Energy Studies Review
Volume 14 | Issue 1 Article 5
5-1-2006
Book Reviews
Steve Sorrell Eoin O'Malley Joachim Schleich Sue Scott
Recommended Citation
Sorrell, Steve; O'Malley, Eoin; Schleich, Joachim; and Scott, Sue (2006)
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Energy Studies Review Vol. 14. No.1, 2006 pp.186-192
BOOK REVIEW
The Economics of Energy Efficiency: Barriers to Cost-Effective Investment
STEVE SORRELL, EOIN O'MALLEY, JOACHIM SCHLEICH, and SUE SCOTT
Published by Edward Elgar Cheltenham, UK, 2004 ISBN: 1840648899
The authors of this book define a barrier to energy efficiency as 'a
mechanism that inhibits a decision or behaviour that appears to be both energy
efficient and economically efficient' (p. 27). Such mechanisms prevent
(sufficient) investment in cost-effective energy efficient technologies, and
therefore contribnte to the energy efficiency gap, which the authors
imprecisely define as 'the existence of unexploited investment
opportunities that appear worthwhile at cnrrent prices' (p.30). Of
coursesuch investment opportunities conld just as easily arise in a variety of
contexts, not just those associated with improvements in energy efficiency. The
narrower focns of this book is on whether there are widespread and cost
effective opportunities available to improve energy efficiency, and if so, what
might be done to encourage exploitation of these opportunities, particularly in
terms of public policy or organizational change.
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The material in this book essentially summarizes - and puts in a particularly
reader-friendly form - a selection of the information obtained and analysis
conducted as part of a project on barriers to energy efficiency in public and
private organizations that was undertaken in the U.K., Ireland, and Gemlany
during 1998-2000. The project itself involved surveys and detailed interviews
with various people in these organizations who were selected because they were
in charge of, associated with, or had some knowledge and/or related interest
in, energy use and possibly (although not necessarily) energy efficiency within
those organizations. To put the results of such a project in an accessible
form, the analysis is broken into case studies of particular sectors in the
various countries, where the infoffi1ation and analysis in the case study for
each sector is typically based on surveys that elicited responses from many
entities (fiffi1s or organizations) in that sector, and thendetailed follow-up
interviews with between four and seven of these entities within each sector.
The four sectors that are considered in this book, each forming a separate
chapter, are the higher education sectors in Geffi1any and in the U.K, the
brewing sector in the U.K.,
and the mechanical engineering sector in Ireland. In addition, reflecting
the author's contention that ongoing reforms to U.K constmction industry have
the potential to address many of the barriers they identify elsewhere (at least
in the U.K.), and motivated mainly by comments obtained in the interviews
conducted for the case studies in the U.K. higher education sector, the book
includes an additional chapter that focuses on the UX constmction industry,
although without the benefit of the same type of survey and interview
information obtained for the other
sectors.
To provide a framework for the case studies, Chapter 2 is a stand-alone
methodological piece that develops a taxonomy of six
barriers to energy efficiency and identifies the causal mechanisms that
underlie these barriers. In developing this categorization, the authors
emphasize - and to my mind overemphasize, both here and throughout the
remainder of the book - the need to use ideas from transactions cost economics
and behavioural economics (mainly the concept of bounded rationality, which can
loosely be described as individuals not seeking out or using all available
relevant infoffi1ation when making a decision) as well as ideas from what the
authors refer to as orthodox orneo-classical economics. I don't believe this
distinction between the different areas of economic theory from which the ideas
are drawn to be important to, or even adopted by, a majority of economists, and
it is unlikely that non-economists would care. The authors, however, use this
distinction to emphasize that some of the barriers that they identify may not
be viewed as barriers in the orthodox sense since they are not market failures
and provide no grounds for policy intervention, while others may prove too
costly to overcome (p. 83). This seems like an overly strong simplification,
or
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188 Energy Studies Review Vol. 14, NO.1.
