  €0.26/kWh  by  the  end  of  2012),  such  that  a  typical   household  of  three  persons  that  uses  4250  kWh  of  electricity  annually2  currently  spends   €1100  on  electricity.   And  households  must  brace  themselves  for  even  higher  bills  going  forward,  given  plans   for  major  investments  in  the  electricity  grid  and  local  renewable  energy  networks3.   Residential  electricity  rates  could  easily  increase  by  another  50%  or  more  in  the  coming   decade,  considering  that  the  renewable  energy  surcharge  on  electricity  rates  alone  will   increase  household  electricity  rates  by  another  51%  in  real  terms  by  2021  (to  nearly   €0.40/kWh  incl.  VAT),  compared  with  2011.       6. Households  chronically  under-­‐invest  in  energy  efficiency   The  total  cost  that  a  household  pays  to  own  an  appliance  over  its  lifetime  includes  its   purchase  price,  the  cost  to  operate  and  maintain  it  and  the  cost  to  dispose  of  it  (which,   in  Germany,  is  included  in  the  purchase  price).  Yet  shoppers  seldom  consider  the  full   costs  when  making  purchase  decisions.  Instead,  they  tend  to  focus  on  features  and   purchase  price,  and  the  most  efficient  major  domestic  appliances  tend  to  come  with  a   higher  price  tag.  This  can  lead  to  consumers  paying  more  than  necessary  for  the  energy   services  they  need  (e.g.,  cooling,  washing).     For  example,  the  purchase  price  of  an  A+++  fridge-­‐freezer  might  be  20  –  25%  higher   than  a  comparable  A+  model,  but  energy  bill  savings  would  exceed  this  incremental  cost   by  250%.  Table  1  provides  cost  of  ownership  comparisons  for  appliances  produced  by   Bosch  and  Siemens  Home  Appliances,  which  offer  comparable  levels  of  energy  services   with  differing  efficiency  levels.                                                                                                                 2  Source:  EnergieAgentur.NRW  According  to  various  news  reports,  Germany’s  Finance  Minister,  Philipp  Rösler  (FDP),  has  stated  that  implementing  the  new  energy   vision  will  result  in  an  increase  in  household  electricity  bills  of  €30  –  40  annually.   3
  4. 4.     7. Programs  to  eliminate  barriers  to  super-­‐efficient  appliances  are  proven  and  cost-­‐ effective     There  are  two  basic  strategies  for  providing  the  underlying  energy  services  in  the  future:   (i)  invest  100%  in  generating  capacity  to  meet  the  projected  level  of  demand,  or  (ii)   invest  in  a  combination  of  end-­‐use  efficiency  programs  to  reduce  demand  and  in   generating  capacity  to  meet  the  residual  demand.     Utility-­‐scale  programs  to  promote  super-­‐efficient  appliances  frequently  overperform   and  have  proven  to  be  far  less  costly  (with  program  costs  typically  below  €0.03/kWh)   and  provide  greater  societal  co-­‐benefits  than  investments  into  new  generation  capacity   (at  a  cost  of  €0.14/kWh  at  present4,  which  is  expected  to  increase  under  the  new  energy   strategy).  At  €0.10/kWh,  far  below  the  cost  of  new  supply,  the  value  of  the  savings   achieved  by  a  super-­‐efficient  fridge  relative  to  a  standard  model  (Table  1)  would  justify  a   rebate  of  over  €200  per  unit,  which  would  eliminate  the  incremental  cost  barrier.     8. Super-­‐efficient  appliances  are  particularly  beneficial  for  low-­‐income  households   Low-­‐income  households  can  least  afford  the  up-­‐front  incremental  cost  of  super-­‐efficient   products  and  get  locked  into  high  energy  bills.  In  addition,  most  components  of  energy   tariffs  are  regressive.  A  supplier  efficiency  scheme  that  specifically  targets  low-­‐income   households  can  therefore  have  a  direct,  positive  social  impact  on  household  budgets                                                                                                               4  Source:  First  table  at
  5. 5. and  indirectly  stimulate  economic  activity  and/or  reduce  the  need  for  the  government   to  provide  financial  support.     A  low-­‐income  household  participating  in  a  program  that  enabled  it  to  acquire  the  most   efficient  products  included  in  Table  1  would  see  its  annual  electricity  bill  cut  by  €172,   relative  to  standard  efficiency  products.5  The  energy  bill  savings  that  accrue  over  the  15-­‐ year  lifetime  of  the  appliances  (€2586,  not  assuming  any  tariff  hikes),  exceed  the   incremental  cost  of  the  super-­‐efficient  appliances  (€1004)  and  offset  72%  of  their  total   purchase  price  (€3598).     When  new,  super-­‐efficient  appliances  are  replacing  existing  appliance  still  in  operation,   the  home  economics  look  even  better:  A  300-­‐liter  refrigerator  purchased  5  or  10  years   ago,  for  example,  could  easily  be  consuming  450  to  600  kWh/y,  so  the  household  could   see  its  electricity  bill  drop  immediately  by  €10  a  month,  just  by  replacing  the   refrigerator.     9. Energy  savings  are  easy  to  quantify   It  is  feasible  to  apply  simplified  engineering  approaches  or  assign  stipulated  electricity   saving  values  for  units  disseminated  under  appliance  programs,  reducing  uncertainty   and  cost  associated  with  quantifying  electricity  savings,  making  them  ideally  suited  to   supplier  obligation  programs  and  white  certificate  trading.       