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Energy Efficiency Series

Financial Crisis

and Energy Efficiency

INFORMATION PAPER

PHILIPPINE DE T’SERCLAES,

EMILIEN GASC, AURÉLIEN SAUSSAY

2009 OCTOBER

INTERNATIONAL ENERGY AGENCY

The International Energy Agency (IEA), an autonomous agency, was established in November 1974. Its mandate is two-fold: to promote energy security amongst its member countries through collective response to physical disruptions in oil supply and to advise member countries on sound energy policy.

The IEA carries out a comprehensive programme of energy co-operation among 28 advanced economies, each of which is obliged to hold oil stocks equivalent to 90 days of its net imports. The Agency aims to:

n Secure member countries’ access to reliable and ample supplies of all forms of energy; in particular, through maintaining effective emergency response capabilities in case of oil supply disruptions.

n Promote sustainable energy policies that spur economic growth and environmental protection in a global context – particularly in terms of reducing greenhouse-gas emissions that contribute to climate change.

n Improve transparency of international markets through collection and analysis of energy data.

nSupport global collaboration on energy technology to secure future energy supplies and mitigate their environmental impact, including through improved energy

efficiency and development and deployment of low-carbon technologies.

n Find solutions to global energy challenges through engagement
and dialogue with non-member countries, industry,	IEA member countries:
international organisations and other stakeholders.	IEA member countries:

International Energy Agency

9 rue de la Fédération

75739 Paris Cedex 15, France

Australia Austria

Belgium Canada

Czech Republic Denmark

Finland France

Germany Greece

Hungary Ireland

Italy

Japan

Korea (Republic of) Luxembourg Netherlands

New Zealand Norway Poland Portugal

Slovak Republic Spain

Sweden Switzerland

Turkey

United Kingdom

United States

Please note that this publication is subject to specific restrictions that limit its use and distribution.

The terms and conditions are available online at www.iea.org/about/copyright.asp

The European Commission also participates in

the work of the IEA.

INTRODUCTION

From the New Deal to responses to blackouts, history teaches us that crisis times can result in salutary reforms. Recent international economic developments —namely the international financial and economic crisis, combined with the volatility of energy prices— threaten to jeopardise our economic well being and our ability to address other goals like climate change mitigation. However, this need not be so. Governments can, and should, face these challenges by turning them into an opportunity to kick-start the long awaited low-carbon revolution. A central part of that revolution is energy efficiency, and the time for action in this area is now.

Governments have understood the importance of financing energy efficiency now. This realisation is exemplified through the central role occupied by energy efficiency in most stimulus packages. The purpose of this memo is to identify the impact of the financial and economic crisis on the evolution of public sector investments, energy efficiency policy development, and private sector investments.

The memo will first identify trends which have emerged from the implementation of IEA government stimulus packages. Most relevant case studies will be provided along with lessons and challenges.

Financial Crisis and Energy Efficiency - IEA /EED

Part I: Identification of Trends

1. Trends

Stimulus packages have increased energy efficiency investments

A striking consequence of the financial-economic crisis is a sharp increase in energy-efficient public spending. The United Nations Environment Programme (UNEP)1 reports that "leading governments"2 have committed USD 183 billion to "clean energy" overall in their stimulus packages. From that amount it is estimated that USD 61 billion was targeted towards energy efficiency alone by contrast with USD 34 billion for renewable energy3. Australia for instance has directed 9% of their stimulus funds towards energy efficiency (The Green Economy Post, June 2009).

An HSBC bank report quoted by The New York Times on the economic crisis furthers these claims stating that “energy efficiency and energy management companies and projects have benefited the most from the global effort to stimulate economies over the past eight months"4. HSBC continues by emphasising that over USD 180 billion —out of USD 350 billion earmarked by governments for climate-related projects— “went to projects and companies that improve the efficiency of buildings, transportation and industry, or to projects and companies developing and producing fuel cells and energy storage systems"5.

The box below provides data on the US example. The US budget for 2009 is detailed with relevant lines for energy efficiency. Although, these budget lines do not form part of recovery packages, it is important to note that ordinary line of budgets are still being allocated to energy efficiency programmes over and above those granted by the recovery programmes6.

