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Pay as You Save or Save As You Pay? An evaluation of on-bill financing models for energy efficiency improvements

Kloke, Sarah LU (2014) In IIIEE Master thesis IMEN41 20141
The International Institute for Industrial Environmental Economics
Abstract (Swedish)
This thesis aims to shed light on the impact of the so-called Pay as You Save® (PAYS ®) or on-bill programmes for energy efficiency improvements in the building sector. These programmes are based on an innovative financing model that was developed to overcome several barriers to the up-take of energy efficiency measures by households and businesses. From the consumer’s side, these barriers include high up-front costs often paired with a lack of available capital, inertia, disincentives due to long pay-back periods, risk aversion, split incentives between landlords and tenants and high transaction costs.
Despite increasing attention to innovative financing schemes for energy efficiency improvements, very little is known about the impacts... (More)
This thesis aims to shed light on the impact of the so-called Pay as You Save® (PAYS ®) or on-bill programmes for energy efficiency improvements in the building sector. These programmes are based on an innovative financing model that was developed to overcome several barriers to the up-take of energy efficiency measures by households and businesses. From the consumer’s side, these barriers include high up-front costs often paired with a lack of available capital, inertia, disincentives due to long pay-back periods, risk aversion, split incentives between landlords and tenants and high transaction costs.
Despite increasing attention to innovative financing schemes for energy efficiency improvements, very little is known about the impacts of on-bill programmes. To fill this knowledge gap, an analysis comprised of three steps is carried out. Firstly, the intervention theory of the original PAYS ® system, as it was developed by the Energy Efficiency Institute, Inc. is analysed. Secondly, in an ex-post evaluation the How$mart® programme in Kansas (U.S.) and the Green Deal (UK) are portrayed and compared to the PAYS ® intervention theory with regards to their effectiveness in overcoming market barriers. The programmes are also compared between each other, inter alia the sources and scale of administrative and transaction costs. Thirdly, identified lessons learned are transferred to the German context where the introduction of new market-based instruments, in which on-bill programmes could play a role, is currently debated.
The findings suggest that carefully designed on-bill programmes, and particularly a sub-group of programmes that offers the installation and financing of energy efficiency measures as a service instead of a loan, are able to overcome market barriers such as high up-front costs, lack of finance, or the split incentive dilemma. The research results also highlight several limitations including low participation rates, limited ability to work as a purely market driven instrument, and high rebound effects, particularly in low-income households, that reduce the applicability for those consumers most in need.
A prerequisite for unsubsidised on-bill programmes to have an impact is that the costs of energy efficiency measures as well as programme costs can be financed through energy cost savings. Policy-makers and programme operators should therefore focus on reducing transaction and administrative costs attached to on-bill programmes by implementing simple and streamlined programme designs. Seeking access to low cost capital is another crucial facilitating factor. (Less)
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author
Kloke, Sarah LU
supervisor
organization
course
IMEN41 20141
year
type
H2 - Master's Degree (Two Years)
subject
publication/series
IIIEE Master thesis
report number
2014:24
ISSN
1401-9191
language
English
id
4699056
date added to LUP
2014-10-22 12:59:24
date last changed
2014-10-22 12:59:24
@misc{4699056,
  abstract     = {This thesis aims to shed light on the impact of the so-called Pay as You Save® (PAYS ®) or on-bill programmes for energy efficiency improvements in the building sector. These programmes are based on an innovative financing model that was developed to overcome several barriers to the up-take of energy efficiency measures by households and businesses. From the consumer’s side, these barriers include high up-front costs often paired with a lack of available capital, inertia, disincentives due to long pay-back periods, risk aversion, split incentives between landlords and tenants and high transaction costs.
Despite increasing attention to innovative financing schemes for energy efficiency improvements, very little is known about the impacts of on-bill programmes. To fill this knowledge gap, an analysis comprised of three steps is carried out. Firstly, the intervention theory of the original PAYS ® system, as it was developed by the Energy Efficiency Institute, Inc. is analysed. Secondly, in an ex-post evaluation the How$mart® programme in Kansas (U.S.) and the Green Deal (UK) are portrayed and compared to the PAYS ® intervention theory with regards to their effectiveness in overcoming market barriers. The programmes are also compared between each other, inter alia the sources and scale of administrative and transaction costs. Thirdly, identified lessons learned are transferred to the German context where the introduction of new market-based instruments, in which on-bill programmes could play a role, is currently debated.
The findings suggest that carefully designed on-bill programmes, and particularly a sub-group of programmes that offers the installation and financing of energy efficiency measures as a service instead of a loan, are able to overcome market barriers such as high up-front costs, lack of finance, or the split incentive dilemma. The research results also highlight several limitations including low participation rates, limited ability to work as a purely market driven instrument, and high rebound effects, particularly in low-income households, that reduce the applicability for those consumers most in need. 
A prerequisite for unsubsidised on-bill programmes to have an impact is that the costs of energy efficiency measures as well as programme costs can be financed through energy cost savings. Policy-makers and programme operators should therefore focus on reducing transaction and administrative costs attached to on-bill programmes by implementing simple and streamlined programme designs. Seeking access to low cost capital is another crucial facilitating factor.},
  author       = {Kloke, Sarah},
  issn         = {1401-9191},
  language     = {eng},
  note         = {Student Paper},
  series       = {IIIEE Master thesis},
  title        = {Pay as You Save or Save As You Pay? An evaluation of on-bill financing models for energy efficiency improvements},
  year         = {2014},
}