Renewable and Sustainable Energy Reviews 70 (2017) 968–975

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Renewable and Sustainable Energy Reviews

journal homepage: www.elsevier.com/locate/rser

Energy efficiency policy evaluation by moving from techno-economic MARK

towards whole society perspective on energy efficiency market
⁎
Vesna Bukaricaa, Željko Tomšićb,
a
Environmental Protection and Energy Efficiency Fund, Radnicka cesta 80, 10000 Zagreb, Croatia
b
University of Zagreb, Faculty of Electrical Engineering and Computing, Unska 3, 10000 Zagreb, Croatia

A R T I C L E I N F O A BS T RAC T

Keywords: Energy efficiency is recognised as a key strategy to tackle three energy-related challenges – climate change,
Energy efficiency energy security and economic development – at the least cost to the society. In the recent years of the economic
Policy making downturn, it gained even more relevance in the developed countries as there is more than ever the need to
Energy efficiency market decouple economic recovery and growth from energy consumption. However, despite this formal recognition,
Policy evaluation
energy efficiency remains the least understood and the most neglected feature of overall energy policy.
Model of barriers to energy efficiency
Despite the substantial efforts made to develop sound energy efficiency policies, the desired effects in terms
of achieved energy savings are lacking. The phenomenon is known as energy efficiency gap and its persistence
was the main driver of this research. The aim of the research was to examine the causes and propose solutions
for bridging the gap. Therefore, ideal policy making cycle is defined connecting design, implementation and
multiple criteria evaluation of policy instruments’ impacts in closed, repetitive loop. Concept of energy efficiency
market was introduced as a basis for policy making, enabling better understanding of the overall environment
where policy needs to be implemented.
Paper deals with the concept of energy efficiency market. It discusses the fundamental aim of energy
efficiency policy – to achieve market transformation towards more efficient products and services. It presents
market barriers that call for policy interventions, but upgrades the list of usually addressed barriers with
behavioural and societal aspects of energy efficiency related decisions.
Established methodology for energy efficiency market assessment includes upgraded model of barriers to
energy efficiency.
Focus of this paper is how to establish a model of energy efficiency market and to upgrade exisitng model of
barriers to energy efficiencies to describe the reality better as to be a basis for policy instruments design.

1. Background and problem definition
Energy efficiency is recognised as a key strategy for energy
sustainable development and main tool to tackle three energy-related
challenges: climate change, energy security and economic development
– at the least cost to the society. However, despite this formal
recognition, energy efficiency remains the least understood and the
most neglected feature of overall energy policy. This has been widely
discussed in the scientific literature for more than two decades. All
these studies provide the common typology of barriers causing the gap
and offer generic policy solutions for their removal. These solutions,
however, even when applied, are not delivering the desired level of
energy efficiency improvements. There is still gap in results between
policy planned measures are implemented measures [1,2].
Therefore it must be given primary consideration of energy
efficiency in national policies, and be integrated into mainstream
economic planning, local government and business development
processes in general. Governments have choices in how to approach
energy efficiency and which policies and measures to pursue. No
country can ignore the development, social and economic opportunities
that are being unleashed by relevant energy efficiency policies and
measures around the world [3].
There are two shortcomings of existing models of barriers to energy
efficiency. Firstly, they do not take into account the maturity of energy
efficiency market (in the paper, the term ‘energy efficiency market’ is
used as a concept introduced to be a basis for policy making), generally
assuming that it is developed enough but not functioning properly due
to identified barriers. In general, it denotes overall environment in
which energy efficiency policy is supposed to be implemented.
Secondly, and as a consequence of the first, the choice of policy

⁎
Corresponding author.
E-mail addresses: vesna.bukarica@fzoeu.hr (V. Bukarica), zeljko.tomsic@fer.hr (Ž. Tomšić).

