Energy efficiency auction schemes

By Coline Grimée

Rationale for an energy efficiency auction scheme

In the framework of the EU Green Deal, the EU has agreed on a target of 32.5% of energy savings to be achieved by 2030 (Directive (EU) 2018/2002), as a continuation of the 20% energy efficiency gains that were targeted for 2020. Achieving such a target will require appropriate policies to be developed, from regulations to market-based instruments. Public funding can be a powerful tool to leverage investments in energy efficiency measures, but the EU State Aid Guidelines limit the granting of state aid without a competitive bidding process (Anatolitis and Schlomann, 2022). Unlocking public finance hence requires market-based instruments to be put in place.

Market-based instruments (MBI) typically set a policy framework determining the outcomes to be achieved, without specifying the means to achieve them. The idea behind MBIs is that competition and innovation within the market will produce the most cost-effective solution to achieve the goal set out in the policy framework. According to the European Commission, they “provide incentives to firms and consumers to opt for greener production or products” (European Commission, n.d) . 

A well-known market-based instrument in the context of the EU Green Deal is that of tradeable emissions permits, regulated within the EU Emissions Trading Program, or carbon taxes. Among the market-based incentives used in the field of energy, we can count obligations, already defined in the EU Directive on energy efficiency of 2018. Obligations subject actors to a specific target of energy savings, but subjects are free to choose the method by which they reduce their energy consumptions (IEA, 2017). 

The pendant to obligations within the energy savings realm is that of auctions. Auction schemes are a relatively new concept in energy efficiency. By May 2022, only three European countries (Portugal, Germany, and the United Kingdom) (Rosenow, Cowart, Thomas, 2018), and nine countries worldwide had experienced with EE auction schemes (Anatolitis and Schlomann, 2022). By contrast, auctions for renewable energy have gained much more traction worldwide, and their success invite for reflection on their application for EE. In this case, auctions invite bidders to deliver energy savings in return for finance, which usually comes from public budget, levies, or taxes (IEA, 2017). Unlike obligations, for which governments lose control over pricing, auctions allow governments to keep control over the procurement of energy savings (IEA, 2017)

While designing auctions for energy efficiency, several aspects need to be taken into consideration.

1. Product auctioned. Usually this involved a decision between a fixed budget or a fixed amount of savings to be achieved. Auctioning a budget rather than savings allows governments to keep control over future expenditures but entails uncertainty over the contracted energy savings (Anatolitis and Schlomann, 2022). 
2. Financing. Auctions in the European context have been funded through levies on energy bills (Portugal and Switzerland), general taxation revenues (United Kingdom) and ringfenced carbon market revenues (Germany). Levies on energy bills are considered more regressive than general taxation revenues. If the auction scheme is meant to have a social impact, financing the scheme through general taxation or carbon market revenues, when possible, may hence be preferable. 
3. Fuel type. Policymakers may decide to target savings for specific fuel types, or for energy in general. The choice depends on the final aim of the energy consumption reduction (reduced GHG emissions, energy sobriety, reduced dependence on imports, etc.). 
4. Sector. Similarly, auctions can be designed in a sector-neutral way or target specific sectors. Again, this will depend on the underlying aim of the auction scheme. Auctions could, for example, focus on harder to decarbonize sectors, sectors with less access to finance (e.g., SMEs), sectors not yet subjected to regulations, etc. An important factor to keep in mind is that parallel funding options have been shown to drive away competitors, leading to low participation rates, hence defeating the purpose of auctions (Anatolitis and Schlomann, 2022). As such, auction designers should target sectors and fuel types which generally lack financing options in order to maximize the impact of such auctions. 
5. Measures. Auction schemes can focus on a set list of measures or be open and technology neutral. The first option has predominantly been used in RE auction schemes but may hamper the innovation-fostering aspect of auction schemes. 
6. Measurement of EE. Determining winning bids requires measuring the prospective EE they can deliver. Traditionally, this has been done through verified track records of bidding measures. Less frequently, physical calculations were used. However, smart metering systems are increasingly replacing this measurement system for a more accurate prediction of the energy savings that can be delivered from bidding measures (IEA, 2017). 
7. Lifetimes. Project designers must decide for how long a bidding project can claim funds for generated savings. While prioritizing short lifetimes may incentivize short-term measures (i.e., lightning) over longer-term solutions, longer lifetimes may increase uncertainty about the savings actually generated. 
8.  Payment procedures. While auctions for energy capacity usually pays out bidders according to the clearing price (meaning every winning bid is paid out the clearing price), auctions in EE usually reward at the asking price (IEA, 2017). Although this generates a loss in economic efficiency (as strategic bidding is enabled), it also avoids significant rents to be generated for low bidders, hence maximizing the availability of public funds. 
9. Projects or programs. Many EE auction schemes have allowed both projects and programs to submit bids. Projects usually entail a single installation entering the auction on a bid to decrease their energy consumption, while programs allow for a variety of smaller actors (households, SMEs, etc.) to aggregate, thereby decreasing participation costs for individual actors. 

The variety of factors to take into consideration when designing an auction program has several implications for the incorporation of an article on energy efficiency auctions in the Energy Efficiency Directive. 

Firstly, considering the distribution of competences between the EU and individual Member States on energy, auction schemes are best designed at Member State-level. Indeed, the proper implementation of auction schemes is highly dependent on the market and regulatory environment it operates in. As such, an EU-wide auction scheme may not manage to capture the variety of energy profiles existing within the EU (on fuel type, other financing options, etc.). The EU can encourage the design of such schemes, i.e., through the allocation of funds to auction schemes fitting the overall EU goals on energy efficiency. 

