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RTD Strategy Report

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RTD Strategy Report

    EnerBuild RTD Strategy Report (Rev. 3.2)

    31 March 2003

Co-ordinator:

    Professor J Owen Lewis

    National University of Ireland, Dublin Energy Research Group

    University College Dublin

    School of Architecture

    Richview, Clonskeagh

    IRL-Dublin 14

    http://www.enerbuild.net

Report prepared by Cian O‟Riordan

    EnerBuild RTD: Strategy Report

1. Introduction and Objectives ..................................................................................................................... 3

2. Structure of the Construction Industry and Implications for Research ....................................................... 5

    2.1 The Driving Forces: Security of Supply and Climate Change ............................................................. 5 2.2 The Importance of Energy in Buildings .............................................................................................. 5

    2.3 Market Failure and Energy Efficiency in the Building Sector and the Role of the EnerBuild Network .. 5 42.4 European Responses ....................................................................................................................11 2.6 Conclusion .............................................................................................................................12

3. State of Research and Future Priorities ..................................................................................................14

    3.1 Introduction .............................................................................................................................14

    3.2 Solar Technologies [Mats Santamouris, University of Athens]...........................................................15 3.3 Lighting & Daylighting (Prof. Marc Fontoynont, CNRS) .....................................................................24

    3.4 Mechanical Heating & Cooling (John Berry, Ove Arup) .....................................................................29

    3.5 Building Integrated PV (Peter Toggweiler, Enecolo) .........................................................................35

    3.6 Building Components (Peter Wouters, BBRI) ...................................................................................40

    3.7 Building & Urban Design (Koen Steemers, Cambridge Architectural Research) ................................44

4. Cross-Cutting Considerations .................................................................................................................49

    4.1 Health, Comfortable, and Safe Spaces for The People of Europe .....................................................49 4.2 Information Technology ....................................................................................................................56

    4.3 Dissemination & Technology Transfer ..............................................................................................65

    4.4 The EnerBuild Strategy: A Sociological Commentary (Elizabeth Shove, University of Lancaster) ......72

5. Assessment of Future Priorities & Activities necessary ...........................................................................76

    5.1 Introduction .............................................................................................................................76

    5.2 Review of above .............................................................................................................................76

    5.3 Pareto Voting .............................................................................................................................76

    5.4 Conclusion .............................................................................................................................78

6. Future Structures .............................................................................................................................83

7. Conclusion: Research and Energy Efficiency in Buildings .......................................................................85

Appendix A - References ............................................................................................................................86

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    1. INTRODUCTION AND OBJECTIVES

    The EnerBuild RTD Thematic Network aims to enhance cooperation and the exchange of knowledge between coordinators of building sector energy research and development projects supported in the European Commission‟s Fourth and Fifth Framework programmes. This RTD Strategy Report has been prepared for submission to the European Commission DG Research as one of the project‟s final deliverables. It draws on information gathered over the course of the 36-

    month EnerBuild project, at a series of meetings with project participants and workshops with industrial and research representatives not directly involved in EnerBuild; and on the specialist expertise of the EnerBuild Steering Committee members.

    The objective of this RTD strategy report is to examine and propose a development strategy and funding priorities for future RTD actions in the Building Sector based on the broad technical and economic experience, and market knowledge available among the project participants. The report seeks to answer a simple question: how can future RTD actions in the Building Sector contribute to the construction of more energy efficient and sustainable buildings?

    The report looks at different areas of building-related research, following the lines the project thematic groups and specialist research areas of the thematic group coordinators. This strategy is intended to be pragmatic in nature: it seeks to identify pathways of technical enquiry (being a strategic document, pathways of technical enquiry rather than specific research projects are identified) that are likely to have an actual market impact. Consequently, its fundamental approach involves “the strategic evaluation of contextually specific opportunities for success. The implicit goal is to identify efficient and effective means for creating and exploiting possibilities for increasing the energy efficiency of the built environment given the contours of the present social, economic 1and technological landscape”.