The EU-wide EUR 3.5 billion financial package includes support for energy efficiency7, while South Korea "is allocating USD 6 billion to energy conservation”.

In Germany, the federal government has announced USD 588 million for research and development in energy efficiency and climate protection research8. The Helmholtz Association,

1Fritz-Morgenthal S., Greenwood C., Menzel C., Mironjuk M., Sonntag-O’Brien V., The global financial crisis and its impact on renewable energy finance, The United Nations Environment Programme, (April 2009).

2No further clarification of the term is made.

3April 2009, based on New Energy Finance figures.

4In Kanter J., Green Inc: Stimulus Packages a Boon for Efficiency, The New York Times, (16 June 2009).

5Compared to pre-crisis efforts, HSBC states that "at a minimum, the global stimulus packages have already begun to have a material and positive impact on stock price performance". Still, "companies focused on EE make up the second largest component [of the HSBC Global Climate Change Index] with about 285 of the index [while renewable energy and nuclear companies make up 605 of this index]".

6Throughout the paper, the US example comes back on several occasions. This is to be explained by the higher level of

data publicly available online for the US by comparison with other member countries. It is no way indicative of a judgment on the actual measures.

7The Green Economy Post, Update 13 April 2009: “The EU’s economic recovery plan will invest funds not spent by September 2010 in energy efficiency and ’smart city’ projects, as it amended the European Energy Programme for Recovery".

8UNEP, April 2009.

Financial Crisis and Energy Efficiency - IEA /EED

notably, reports that it will receive around EUR 65 million for research and development in ''energy efficiency and CO2 reduction”9.

Box 1: The Case of the US

The US recovery package includes USD 16.8 billion investments in energy efficiency. This number comes from official source, the DOE and includes renewable investments. However, the projects’ details show an overwhelming majority of EE related spending (i.e. see Annex). Examples of the recovery package applications include: local energy efficiency block grants (see MLG case-study), federal building efficiency upgrades, expanded Weatherization Assistance Program under the American Recovery and Reinvestment Act (ARRA) of 2009.

The US Senate has approved (29 July 2009) new appropriations levels for DOE programmes in

EEfor the next fiscal year (2010) (Alliance to Save Energy, 2009). Detailed as:

USD 202 million for the Building Technologies Program (+ USD 62 million compared to 2009 fiscal year).

USD 100 million for the Industrial Technologies Program (+ USD 10 million compared to 2009 fiscal year).

USD 32 million for the Federal Energy Management Program (+ USD 10 million compared to 2009 fiscal year).

USD 323 million for the Vehicle Technologies Program (+ USD 81 million compared to 2009 fiscal year).

Alliance to Save Energy reports overall figures for the US: the Senate has approved (29 July 2009) USD 2.23 billion for DOE's EERE programmes (up from USD 1,928 billion for the fiscal year 2009).

Most governments have recognised the potential of green development and technologies as a potential driving force on the road to recovery. The stimulus packages announced at the beginning of 2009 thus, involved an important share of spending devoted to eco-friendly development. Given its cost-effectiveness, energy efficiency funding has garnered a sizeable share of the overall stimulus green spending. Indeed, out of the USD 787 billion ARRA, USD 16.7 billion is specifically destined to EE spending. USD 626 million10 out the additional USD 2.34 billion11 provided in the UK Budget 2009 is directed at EE (source: UK Budget 2009, chapter 7).

Other noteworthy examples of stimulus packages:

Korea’s Green Growth Plan, which extends the Green New Deal initially announced in

January 2009 into a full five-year plan to achieve more eco-friendly growth, rising its funding to USD 87 billion12, or 2% of Korea’s GDP.

Japan also plans to spend USD 590 million out of the USD 2.18 billion devoted to energy projects funding in the Japanese stimulus package.

9Helmholtz Association, 2 May 2009

10GBP 375 million

11GBP 1.4 billion

12KRW 107 trillion

Financial Crisis and Energy Efficiency - IEA /EED

Weatherization programmes receive the greatest share of funding

The highest level of money allocated by governments to energy efficiency programmes is allocated to weatherization programmes.

However, while stimulus packages have increased the amount of funding available to EE projects, these newly available funds are mostly devoted to the extension of existing policies. Governments have apparently favoured the improvement of ‘tried and true’ established energy efficiency programmes, such as private home insulation subsidies, over the implementation of new initiatives13.