10. There  is  no  Federal  government  measure  currently  in  place  to  explicitly  speed  the   development  and  adoption  of  super-­‐efficient  appliances  in  Germany   In  fact,  there  are  few  policy  options  to  “pull”  the  residential  efficiency  market  at  the   cutting  edge  of  innovation,  which  is  one  of  the  key  market  functions  of  government   programs.  There  is  no  evidence  that  passing  the  EU-­‐ETS  production  cost  increment   (which  is  only  a  minor  component  of  residential  electricity  price  formation  in  Germany)   through  to  households,  for  example,  has  translated  into  a  discernable  price  signal  that   has  encouraged  consumers  to  purchase  high-­‐efficiency  appliances.  Targeted  product   policies  are  therefore  essential  to  speed  diffusion  of  efficient  household  appliances  and   to  achieve  more  cost-­‐effective  domestic  reductions  than  would  otherwise  be  achieved.       Super-Efficient Appliances under the Energy Efficiency Directive Under  Article  7  of  the  EU  Directive  2012/27/EU  on  energy  efficiency,  each  Member   State  shall  set  up  an  energy  efficiency  obligation  scheme  that  establishes  targets  for   energy  distributors  and/or  retail  energy  sales  companies  operating  in  its  territory  that   are  at  least  equivalent  to  achieving  new  savings  each  year  from  1  January  2014  to  31   December  2020  of  1,5  %  of  the  annual  energy  sales  to  final  customers.  Governments  are   also  free  to  achieve  part  or  all  of  the  targeted  savings  through  alternative  policy   measures.  Regardless  of  the  exact  model  chosen  by  the  German  government,  careful                                                                                                               5  In  net  present  value  terms,  the  total  savings  over  15  years,  discounted  at  3%  per  year,  would  amount  to  €137  per  year.
  6. 6. attention  should  be  given  to  the  residential  sector,  because  the  savings  and  co-­‐benefits   could  be  “utility  scale”.     Consider  a  program  to  build  an  efficiency  power  plant  (EPP)  equivalent  to  one  of   Germany’s  remaining  1400  MWe  nuclear  power  plants,  using  super-­‐efficient  appliances   as  the  “fuel”.  One  such  EPP  could  be  built  within  three  years  by  incentivizing  4.6  million   households  annually  to  purchase  the  super-­‐efficient  appliances  in  Table  1  instead  of  the   standard  models.  This  would  be  roughly  a  doubling  of  the  normal  turnover  rate  of   appliances.  At  a  program  cost  of  €0.10/kWh,  an  average  incentive  of  €980  per   household  could  be  paid,  essentially  eliminating  the  incremental  up-­‐front  cost,  thereby   instantaneously  removing  the  greatest  barrier  to  market  transformation  and  making  a   large-­‐scale  program  feasible.  These  efficiency  investments  would  remain  “online”  for   the  roughly  15-­‐year  appliance  lifetime.     While  a  1400  MWe  EPP  would  cost  only  €900  million  all-­‐in  (including  incentives  over  3   years  and  “operation”  for  another  12  years  or  so),  the  average  construction  cost  alone   of  the  equivalent  new  capacity  would  likely  be  at  least  three  times  higher  (€2   million/MW),  without  considering  operating  (or  retirement/decommissioning)  costs,   such  as  fuel  costs  or  renewable  energy  subsidies.  As  a  “free”  side  benefit  of  building  an   EPP,  carbon  dioxide  emissions  could  be  reduced  by  50  million  tons  over  the  12-­‐year   lifetime  of  the  EPP  (applying  an  emission  factor  of  0.5  tCO2/MWh).   The  above  estimates  are  intended  to  be  conservative.  Other  than  in  the  case  of  low-­‐ income  households  that  live  from  paycheck  to  paycheck,  for  example,  it  is  not  necessary   to  completely  offset  the  incremental  cost  for  incentives  to  be  effective.  Most  programs   have  managed  to  keep  program  costs  below  3  euro  cents  per  kWh.  And  it  can  be   expected  that  building  a  1400  MWe  EPP  within  three  years  would  lead  to  such   economies  of  scale  in  appliance  manufacturing  that  a  second  EPP  could  virtually  build   itself,  as  the  incremental  cost  dwindles  to  zero.     It  makes  sense  to  implement  such  a  large-­‐scale  model  immediately.  These  estimations   underscore  the  critical  role  that  residential  energy  efficiency  can  play  in  realizing   Germany’s  new  energy  vision.  A  well-­‐designed  scheme  of  supplier  efficiency  obligations   and  tradable  white  certificates  can  be  expected  to  be  highly  cost-­‐effective6,  and  we   anticipate  that  the  market  will  confirm  our  conviction  that  programs  targeting  home   appliances  would  be  particularly  attractive.       Authors   Dr.  Anne  Arquit  Niederberger,  Policy  Solutions   Samuel  Shiroff,  BSH   Dr.  Peter  Böhm,  BSH                                                                                                               6  The  California  Public  Utility  Commission  has  defined  cost-­‐effectiveness  as  “an  indicator  of  the  relative  performance  or  economic   attractiveness  of  any  energy  efficiency  investment  or  practice  when  compared  to  the  costs  of  energy  produced  and  delivered  in  the   absence  of  such  an  investment.”   (