On 10 March, the European Commission, Parliament and Council reached an agreement that, if approved, will mean an increase in the efforts that Member States will have to make in terms of energy efficiency.

Through the reform of the Energy Efficiency Directive, two objectives are pursued: to move towards climate neutrality by 2050 (as part of the European Green Pact) and to reduce imports of fossil fuels from Russia (as part of the REPowerEU plan).

To meet these objectives, the pact proposes an increased role for public administrations (including local administrations) to:

• Reduce their own consumption;
• audit the consumption of large energy consumers if they do not use energy management systems, and;
• ensure a supply of green finance from financial institutions.

In anticipation of these measures, last January, the Spanish government approved the system of 'energy efficiency certificates' (EEC) or 'white certificates'. These have arrived in Spain through RD 36/2023 after decades of operating successfully  in other countries such as, France. In principle, this system could help to achieve the objectives of the European agreement, but for this to happen it is essential to incorporate consumer preferences and conditions regarding the adoption of energy efficiency measures.

Challenges and opportunities for EECs

Until now, gas and electricity retailers and wholesale oil operators were obliged to make contributions to the National Energy Efficiency Fund (FNEE), managed by the Public Administration, to promote energy efficiency improvements at a national level.

These types of policies run the risk of not being efficient if the established contribution does not correspond to the real costs of energy efficiency. Therefore, from now on, obligated parties will be able to comply with these obligations, totally or partially, through energy efficiency actions in sectors such as buildings, transport, industry or services.

Under the new system of EECs, the savings achieved are certified, and can then be used to meet  obligations or sold to another obligated party to match their obligations. The possibility to buy and sell certificates allows each party to meet its obligation at the lowest possible cost. This  mechanism is more efficient than traditional public interventions, such as standards, taxes or the current contribution to the FNEE, which impose the same effort on all parties, regardless of the cost to each party.

This measure is therefore intended to:

• Make the way in which energy savings can be achieved more flexible;
• allow these to be done at the lowest possible cost;
• incentivise the adoption of energy efficiency measures among final customers, and;
• improve the accounting of savings on the national territory, including any energy efficiency measures.

However, as is often the case, the success of this measure depends on its design, and in this respect, some details of the regulation are still to be published:

• The catalogue of savings actions and their calculation methodology, which will become a kind of supply curve pre-established by the legislator and made up of measures with an estimated cost and savings potential. There is a trade-off between actual savings and monitoring capacity. The difference between estimated and actual savings could be large if a rebound effect occurs, which happens when customers increase the energy consumption associated with one service as a consequence of a reduction in the energy consumption of another service on which the savings investment was made.
• The formation of the price of the PPA and its evolution over time, which should be the result of the costs of the actions included in the catalogue, the efforts of the parties obliged to carry out the actions and the price of the contribution to the FNEE. It may also affect the design of the auction mechanism that is planned to be implemented so that the State can meet its energy saving needs.
• Interaction with other energy policy instruments and in particular with subsidies for the replacement of household appliances, the installation of solar panels, etc.

The importance of incorporating preferences

Even if the design of the mechanism is correct, the consumer (household or company), who is the owner of the savings, has the final say. And as has been observed in numerous studies, there are a number of decision-making constraints that prevent economic incentives from being insufficient for customers to decide to make the investment (a situation known in the literature as the 'energy efficiency paradox').

One of the biggest barriers is the lack of funding to meet the upfront cost. But even when the necessary funds are available or can be obtained, there are other factors intrinsic to the decision making process, such as heuristic rules, social norms, emotions, etc. that cause consumers not to act as a priori expected. An example is the reluctance of some people to change boilers, because they take into account the cost incurred at the time of purchase, even when this entails an extra cost each month. This is known as the ‘sunk cost fallacy’.

Behavioural economics offers alternative approaches to intervene in this process, taking advantage of these elements to increase investment in energy efficiency. The methodology used involves:

• Having a good understanding of the preferences and constraints of those concerned;
• designing a set of products and campaigns consistent with the above, and;
• testing different options to find the most successful one.

Therefore, energy efficiency is necessary to achieve decarbonisation goals, both at public and private level, and advancing  the design of efficient policies such as EECs is good news. However, to achieve the desired results, additional effort will be needed from obligated actors, or any other party interested in offering green products, to convince the owners of the savings to make the relevant investments.

For more information, please contact  media@frontier-economics.com or call +44 (0) 20 7031 7000.