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Policy uncertainty is key barrier to energy efficiency investments

8 August 2023
Financed by ASI seed money, researchers have identified policy uncertainty as the key barrier for Dutch organisations to energy efficiency investments.

Most firms require energy in some form, resulting in greenhouse gases and contributing to climate change. To reach climate targets, it is key to make more efficient use of energy. Figure 1 shows the primary energy use in The Netherlands from 1990 until 2021 and the Energy Efficiency Directive (EED) targets set by the European Commission for 2030. While the most recent Climate and Energy Outlook (KEV) (PBL, 2022) states that with current policies, energy use will only decrease with 11.9 percent, the EED targets and more ambitious revisions (EED revised and REPowerEU) will require larger reductions.

Meanwhile, many existing technologies are available that according to standard net present value (NPV) computations can be profitably employed, but are not being adopted by firms. This is the energy efficiency gap, introduced by Hirst and Brown (1990), and has resulted in studies investigating barriers to energy efficiency investments. We present insights from a questionnaire from October 2022, comparable to De Groot et al. (2001), which allows us to measure the energy efficiency gap in the Netherlands and make comparisons over time regarding relevant barriers to investment. The questionnaire was completed by 101 firms.

Of these firms, 70 percent have already invested in energy efficiency over the past 5 years. However, for the median firm, the potential, profitable energy savings or energy efficiency gap still is 15 percent. This suggest that there are ample opportunities to reduce energy use further. The picture above shows which barriers firms experience. We see that it is policy uncertainty that has become more relevant over the years. This suggests that firms are not necessarily helped by current policy instruments, as the expectation of future changes in policy may suggest that waiting to invest could be better than investing today. At the same time, of the firms that are subject to government policy on energy efficiency (38 in the sample), about 80 percent indicates that existing policies have not reduced uncertainty about future policies.

Looking at the policy context of the past years, this is a striking result, as energy efficiency has become increasingly important. It becomes apparent that uncertainty around current policies severely hinders investment in energy efficiency. In order to reach the set targets, additional policy measures are necessary (see for example the recent report of the working group led by Laura van Geest, Rijksoverheid, 2023). It may therefore be wise to consider carefully how to design the policy in such a way that it is transparent, not too complicated, and predictable, in order to reduce existing policy uncertainty among firms. In addition, policies should focus on addressing the barriers ranked as most important by the firms. The fact that in comparison to 1998 the importance of most barriers have increased, suggests that firms have already invested in the low-hanging fruits. Thus, in order to speed up the required energy efficiency improvements and stay on track to reach climate targets, it is important to address these barriers.

This project was financed by ASI seed money and you can find the published discussion paper here on the Tinbergen Institute website.

Project team: Sacha den Nijs, Leon Bremer, Bart A.G. Bossink, Lynn Bouwknegt, Henri L.F. de Groot, Mark J. Koetse, Gerard M. van der Meijden

De Groot, H. L. F., Verhoef, E. T., & Nijkamp, P. (2001). Energy saving by firms: Decision-making, barriers and policies. Energy Economics, 23(6), 717-740. Link.

Hirst, E., & Brown, M. (1990). Closing the efficiency gap: barriers to the efficient use of energy.                 Resources, Conservation and Recycling, 3(4), 267–281. Link.

PBL, TNO, CBS & RIVM (2022), Klimaat- en Energieverkenning 2022. Den Haag: Planbureau voor de         Leefomgeving. Link.