Different technological investment options are accorded different financial criteria according to the map imposed by the market structure in energy. In very broad terms, this market structure can be thought of as being determined by a wide variety of different factors including of course regulatory frameworks, tariff structures, ownership patterns, price regulation formulae and the structure of energy institutions. These factors in themselves are often influenced by 'softer' institutional and social factors such as historical preference, received wisdom, corporate practice and so on, as well as by less easily quantifiable but nevertheless economically significant factors like the availability of information and expertise. In other words, almost all of those factors which have frequently been identified as market barriers to the implementation of energy efficiency have a bearing on the structure of the energy market, and therefore on the map which allocates specific profitability criteria to specific technological options. There is also the factor of market uncertainty , i.e. the private sector tends to require higher discount rates than the government because it has less ability to determine the future economic environment.
Do all these factors have to be accepted as inevitable and immutable features of the energy market?
Obviously, the answer to this question is crucial. If the answer is to the effect that all of these factors are inevitable consequences of the operation of a perfect market in energy services, then there are no means of altering market structure in such a way as to remove impediments to energy efficiency improvements; and consequently no changes can be expected in the investment map determined by that structure. In this case, it will have to be accepted that the simple microeconomic analysis of technological preferences on the basis of a common social discount rate has no counterpart in the real world: it relates only to an unattainable ideal. As a corollary, there must in fact be some real economic factors (transaction costs) which can be identified to account for the differences between the apparent social preferences and the actual investor preferences, and these transaction costs must be the reason why the apparent social preferences are simply misguided.
On the other hand, if it is accepted that there are certain historical and institutional contingencies in the existing market structure, then this gives some encouragement to seek out opportunities to alter those contingent factors in such a way as to move investor preferences closer to the social preferences, and thereby unlock the vast apparent potential for improvement in energy efficiency. In other words, there is the possibility that certain kinds of broad structural changes in the market can increase the price elasticity of fossil fuel demand by easing the substitution of more efficient energy service supply chains. Such changes might include new regulatory requirements for buildings and appliances; changes in price regulation formulae; changes in ownership structure; the availability of innovative financing arrangements; improved awareness and education and so on.
In fact, a cursory overview of the possibilities immediately persuades us that there are very real opportunities for such change. For instance, the existing market structure maps private consumers onto investments in improved energy efficiency in the domestic sector (such as domestic appliances and lights). This mapping immediately allocates higher required rates of return for these energy service options, and obscures (Figure 10.4) the benefits which are apparent from the social perspective (Figure 10.1). But this is to some extent a contingent factor arising from the historical development of the fuel supply network. There is no a priori reason why energy utilities should not invest capital in energy efficiency except that, under the historical structure of the market, price regulation formulae have prevented them recovering the costs of such investments from consumers. A change in price regulation could free up low-cost capital for energy efficiency investments. This would have the effect of reallocating investors within the market structure map and radically altering the economic preferences between different energy service supply chains. Energy efficiency investments would once more be comparable with energy supply options on the basis of an equal rate of return, and the new energy structure will better reflect socially optimal choices.
Equally there are a number of other broadly structural changes which might be made, with the same effect. Energy efficiency standards in appliances, for example, have the effect of allocating industrial capital to the manufacture of improved energy conversion technologies. Building regulations allocate industrial capital to investment in the thermal structure of dwellings. These regulatory measures force capital into sectors of the energy services supply network which have been subject to over-high discount rates from a social point of view and offset the bias of the discount rate structure towards investments in fuel supply. There can also be cost advantages to be gained through implementing change at the design stage rather than in post hoc improvement.
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