http://dx.doi.org/10.1016/j.rser.2016.12.002
Received 5 September 2015; Received in revised form 28 April 2016; Accepted 3 December 2016
Available online 27 December 2016
1364-0321/ © 2016 Elsevier Ltd. All rights reserved.
V. Bukarica, Ž. Tomšić
instruments applied in a certain market with the aim of removing
barriers might be inappropriate, further maintaining the gap. Namely,
different instruments have different purposes and effects, hence are
appropriate at different market maturity levels and in different market
conditions.
To tackle these problems, firstly the model of energy efficiency
market needs to be established and methods for its analysis developed.
Only thorough analysis and understanding of brakes and levers market
participants are facing can provide policy makers quality information
on potential impacts of considered policy instruments.
2. Introduction to energy efficiency market
Market assessment is a starting point in policy making. However,
the concept of energy efficiency market is rather undetermined and
poorly presented in the relevant energy economics literature (e.g. [4,5]
or [6]). This should not be a surprise, as energy efficiency is not widely
considered to be a product having its sellers and buyers. Energy
efficiency may be considered purely as a feature of other products,
having their markets and subject to the laws of supply and demand.
This approach in policy making is sufficient if policies are aimed at
stimulating specific product markets. However, in the desire to create
comprehensive energy efficiency policy, aimed at creating changes and
shifts towards more efficient products, services, solutions and beha-
viours, an effort should be made to develop a general concept of energy
efficiency market and to model its functioning. This paper serves
exactly this purpose – to establish a model of energy efficiency market
and methods for its assessment. Recent studies show that there is limit
to market forces in improving energy efficiency [7].
2.1. Understanding energy efficiency market
The energy efficiency market is very specific with a quite gawky
quality - it is not exactly one market but a conglomeration of various
industries as diverse as appliance manufacturers, energy auditors,
smart meter software designers and cogeneration developers [8]. In
addition, energy efficiency market's supply side includes also various
institutions involved in financing and implementation of energy
efficiency projects (banks, investment funds, energy service companies,
service providers, design engineers, constructors, etc.) [9]. The demand
side of energy efficiency market includes project sponsors with ideas for
energy efficiency improvements (end-users, i.e. building owners and
renters, building managers, public sector institutions and local autho-
rities, industries). Therefore, energy efficiency market has a variety of
players with different backgrounds and as such is highly influenced by
behavioural, socio-economic and psychological factors that govern
market players’ decisions. All these influences have to be taken into
account when defining policy instruments for promoting energy
efficiency, i.e. the current development stage of an energy efficiency
market has to be evaluated.
The performance of energy efficiency market can be evaluated
according to the actual energy efficiency improvements delivered, i.e.
according to number of successfully implemented energy efficiency
projects. Basically, the energy efficiency market transformation de-
pends on the success of the project development process. Policy
instruments are used to stimulate demand for energy efficiency projects
and to lead the project from the inception idea to the actual
implementation. Development of an energy efficiency project goes
through various stages, from the very initial idea, until the final and
actual implementation of the project that operates and yields results in
terms of reduced energy consumption and emissions. So, if all the
stages in the project development from the initial idea through
evaluation of project's feasibility and cost-effectiveness to actual
financing and implementation of project are considered, this process
can be represented as a pipeline shown in Fig. 1. Due to various
barriers, only few of a variety of identified opportunities for energy
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Renewable and Sustainable Energy Reviews 70 (2017) 968–975
efficiency improvements reach the stage of a bankable project, becom-
ing actually implemented; hence the narrowed pipeline presentation is
chosen in Fig. 1.
For example Croatian experience shows that only few identified
opportunities for energy efficiency improvements actually reach the
stage of bankable project, becoming actually implemented. Thus, for
every stage in this process existing barriers must be identified and
support instruments designed to ensure project pipeline throughput.
Experience shows that not every support instrument is relevant for
every stage of the project development! And what instrument is
relevant for particular stage of project development process is deter-
mined according to the barriers that are preventing the shift to the next
stage. Important is to realize that the development of energy efficiency
market will be achieved only when actual energy efficiency projects are
“distilling” from the pipeline.
2.2. Assessing market maturity: model of barriers to energy
efficiency
According to neoclassical economic thought, the dominant main-
stream microeconomic theory applied today, observed deviations from