Box 2: Weatherization programmes in Australia, New Zealand, the UK, and the US

The Home Insulation Program (Australia)

The Home Insulation Program is a component of the Energy Efficient Homes Package, itself part of the USD 36.25 billion Nation Building-Economic Stimulus Plan of Australia.

Under the Home Insulation Program, homeowners, landlords and renters with little or no ceiling insulation may be able to get up to USD 1,381 to have ceiling insulation installed. The USD 1,381 should cover an average house, so householders might not be out of pocket at all.

The Home Insulation Program commenced on 1 September 2009. Prior to the Home Insulation Program, there was the Homeowner Insulation Program and Low Emission Assistance Plan for Renters from 3 February to 31 August 2009.

Another component of the Energy Efficient Homes Package will seek to help up to 420 000 households install a solar hot water system. The combined Energy Efficient Homes Package measures are expected to create jobs, help millions of households reduce their energy use, cut their power bills by up to USD 604 a year (USD 173 from the Home Insulation Program and USD 431 from the solar hot-water system).

Warm Up New Zealand: Heat Smart (New Zealand)

New Zealand’s 2009 Budget announced USD 227.4 million over the next four years for home insulation, clean heat and other energy efficiency measures. The fund is made up of USD 171.5 million of new funding, on top of EECA’s existing USD 56 million programmes. The ‘Warm-Up New Zealand: Heat Smart’ programme will retrofit 180 000 homes with insulation and clean-heating devices. The scheme provides government grants of USD 915 towards a third of the cost of insulation and a USD 352 grant for clean heaters.

‘Warm Up New Zealand: Heat Smart’ started on 1 July 2009 and is run by the Energy Efficiency and Conservation Authority (EECA).

According to New Zealand’s government, 27 000 homes are to be retrofitted in the first year, building to more than 60 000 in the fourth year. By the end of year four, around 180 500 houses will be insulated – representing 20% of all poorly insulated and under-heated houses. “Half a million New Zealanders will benefit from the scheme, and there has already been a great response”, PM John Key said.

Because of high demand for the scheme subsequent years funding may be brought forward. Indeed, if take up continued at the current rate, the 27 000 target would be exceeded by 15 000 by the end of a full year.

13 Examples of such extended programmes include the US Weatherization Assistance Program and the UK Warm Front.

Financial Crisis and Energy Efficiency - IEA /EED

Weatherization Assistance Program (US)

The Weatherization Assistance Program (WAP) is a mature US Department of Energy (DOE) programme created in 1976. It originally aimed at providing federal funding for local energy efficiency projects that decrease fuel poverty.

WAP involves both federal and state authorities. The federal government distributes funds to the state governments, and individuals can then apply to the relevant state agency to benefit from the program. However, the eligibility criteria and technical merit of the proposed energy efficiency measures are determined at the national level.

In its original form, households had to earn less than 150% of the federal poverty level to meet the application threshold. Eligible families could then benefit from up to USD 2,500 in subsidies to fund energy efficiency improvements of their home.

The ARRA has substantially extended the program, raising the income threshold to 200% of the poverty level while increasing the maximum single-household subsidy to USD 6,500. Other minor changes were brought to the authorized spending mix (e.g. technical and training assistance can now receive a maximum of 20% of the funds, up from 10%), but it is noteworthy that the ARRA overhaul of the WAP did not include the addition of any new initiatives.

"The Weatherization Assistance Program run by the DOE relies on annual appropriations that normally do not support more than 100 000 retrofits a year" (Center for American Progress and Energy Future Coalition, CAP-EFC).

Alliance to Save Energy cites US Senate:

USD 200 million for the WAP, USD 250 million LESS than in fiscal year 2009 (the Administration itself had asked for a USD 250 million budget, still USD 200 million less than last year).

For CAP-EFC, the Weatherization Assistance Program is in part counter-effective in that it is capped at USD 6,500 per home (up from USD 2,500 in recent, pre-crisis years), although CAP-EFC mentions that cost-effective solutions to attain 20% to 40% energy savings require an average investment of USD 5,000 to USD 20,000 per home.