    Something that defines the nature of this landscape is the structure of the construction industry, and its fragmented nature this presents particular challenges for the dissemination and transfer of research technologies into buildings. Two particular contours in the current landscape are the EU Directive on Energy Performance in Buildings [COM (2001) 226], and the emerging EC Sixth Framework Programme (FP6).

    The report also examines social, comfort and information technology issues that impinge upon the research directions by drawing on studies undertaken by the EnerBuild network participants.

As this report features contributions from experts in specialist areas solar technologies, lighting

    and daylighting, mechanical heating and cooling, building and urban design, building components, photovoltaics in buildings, comfort, sociology, information technology, and dissemination and technology transfer the final sections seek to draw the various contributions together. In particular, we seek to identify the research areas and activities that we regard as particularly important to creating energy efficiency in buildings: these may cut across several of the specialist areas.

    Based upon the foregoing, the Fig. 1.1 illustrates the framework for this RTD Strategy Report: 3 of 89 31-Mar-03

EnerBuild RTD: Strategy Report

Fig. 1.1

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    2. STRUCTURE OF THE CONSTRUCTION INDUSTRY AND IMPLICATIONS FOR

    RESEARCH

2.1 The Driving Forces: Security of Supply and Climate Change

    In its Green Paper "Towards a European Strategy for Energy Supply" the Commission highlighted three main points:

     The European Union will become increasingly dependent on external energy sources;

    enlargement will reinforce this trend. Based on current forecasts, if measures are not taken,

    import dependence will reach 70% in 2030, compared to 50% today.

     At present, greenhouse gas emissions in the European Union are on the rise, making it

    difficult to respond to the challenge of climate change and to meet its commitments under

    the Kyoto Protocol. Moreover, the commitments made in the Kyoto Protocol must be

    regarded as a first step; climate change is a longterm battle involving the entire

    international community.

     The European Union has very limited scope to influence energy supply conditions. It is

    essentially on the demand side that the EU can intervene, mainly by promoting energy

    savings in buildings and in the transport sector.

2.2 The Importance of Energy in Buildings

    Buildings have a key role to play in addressing the security of supply and climate change issues.

    Buildings consume high proportion of EU primary energy: the total final energy consumption in the EU in 1997 was about 930Mtoe, with buildings accounting for approximately 40% of this.

    This total quantity of energy consumed, means buildings contribute highly to CO2 production. There are large national differences amongst member states, depending on climate and living standards. Economic growth and energy demand are closely linked.

The long lifetime of buildings 50 to 100 years means decisions made now regarding the energy

    efficiency and lifetime of new stock will have a significant impact on current energy demand (in the form of energy embodied in them during construction) and future energy demand (in the form of annual energy consumption and the cycle for replacement or refurbishment) over the long term.

    In addition, their long life means new buildings represent only 1-2% of the building stock and major improvements are needed to existing stock in the form of refurbishment.

    As regards energy in buildings that is used for heating, hot water, air-conditioning or lighting purposes, a savings potential of around 22% of present consumption is estimated to exist and can 3be realised by the year 2010.

    If the building sector meets the indicative target set out in the Commission‟s Green Paper “Towards a European Strategy for Energy Supply”, which is to improve energy intensity of final

    consumption by a further 1 % per year over that which would have otherwise been attained, the avoided energy consumption of over 55 Mtoe would contribute to around 20% of the EU Kyoto commitment.