perfectly competitive behaviour of markets are caused by market
failures [10]. A market failure occurs when a market fails to work
efficiently to produce goods in a way that optimises benefits to society
[10] i.e. to increase the social welfare. Non-market failures, on the
other hand, are seen as barriers that are not in collision with market
behaviour viewed by economic theory, but are still impeding utilisation
of existing energy efficiency improvement potentials. Both market and
non-market failure can be put under the same umbrella of market
barriers. In markets not delivering socially desired results, e.g. energy
savings, there is a justification of policy interventions. Market assess-
ment needs to identify existing barriers for every stage in the decision
making process about investing in energy efficiency improvements, as
shown in Fig. 1, removal of which is to be ensured by appropriately
designed policy instruments. Some authors (e.g. [11]) argue that only
market failures require policy interventions, the others believe that
tackling non-market failures by policy instruments can achieve even
greater results. As the intention of this research was to identify a
comprehensive approach to policies for energy efficiency improvement,
both types of failures will be discussed and possible solutions for their
removal proposed.
2.2.1. Market failures
Competitive markets fail for four basic reasons: incomplete infor-
mation, public goods, externalities and market power (detailed theore-
tical elaboration of these facts can be found in [12] or [10]).
2.2.1.1. Incomplete (imperfect) information. Incomplete information
is the most widespread barrier preventing fulfilment of energy
efficiency improvement potentials. It affects both consumers and
producers, i.e. both demand and supply side of energy efficiency
market. When consumers are not given enough and quality
information about the effects of their energy related purchase and
behaviour decisions, they will not be able to weight these effects against
other factors governing their decisions. This will affect the energy
efficiency market in a way that the demand for energy efficient products
and services will be underdeveloped. The supply side will not be
triggered to offer innovative and more energy efficient products and
services; hence this will depress or at least slower further development
of energy efficiency. Effects of this barrier on the supply side of energy
efficiency market are the lack of financing from financial institutions
for energy efficiency projects, reluctance of designers to apply energy
efficiency criteria in their building projects, lack of energy services
offered in the market, etc.
V. Bukarica, Ž. Tomšić
Fig. 1. Understanding energy efficiency projects' development flow as a basis of energy efficiency markets [9,35].
Subcategories of imperfect information barrier are asymmetric
information and transaction costs. Asymmetric information barrier
occurs when parties involved in energy efficiency activity have different
levels of information (e.g. builders and potential buyers of the new
buildings; ‘landlord-tenant’ problem). Transaction costs problem oc-
curs when economic gains from improved energy efficiency are out-
weighed by costs of gathering, processing and applying information in
decision making process. Transaction costs may be considered as
opportunity costs of time spent to finding the right solution.
All types of imperfect information problems may be diminished by
policy instruments like energy efficiency labelling of appliances,
equipment and buildings, but also by strong promotional and educa-
tional activities.
2.2.1.2. Public goods. A public good is a good that can be made
available cheaply to many consumers, but once the good is provided to
some consumers, it is very difficult to prevent others from consuming it
- thus, the markets undersupply public goods [12]. Innovations in
energy efficiency that benefit the society at large can be considered a
public good [10]. Research and development (R & D) are crucial
activities to achieve advancement in energy efficiency. However, the
industries are often reluctant to invest in R & D and are waiting for
other to develop knowledge that would then benefit all, i.e. so called
free rider effect occurs. Therefore, policy instruments should ensure
that enough investments are made in R & D of energy efficiency
technologies. The most widely used instrument to mend this market
failure is concluding voluntary agreements with manufacturing
industries. Namely, the EU has made several such agreements with
industries in order to deliver more efficient appliances to the European
and world markets, e.g. to reduce stand-by losses of televisions, VCR
and DVD players, to reduce energy consumption of domestic washing
machines and of refrigerators and freezers [13].
2.2.1.3. Externalities. Energy markets are still not adequately
addressing externalities like adverse environmental and human
health impacts as well as political instabilities related to energy
supply (lives lost in energy resource wars). The energy price
structures which internalise negative externalities of energy
consumption would be probably the most powerful signal for
boosting energy efficiency, i.e. it will trigger both demand and supply
for energy efficiency products and services. The most widespread way
for removing this market failure is imposing various environmental
and energy fees/taxes. However, usually they are only imposed to large
consumers (e.g. industry), while the vast majority of small, individual