Warm Front (UK)

Warm Front is a UK government initiated programme which aims at reducing fuel poverty and improving energy efficiency for modest household. In this respect, it is quite similar to the Weatherization Assistance Programme.

Eligibility to Warm Front is based on the eligibility to other social welfare programs, however in any case the applicant’s income should not be higher than USD 26,792 a year. This income ceiling has not been raised by the stimulus package.

The process to receive a Warm Front grant is fairly straightforward: first, applications are screened for qualification requirements; eligible households’ homes are then assessed by mandated technical surveyors. After determining the most relevant energy efficiency improvements, installation follows suit.

Warm Front is one of the major beneficiaries of the British stimulus package: it received USD 167 million additional funds, out of the USD 894 million stimulus funds devoted to eco-friendly projects. While this additional funding did not improve coverage – which is still limited to low income households –, it allowed increasing the maximum available subsidy to USD 5,846, or USD 10,022 where oil, low carbon or renewable technologies are recommended (source: Warm Front program).

Financial Crisis and Energy Efficiency - IEA /EED

United Kingdom "is allocating USD 141 million to address building insulation and heating issues. Their auto industry bailout included measures to support the manufacture of low carbon vehicles. USD 706 million is to go to a five year inner-city rail development program. It is anticipated to say that the budget schedule for late April will contain additional green economy measures" (The Green Economy Post, 20 March 2009).

Still, one specialist involved in energy efficiency programmes in the UK mentioned that Warm Front is facing “a significant reduction in budget in the coming years”. For him, this is due to the fact that “over the previous two years the government has brought forward funding allocations to the scheme to increase activity [which has] left a shortfall in funding for coming years”. Still, according to this person, “in the current financial climate, where both main political parties are talking about the need to cut public expenditure, it is unlikely that this shortfall will be made up”.

Stimulus money spent on energy efficiency creates jobs

An important characteristic of energy efficiency funding during the financial crisis and ensuing stimulus packages, is the need to justify energy efficiency financing by the number of jobs that it

will create. CAP-EFC14 estimates that a USD 500 billion investment in the retrofitting of 50 million buildings would induce the creation of a total of 625 000 direct and indirect jobs15,16. This does

not prevent “well over a million construction workers from sitting idle in a sagging housing market" reports CAP-EFC. Such observation is an indicator of the gaps in allocation of resources and administration which will be elaborated in the next section — challenges.

Building retrofitting has the advantages of creating employment in the two sectors of the economy which are hit hardest by the economic downturn: construction and manufacturing. CAPEFC stresses that job creations are certainly necessary "to help lift the country out of a difficult economic recession", but they insist on the necessity to create "good" jobs17. CAP-EFC admits that jobs in retrofitting are not "automatically good jobs", but "they can be made so if adequate attention is given to the development of labor standards, wage classifications, training supports and performance standards". It is estimated that the ARRA provides USD 500 million for green jobs training, of which USD 180 million is directed toward the economically disadvantaged (a move CAP-EFC considers as “insufficient”). This ARRA funding for training will expire in 201018.

14Center for American Progress and Energy Future Coalition, Hendricks B., Goldstein B., Detchon R. and Shickman K.,

Rebuilding America: A National Policy Framework for Investment in Energy Efficiency Retrofits, Center for American Progress and Energy Future Coalition, (August 2009).

15This number however does not include the jobs that are induced in other sectors of the economy through an increase in economic activity and local spending.

16CAP-EFC use a scenario where every USD 1 million invested in building efficiency retrofits directly creates 12 full- time-equivalent jobs (Pollin R. and others (2009), The Economic Benefits of Investing in Clean Energy, Center for American Progress). CAP-EFC quotes another research institution to back these numbers up : “This number is corroborated by the Center on Wisconsin Strategy [Rogers J., Seizing the Opportunity (for Climate, Jobs and Equity) in Building Energy Efficiency, University of Wisconsin-Madison: Center on Wisconsin Strategy], which estimates that every USD 1 million invested in residential and commercial retrofits directly creates 10 to 14 person years of construction jobs and program support, and 3 to 4 person years of indirect employment in manufacturing supply chains”.

17Which are defined as with living wages, benefits and opportunities for advancement along career pathways.