    2.3 Market Failure and Energy Efficiency in the Building Sector and the Role of the

    EnerBuild Network

    (J. Peter Clinch, Department of Environmental Studies, University College Dublin)

I. Introduction

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    Many cost-benefit studies have demonstrated that improving energy efficiency in the building 1sector makes economic sense. Indeed, it is often shown that energy-efficiency measures pay for themselves simply by savings in energy costs. Added to this benefit is the economic value of reductions in emissions associated with fossil-fuel consumption. These reductions in environmental emissions may also assist countries or regions to comply with their obligations under international environmental agreements such as the Kyoto (global warming) and Gothenburg (acidification) Protocols and to comply with EU Directives. Improved energy efficiency in buildings has also been 2shown to have the potential to provide health and comfort benefits. These studies are consistent

    with the view of the European Commission that the building sector offers one of the largest single 3potentials for energy efficiency and should thus be a major focus for action. However, despite the

    positive net benefits of some of these energy-efficiency technologies and programmes, it is generally recognised that there is a sub-optimal take-up of such opportunities. The purpose of this paper is to examine why the market fails to ensure that society captures the net benefits of energy-efficiency opportunities, to explore the role of various policy instruments in addressing this problem, and to examine the role of EnerBuild in this regard.

II. Why does the market fail to deliver an optimal level of energy efficiency?

    The question arises as to why, if the benefits of the energy-conservation measures tend to outweigh their costs, these measures are not adopted. The principal causes are Market Failure and Government Failure.

Market Failure

    The first Fundamental Theorem of Welfare Economics builds on the observation of Adam Smith that, if markets are competitive, and individuals act in their own self-interest, a 'Pareto-optimal' equilibrium will be achieved where no one individual can be made better off without making someone else worse off. However, it is well recognised by economists that a market economy will fail to achieve optimal outcomes due to various market failures. Firstly, the market for a particular good or service may not be competitive. Secondly, the Theorem ignores the distribution of income and equity considerations. Third, the Theorem assumes no externalities. In reality, the actions of one agent in the economy may have real (non-monetary) consequences for the welfare of others. For example, the burning of fossil fuels to generate energy causes the release of various pollutants that impose costs upon those other than the energy consumer. The existence of 'externalities' will result in a suboptimal outcome if left unchecked. Closely related to the concept of externalities are those of 'property-rights failure' and 'missing markets'. These are particularly relevant in regard to the environment. In a market economy, goods and services are allocated by the price mechanism which reflects underlying supply and demand. Many environmental resources are not owned and so do not have a price (or are under-priced). If environmental goods (such as the assimilative capacity of the atmosphere) are under-priced, they will be overused thereby resulting in a suboptimal outcome. Public goods (such as national defence and some forms of R&D) which are either perfectly or imperfectly non-rivalrous and non-excludable in consumption will not be provided by the unfettered market. Market failures also result from imperfect information in the market which may lead to sub-optimal outcomes. A further difficulty results from principal-agent-type problems whereby the objectives of staff or shareholders differ from those of the management.

Government Failure

    Government exists to address these various market failures but may cause further distortions by its own behaviour. This usually results from perverse incentives being introduced by inappropriate pricing, by poor management or, in extreme cases, by corruption.

     1 For example, Pezzey (1984), Henderson and Shorrock (1989), van Harmelen and Uyterlinde (1999), Arny et al. (1998), Blasnik (1998), Brechling and Smith (1994), Goldman et al. (1988), Skumatz (1996), Clinch and Healy (2001). 2 See, for example, Clinch and Healy (2000). 3 Towards a strategy for the rational use of energy, EC COM(98)246 29 April 1998

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    III. Market and Government Failure with regard to Energy-Efficiency in Buildings

    Failures in the market and by government provide a number of impediments to the take-up of energy-efficiency opportunities in the building sector despite the results of cost-benefit analyses demonstrating the net economic benefits of such opportunities.

