UNFCCC CDM Joint Coordination Workshop 2007 End-Use Energy Efficiency – With or Without the CDM

1. UNFCCC CDM Joint Coordination Workshop 2007End-Use Energy Efficiency – With or Without the CDM Anne Arquit Niederberger Policy Solutions policy@optonline.net

2. End-use energy efficiency is crucial for climate mitigation, and Parties expect the CDM to promote it Thesis 1

3. Energy System Unsustainable + 100% IEA WEO 2006

4. Energy Efficiency Crucial 42 Supply – nuclear 10% Supply – renewables 12% Supply – power sector efficiency & fuel switching 13% --------------------------------------------- Demand – electricity end-use efficiency 29% Demand – fossil fuel end-use efficiency 36% 38 Reference Scenario 34 Gt of CO2 Alternative Policy Scenario 30 IEA WEO 2006 26 2004 2010 2015 2020 2025 2030

5. Benchmarking at Average Developed Country LevelEnergy-Use Intensity Convergence Luken, 2007

6. Save Energy NowPayback Periods* • 2 – 4 years • Modify steam turbine operation • Use oxygen for combustion • Change process steam use • 9 mo. – 2 years • Heat feed water with boiler blowdown • Lower excess oxygen • Flue gas heat recovery 2% • > 4 years • Install CHP system 17% 41% 40% • < 9 months • Improve insulation • Implement steam trap program • Clean heat transfer surfaces • Results from first 36 assessments

7. Alternative Policy Scenario:Energy Investment Change in Cumulative Energy-RelatedInvestment vs. Reference Scenario 2005-2030 3 000 Additional investment: $2.4 trillion (avoided fuel cost: $8.1 trillion) 2 000 1 000 0 Billion dollars (2005) $560 billion savings -1 000 -2 000 -3 000 Avoided supply-sideinvestment -4 000

8. Advantages of Meeting Energy Needs via Efficiency Policies • Energy efficiency… • is cheaper than – and substitutes for – new supply • can meet a significant share of demand • is faster to implement • reduces energy imports & dependence • lowers marginal energy costs • reduces local pollution • increases productivity

9. Barriers to End-Use Efficiency • Well-documented • Lack of capital • Lack of awareness/information/know-how • Retrofit risks and costs (e.g., production interruption) • Operational cost not considered in investment decisions • Energy not a strategic concern – not managed or rewarded • Pervasive • Persistent  Efficiency will not just "happen" – even with higher energy prices

10. Greatest – and most cost-effective potential – in developing countries Ancillary benefits (local air pollution mitigation) also greatest in DCs But individual end-users must decide to invest more in durable goods Massive need for regulation, incentives, capacity building Key questions: How can we get end-users to make the right choices? Can CDM be an effective instrument to finance end-use efficiency? Significance of WEO for CDM

11. The Kyoto Mechanisms have largely failed to stimulate end-use energy efficiency Thesis 2

12. Demand-Side Energy EfficiencyRegistered CDM Projects Total of 563 Registered Projects In terms of average annual CERs: << 0.5% (approx. 300 000)  Huge unrealized potential for demand-side efficiency

13. Approved methodologies for the types of energy efficiency programs that will have greatest impact are lacking Thesis 3

14. Demand-Side Efficiency CDMAreas of Greatest Opportunity • New installations/equipment (economic growth, unsaturated consumer markets) • Market transformation efforts • Industry (system design standards, energy management systems, voluntary commitments) • Buildings (codes & enforcement, labels, certification, design training) • Appliances & lighting (standards, labels, information, incentives) • Vehicle fuel economy (standards, manufacturer incentives, taxation) • Land-use and transportation planning  Not simple replacement of individual pieces of existing equipment

15. Example: Industry1000-Enterprise Program China • Targets largest industrial energy end-users • Total energy demand (2004): 19.6 EJ(33% of China’s total energy demand; nearly half of industrial demand) • Measures • Establish an energy conservation organization and formulate energy efficiency goals • Establish an energy utilization reporting system • Conduct energy auditing, formulate energy conservation plan and invest in energy efficiency improvement • Adopt incentives and necessary training • Goals formulated in terms of energy intensity benchmarks • Projected savings 2004-2010: 15%(100 million tce or 2.93 EJ)

