C.C. Koopmans, D.W. te Velde r Energy Economics 23 2001 57]75 62
One final notion about the energy efficiency gap is worth mentioning. Some argue that neither point A nor points E and E
U
could be socially efficient. Such a social optimum can be attained if energy prices fully internalize the environmental
damages of energy use, and after the abolishment of subsidies on energy use. However, in this paper we abstract from the socially optimal level of energy
efficiency. We do not state which of the explanations of the energy efficiency gap call for government intervention. In this paper, we are merely interested in the
behavioral modeling of investing in energy efficiency.
3. ICARUS
The bottom-up database ICARUS contains information on energy-saving tech- niques in the Netherlands. It tries to assess the possibilities for energy saving in
Ž .
2000 and 2015 De Beer et al., 1994 . ICARUS has been a basis for environmental policy making from the early 1990s, and has since been updated on a regular basis.
Using ICARUS, scientists at the University of Utrecht have projected the energy use in 1990 on to 2000 and 2015 for given production growth at frozen efficiency,
i.e. the same energy efficiency levels. On the basis of an average firm in a sector, they have subsequently identified costs and energy savings potentials of all avail-
able energy savings techniques, which were not implemented in 1990. Life cycle costs include the initial investment costs, maintenance costs during the whole
life-cycle and other costs. It is possible to calculate which techniques are profitable in 2000 and 2015 at given energy prices and discount rates. From this, we can
Ž .
compute energy intensity levels at the sectoral level see Fig. 4 for an example . We have focussed on the demand side of the energy market, thereby abstracting from
the supply side options, such as cogeneration.
Ž .
Ž .
Fig. 4. Energy-intensity 1990 s 100 in 2015 in ICARUS at different energy prices p s 1990 price Ž .
and discount rates r ; fuel use in the food and drink sector.
C.C. Koopmans, D.W. te Velde r Energy Economics 23 2001 57]75 63
This bottom-up projection has a very serious limitation. ICARUS compares the Ž
. actual situation in 1990 point A in Fig. 2, Fig. 3 , reflecting a partial implementa-
tion of cost-effective techniques, with a situation of full implementation of cost- Ž
.
2
effective techniques in 2015 point E . Hence, predicting the location of point A for 2015, using only bottom-up information, is not possible. To make such a
prediction we would require additional information about the distance between the points A and E in 2015. In the next section, we present a model that explicitly
describes the difference between points A and E using vintages of capital goods and lagged behavioral reactions.
When we consider energy efficiency improvements over time, it matters whether existing capital can immediately be retrofitted after rapid price movements, or that
only new techniques and production processes gradually penetrate by scrapping old ones. In the medium-term, retrofit is the most important mechanism. In the long
run, new production processes and techniques determine energy efficiency by replacing existing capital that often has retrofit techniques added on.
Acknowledging the difference in techniques, we asked the makers of ICARUS to Ž
supplement the database with information on the type of investment Van Vuuren, .
Ž 1996 . ICARUS now distinguishes between new or replacement techniques e.g. a
. Ž
. new energy efficient car and retrofit techniques e.g. wall insulation . A third
category consists of good housekeeping, mainly reflecting labor intensive changes in energy management. As ICARUS was not designed to draw these distinctions
originally, some matters of definition remain. Consider for instance a new electri- cal central heating pump in an existing house: Should one classify this as a
completely new technique or as a retrofit technique? However, at the same time it
Ž .
sheds light on other issues: for instance, it appeared that retrofit on new future investments was not accounted for in ICARUS. Furthermore, it appeared that
some of the techniques regarded as retrofit techniques could also be implemented in new vintages, suggesting that the energy-saving potential of replacement tech-
niques should include part of the potential of retrofit techniques.
Another addition to ICARUS concerns a more detailed picture of the availabil- ity of techniques over time. We have asked the makers of ICARUS to discern not
only 2000 and 2015, but also 1995 and 2008. It appears that very few ‘new’ techniques become available after 2008. This raises the question of whether it is
possible to look beyond 2010 on the basis of bottom-up information available in 1990.
With some simple assumptions, ICARUS allows us to empirically determine the magnitude of the energy efficiency gap in 1995. Suppose that investors use a 15
discount rate in analyzing energy-saving techniques and assume that real energy- prices have been at the 1990 level. Then, ICARUS shows that 9 energy efficiency
Ž .
improvement excluding good housekeeping measures would have been profitable in the Netherlands in 1995 compared to 1990. However, empirical analysis shows
2
An exception applies to the government, services and households sector, where ICARUS accounts for partial implementation in the end year.
C.C. Koopmans, D.W. te Velde r Energy Economics 23 2001 57]75 64
that only some 5 has been achieved in practice, implying an energy efficiency gap of some 4.
4. NEMO Ž
