For the market to stimulate investments in energy efficiency, energy prices must reflect the full cost of providing energy to end users. While this is true for all end-use sectors, it is particularly relevant in the buildings sector, because of the political interest in keeping energy prices low to homeowners in countries with administered price systems. Where energy prices are subsidised, homeowners and commercial building owners and managers receive muted signals on the benefits of investing in efficiency, undercutting the potential market for energy-efficient products. In countries with administered price systems, the industrial sector often subsidises the housing sector. These cross-sector subsidizes can make industries less competitive. If the housing subsidies were paid by governments, taxes would need to be increased or funds diverted from other public services, such as education or health care.
A World Bank study of the effect of energy price increases in six countries--Columbia, Ghana, Indonesia, Malaysia, Turkey and Zimbabwe--found that eliminating subsidies does not cause disproportionate hardship for the poor, lower economic growth, create inflation or reduce industrial competitiveness, but does improve public revenues (Hope, 1995). The consumption of commercial fuel increases greatly with income, according to the study, so energy subsidies largely benefit non-poor, urban households. A study of subsidised household energy prices in transition economies also concluded that they benefited the rich more than the poor (Freund, 1995). One approach is a staged removal of energy subsidies, which creates a market for investments in energy-saving products and services.
The landlord-tenant relationship can create problems unique to the buildings sector when the landlord pays the energy costs, but has little control over the energy-using practices of the tenant. For tenants, if energy services are free, there is no incentive to use energy wisely. Technical problems may also make it difficult to make homeowners and tenants responsible for the energy they use. In many high-rise multifamily buildings, heat is delivered to apartments through vertical pipes, making it difficult and costly to try to measure the energy used by each individual apartment unit. In new buildings, this problem can be addressed by building codes that require that heating systems be designed to serve individual, metered apartment units.
Even in market economies, energy prices rarely include the full societal costs of related environmental externalities. These costs are reflected in adverse health impacts and environmental degradation. If the market mechanism is to exercise its full potential for achieving environmental goals, the price of energy needs to incorporate these environmental externalities.
The lessons learned from in-country technology transfer programmes also need to be recognised in international programmes. This is particularly important for countries moving toward market economies. During this transition, it is often useful to ask: Who is paying the energy costs?. Someone is. It may be municipalities through subsidies, industries through cross-sector subsidises, or energy supply industries through unrecovered costs. Whoever is paying these costs will have an interest in reforms. It is also useful to track the flow of energy from source to end use, to identify the changes in ownership, to metre the quantity of energy in each transaction, to measure the performance of each owner, and to move toward a system of rewards and penalties that improves the overall efficiency of the energy delivery system.
Multilateral and bilateral assistance programmes can encourage the movement to full-cost energy pricing by ensuring that any projects that are supported incorporate progress toward market reforms. The Russian Enterprise Housing Divestiture Project of the World Bank exemplifies this approach. The Bank is providing loans of US$300 million for basic energy efficiency measures in a total of 3,500 residential apartment buildings in six Russian cities. The participating cities are undertaking policy reforms designed to reduce housing maintenance and utility costs. The World Bank is also initiating a similar project in Lithuania.
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