Energy efficiency and economic stimulus

Delivering immediate job creation and industry support depends on deploying stimulus packages rapidly and at scale to achieve immediate impacts in terms of job creation and industry support. In this paper, the IEA examines three categories of energy efficiency investments for governments to consider in their economic stimulus packages to either enhance existing programmes or develop new ones.

Stimulus policies targeting the buildings and construction sector often have the greatest macroeconomic impacts. This is because many countries have a large need for new buildings and renovations of existing ones, and because the sector has strong potential for activating local value chains. Buildings and construction programmes can include investment in housing, schools, hospitals and municipal facilities.

Energy efficiency opportunities in new and existing buildings could include high efficiency insulation and building fabric; high efficiency heating, cooling, hot water and lighting systems; and rooftop solar PV and battery storage. These programmes can be split into two categories – new buildings programmes, and upgrade programmes for existing buildings.

New buildings programmes can provide incentives to construct new buildings to high energy efficiency standards. These programmes can draw on the cost-effective solutions already available at little additional cost and deliver considerable benefits. Through large-scale implementation, innovations such as prefabrication can bring down costs and improve efficiency.

Upgrade programmes provide incentives to roll out replicable upgrades to existing buildings at scale. Analysis suggests that around 60% of expenditure on home energy efficiency retrofits goes towards labour, delivering strong employment growth.2 Public sector programmes focusing on homes and certain relatively standardised building types such as social housing, hospitals, office buildings and schools have proven effective in generating significant economic benefits.

Such incentives can be scaled up from existing programmes or newly created to further job creation and stimulus. For example, more than USD 11 billion in stimulus funding was made available for building upgrade programmes in the United States from 2009 to 2011. Targeting specific sectors, such as homes, businesses, government buildings and other public facilities (e.g. schools and hospitals), these programmes delivered about USD 2 in energy cost savings for every USD 1 invested and more than 200 000 jobs were created across the country as a result.3

Governments often provide incentives directly to consumers (or through manufacturers or retailers) to replace old, inefficient products with new, more efficient models through technology replacement programmes for cars, refrigerators or other appliances. This can include investments in so-called ‘cash for clunkers’ programmes for cars, refrigerators or other appliances and digital devices. In the manufacturing industry, motor replacement, heat recovery or heat pump programmes could deliver substantial job creation results while also achieving significant environmental benefits. Of course, consideration must be given to the overall environmental impacts of early replacement of technologies: jobs can be created in the recycling industry through targeted circular economy programmes.

‘Cash for clunkers’ style replacement programmes can help to deliver effective economic stimulus, and can support jobs throughout the manufacturing, transport and retail supply chains. To ensure they deliver energy efficiency improvements, such programmes should be carefully designed to include references to well-established energy efficiency standards and labels and to encourage purchases of high efficiency products. One of the critical points of such programmes is to what extent the incentives generate new economic activity, bring forward economic activity, or support purchases that were likely to happen anyway. Careful programme design can maximise the benefits generated.

In the car industry in the United States, for example, the USD 2.85 billion ‘cash for clunkers’ programme of 2009 provided rebates to 680 000 consumers to replace old vehicles with new ones. By giving larger rebates for more efficient vehicles, the programme was able to increase the proportion of energy efficient sales.4 The programme successfully brought forward 380 000 vehicle sales from future months.5 Similar programmes were introduced in several other countries in response to the global financial crisis (e.g., Austria, Germany, France, and the United Kingdom).6

Replacement programmes can also boost employment in the appliance manufacturing sector while fostering the uptake of more efficient devices. In late 2017, Colombia implemented a ‘cash for clunkers’ programme aimed at replacing over 1 million inefficient refrigerators. This programme offered a significant reduction in VAT for a new refrigerator and included a dimension to recycle the old refrigerators in an environmentally responsible manner. The new refrigerators used 25% less energy than the old units, resulting in significantly lower energy bills for consumers and reduced demand for subsidies from low-income households. Expansion of direct and indirect jobs has been estimated at 12,000.7 Similar programmes have been introduced in other countries, such as Mexico (with a focus on replacing inefficient televisions), and the United States (promoting a range of household appliance replacements).8

Finally, technology replacement programmes can support the manufacturing and rollout of newer technologies such as heat pumps, digital building management systems and electric vehicles. Fleet upgrade programmes focussed on buses, trains, vans or taxis could also drive economic stimulus and energy efficiency.

Large-scale infrastructure projects can generate a high number of jobs that leverage both public procurement and local value chains. Such projects include investment in infrastructure that enables energy efficiency, such as smart grids and electric-vehicle charging, as well as next-generation digital connectivity for a more efficient, resilient and future-proofed energy system. To further support construction jobs at the local level, infrastructure projects could also include investment in public transport infrastructure, the creation of cycling lanes and pedestrian zones, and the large-scale deployment of street-lighting upgrades. Smart street-lighting upgrades can also deliver multiple infrastructure services, as street light poles can also serve as electric-vehicle charging stations, and include 5G telecommunications infrastructure. For example, India’s Street Lighting National Program has upgraded around 11 million street lights with efficient LEDs. This has generated 13 000 jobs, while reducing greenhouse gas emissions by 5 million tonnes a year.9

By enabling the uptake of sustainable mobility options these investment projects support clean energy transitions while increasing the well-being of urban residents.