overly tight definition of barriers that is at odds
with the authors' earlier definition. Their definition of barriers, as repeated
in the opening sentence of this review, contains no reference to the need for
policy intervention, so this inclusion here seems misleading. In terms of
barriers being too costly to overcome, it is difficult to understand why this
might prevent something being described as a barrier, although it does raise
questions about what costs are included for a potentially energy efficient
investment to be described as 'economically efficient' in the first
place, as specified in the definition of barriers. Regardless of their origins,
the six barriers to energy efficiency are identified as risk, imperfect infonnation,
hidden costs, access to capital, split incentives, and bounded rationality.Each
of these barriers is discussed in some detail, including its nature and
determinants, and is interpreted using more formal economic concepts. In some
cases the discussion of a particular barrier identifies and describes several
components, such as with the imperfect inforn1ation barrier, which includes
imperfect information in energy service markets as well as asymmetric
inforn1ation and adverse selection in these markets. The discussion of this
barrier also suggests how these infonnation problems might be overcome, and
concludes with a very useful summary. These summaries, which occur in numerous
places throughout the book, are generally quite helpful at synthesizing a
number of different ideas. Chapter 2 concludes with a table that identifies
mechanisms through which energy efficient opportunities may come to be
neglected for each of the six barriers. The case studies in the following
chapters are interpreted in terms of this framework. The particular sectors
that are selected for the case studies differ in the predominant ways in which
they use energy, as well as in terms of the proportion of their costs accounted
for by energy expenditures. For the public sector organizations that dominate
the higher education sector, energy use is less than 2% of total costs, and is
primarily required for applications in building services, such as heating,
lighting and air conditioning. In process industries, of which brewing firms
are taken to be representative, energy use is mainly required for process
applications thatare specific to the sector, and comprises less than 5% of
total costs. In mechanical engineering firms, which are viewed as being
representative of light industry, energy costs comprise less than 2.5% of total
costs, and energy is required mainly for generic technologies such as
mechanical drives, furnaces, and space heating. As the
authors note, although the shares of costs attributable to energy are
relatively small in all three sectors, 'these types of organization
account for around 2025 per cent of final energy demand in OECD countries'
(p. 1I). Thus, to the extent that documented 'studies regularly
suggest that cost-effective opportunities to improve energy efficiency in these
sectors are widely
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available' they may be considered as prime targets by those concerned with
greenhouse gas emission reductions through improved energy use. The format of
each of the four chapters containing the case studies is very similar,
beginning with a description and overview of the sector that also includes
details concerning the pattern of energy use and energy costs, as well as other
information, the nature of which differs across sectors, on such areas as the
financial and organizational context, the decision-making procedure for
investments, the determinants of energy performance, and recent initiatives on
energy and environmental management. In the case of the U.K. higher
education and brewing sectors, this isfollowed by analysis of a postal survey
on energy management practices, technology adoption, and perceived barriers to
energy efficiency. It is unfortunate that similar surveys were not conducted
for the other two sectors, since the survey response rates (30% for U.K. higher
education and 53% for u.K. brewing) suggest that the information from the
surveys may be more representative of the sector than the (more detailed)
information from the five or so individual organizations in each sector on
which the remainder of the analysis is based. The focus of the analysis of the
mail surveys and case study organizations is on judging and explaining the
reasons underlying the overall perfornlance of the organization in terms of
energy efficiency. In terms of the mail out surveys, performance measures are
derived from self-assessment of variables such as technology adoption. The
authors note (p. 135) that this is 'subjective and indirect, but nevertheless
useful'. This seems like a somewhat self-serving evaluation, especially in
view of the biases that may have been introduced by self-selecting respondents,
and while information about how organizations view themselves may be of
interest (and I certainly found it so), it is difficult to envisage how this
could be used as the basis for policy prescriptions. The analysis of the
mail-in surveys is similar for both sectors for which these were available, and
is organized in several categories that include energy and environmental
management, energy information systems, investment inenergy efficiency,
technology adoption, and barriers to energy efficiency. Of these, perhaps the
most interesting are the last two sections. Technology adoption reports the percentage
of respondents that have adopted each of the relatively short payback period
energy efficient technologies or techniques that was included on an extensive
list tailored specifically to each sector. The barriers to energy efficiency
section provides a summary of respondents' perceptions of the importance of
each item contained on a similarly long tailored list of barriers to energy
efficiency that were phrased in terms designed to be meaningful to the survey
participants. While this list generally contains items that would be difficult
to dispute (Lack of time/other priorities, Technical risk, Lack of staff
awareness, Business/market
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uncertainty, etc.), some of the items seem strange.
For example, in the case of the u.K. brewing sector, the
most important barrier was 'Technology inappropriate at this site'.
It is difficult to reconcile this description with the definition of a barrier
as 'a mechanism that inhibits a decision or behaviour that appears to be both energy efficient and economically efficient'. The
infoffi1ation obtained in the interviews that were undertaken as part of the
case studies for three of the four sectors (the Irish mechanical engineering
sector analysis is structured differently)is usefully categorized under a
series of headings that generally include Organization, Energy and
Environmental Policy, Energy Information Systems, Accountability and Incentives,
Capital Budget and Investment, New Building and Refurbishment, Purchasing and
Policy Integration, Awareness and Culture, Energy Services and Outsourcing, and
Status of Energy Management. Following this discussion, the main barriers to
energy efficiency in each sector are identified and explained, utilizing the
framework that was introduced in Chapter 2. Each case study chapter then
concludes with a section on policy implications, focusing on how the barriers
may be overcome and energy efficiency improved, and an overall summary and
conclusions section. As might be expected, both the barriers and
recommendations differ from sector to sector. At the risk of
oversimplification, to the extent that there are recurring barriers (although
they are not always the most important), they would appear to be access to
capital and hidden costs, predominantly involving constraints on staff time,
which, it is argued, would best be remedied through changes at the
organizational leveL As the authors note, such changes are unlikely to occur
while energy costs and environmental perfoffi1ance remain a relatively marginal
concern. Chapter 7 summarizes features of the U.K.