18On another example than the US, South Korea "has committed USD 36 billion to their green job creation plan" (The Green Economy Post, 20 March 2009).

Financial Crisis and Energy Efficiency - IEA /EED

Cleaning the transport sector is another focus of stimulus spending

After the building sector, countries are focusing their greening efforts towards the transport sector. The Cleantech Group reports that the second German stimulus package included a EUR 2,500 bonus to consumers to trade inefficient vehicles (13 February 2009). The Green Economy Post gives the following figures for Germany: "their green stimulus funds are focused on energy efficiency USD 101 million. Incentives have been put in place to encourage people to buy fuelefficient cars and USD 2.5 billion will be spent on public transportation infrastructure and USD 633 million in loans will be used to promote the development of low carbon engines" (20 March 2009).

Italy is another example of important greening of the transport sector "last month [February] Italy announced a car-incentive program with USD 1.6 billion designed to encourage people to replace older vehicles with scooters and fuel-efficient vehicles. USD 79 million have been allocated to finance pail projects" (The Green Economy Post, 20 March 2009).

The improvement of rail service should be a major focus of Italy’s USD 7 billion used to promote clean modes of transportation. (The Green Economy Post, March 20, 2009). France, on the other hand, is providing incentives for people to replace inefficient vehicles with an envelope of USD 632.5 million. In addition to these USD 632.5 million, USD 1.27 million has been committed by France for high speed rail (GreenEconomyPost.com, updated 1 June 2009).

Tax exemptions

Tax exemption is another common instrument used by governments to help incentivise people towards ‘green’ behaviours. CleanTech Group reports the US has provided USD 20 billion in tax breaks for the clean energy sector as part of the ARRA (13 February 2009). UNEP has polled experts in renewable energies and clean energy in general about the relative importance of the various clean energy policy requirements of institutional investors: "only" 72% of them consider that tax breaks are an important or very important requirement —tax breaks come last of four, after "Stable subsidies" (90%), "Long-term carbon price" (80%) and "Higher targets" (73%) (April 2009). Italy has also included tax breaks for buying new more efficient cars.

Finally, CAP-EFC reports that "in the Northeast (US), a number of states use a consumer surcharge to support a public benefits fund that invests in efficiency" to decouple utility sales from profits (since utility revenues in most states are linked to the amount of energy they sell) (August 2009).

Green capital replacement: a challenge increased with the crisis

The crisis has added to barriers preventing capital replacement in the built environment. According to the CAP-EFC, one new barrier is "the risk of creditor default in a real estate finance market that today is severely constrained". The mathematics is also more problematic today than they were before the crisis. In the US, as a result of the crisis, housing values have decreased by USD 2.3 trillion; as such, the ratio retrofitting costs vs. value of the building becomes more impressive and less likely to prompt retrofits among house owners. For CAP-EFC "the real challenge today in the commercial market, however, is a toxic combination of plummeting property value and increased vacancy rates".

Financial Crisis and Energy Efficiency - IEA /EED

In Australia, the overall stimulus package of USD 26.5 billion19, includes a free ceiling insulation for 2.7 million homes, leading to an expected USD 172 cut in each of these household energy bill (source: Prime Minister of Australia Press Release, 3 February 2009). A further USD 81 million investment was announced on 3 July 2009 to create 50 000 new government-sponsored green jobs and skills training (source: PMoA, 30 July 2009).

Despite these efforts, some commentators question the adequacy of the different packages on capital replacement. It is argued that capital replacement has historically been more common in large industrial and commercial structure than in the residential sector. It remains to be stated whether these stimulus packages will be able to address these shortcomings.

2. Lessons

Since the crisis, public sector investments in energy efficiency have dramatically increased. This has in turn triggered higher interest by private investors. Such a trend has prevented total energy efficiency financing from collapsing —in contrast to renewable investment. This being said, there are no guarantees that this increase will transform in a sustainable trend, nor is there any guarantee that the private sector is deeply committed to energy efficiency investments.

The figure below shows the evolution of private investments in the first two quarters of this year. At present, it appears as if 2009 investments in energy efficiency will at least equal 2008 investments.

Figure 1: Venture Capital/Private Equity New Investment by Sector Efficiency & Power Storage