consumers, that are responsible for more than 40% of energy
consumption are left untouchable. If consumers do not bear the full
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Renewable and Sustainable Energy Reviews 70 (2017) 968–975
costs of the effects their energy use fosters, they are not at all
stimulated to take care of their energy use patterns, resulting in
much higher energy consumption then socially desirable, i.e. higher
then social optimum. On the other hand, the usage of energy efficiency
technologies has also positive externalities to the society in general in
terms of reaching energy security and climate change mitigation goals.
However, these external societal benefits are also not being widely
enough internalised - tax credits for energy efficiency improvements
have huge potential to remove this failure. And finally, the
internalisation of externalities could also be reached by increased
awareness of consumers, i.e. with the rising demand for socially
responsible and environmentally friendly products and services.
Consumers' purchasing power will push supply side to offer more
efficient products and services. The individual consumer with huge
market power and ability to make real change is public sector.
Application of energy efficiency and sustainability criteria in public
procurement will have direct impacts in terms of environmental (e.g.
buying “green” electricity will reduce CO2 emissions), financial (life
cycle costs of energy efficient products/services are generally lower
than for inefficient once) and social (e.g. stimulating local producers)
improvements and moreover, purchase decisions made by public
authorities can influence the whole market [14]. And finally, legally
imposed energy efficiency minimal standards are also a tool for
removal of this market failure, proved to be very efficient in “forcing”
industry to find innovative solutions.
2.2.1.4. Market power (imperfect market structures). “Energy is a
commodity as any other and should be traded in a competitive
market” - although this has become a mantra of the past decades
that were denoted with the energy market restructuring and
liberalisation, a completely free utility markets are still not achieved.
Namely, in the perfect market competition, there are number of market
players and no buyer or seller can influence the price. However, energy
sector was historically monopolistic system. Although significant efforts
in liberalisation process were made, still governments are exercising
wide-scale regulation to reduce negative effects associated with the
exertion of market power [10]. Apart from lack of competition in the
market, imperfect market structures include also a way in which
electricity prices are structured by electricity producers and
regulators. Namely, utilities are still selling a commodity, like
electricity, and not service such as light, heat or mobility. Therefore,
the electricity industry is incentivised to sell as much electricity as
possible and not to offer a high-value service in the most
environmentally acceptable way. What is even more problematic is
that in some countries, regulatory agencies are financed through
electricity prices, which is a serious obstacle for any energy efficiency
V. Bukarica, Ž. Tomšić
and demand management efforts. And finally, electricity prices are not
structured properly. Namely, electricity should be delivered to the
consumers at a specific location and in specific time of demand. Since
the prices consumers are paying are typically based on historical
average costs, it was frequently suggested that consumers faced
inadequate incentives to save energy. To simplify, if the consumers
were aware of the electricity price in a given moment (e.g. high prices in
times of load peaks), it would be expected that they would act
differently and perform demand management activities by
themselves. Therefore, short-run marginal costs of electricity
production and transmission should be reflected in the electricity
price. Not an easy task at all, but efforts should be made to send
right price signals to consumers that reflect changes in electricity costs,
which could lead to more energy efficient consumption patterns.
2.2.2. Non-market failures
There are few more issues that hinder wider adoption of energy
efficiency technologies and practices. They cannot be addressed as
market failures, but still causes the energy efficiency gap, i.e. gap
between actual and optimal energy use [11]. These non-market failures
and policy interventions for their removal are discussed hereafter.
2.2.2.1. Lack of access to capital. Relevant literature very often points
out lack of financing opportunities for energy efficiency as a main
barrier. However, this is actually not market failure - it is rather a
consequence of the existence of imperfect information on the supply
side of the market, leaving banks reluctant in financing such projects
due to lack of understanding and knowledge on energy efficiency in
general. Anyhow, it is a real barrier to energy efficiency and as such
deserves policy efforts, since lack of capital may make it difficult or
impossible to invest in energy efficiency, regardless of desire. Financial
aids are one of the solutions. These have to be designed carefully to
avoid free riders effect. Regarding the banking, no business is more
profit oriented then banks. They will find their interest in financing
energy efficiency projects themselves, without any policy interventions.
Banks are able and willing to provide financing for commercially viable
energy efficiency projects, but there needs to be sufficient market
