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Energy Efficiency
Published in: Energy Efficiency 4/2008

01-11-2008

Market imperfections and economic efficiency of white certificate systems

Author: Adriaan Perrels

Published in: Energy Efficiency | Issue 4/2008

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Abstract

This paper takes the view that energy markets and markets for energy efficiency have significant imperfections, including ones that cannot be repaired through prices alone. The acknowledgement of the various market imperfections, however, does not endorse automatically the use of various instruments, such as tradable white certificates (TWC). Therefore, it is necessary to clarify under what conditions a TWC system can have equal or superior effectiveness and economic efficiency as compared to other instruments. The article explains the principles of a TWC system in terms of market functioning and price formation. It also highlights some key assumptions regarding additionality of energy savings, transaction cost, free riding, target setting and regulatory predictability. Subsequently, the paper illustrates how a TWC system interacts with other energy efficiency policy instruments, in particular standards and taxes. After these explanatory sections the article turns to the modelling of actual TWC price formation in selected countries and subsequently presents a comparative assessment of a TWC system with an energy tax for Finland and the Netherlands.
previous article Market behaviour and the to-trade-or-not-to-trade dilemma in ‘tradable white certificate’ schemes
next article Multiple instruments to change energy behaviour: The emperor’s new clothes?

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Appendix
Available only for authorised users
Footnotes
1
Financial support from the European Commission and the Finnish ministry of Trade and Industry is gratefully acknowledged. More project reports can be found at www.​eurowhitecert.​org.
 
2
Speeding up adoption of energy saving technology can also imply that the learning curve is exploited faster; hence unit-cost reduction can occur earlier. On the other hand there is a risk of too quick a spread of premature technology, which would imply extra cost, not less cost, over a longer time span.
 
3
As energy prices and unit-costs of saving may vary over the course of the compliance period, there is uncertainty for investors. Adding a discretionary option for change to the target setter only complicates the uncertainty and may add cause for exerting pressures by various stakeholder groups.
 
4
Given the Ramsey pricing assumption, there is even an elevated likelihood that it concerns such customers, since the low price elasticity is—among others—tied to lack of knowledge and underutilised energy saving potential.
 
5
Companies may also try to realise savings among the customers of another company, but that could be regarded as an intrusion and does not enhance (own) customer loyalty. On the other hand unless the obligated parties are energy network companies (like in Italy) the client loyalty aspect is not relevant.
 
6
Figure 4 assumes that the technical energy saving potential covers a large part of a firm’s current consumption. In fact the curve E may have a less tilted slope (as in Figs. 1, 2 and 3). A consequence of the current display is that firm A would have a second optimal solution involving drastic energy savings.
 
7
Given proviso 7 in Chap. 3, this statement is correct, but considering the digression suggested by the curve E, less overcompensation may have arisen depending on the functionality of the certificate market.
 
8
Regarding the creation of a good knowledge base, it would probably improve market transparency and reduce social-economic cost if that were pursued as much as possible as a common broad based high quality endeavour. The positive spillovers of a better overall quality and prevention of duplication would justify public funding support.
 
9
We refrain here from complications of financing cost for the end-user. Such facilities could be assumed to be part of the transaction cost (TC).
 
10
If there is already experience with company switching among clients, client loyalty expressed as an exit likelihood function (with extra services as latent variables) could be integrated in the formalised cost optimisation.
 
11
Considering the TWC-like systems in place or considered up to now, it seems reasonable to assume the obligated party is a company which (also) sells energy to end-users. Please note that the Italian system focuses on energy network companies, in which case the target can be formulated as a percentage of the volume of distributed energy. In that case the company can otherwise still be assumed to be driven by cost minimisation.
 
12
The applied elasticities are based on generic a priori information, not on empirical investigations of the sectors at hand in exactly their current conditions. If the latter would have been the case, the split incentive effect should cause the elasticity to get closer to zero.
 
13
These figures represent sort of middle-of-the road levels. For the Netherlands some estimations are available (Boonekamp 2007; Lijesen 2007). Nevertheless estimates tend to vary significantly across countries, time periods, and, not least, due to differences in data definitions and estimation methods (EIA—Annual Energy Outlook 2003; van den Bergh 2008; Christoffersen et al. 2006; Nesbakken 1999).
 
14
District heat has large advantages in terms of conversion efficiency and primary energy saving, which is a reason to be reluctant to tax district heat delivery.
 
15
In fact for the energy intensive industry there is a rebate system defined as excess tax payments beyond a threshold based on a percentage of the value added of a company.
 
16
The current energy tax system in the Netherlands includes a lump sum (ex ante) reduction of the energy bill.
 
17
The degree could depend on the need to reduce also public deficits.
 
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Metadata
Title
Market imperfections and economic efficiency of white certificate systems
Author
Adriaan Perrels
Publication date
01-11-2008
Publisher
Springer Netherlands
Published in
Energy Efficiency / Issue 4/2008
Print ISSN: 1570-646X
Electronic ISSN: 1570-6478
DOI
https://doi.org/10.1007/s12053-008-9020-z

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