Session 7 introduces the institutional framework needed to implement energy efficiency (energy agency, utility Demand Side Management, other) notably by presenting the example of Tunisia. It deals with the way to fund energy efficiency programmes via tax and social levies or carbon finance. This session gives an overview of white certificates schemes notably with the examples of India and Uruguay, and introduces different support energy efficiency schemes (grants, tax incentives, soft loan,other).

1. www.mc-group.com
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-countries

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INSTITUTIONAL AND FINANCIAL
FRAMEWORK
By Pierre Baillargeon
Vice-President
Econoler
Webinar – March 8, 2012

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

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1. Institutional Framework for EE
Implementation

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

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1.1 Energy Agency

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INSTITUTIONAL FRAMEWORK
ENERGY AGENCY
Government 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 countries

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INSTITUTIONAL FRAMEWORK
ENERGY AGENCY
Government 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)

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INSTITUTIONAL FRAMEWORK
ENERGY AGENCY

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INSTITUTIONAL FRAMEWORK
ENERGY 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)

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INSTITUTIONAL FRAMEWORK
ENERGY 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)

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INSTITUTIONAL FRAMEWORK
ENERGY AGENCY
Responsibilities vary according to the mandate of
the 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 appliances

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INSTITUTIONAL FRAMEWORK
ENERGY AGENCY
› Awareness and communication
• Information, awareness
- Media campaigns, printed material, trade fairs
• Education
- 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, Danfoss
AchEE kid education program

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INSTITUTIONAL FRAMEWORK
ENERGY 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
stakeholders

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INSTITUTIONAL FRAMEWORK
ENERGY AGENCY
Large agency with mandate broader than EE and
RE – 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 programs

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INSTITUTIONAL FRAMEWORK
ENERGY AGENCY
Disadvantages
› 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 agency
Reference for other institutional arrangement analyses: An analytical
compendium of the Institutional Framework for Energy Efficiency
Implementation, World Bank, ESMAP 2008.

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INSTITUTIONAL FRAMEWORK
ENERGY AGENCY
Important criteria to consider when establishing EE
institutions:
› 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 future

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1.2 – Utility-Based
Demand-Side Management

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INSTITUTIONAL FRAMEWORK
UTILITY-BASED DEMAND-SIDE MANAGEMENT
What 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 programs

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INSTITUTIONAL FRAMEWORK
UTILITY-BASED DEMAND-SIDE MANAGEMENT
Utility-based DSM refers to energy efficiency
programs 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 additions

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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

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INSTITUTIONAL FRAMEWORK
UTILITY-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 capacity
But: Reduces distributor profit, disincentive model
unless compensation is incorporated

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DSM Process (1)
Establish load shape
objectives
Conduct market research
- Audits - Metering
- Surveys - Focus groups
Identify measures
Screen measures
Formulate program
concepts
Similar to the activities that
could be conducted by a
government agency
Let’s see in more details

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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/impact
DSM Process (2)

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DSM CASE STUDY

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DECOUPLING
Reduced sales of energy means reduced profitability
for distributors.
The recovery of lost income or "decoupling" is to
limit this negative impact.
Widely used in the context of EE
programs conducted by public utilities, particularly in
the US and Canada.

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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.

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

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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.

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INSTITUTIONAL FRAMEWORK
FINANCIAL 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.

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INSTITUTIONAL FRAMEWORK
FINANCIAL 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, depreciation

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1.3 - Private Sector Support

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INSTITUTIONAL FRAMEWORK
PRIVATE 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.

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Examples 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 Webinar
INSTITUTIONAL FRAMEWORK
PRIVATE SECTOR SUPPORT

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2. Financial Sources

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

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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 specifically

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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)

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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, or
discourages energy consumption

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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 finance
the NYSERDA program (State of New York – US). UE after
2012

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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
utility

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FINANCIAL SOURCES
MANDATORY 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
certificates

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FINANCIAL SOURCES
MANDATORY ENERGY RATE INCREASES
Types of rate increases
› Uniform tariff increase
› Differentiated rate increase
• By sector or type of end-user
› Inverted tariff (inverted block or progressive pricing)

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FINANCIAL SOURCES
VOLUNTARY ENERGY RATE INCREASES
The consumer voluntarily agrees to pay for a
traceable energy
› Renewable energy
• Traceable to the purchase of green certificates
› Compensated in CO2
› Compensated in energy savings
• White certificates
• Program evaluation

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FINANCIAL SOURCES
CARBON 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 period

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

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WHITE CERTIFICATES VS. MEASURE-
SPECIFIC INCENTIVES
Two main approaches to distribute funding in a
market
› 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
theory

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WHITE CERTIFICATES VS. MEASURE-
SPECIFIC INCENTIVES
Uruguay 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 certificates

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WHITE CERTIFICATES VS. MEASURE-
SPECIFIC INCENTIVES
Measure-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 case

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Other Support Schemes

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OTHER SUPPORT SCHEMES
Fiscal 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 depreciation

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