demand for financing such projects [15]. The role of the policy is
creating a critical demand for such bank services, which will be
accomplished by providing consumers with complete information and
other measures for removing market failures. Furthermore, efforts
should be made to stimulate development of ESCOs (Energy Service/
Saving Company) that will be able to finance energy efficiency
investments and to make it a profitable business with, at the same
time, positive effects to the society as a whole. Legislators should
enable transformation of utilities to become energy service companies.
They will implement energy efficiency improvement measures in their
consumer's homes. They will then recoup the costs of such
improvements in instalments that are included in the consumers'
monthly bills (which will show the costs for energy efficiency
measures, along with the costs of energy itself - which will fall) [16].
This approach should become the default utility service and with the
new Energy Efficiency Directive (EED) [17], the EU is moving in this
direction.
2.2.2.2. High discount rates. Cost-effectiveness of energy efficiency
projects is dependent on future energy costs, which are uncertain;
hence, higher discount rates are used in the decision-making process.
Uncertainty is not a form of market failure in and of itself [11]. It is
very reasonable to take into account uncertainty of an investment into
calculation of its feasibility and profitability, and it is done exactly
through discount rate. Many studies have dealt with the issue of
consumers’ discount rates. The findings suggest that general discount
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Renewable and Sustainable Energy Reviews 70 (2017) 968–975
rates of energy efficiency investments for residential consumers were
high at around 20–30% which translates into short payback period of
roughly 3–5 years [18]. Clearly, these discount rates far exceed market
interest rates. The divergence between the interest rates and the
observed discount rates illustrates that market is not in equilibrium
and that people's welfare would be improved by borrowing to finance
investments in energy efficiency [19]. It is additionally very interesting
to note that discount rates fall with the increase in income, implying
that low-income consumers tend less to invest in energy efficiency. The
same could be broaden to the country level - poor countries tend to
have high (social) discount rates due to high risk premium in the
financial market, the scarcity of capital, the high leverage of debt and
political instability [19]. The statement is easily confirmed by the
energy statistics and energy intensity indicators, showing that, as a
general rule, less developed (or poorer) countries are more energy
intensive. On the other hand, if energy efficiency is seen as a means to
fight climate change and to avoid possible catastrophic consequences,
some authors argue that social discount rates should be set low,
perhaps as low as zero [10]. Anyhow, as long as there is a
discrepancy between two discount rates policy interventions are
needed. They should work to reduce the costs of energy efficiency
improvements, making a positive return more likely and increasing
positive returns on investments [10].
3. Moving from techno-economic towards whole society
perspective
3.1. Upgrading model of barriers to energy efficiency: importance of
social (inter)actions
The existence of market barriers causes well known phenomenon
called ‘energy efficiency gap’ or ‘energy paradox’, which has been
abundantly discussed in the academic literature (e.g. [19,20], [21–23]
and [24]). The ‘gap’ has been defined as the paradox of the gradual
diffusion of apparently cost-effective energy efficiency technologies
[11]. As explained by Eyre [25]:
Investment in energy efficiency is consistently observed to fall short
of levels which informed analysts assure policy makers is both
possible and economical.
Based on the thorough literature review and the above discussion of
barriers, typical approach in modelling barriers to energy efficiency and
offering universal solutions is summarised in the Table 1.
Most recently, the ‘barrier’ approach has been criticised by sociol-
ogists for two main reasons.
First, the term ‘barriers’ connotes an individualistic view of action
[26] that should be reconciled with a top-down approach [27], i.e.,
governments have a legitimate part to play in supporting efforts to
correct these and other market imperfections [28].
Second, the term ‘barrier’ suggests that they can be 'jumped over’
one at a time, which does not reflect the interactions between them
[29]. Therefore, several other terms have been suggested, e.g., ‘brakes’
[30], to account for the socio-technical context in which energy-related
practices and changes take place. The use of the term ‘brakes’ is hereby
suggested, as it conforms to the author's belief that social roles and
interactions are just as important for the success of energy efficiency
policy as technical, economic and behavioural considerations. In this
respect, society must continually and simultaneously ‘release of the
brakes’ to change energy-related behaviours, rather than ‘jumping over’
individual barriers one at a time.
The gap, as originally defined, implies the existence of several
energy savings potential categories. Technical potential is not achiev-
able due to the lack of cost-effectiveness, while the remaining economic
V. Bukarica, Ž. Tomšić Renewable and Sustainable Energy Reviews 70 (2017) 968–975