16. Example: AppliancesAir Conditioner Standard Ghana • Comprehensive program to implement mandatory minimum energy efficiency standard within 1 year: • Build testing laboratory to ensure compliance • Ensure prerequisites, so that all products can be labeled • Information to retailers, distributors, wholesalers, customs officials • Training and capacity building • Mitigation (7 yrs): 3 Mt CO2e

17. Example: Utility DSMShared Savings Incentives USA • Utilities can increase tariffs to share NPV benefits of their energy efficiency programs • Requires third party measurement of energy savings and cost savings to society • Typical benefit/cost ratio: 3 to 1 • Encourage entrepreneurialism and identification of new/unforeseen opportunities for energy efficiency Source: Goldstein/NRDC

18. Real Efficiency Programs • Planning and zoning laws • Comprehensive market transformation initiatives (regulation, standards/codes, information, training, incentives) • Building codes (new, existing) • Rating and accreditation schemes • Equipment/system standards, labels (lighting, motors, standby, buildings, industrial facilities…) • Energy management systems/standards • Voluntary initiatives/programs

19. Effective EE programs Assume that real barriers exist Address capital cost barrier, even though cost-effective CDM process Barriers to be demon-strated for each project Tendency to equate profitability with non-additionality CDM Approach  Real EE Programs

20. 9 8 7 6 5 years 4 3 2 1 0 2005-2015 2016-2030 2005-2015 2016-2030 Road transport Electrical equipment in residential and commercial sectors Motors in industy Despite Short Payback Periods… OECD Non-OECD IEA WEO 2006

21. …Serious Barriers Exist • Example 1: Market penetration of high-efficiency industrial motors in OECD countries • Example 2: Cost-effective savings potential in household appliances amounts to 36% of total residential electricity demand in the OECD >70% <10%

22. Effective EE programs Assume that real barriers exist Address capital cost barrier, even though cost-effective Aim to transform markets, not provide incentives for 1-time technology change Often target systems and therefore involve multiple technologies CDM process Barriers to be demon-strated for each project Tendency to equate profitability with non-additionality Lack of guidance/ accepted approaches to attribute energy savings to programs PoA limited to single methodology, single technology CDM Approach  Real EE Programs

23. Why System Efficiency Matters System efficiency = 13% 15 kW motor efficiency= 91% Combined motor & pump efficiency = 59% Adapted from LBNL / Don Casada (Diagnostic Solutions)

24. Example: Glass Cluster Firozabad UNIDO • Income for half a million people • Very primitive, dangerous and inefficient technology • Annual emissions: 1 Mt CO2 • Mitigation actions: • Improve furnace design & burner efficiency • Introduce temperature, gas usage & pressure controls • Heat recovery • Reduction potential: 100‘000 tCO2 per year (333 tCO2 / unit) • Ideal for PoA, but does not qualify, due to mix of technologies

25. Effective EE programs Assume that real barriers exist Address capital cost barrier, even though cost-effective Aim to transform markets, not provide incentives for 1-time technology change Often target systems and therefore involve multiple technologies Find balance between robustness and practicality to deliver outcomes CDM process Barriers to be demon-strated for each project Tendency to equate profitability with non-additionality Lack of guidance/ accepted approaches to attribute energy savings to programs PoA limited to single methodology, single technology CDM Approach  Real EE Programs

26. Total Electricity Use, per capita, 1960 – 2001 kWh 14,000 12,000 12,000 U.S. 10,000 8,000 8,000 KWh 7,000 6,000 California 4,000 2,000 0 1960 1962 1964 1966 1968 1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000

27. The nature of dispersed end-use energy efficiency programs raises particular methodological challenges Thesis 4

28. Demand-Side Energy Efficiency CDM"Killer" Issues • Demonstrating additionality of projects that typically have short payback periods • Determining emission reductions for small, dispersed actions implemented under programs

29. Additionality & Investment Decision-MakingPerspective of Factory Owner Barriers to pre-mature replacement of existing, properly functioning equipment exist: • Capital cost of new equipment plus sunk cost (if existing equipment is not yet amortized) • Production interruption losses due to installation • Risk that new technology will not function properly from the outset • Lack of consideration of operating costs in investment decisions