These stimulus activities can build on pre-existing approaches and accelerate achievement of existing policy targets – or leverage new, more radical approaches. In either case, the drive for accelerated activity and stimulus presents opportunities to align policy and regulatory systems and to eliminate practical barriers to investment that may be hindering activity.

It is also necessary to consider where best to target public funding, and where private capital may be available if the conditions are right. For example, the right policy signals can encourage private investment in infrastructure such as smart grids. On the other hand, in the near term, it is unlikely that homeowners will be willing to use their savings or take on new debt for home upgrades without considerable public financial support.

Using pre-existing solutions and specifications can maximise the speed of impact while protecting consumers. Similarly, established delivery mechanisms and market structures can be exploited. For example, if utilities already have the capacity to deliver energy efficiency upgrades of buildings, they could be incentivised to scale up those activities quickly. Similarly, municipalities may be an important channel to deliver housing programmes or street-lighting upgrades.

Some approaches and policy mechanism include those listed below and should be considered jointly in order to build an effective policy mix:

• Grants or rebates can be targeted at consumers, retailers, or manufacturers to improve the efficiency of goods purchased, stocked and produced. The use of existing systems and processes can accelerate launch timeframes.
• Auctions can target builders, developers, utilities or other actors with the capacity to deliver at scale. While governments specify the quantity and types of projects along with the products and services to be delivered, providers compete on price. Auctions will deliver faster in situations where existing contracts and procurement structures are already in place.
• ‘Cash for clunkers’ programmes can provide incentives to retire old, inefficient products such as cars or refrigerators with new efficient models. These programmes can drive new sales, bringing forward the early retirement of products with traditionally long sales cycles while also increasing jobs in the recycling industry.
• Programmes delivered by energy utilities can be deployed where the utilities already have a direct role in delivering energy efficiency upgrades, energy efficiency auctions or energy efficiency obligation schemes. In these contexts, such programmes may be used to drive a range of energy efficiency upgrades to different sectors, including, for example, upgrades across utility-owned street-lighting networks. Where energy utilities do not already have this role, other delivery approaches may be more appropriate.
• Green procurement can harness government or private sector purchasing power to drive energy efficiency improvements by specifying minimum efficiency requirements for procurement such as new buildings, leased buildings, appliances, vehicle fleets, public transport or infrastructure. As governments often have significant purchasing power, green procurement standards can help drive short‑term improvements (e.g. for leased buildings and vehicle fleets) while supporting a sustainable market for energy efficiency products, services and jobs in the intermediate and longer term. This can soften the impacts of boom-bust cycles.
• Bulk procurement and direct install programmes can involve government or contracted partners delivering upgrades targeting ‘hard to reach’ sectors and technologies. Such programmes bring the benefits of bulk procurement and on‑the‑ground delivery under one agency’s responsibility to achieve scale and speed.

Previous stimulus and energy efficiency programmes offer governments and policy makers valuable insights into programme design and implementation. These insights include:

• Leverage existing programmes – Governments can deliver faster and safer stimulus by supercharging existing programmes and by leveraging standing programme administration, contracts, guidelines and service providers.
• Consider shovel-ready options – These can include retrofitting existing buildings and infrastructure, ‘plug and play’-style appliance upgrades, boosting existing programmes, and supporting municipalities to deliver ready‑to‑go projects that are lacking funding.
• Standardise as much as possible – Seek interventions that are widely applicable, uniform and do not require much bespoke design. Develop standard designs, contracts, etc. to normalise transactions as much as possible. Consider lists of ‘approved’ solutions and technologies to reduce ambiguity and risk.
• Address unnecessary regulatory barriers – Excessive regulatory barriers, such as in planning and development regulations, can often hinder energy efficiency and clean energy projects. Policy makers could examine removing or simplifying red‑tape to facilitate the speedy rollout of economic stimulus.
• Align energy efficiency stimulus policies within the energy sector and across the whole of government – Consider the opportunity to embed ‘efficiency first’ principles in all stimulus programmes. By aligning policies across all relevant government agencies, policymakers can ensure that energy efficiency gains during the stimulus period are sustained over time.
• Set the right level of ambition – Policy makers should think about setting the energy efficiency standard as high as possible while remaining realistic about potential supply, technology and price constraints.
• Get the level of incentive right – Find the right balance between a high enough incentive to drive uptake without introducing programme risks or creating boom‑bust cycles.
• Market capacity (supply-side) – Consider suppliers’ capacity to scale up quickly while maintaining quality of products and services, factoring in workforce skills and training availability and requirements.
• Market capacity (demand-side) – Consider demand for products and services, purchasing decision points and consumers’ motivation for taking up products and services.11 Make sure that consumers can make well‑informed choices among qualified products and services.
• Resource efficiency issues – Reflect on how to avoid material waste (e.g. retiring two‑year‑old white goods) and support new employment opportunities in the waste resource and recycling industry at the end of a product’s life.
• Turn short-term impacts into long-term transformations – While the focus is on short‑term stimulus impacts, good programme design will maximise the long‑term benefits by raising efficiency standards and developing new markets, as well as adapting large‑scale infrastructure planning and decision-making processes to consider energy efficiency benefits. This will help support ongoing energy efficiency and construction jobs beyond the life of the stimulus programme.
  

The IEA is supporting governments around the world as they develop options to include energy efficiency in economic stimulus packages. We welcome inputs into our work. Please contact us at energy.efficiency@iea.org.