The private and social benefits and costs may differ

    A social cost-benefit analysis considers all the benefits to society of installing improved energy-efficiency technologies in the building sector. However, an economic agent (an individual, developer or firm) normally only takes account of the direct benefits to themselves, i.e. the private benefits of energy-efficiency measures. External benefits which are captured by wider society (e.g. reductions in environmental emissions) may not to be considered when a private individual is considering whether to invest in such measures. The payback periods and net benefits of various measures and programmes are adversely affected by the exclusion of non-private benefits. In addition, while some of the benefits may be private in nature, they may not be recognised or considered by those who benefit. Energy savings may well be considered but improvements in health, being non-monetary in nature, are often not known about or recognised when making financial decisions.

    Cost-benefit analyses exclude transfers. In addition, prices may be adjusted to reflect more closely the true opportunity cost of using resources. However, private agents face actual market prices and taxes and the cost of any labour required is the market wage (a cost-benefit analysis may reduce labour costs to reflect underemployment). Thus, the actual costs of adopting energy-efficiency measures may be higher than reflected in cost-benefit figures.

The private and social rates of discount may differ

    The consideration of time is usually of considerable import when assessing the net benefits of energy-efficiency technologies or programmes. There is no agreement on an appropriate figure for the social rate of discount which would be used in a cost-benefit analysis. Most such studies employ a range of discount and use a Government test discount rate (often around 5 or 6%) for the purpose of public policy recommendations. While this might be considered the appropriate rate for the social cost-benefit analysis, it is less applicable to the private agent. Those who are considering improving the energy-efficiency characteristics of a building are likely to carry out a financial analysis. The market interest rate is likely to be used in these calculations as it reflects the opportunity cost of capital. These rates may be somewhere in the region of 10% which would reduce the net present value of future energy savings and thereby increase the payback period and possibly result in a negative return.

Those who make the decisions may not reap the rewards

    In addition to the problem of external benefits being excluded, there may be market inefficiencies as regards the incentives for developers to adopt improved technologies. This can result because those making the decision as to whether to upgrade the energy-efficiency standards of a new building may not be the occupiers of the completed building. In some cases, the fixed costs of installing improved energy-efficiency technologies may outweigh the cost of traditional measures. The variable costs (the costs of running the systems) may be lower, i.e. there will be a payback period of a number of years. If the market were to work efficiently, part of this discounted saving (see below) would be appropriated by the developer. However, the market may fail in this regard, principally, due to information asymmetries. If the benefits of the technologies cannot be adequately communicated to the purchaser or renter of the building, there is little incentive for the developer to bear the fixed costs.

Principal-agent problems may exist

    Related to the above, it may well be that those who make the decisions regarding whether to install the better technologies or whether to rent or purchase a building which embodies these technologies, may not be those who occupy the building day-to-day. For example, if the management of a large corporation is not to occupy the new building, it may not adequately 7 of 89 31-Mar-03

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    consider the effects of its energy-efficiency characteristics on the work environment of the occupants. If the technologies have some health or comfort benefits, the extent to which this recognised by the management will depend upon how clearly they associate a healthy work environment with the productivity of the corporation.

The distribution of income may be an inhibiting factor

    Socio-economic considerations play an important role in relation take up of energy efficiency opportunities in the household / domestic sector. The least energy-efficient households are more 4likely to be lower income households Such households are much less likely to have available

    funds and, thus, are most likely to have to resort to a loan. They are less likely to be in the position 5of accessing credit (particularly at the market rate of interest)and they are more likely to have

    more pressing alternative uses for any extra funds. They may, additionally, have an aversion to borrowing funds, as has been reported by Salvage (1992). It has also been shown that low-income households tend to have higher discount rates, i.e. they exhibit myopic tendencies whereby they place a greater value on income now as opposed to in the future, partly resulting from the higher degree of uncertainty about the future stemming from their financial instability.

The public-good characteristics of innovation may result sub-optimal R&D effort

    Research and development can be a costly business for a private agent in the short term whereas the benefits, if there are any, may only arise well in the future. A high private discount rate and risk of failure will discourage R&D effort. In addition, inadequate patent protection may lead to aisk of the innovator being unable to appropriate sufficient benefits to reward their effort. This provides a rationale for state-aid for R&D.