30. Additionality for Demand-Side Efficiency • Demonstrating additionality of energy efficiency retrofits should be easy: • Additional capital cost (always for retrofits, often for new equipment / installations) • Non financial barriers well-documented, prevalent, persistent – even in OECD countries • Need straightforward guidance/tools to demonstrate additionality through barrier analysis • Checklist of relevant barriers to energy efficiency • Top-down determination of additionality, based on barrier analysis for important project types • Documentation requirements for other project types that can be met without new analysis

31. Quantification - Basic Approaches • Deemed values • Engineering algorithms (pre-defined) • Monitored parameters • Default parameters • Direct monitoring ex ante / ex post • Simulation models • Monitoring plans

32. Determining GHG Reductions from EESuggested Approaches • Top-down methodology guidance, drawing on good practice / existing protocols • Stipulated values of emission reductions for selected technology / systems • Pre-approved models/software programs • Top-down guidance/rules on gross-to-net adjustments (e.g., free riders / spillovers, rebound effects…)

33. Energy efficiency experts should play a much greater role in the CDM Thesis 5

34. What Can Experts Deliver?Systematic Methodological Framework • Baseline determination • Baseline adjustments (monitoring) • Routine (monitored independent variables, e.g., weather) • Non-Routine (e.g., change product line) • Gross-to-net adjustments • Free riders / positive spillovers • Secondary effects (e.g., leakage, rebound) • Reduced T&D losses project-level "gross" savings program-level "net" savings

35. What can EE Experts Deliver? • Systematic methodological framework • Good practice guidance, including recommendations on: • Appropriate methodological approaches for important project types • Deemed values, equipment lifetimes, load factors and other default values • Robust Key Performance Indicators for common project types

36. MERVC Activities for Energy Efficiency – Standards/Guidance

37. MERVC Activities for Energy Efficiency – Regulatory Programs

38. Australia NSW/ACT Greenhouse Gas Benchmark Rule (Demand Side Abatement) Italian White Certificate scheme UK Energy Efficiency Commitment US NOx SIP Call Set-Aside Program US State utility DSM programs (e.g., California www.cpuc.org/deer) Stipulated values for discrete equipment, such as CFLs, building technologies (e.g., insulation, windows), industrial motors DEER database of energy savings, equipment lifetimes and incremental costs for household appliances, lighting, motors… Deemed Values in Practice

39. Key Performance IndicatorsExample: Location Efficiency • Dependent variables • Automobile ownership per household • VKT per automobile • Determine impact of independent variables on KPI • Relationship likely applicable globally Goldstein/NRDC

40. Energy Efficiency ExpertiseEntry Points CDM • Existing channels • Calls for public inputs • Submission of proposed new methodologies • Desk Reviews • Proposed new interfaces • Independent Energy Efficiency Network, a "community of practice" that can provide unsolicited inputs or respond to requests • Energy Efficiency Working Group to be established by CDM-EB

41. Key Recommendations • Design PoA to work for end-use efficiency programs • Adopt appropriate simplified additionality rules that reflect well-documented, prevalent and pervasive nature of barriers • Reflect the nature of real energy efficiency programs • Begin from MERVC good practice for program evaluation • Adopt consistent methodological framework (baseline, baseline adjustment, gross-to-net adjustment) • Prepare (in a top-down fashion) methodologies, tools, guidance for demand-side energy efficiency, based on existing protocols / good practice • Tap expertise of independent efficiency expert network and/or create Energy Efficiency Working Group

42. Liu Jiang, Vice-Chair NDRC What we lack is not the technologies,but the mechanismfor technology diffusion and transfer… Large-scale infrastructure construction is underway in the developing countries; should obsolete – instead of advanced and climate-friendly – technologies be applied, we would expect a high greenhouse gas emission trajectory in the decades to come. We should not miss the best opportunity of protecting the climate system.

43. Summary of Theses • End-use energy efficiency is crucial for climate mitigation, and Parties expect the CDM to promote it • The Kyoto Mechanisms have largely failed to stimulate end-use energy efficiency • Approved methodologies for the types of energy efficiency programs that will have greatest impact are lacking • The nature of dispersed end-use energy efficiency programs raises particular methodological challenges • Energy efficiency experts should play a much greater role in the CDM