Table 1
Standard model of barriers to energy efficiency.

Typical model of barriers to energy efficiency based on neoclassic theory of perfect competitive market

Barriers Typology Effects Solutions

Incomplete (imperfect) Market failures Affects both demand and supply side of EE market leaving the
information (imperfections in market demand underdeveloped and supply side disinterested;
functioning)
Principal/agent problem - occurs when a possessor of
information is unable to convey it credibly to the final
beneficiary (e.g. building landlord/tenant).
Public goods Market failures Energy efficiency serves the public as it delivers better living
(imperfections in market conditions, less environment pollution and lower energy costs
functioning) (cont.) – however, markets tend to undersupply public goods as they
are unpriced.
Externalities Energy price does not reflect the adverse environmental and
human health effects of energy consumption nor impacts of
political instabilities related to energy supply;
Positive externalities of improved energy efficiency should also
be taken into account.
Market power Remains of monopoly in energy sectors prevent development
(imperfect market of truly competitive energy markets and restructuring of
structures) utilities to become energy service companies;
Improper structures of energy prices based on historical
average costs and not on short-run marginal costs.
Incomplete markets Non-market failures (problems Energy efficiency is not a product itself, but an attribute of a
with market development) product intended to provide some other service – energy
efficiency is not treated as an optional item (as a consequence
of imperfect information).
Access to capital Low credit worthiness of companies/individuals makes it
(liquidity difficult or impossible to invest in energy efficiency.
constraints)
High discount rates The risks related to the return of investments are taken into
account through higher discount rates implemented in
profitability calculations of energy efficiency projects.
Dedicated promotional and informational
campaigns and tools (lowers transaction costs
related to information gathering);
Energy labelling of appliance, equipment, buildings
and cars;
Informative billing and smart metering;
Technical assistance programmes (energy auditing)
Government support and public –private
partnership to R & D of energy efficient
technologies;
Education and training programmes;
Voluntary agreements with manufacturing
industries
Correct energy pricing and taxation;
Environmental fees;
Tax credits for energy efficiency investments;
Minimal efficiency standards;
Utilising purchasing power (green public
procurement and consumers' awareness)
Full liberalisation of energy markets;
Smart metering and real-time pricing;
Smart appliances
Implementing market
transformation programmes;
(Revolving) funds (as initial driver of demand for
energy efficient solutions);
Stimulating energy services (ESCO) market
Feed-in tariffs for energy savings;
White certificates

potential is not achievable due to the existing brakes classified in one of
the categories specified in Table 1. This economic potential is contained
in the definition of the gap and is also a basis for establishing policy
targets. Market forces will achieve some of the economic potential. The
utilisation of the remainder needs to be stimulated by public policy,
hence we may call it ‘policy potential’ (which corresponds to estab-
lished policy targets). However, the typical policies, which address the
brakes and provide levers based only on examination of market
barriers (market failures and non-market failures), are failing to
achieve this potential/target. Therefore, the term ‘social potential’ is
introduced, implying that existing policies are failing to meet expecta-
tions due to lack of understanding and appreciation of the social
context in which energy related behaviours and decisions occur. The
relationship of these potentials and brakes is presented in
Fig. 2.Therefore, it is reasonable to raise the following question

Fig. 2. Different levels of energy efficiency potential with corresponding gaps.

