Mind the Gap

Foreword

The imperative to improve energy efficiency is now stronger than ever. Energy efficiency must be one of the strategies employed to address the challenges of energy security, climate change, and economic development. The importance of energy efficiency has been reaffirmed by political leaders, particularly in recent meetings of the G8 Heads of State and the IEA Governing Board.

Acknowledgements

This book was coordinated and prepared by Philippine de T’Serclaes (Analyst) and Nigel Jollands (Senior Analyst) under the supervision of Richard Bradley (Division Head) of the IEA Energy Efficiency and Environment Division. Key contributors include Alan Meier, Jayant Sathaye, Emilie Jessula, Sartoru Koizumi, and others from various organizations such as the American Council for an Energy Efficient Economy (ACEEE), Ecofys, EC Group AS, Central Research Institute for Electric Power Industry, Lawrence Berkeley National Laboratory, and Energy Futures Australia.

Executive Summary

This book provides a detailed analysis of principal-agent (PA) problems, which are significant market barriers affecting energy efficiency. PA problems are prevalent in various sectors, including commercial offices, residential buildings, and end-use appliances. The book estimates that over 3,800 PJ/year of energy use is affected by such barriers, accounting for around 85% of Spain's annual energy use.

Introduction

The need to improve energy efficiency is crucial for addressing global challenges such as energy security, climate change, and economic development. Political leaders have recognized the importance of energy efficiency, and the IEA has consistently identified significant cost-effective energy efficiency potential.

Theory

Market Barriers to Energy Efficiency Improvements

The book focuses on principal-agent problems, which are variations of the "landlord-tenant" problem. These issues arise when one party (the agent) makes decisions that may not align with the interests of another party (the principal). This misalignment can lead to suboptimal energy efficiency outcomes.

Agency Theory and Principal-Agent Problems

Agency theory helps explain how PA problems occur and persist. In the context of energy efficiency, PA problems can prevent optimal energy use, even when the potential for cost savings is clear.

Methodology

The book uses a detailed methodology to analyze PA problems across different sectors. It includes case studies from five OECD countries in three sectors: commercial offices, residential buildings, and end-use appliances.

Commercial Sector: Case Studies

Principal-Agent Problems in the Commercial Offices Sector

• Japanese Commercial Office Space: Over 61 PJ/year of energy use is affected by PA problems.
• Commercial Offices in the Netherlands: Around 73 PJ/year of energy use is impacted.
• Commercial Office Space Leasing in Norway: Approximately 83 PJ/year of energy use is affected.

Residential Sector: Case Studies

Principal-Agent Problems in the Residential Sector

• Refrigerator, Water Heater, Space Heating, and Residential Lighting Energy Use: These appliances are significantly affected by PA problems.
• Space Heating in Rented Houses in the Netherlands: Around 123 PJ/year of energy use is impacted.
• Set-Top Boxes in the United States: The energy use of set-top boxes is also affected by PA problems.

End-Use Appliances: Case Studies

Principal-Agent Problems in End-Use Appliances: Vending Machines

• A Case Study on Japanese Vending Machines and Display Cabinets: Energy use in vending machines is significantly impacted by PA problems.
• Vending Machine Energy Use in Australia: Approximately 153 PJ/year of energy use is affected.

Conclusion

This work provides a comprehensive analysis of principal-agent problems and offers potential solutions to reduce these barriers and enhance energy efficiency. The findings highlight the significant impact of PA problems on energy use and underscore the need for targeted interventions to address these market failures.