Can Competition Accelerate Energy Savings? Options and Challenges for Efficiency Feed-in Tariffs

Abstract

Numerous studies have documented the critical market barriers that suppress consumer investments in energy efficiency well below economically optimal levels. Meanwhile, the policy imperatives for increasing such investments – particularly the need to address global climate change – have never been more compelling. This paper examines how a new policy construct – an energy efficiency feed-in-tariff (EE FiT) – might be designed to address this problem. While an EE FiT will not always be the best approach, its potential benefits merit serious consideration where alternative programmatic routes to efficiency are not well-established. In particular, EE FiTs offer the potential to create new markets and enable new market entrants to uncover and deliver EE resources. This market-based approach may also have advantages in jurisdictions facing political objections to other methods of funding efficiency initiatives. However, as the European experience with FiTs for renewable power reveals, any jurisdiction considering adoption of an EE FiT will need to consider a range of questions, both fundamental and practical. This paper identifies key policy issues and options for EE FiT design. No jurisdiction to date has created an explicit EE FiT; this paper draws on experience in Europe with white certificate programmes, and in the US with utility efficiency mandates and regional capacity markets, in particular the “standard offer” programmes that have been offered by obligated entities over the past two decades. The standard offer programmes differ from a pure efficiency FiT, as they have been offered as part of a portfolio of measures designed jointly to meet an energy savings obligation, not as the fundamental policy construct for achieving savings. Nevertheless, they offer valuable insights into the policy and implementation choices that would need to be made to enable an EE FiT to effectively deliver on its promise.