Energy efficiency gap

This article is about the energy efficiency gap. This article is about the energy efficiency gap. Energy efficiency gap refers to the improvement potential of energy efficiency or the difference between the cost-minimizing level of energy efficiency and the level of energy efficiency actually realized. It has attracted considerable attention among energy policy analysts, because its existence suggests that society has forgone cost-effective investments in energy efficiency, even though they could significantly reduce energy consumption at low cost. This term was first 'coined' by Eric Hirst and Marilyn Brown in a paper entitled 'Closing the Efficiency Gap: Barriers to the Efficient Use of Energy' in 1990. Energy efficiency refers to changes in equipment and behavior that result in increased energy services per unit of energy consumed, while behavioral changes that reduce energy use are often referred to as energy conservation. Energy intensity which measures energy consumption per Gross Domestic Product (GDP) is one indicator of energy efficiency.Many people have attempted to measure the energy efficiency gap, and their approaches differ based on the definitions of the optimal level of energy use. A popular theme is Hirst and Brown (1990)'s definition: energy efficiency gap is the unexploited economic potential for energy efficiency, in other words, it emphasizes the technically feasible energy efficiency measures that are cost-effective but are not being deployed. Many other studies have used this definition, such as International Energy Agency (2007) and Koopmans and Velde.Jaffe and Stavins (1994) identify five types of optimality and the corresponding definitions of the energy-efficiency gap: the economists' economic potential, the technologists’ economic potential, hypothetical potential, the narrow social optimum and the true social optimum. In particular, economists' economic potential could be achieved by eliminating market failures in the energy efficiency technology market, while technologists' economic potential could be achieved by eliminating both market and non-market failures. Achieving the hypothetical potential would require the elimination of market failures in the whole energy market, for instance, having energy prices that reflect all externalities. The society can achieve the narrow social optimum by implementing all available cost-effective programs, and the true social optimum can be achieved if the environmental effects of energy generation and consumption is taken into consideration. Energy efficiency gaps exist because market failures exist. It is important to identify and understand those barriers in order to achieve desirable government policy interventions. According to Hirst and Brown (1990), various barriers that prevent the society from successfully closing energy efficiency gap can be divided into two categories: structural barriers and behavioral barriers.Structural barriers result from the actions of public and private organizations, and are usually beyond the control of the individual energy end user. Some examples are presented as following: Distortion in fuel prices. The fuel prices that consumers pay do not reflect the social and environmental costs associated with fuel production, distribution and consumption. Consumers tend not to invest on energy efficiency technologies due to this distortion. Uncertainty about future fuel prices. There have been great uncertainties with the prices for fuels, such as electricity and petroleum. More stringent environmental regulations and global warming concerns also increase the volatility of fuel prices. These uncertainties prevent consumers from making rational purchase decisions of new energy-using systems. Limited access to capital. Consumers often face high up-front costs for energy-efficient systems. In addition, high discount rates are used to make tradeoffs between the initial capital investment and reduced operating costs, which also hinder the investments in energy-efficiency technologies. Government fiscal and regulatory policies. Government policies tend to encourage energy consumption, rather than energy efficiency. For instance, government support has focused more on energy production, and the profit of electric utilities is a function of sales. Codes and standards. The development of codes and standards often lag behind the development of technologies. It also takes a long time to adopt and modify standards, which becomes a barrier for energy efficiency technological innovation.