Without prejudice to Member States’ right to “determine the conditions for […] the general structure of its energy supply” (TFEU, Article 194), the EED could condition the allocation of such funds to certain criteria, such as the contribution of the scheme to wider EU goals and the reduction of a silo-effect of policies (Holmes, Dufour, Skillings, 2015). As such, funding could prioritize auction schemes that fulfill the general aim of reducing energy consumption, but also act to reduce GHG emissions and dependency on (imported) fossil fuels. In an attempt to push for social policy, the EED could also prioritize funding for schemes with a social aspect (i.e., reducing energy poverty in households or favoring the local impact of a scheme). 

Secondly, as the EU regulatory framework on energy efficiency already covers many sectors and energy actors while still leaving Member States liberty on the exact actors to include in their obligation schemes, auction schemes should be designed in complement of the obligation schemes, at the risk of undermining the effect of obligations. Indeed, allocating auction funds to actors which are already subject to an obligation is redundant. In contrast, allocating funds to actors which are not yet subject to obligations may accelerate investments in energy efficiency for sectors or actors that are harder to reach. As the energy markets tissue varies across Member States, as mentioned above, the EED should encourage Member States to design auction schemes in complement of obligation schemes, without prescribing the exact sectors to be targeted. 

Lastly, considering the variety of policies that can be put in place by individual Member States, from obligations to auction schemes and the different variants of both, the EU should insist on transparency and information sharing. One difficulty in achieving the energy efficiency targets set for 2030 is the variety of ways in which it can be measured. Although there have been efforts in clarifying the extent of the target since the last EED, aggregating information on energy saved across various schemes and consolidating it into a common unit is crucial to measure progress towards the Green Deal targets for 2030. 

Draft of an EED article

1. As an additional measure to obligations, each Member State may set up an energy efficiency auction scheme. That scheme shall contribute to accelerating the investment in energy efficiency, hence contributing to achieving the target of a 32.5% gain in energy efficiency by 2030, as set out in directive 2018/2002/EU of the European Parliament and of the Council of 11 December 2018 amending Directive 2012/27/EU on energy efficiency. 

2. Auction schemes shall target sectors and actors not subjected to individual Member States’ energy efficiency obligation schemes as set out in Article 7 of the Directive 2012/27/EU of the European Parliament and of the of 25 October 2012. 

3. Eligible measures in the auction schemes shall exceed any obligation already formulated through regulations, i.e., building codes. 

3. Member States shall express the amount of energy savings aimed for through the energy efficiency auction schemes in terms of either final or primary energy consumption. The method chosen for expressing the required amount of energy savings shall also be used for calculating the resulting savings arising from the auction scheme. 

4. Member States are free to set up the auction schemes according to what best fits market practices and regulatory environments. Member States are required to communicate the program set-up, regarding:

1. the auctioned product: budget allocated or energy saving;
2. the funding source;
3. the segmentation;
4. the award criteria;
5. the expected payback period;
6. the ceiling price;
7. the penalties for non-performance 
8. the frequency at which new auctions are issued 

5. Member States are encouraged to design auction schemes with a social aim in the allocation criteria, including by requiring a share of energy efficiency measures to be implemented as a priority in households affected by energy poverty or in social housing. 

6. Once a year, Member States shall publish the energy savings achieved by each winner of the auction scheme, and in total under the scheme.

Member States shall ensure that obligated parties provide on request:

(a) aggregated statistical information on their final customers  (identifying significant changes to previously submitted information); and

(b) current information on final customers’ consumption,including, where applicable, load profiles, customer segmentation and geographical location of customers, while preserving the integrity and confidentiality of private or commercially sensitive information in compliance withapplicable Union law. Such a request shall be made not more than once a year.

7. Member States shall put in place measurement, control and verification systems under which winning measures in an auction are verified. That measurement, control and verification shall be conducted independently of the participating parties. 

8. Member States shall ensure that when the impact of policy measures or individual actions overlaps, no double counting of energy savings is made.

References

Anatolitis, V., Schlomann, B. (2022). Auctions for energy efficiency and the experience of renewable energy. Odyssee-Mure Policy Brief. Available at https://www.odyssee-mure.eu/publications/policy-brief/auctions-energy-efficiency-res.html

European Commission. (no date). Environmental Economics. Available at https://ec.europa.eu/environment/enveco/mbi.html 

Holmes, I., Dufour, M., Skillings, S. (2015). Restoring Europe to competitiveness: Structural reforms to boost energy productivity and drive growth. E3G. Available at https://www.e3g.org/wp-content/uploads/E3G_briefing_-_Energy_productivity_through_structural_reforms_Sep_2015.pdf

IEA. (2017). Energy utility obligations and auctions. Energy Efficiency Insights Brief. Available at https://iea.blob.core.windows.net/assets/ee0d9ba2-d649-4333-9c68-a8de067ae889/EnergyUtilityObligationsandAuctionsEnergyEfficiencyInsightsBrief.pdf

Rosenow, J., Cowart, R., & Thomas, S. (2019). Market-based instruments for energy efficiency: a global review. Energy Efficiency, 12(5), 1379-1398.

Tolmasquim, M. T., de Barros Correia, T., Porto, N. A., & Kruger, W. (2021). Electricity market design and renewable energy auctions: The case of Brazil. Energy Policy, 158, 112558.