Ireland’s Energy Efficiency Obligation Scheme (EEOS) was developed, along with others in EU Member States, following the adoption of the Energy Efficiency Directive (EED).
Ireland’s Energy Efficiency Obligation Scheme is among 16 such schemes tin operation, and they have proven to be an effective and cost efficient means to implement policy measures to reduce energy consumption. There are considerable differences in the details of these schemes, but the objective, to save energy, is common across all.
Energy Efficiency Obligation Schemes work by placing obligations on energy distributors or retailers to impose fuel levies and use the funds that are generated to achieve energy savings through investments in training, insulation and other means.
Proposed Revision of Ireland’s EEOS
The schemes are due for renewal with new targets for the period 2021 to 2030 the Department of the Environment and Climate and Communications (DECC) has published draft proposals for the revision.
The issues arise form the proposal to identify the oil importers as the only obligated parties in relation to liquid fuels, and the proposal to set an energy saving target for the transport sector at 40% of the overall EEOS target. The Irish national authorities have considerable discretion under the EED in relation to both these proposals.
A consultation paper that was published by the DECC, and a background consultant’s report, provides only limited discussion of these proposals and there was no analysis of important implications should they be adopted.
The proposal that only importers be identified as obligated parties in respect of oil is based on administrative efficiency only. The proposal to assign a target of 40% of overall savings to the transport energy suppliers is based only on an argument that the target should be aligned with the share of transport in overall energy use.
While there is no doubt that there is need for policy in this area and that a well designed EEOS can play a valuable role, these arguments provide an extremely weak basis for these proposals.
Analysis and Main Findings
The study examined these proposals in terms of four criteria that are commonly applied when appraising proposed public policy interventions. These are:
- The rationale for the proposed course of action;
- Its feasibility in terms of the likelihood of a successful outcome following implementation;
- The social and economic efficiency of the policy; and
- The viability of the policy in terms of its likely impact on societal welfare.
The proposals mean that that obligated oil importers that supply to the transport sector would be allocated a savings target of 254 GWh in new savings each year, a cumulative total of 13,987 GWh for the full period. This is in addition to obligations in relation to oil used in other sectors.
The analysis in this report confirms the findings of other research that the low price elasticity of demand means that price incentives will not induce meaningful changes in behaviour over the course of the EEOS. An EEOS is simply not the appropriate mechanism to bring about change in this sector.
As a result, achieving the target would require that an increased levy be applied to oil used in transport with most of the funds that are generated then being used to purchase a large annual volume of energy savings credits that have been realised in other sectors.
This need to transfer resources from transport to other sectors in order to acquire the required credits would lead to a large, socially regressive transfer of funds. This would be ongoing and would transfer funds from lower income households to higher income households and businesses, and from rural areas, including agriculture, to urban areas.
This transfer would impose a cost on society and is in conflict with the objectives of Irish equality budgeting policy as set out in the Programme for Government. However, consideration of this social cost is specifically excluded from the cost benefit analysis (CBA) of the proposed EEOS revision that is included in the ECA report.
That CBA showed that the proposals in the DECC paper provided only marginal benefits with a benefit cost ratio in the range of 1.055 to 1.022. This is far too low to be considered definitive, but this is not discussed in the DECC paper.
In addition, certain adjustments are required to bring the CBA into line with the requirements of Ireland’s Public Spending Code and to include the social cost of regressive transfers. When these adjustments are made, it is clear that any net benefit disappears.
In summary, the study found that there is a clear rationale for the EEOS, but what is proposed is unworkable and fails the feasibility test. The proposals are socially and economically inefficient and involve a number of implicit assumptions that do not stand up to scrutiny.
The proposed redesign, if implemented, would not improve economic welfare and would run the risk of undermining an important element of Irish climate action policy. Together, these results mean that the proposed redesign cannot be considered to be optimal, or even desirable.
Revising Ireland’s Energy Efficiency Obligation Scheme
It is important to recognise that the EEOS is not a revenue raising mechanism and, as a result, the default principle, that taxation should be applied in proportion to consumption in order to be efficient, cannot be adopted as a guide to the optimal design of targets.
The objective is to realise energy savings as economically and socially efficiently as possible, and this must be integrated into the design. Consequently, the relative cost of achieving savings in different sectors should be factored into all target setting to achieve an efficient redesign.
The decision to identify oil importers as the only obligated parties in relation to oil supply has considerable negative implications for the feasibility of the EEOS. Achieving administrative efficiencies should not be prioritised over operational feasibility.
Finally, the social impacts of the EEOS, which are considered when targets are set for the residential and energy poor sectors, are totally ignored in relation to the transfers that will arise.
These costs must be included when appraising the welfare implications of any proposed redesign of the EEOS. It is clear that current proposals must be revised to reduce these costs if a positive outcome of the CBA is to be achieved.