construction industry, and highlights important barriers to energy efficiency
that appear to have been identified predominantly from the case studies of U.K. higher
education sector. The keyproblems that are noted here include transactions
costs associated with energy efficiency information, asymmetric infonnation
between contractors and clients or between subcontractors, lack of incentive to
minimize life-cycle as opposed to initial purchase and installation costs, and
severe time constraints which lead to the use of rules of thumb rather than the
specific detailed analysis that would be appropriate in particular circumstances.
The main recommendation here is for full integration of climate policy
objectives into building industry refonns that are designed to change the
organization of the industry. The overall results ofthe project
are summarized in a final chapter, while two appendices contain examples
of the questionnaire and interview protocols that were used. The authors
conclude that cost-effective energy efficiency opportunities are widely
available but that the typical definition ignores
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hidden costs and other barriers that may be of considerable importance.
Hidden costs and capital constraints are suggested as the main reasons for not
investing in energy efficiency in the case study organizations, although
evidence of the other four barriers identified in the taxonomy is found to
differing extents in the various sectors that were examined. The authors argue
that these barriers 'can be overcome if there exist
alternative institutional arrangements that can lower the net transactioncost
of improving energy efficiency' (p. 306). Desirable criteria for
organizational or public policy initiatives designed to improve energy
efficiency cost-effectively are identified, although it is noted that in view
of the barriers being 'multifaceted, diverse and often specific to
individual technologies and sectors' (p. 309), it is likely that a
co-coordinated policy mix will be required. Some directions for future research
are also suggested. Overall, this is a very interesting and generally
well-written book (apart from an obvious disconnect between pages 240 and 241)
that contains considerable information on why certain energy efficiency
initiatives are not undertaken in a wide variety of circumstances. Yet at the
end there remain a number of issues that are not resolved entirely
satisfactorily. First, in what sense can an energy efficient investment be
regarded as cost effective if there are hidden costs, no access to the required
capital, split incentives, bounded rationality, etc? To my mind, these are all
factors that act to make an investment not cost effective to those who are
making the actual decision, so that it is not surprising that it would not be
undertaken. Of course this observation does not detract in any way from the
authors' analysis of what these factors are and how they may be alleviated, but
it suggests that perhaps these so called barriers might be better interpreted
as factors that contribute to what appears to be a perfectly understandable
(albeit boundedly rational) decision not toproceed with an investment in a more
energy efficient technology. Similarly, rather than implicitly or explicitly
(Chapter 4) suggesting that money has been left 'on the floor' -
creating an energy efficiency gap - due to the non-adoption of certain energy
efficiency investment opportunities, and clearly implying a misallocation
ofresources, it may be better to interpret this 'gap' simply as an
opportunity cost, a measure of the extent of some foregone opportunity due to
actions that are not being taken, with no judgment involved about the
appropriateness of such actions. Second, and perhaps more importantly, the
authors do not address the question of why we would or should expect firms or
organizations to focus on energy efficiency. Many energy efficient techniques
or technologies with relatively short payback periods may be available, as this
book suggests, but presumably so are many other investment opportunities not
involving energy efficiency, and in some cases these may have even shorter
payback periods an example might be reorganization or restructuring of human
resources
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192 Energy SlUdies Review VoL. 14. /Vo. 1.
within an organization. Presumably the reason that we
care about fim1s not being energy efficient but we don't worry about them being
human resource efficient is that we are viewing them from a wider perspective,
due to concerns with climate change, for example. But if energy costs are
relatively small, sothat increasing energy efficiency will not have much effect
on the organization's bottom line, and if society regards increased energy
efficiency as important, why not address this issue directly by increasing the
costs of energy to these organizations in such a way or with such incentives
that they feel compelled to make the organizational and other changes that are
required to use energy more efficiently? There is a long tradition of concern
with barriers to energy efficiency, and as the authors point out in the
preface, 'Ultimately what is required are detailed empirical studies of
the nature, origin and operation of the supposed barriers to energy efficiency
in a wide range of energy service markets, together with evaluation studies of
the costs and benefits of different types of policy intervention' (p. 4).
The book delivers on these requirements, and in doing so admirably satisfies
its objective of contributing to the ongoing 'barriers' debate. It
provides an interesting, detailed, well-researched contribution that may indeed
help in accomplishing the authors' stated intention 'to build a bridge
between the energy economics community and engineering-based practitioners in
the energy efficiency field' (p.vi).
David Ryan University of Alberta
Edmonton, Canada.
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