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V. Bukarica, Ž. Tomšić
Table 2
Upgrades of standard model of barriers to energy efficiency based on sociological and behavioural studies of the market.
Barriers Typology Effects
Bounded rationality Behavioural Optimal decisions will not be made regardless sufficient information
provided due to reasons not strictly related to cost-effectiveness (consumers’
preferences);
X-efficiency Low share of energy in total costs;
Energy not perceived as manageable cost or as a strategic option;
Cooperation and Social Lack of (visible) political will to implement adopted strategies
communication Lack of public participation in policy making
Lack of public dialogue
Incomplete/unclear regulatory framework
Does the gap actually exists or our level of knowledge is not
sufficient to precisely predict expected energy savings?
Sociologists insist that, in practice, brakes to energy efficiency
improvements are much more complex than the theoretical techno-
economic and psychology based typology offered in Table 1. Linking
the technical, financial, organisational, behavioural and social aspects
of interaction in an unbreakable whole, and hence demanding tailor-
made solutions (Table 2). An appreciation of stakeholder interactions,
and the overall social context of energy savings, is missing in energy
efficiency policy making [24]. Beginning from the perspective that
energy consumption belongs to the realm of technology, while energy
savings belongs to the realm of society [20], a transition from an end-
use sector oriented energy efficiency policy, while addressing the
prevailing technical solutions, might be required to stimulate energy
efficiency on a larger scale.
This thorough literature review on the energy efficiency gap
indicates that it is very likely that no single approach – techno-
economic, psychology or sociological – is sufficient to explain the
gap. While in some aspects of everyday life, such as business manage-
ment, concepts from the microeconomic theory of the market may be
relevant for understanding energy-related decisions; in other aspects,
factors such as social norms and interactions (networks), motivations
and attitudes often drive energy-related behaviour. Therefore, for
overall market assessment and understanding it is required to inves-
tigate the brakes and levers as perceived by stakeholders (attitudes)
while accounting for the overall social context in which energy-related
behaviour occurs. For the purposes of the research provided in this
paper, the concepts from both behavioural psychology and especially
from sociology research are embraced (Table 2).
3.2. Behavioural aspect of energy efficiency
While market failure serves as an important barrier to energy
efficiency uptake, so do the characteristics of human behaviour [40].
Literature on human behaviour reveals many entry points for the
inclusion of ‘behavioural insights’ in the design of energy efficiency
programmes [40,41]. As stated in [42] growing body of evidence in
academic literature demonstrates that there is potential for energy
savings due to measures targeting behaviour.
There is a need for detachment from the neoclassical market theory
in policy making and for thorough behavioural studies of both firms
and individuals to better formulate the policies. The assumption of fully
rational behaviour does not apply to the real world. People are
constrained by their psychology and ratio in making optimal decisions,
i.e. even with all proper information available they do not have
capacity/time/will to make calculations that will lead to the most
energy efficient decision. This phenomenon is known as bounded
rationality. In general, people tend to make every decision to achieve
satisfaction, which does not necessary has to be optimal. Moreover,
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Renewable and Sustainable Energy Reviews 70 (2017) 968–975
Solutions
Creating energy and climate literacy (a top
educational priority in schools and in the public
discourse)
Inducing stronger political and management support
Political and institutional leadership
Public sector ‘lead-by-example’
some global problems are beyond human comprehensions, e.g. climate
change. Most of us did not actually experienced severe and catastrophic
consequences of climate change, although some of recent events are
changing the perception of the problem. People do not understand the
connection of their energy consumption patterns and climate change,
while if they have experienced some energy crises, they do partly relate
it to security of supply. People are not relating their energy consump-
tion patterns with wars led over energy sources. So, if such a
connection cannot be made, then people are not able to rationalize
their behaviour, especially since the problems are so huge that their
personal contribution might seem insignificant. In this case, strategy
for energy efficiency policy might be moralisation, which implies
convincing people that they should protect collective environmental
qualities (despite it may also involve some individual costs), and that
their contribution will be socially helpful [31]. Information currently
provided to the consumers through labelling, advising and campaign-
ing seems to be insufficient as they tend not to intrude in peoples’
personal sphere [32]. These standard information packages need to be
complemented with wide social discussions, energy efficiency ‘preach-
ing’ and integration in mainstream education system.
The concept of bounded rationally could be applied to firms as well
– unlike in neoclassic theory, in the reality the firms might be internally
inefficient, i.e. they might operate in the point that is not profit-
maximising and cost-minimising. The phenomenon is known as X-
efficiency [10]. The reasons again lie in the behavioural patterns of
individuals working in the firm, their relationships and overall
organisational set-up, business strategies and operational practices.
In that respect, energy efficiency may not have the same weight in
decision making process as some other aspects of business, leaving the
cost-minimisation potential idle.
3.2.1. Social aspect of energy efficiency
Individuals have the real power to change their behaviour and
induce energy savings in energy-use sectors, eventually closing the gap.
They are to do so by playing their social roles (e.g. members of political
parties, officials, business managers or workers). There is strong belief