There may be considerable information asymmetries

    With suboptimal R&D effort, we may simply be unaware of the opportunities for energy savings in buildings. Sometimes the full nature, extent and magnitude of the benefits of energy efficiency in the building sector are a matter for speculation. Even if the technologies have been invented, it may be that the economic analyse showing the net benefits of their implementation have not been completed. This is often presented as the necessity for public funding of R&D.

    An additional reason for state funding of research is because there is often a 10 to 20-year delay in between the dissemination of public knowledge and its eventual effect on industrial processes (US National Science Board, 1996) which affects the rate of return to R&D. The most extreme case would be in the domestic / household sector where there would likely be very incomplete 6knowledge amongst householders of the opportunities available. This information gap is likely to

    be greater in low-income households where the benefits would be greatest. In addition, an information asymmetry between buyers and sellers of energy-efficiency measures may occur, 7leading to adverse selection of such technology.

    If the market worked effectively, the monetary value of the energy-efficiency measures would be reflected in the value of the buildings and this would provide an incentive for the technologies to be implemented. Information asymmetries inhibit this function of the price mechanism.

Transactions’ costs

    Closely related to the information problem is that of the fixed costs of learning about, and administering, energy-conservation measures. Examples of transactions‟ costs include the time agents must spend to learn about the various options, oversee the work, deal with any disruption etc. Such costs are not reflected in Cost-Benefit Analyses. The amplitude of these transactions‟

    costs may overwhelm the potential pay-off of such an effort, acting as a performance-inhibiting „wedge‟ which prevents the implementation of cost-effective energy-conservation measures. These

     4 See Clinch and Healy (1999); Whyley and Callender (1997) Brechling and Smith (1994). 5 See Weber (1990) for more on this issue. 6 Lack of information is seen as a key reason for market failure in the UK according to Williams and Ross (1980) and Carlsmith et al. (1990) and in Ireland by Healy and Clinch (2003). 7 See Smith (1992).

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    transactions‟ costs are difficult to measure, but are potentially the key factors in explaining the slow

    take-up of financially viable measures, especially in the domestic sector (Convery, 1998).

Property-rights failure

    Tenants are not generally responsible for the energy-efficiency standards of the buildings they occupy. This is also a particular problem in the domestic / household sector. For example, some of the least energy-efficient houses in the UK and Ireland are tenant-occupied (Boardman, 1991; Brechling and Smith, 1992; Brophy et al., 1999). Tenants may feel that they are not responsible for

    undertaking investments in energy efficiency or authorised to do so, i.e. there is a non-appropriability of benefits. Indeed, it is not financially sound for a tenant to invest if they expect to move out in the short to medium term. Likewise, landlords may feel that the benefits to them of such investment may not be recouped if they are unable to raise rents. Also, if investment does take place in a multi-occupancy dwelling, „free-rider‟ incentives may exist in relation to the financing of this public good (Smith, 1992).

Government Failure

    The structure of government may contribute to the lack of take-up of energy-efficiency measures whereby, under institutional arrangements that prevail, there is no one institutionally or politically positioned to „champion‟ them. Policy responsibility for energy efficiency may be spread across a variety of ministries and agencies. In addition, there may be inadequate policy instruments to address market failures. Energy policy traditionally focused on supply-side interventions and neglected demand-side options. Without appropriate incentives to 'internalise' the externalities associated with energy use, such as via carbon taxes or emissions-trading systems, there is little incentive to take such environmental emissions into account.

IV. Policy Measures to Address Market Failure in regard to Energy Efficiency

    There are a number of instruments available to policy-makers to correct for market failure. These include:

Regulation

    Regulation, also known as command-and-control, endeavours to improve the performance of the market via the setting of standards e.g. building regulations. Non-compliance with a standard results in a penalty, usually in the form of legal action and/or fines. Regulation is likely to be most effective for new buildings where minimum standards can be set.

