Under perfect market conditions all additional needs for energy services are provided by the lowest cost measures, whether energy supply increases or energy demand decreases. There is considerable evidence that substantial energy efficiency investments that are lower in cost than marginal energy supply are not made in real markets, suggesting that market barriers exist. We first discuss barriers to the transfer of climate change technologies that apply to all economies, followed by a discussion of additional barriers that are of particular importance to developing nations.
Decision-making processes in companies are a function of their rules of procedure, business climate, corporate culture, managers' personalities and perception of the firm's energy efficiency (DeCanio, 1993; OTA, 1993). Energy awareness as a means to reduce production costs seems not to be a high priority in many companies, despite a number of excellent examples in industry worldwide (e.g. Nelson, 1994). Cost?effective energy efficiency measures are often not undertaken as a result of lack of information on the part of the consumer, or a lack of confidence in the information, or high transaction costs for obtaining reliable information (Reddy, 1991; OTA, 1993; Levine et al., 1995; Sioshansi, 1991). Information collection and processing consumes time and resources, which is especially difficult for small companies (Gruber and Brand, 1991; Velthuijsen, 1995). Especially in many developing countries and CEITs, public capacity for information dissemination is lacking, which suggests the importance of training in these countries, and is seen as a major barrier for technology transfer (TERI, 1997). The problem of the information gap concerns not only consumers of end?use equipment but all aspects of the market (Reddy, 1991). Many producers of end?use equipment have little knowledge of ways to make their products energy efficient, and even less access to the technology for producing the improved products. End?use providers are often unacquainted with efficient technology. In addition to a lack of information at least two other factors may be important: a focus on market and production expansion, which may be more effective than efficiency improvements to generate profit maximisation; and the lack of adequate management tools, techniques and procedures to account for economic benefits of efficiency improvements.
Limited capital availability will lead to high hurdle rates for energy efficiency investments, because capital is used for competing investment priorities. Capital rationing is often used within companies as an allocation means for investments, leading to even higher hurdle rates, especially for small projects with rates of return from 35 to 60%, much higher than the cost of capital (~15%) (Ross, 1986). In many developing countries cost of capital for domestic enterprises is generally in the range of up to 30-40%. When energy prices do not reflect the real costs of energy (without subsidies or externalities) then consumers will necessarily underinvest in energy efficiency. Especially for SMEs, capital availability may be a major hurdle in investing in energy efficiency improvement technologies due to limited access to banking and financing mechanisms, as was also shown in the evaluation of a Japanese energy audit programme for SMEs (Oshima, 1998). Energy prices, and hence the profitability of an investment, are also subject to large fluctuations. The uncertainty about the energy price, especially in the short term, seems to be an important barrier (Velthuijsen, 1995). The uncertainties often lead to higher perceived risks, and therefore to more stringent investment criteria and a higher hurdle rate. Lack of skilled personnel, especially for small and medium sized enterprises (SME), leads to difficulties installing new energy-efficient equipment compared to the simplicity of buying energy (Reddy, 1991; Velthuijsen, 1995).
In many companies (especially with the current development toward lean companies) there is often a shortage of trained technical personnel, as most personnel are busy maintaining production (OTA, 1993). In CEITs the disintegration of the industrial conglomerates may lead to loss of expertise and hence similar implementation problems. In most developing countries there is hardly any knowledge infrastructure available that is easily accessible for SMEs. In Brazil, the SEBRAE programme provides institutional and technical assistance for SMEs, financed through a federal industry tax. SMEs are often a large part of the economy in developing countries. Special programmes may alleviate this barrier (see below).
In addition to the problems identified above, other important barriers include (1) the "invisibility" of energy efficiency measures and the difficulty of demonstrating and quantifying their impacts; (2) lack of inclusion of external costs of energy production and use in the price of energy; and (3) slow diffusion of innovative technology into markets (Levine et al., 1994; Fisher and Rothkopf, 1989; Sanstad and Howarth, 1994). Regulation can, sometimes indirectly, be a barrier to implementation of low GHG emitting practices. A specific example is industrial cogeneration, which may be hindered by the lack of clear policies for buy-back of excess power, regulation for standby power, and wheeling of power to other users. Cogeneration in the Indian sugar industry was hindered by the lack of these regulations (WWF, 1996), while the existence of clear policies can be a driver for diffusion and expansion of industrial cogeneration, as is evidenced by the development of industrial cogeneration in the Netherlands (Blok, 1993). In addition, alternative models may be found important in focusing public policy on the need to raise end-user awareness and the priority to increase energy efficiency. This is likely to be an effective route to ensuring industry takes a comprehensive view of energy efficiency.
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