that social interactions within and between main social stakeholders’
groups could be a strong driver of this change. This was exactly the
hypothesis presented in details in [33] and [34], in which four main
social structures were identified: public sector institutions, businesses,
civil society organisations (CSO) and media.
Public administration has the legislative powers to create enabling
conditions for energy efficiency market operation. At the same time,
they are given the “lead-by-example” role [36] and [37], as it is
assumed that visibility of energy efficiency improvement measures
implemented in public facilities will have the largest spill-over effect to
other end-use sectors. Next to the public administration are social
networks (family, neighbours, and acquaintances) as they play very
important role in individuals’ decision making process on energy
efficiency investments [38]. Respecting this, the engagement of media
and CSOs as opinion makers is very important for market transforma-
V. Bukarica, Ž. Tomšić
tion. CSOs dealing with environmental issues are of particular im-
portance as attitudes towards environment might explain why some
individuals take more energy efficiency measures than the others even
if general characteristics are the same [22]. Finally, demand for energy
efficiency, once created, has to have response by the supply side, i.e.
business sector, which is the fourth stakeholders’ group in the social
interactions matrix.The attitudes of the identified stakeholder groups’
towards energy efficiency should be investigated in order to capacitate
them for implementation of energy efficiency related actions for the
benefit of sustained market transformation. Engagement of all analysed
sectors in the implementation of energy efficiency policy is obviously
required with the final goal to stimulate citizens to act and to change
their behaviour towards higher efficiency. Providing accurate and
sufficient information on benefits of smarter energy use patterns is a
way forward because as concluded by Boardman in [39]:
There has to be a personal motivation to act. You simply cannot
regulate or innovate enough to tackle the problem without first
stimulating a genuine desire to take action.
In this sense, the role of public institutions, CSOs and media
becomes increasingly important as they are the main ‘push’ for energy
efficiency in the society. Supply-side businesses will respond accord-
ingly as they will find their interest in offering more and more efficient
services and products. As political will is often versatile, the role of the
CSOs and media is to maintain the positive public pressure for
supporting energy efficiency efforts.
Having established the stakeholders’ interaction matrix, the bar-
rier/brakes model needs to be upgraded with feedback on brakes and
levers to energy efficiency obtained from these stakeholders.
4. Conclusion
In this paper the concept and model of energy efficiency market was
introduced. It is very hard to define energy efficiency market as it
involves many different stakeholders, products and services. If energy
savings are considered to be a product itself, the task becomes possible
to a certain extent. Describing the behaviour of that market signifi-
cantly exceeds the well-established microeconomic theory and needs to
embrace concepts from behavioural psychology and sociology as well.
Market assessment is a fundamental step in definition of policy
instruments.
This paper describes energy efficiency market as the starting point
of policy making process influencing the choice of policy instruments.
There are number of barriers preventing fulfilment of economic
potentials for energy efficiency. Policy interventions are needed to
remove these barriers.
Evidently, energy efficiency policy making is not one-time job. It is a
continuous, dynamic process that should create enabling conditions for
energy efficiency market as complex system undergoing evolutionary
change and direct that change toward efficiency, environmental
benefits and social well-being. Not all policy instruments are suitable
for all markets. It is needed to understand the maturity level of
country's energy efficiency market and tailor policy instruments to
overcome identified barriers. Policies also have to be adaptive to
changing market conditions.
The aim of the research conducted was to provide a basis for
selection of policy instruments and design of policy measures that will
induce energy efficiency market transformation.
It is established a model of energy efficiency market and upgraded
exisitng models of barriers to energy efficiency to describe the reality
better and to provide simple yet informative basis for policy instru-
ments design.
The upgraded model of barriers to energy efficiency established
rests on the hypothesis that individuals have the power to change their
behaviours within their social roles. For that purpose, main stakeholder
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Renewable and Sustainable Energy Reviews 70 (2017) 968–975
groups that can promote the sense among individuals that they have
the power to change (‘individual agency’) by making changes in their
operations (‘distributed agency’) should be identified. The application
of the developed upgraded model of barriers to energy efficiency can be
proved to be necessary.
The validity of the theory and the applicability of the model of
energy efficiency market established in this paper should be hereafter
demonstrated on the some case example. Firstly, the upgraded model
of barriers to energy efficiency used for evaluation of the market
maturity should be applied to reveal and understand the overall social
context in which energy efficiency improvements are supposed to
occur. Through this model, barriers to energy efficiency can be
identified for stakeholder groups that are considered to be crucial for
overall market operation as they have the power to change individuals’
behaviour. Additionally, a survey needs to be performed to analyse
barriers perceived by citizens, i.e. householders.
We do not simply embrace the prevailing stakeholders’ attitudes
and place the responsibility for insufficient energy efficiency activities
on policy makers alone; rather we advocate both top-down (actions
from policy makers that stimulate stakeholders to change) and bottom-
up (actions from stakeholders that will enhance their involvement in
energy efficiency implementation) approaches.
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