Taxes and charges

    Environmental taxes and charges are forms of market-based instruments. These instruments are put in place by a policy-maker to alter market signals to encourage or discourage certain activities or behaviour. A tax on energy generated from fossil fuels may be part of a strategy to reduce emissions of greenhouse gases. This would provide an incentive to invest in energy-conservation measures. However, energy tends to be price-inelastic and so, when the substitutes for energy generated from fossil fuels are limited, such a tax may not be effective unless combined with other policy instruments.

Tradeable permits and offsets

    Emissions Trading is also market-based instrument. Rather than being a price instrument (like a tax), it is a quantity-based instrument. In the Kyoto Global Warming Protocol, compliance with the greenhouse emission quotas can be achieved, in part, by purchasing from others who have a quota to spare. A price emerges for the permits which reflects the scarcity value of the environment. If such as system were introduced within a country, it would be important that the building sector be included in some way. However, the practical implementation of such a trading system might prove difficult.

Subsidies and tax relief

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    Removal of subsides, if any, on energy products would enhance the incentives for energy efficiency. Tax relief and grants for energy-conservation measures are other potential instruments.

Voluntary approaches

    A voluntary agreement (in place of an implied threat of alternative government regulation) by developers that information on the thermal specifications of buildings be included in sales literature would have had potential if it had not already been overtaken by the EU Energy Performance Directive (see below).

Institutional development

    While not a policy instrument as such, institutional issues are very important. Energy efficiency is usually the concern of a number of government departments. In order to mobilise the policy process, it is helpful if a focal point for energy-efficiency is established to reduce government failure.

V. The Role of EnerBuild in correcting market failure in energy efficiency

    The key role of the EnerBuild RTD Thematic Network is in reducing information asymmetries and encouraging R&D. Its core objective is to improve the flow of information on these potentials for improved energy efficiency in the building sector.

The stated objectives of the Network are:

     To deliver the results of past and current research to potential users in the most important

    sectors with the greatest dissemination potential, with the overall objective of reducing

    emissions and improving the energy efficiency of the built environment in Europe. To facilitate and encourage collaboration, co-operation and exchange among EC-supported

    research projects and researchers.

     To help maintain the technical and industrial content of future European energy-related building

    research and to contribute to the identifications of future research priorities. To form links with relevant targeted research and demonstration actions and other Thematic

    Networks with a view to maximising the effectiveness of the problem-solving effort. To minimise overlap and facilitate communications between national and EC-funded activities. To encourage the formation of new RTD partnerships between stakeholders in construction

    including industry, designers, developers and researchers.

     To evaluate the effectiveness of different strategies and media in disseminating RTD results

    and supporting innovation in the European building sector.

    EnerBuild therefore improves the R&D effort and its effectiveness so that we become aware of the opportunities for energy savings in buildings and associated environmental emissions reductions. Without these initiatives, the full benefits of innovation in energy efficiency will not be forthcoming. In addition, as mentioned previously, it has been shown that there is often a 10 to 20-year delay between the dissemination of public knowledge and its eventual effect on industrial processes. Initatives such as EnerBuild aim to reduce this 'transmission failure'. It also aims to reduce the adverse selection of the technology. The efforts of EnerBuild are consistent with the European Union's efforts to improve information flow with regard to energy efficiency in the building sector as demonstrated by the passing of the Energy Performance Directive on 17.11.02 which requires all member states to implement an Energy Certification Scheme for all buildings by 2006. This requires Energy Performance Certificates to be available when buildings are sold, let, substantially renovated and for such Certificates to be readily visible in buildings frequented by the public.

VI. Conclusion

    There are a number of reasons why economicall-efficient energy-conservation measures may not be taken up by private agents. These result predominantly from market failure in the form of differing private and social rates of discount, the fact that those who make the decisions may not 10 of 89 31-Mar-03

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