Voluntary Agreements with commercial or public organisations

Voluntary Agreements (VAs) on energy efficiency targets and actions can be concluded by the government with commercial or public organisations. The organisations commit to reach energy efficiency targets and/or to implement energy efficiency actions, e.g. investing only in (very) energy-efficient appliances.

Worldwide implementation status
Voluntary Agreements (VAs) on energy efficient appliances have already been implemented, especially in Europe and the USA.
In the USA, the FEMP programme and the Energy Star programme were introduced to increase the energy efficiency of appliances. To earn the Energy Star, an appliance must meet strict guidelines set by the U.S. Environmental Protection Agency (EPA). The EPA provides technical support, assists in quality control, supports consumer outreach, etc. (Energy Star).
From 2007 to 2013, the Danish Electricity Saving Trust introduced the Curve Breaker Agreement (CBA) (Klima-, Energi- og Bygningsministeriet 2013). The Agreement set binding targets for reducing electricity consumption to voluntary signatories. The targets typically ranged between three and 15 per cent of demand reduction over a period of three to five years. Target groups were municipalities, regions, ministries and agencies but also non-governmental actors .The defined targets were negotiated with CBA coaches who work at the Danish Energy Saving Trust (DEST). Read more in the bigEE good practice policy file on the CBA.

Governance level
Voluntary Agreements (VAs) on energy efficiency can be formulated and implemented at trans-national, national, regional or local level.

Related sectors

• residential
• services: For example, local authorities, universities, all kinds of companies
• industrial

• Refrigerators and freezers
• Clothes Washers
• Clothes Dryers
• Kitchen stoves and ovens 
• Coffee machine
• Microwave
• Dishwasher
• Home Audio 
• Television
• Monitors
• Computer
• Office equipment (Copiers, Fax machines, Printer, Server etc.)
• Data centres
• Commercial Food Cooling Equipment
• Commercial Laundry equipment

Related target groups

• Investor: Investor-users of appliances can commit to only purchase energy-efficient appliances meeting a certain standard but may also commit to reduce their electricity use by a certain percentage.
• Governmental actor: For example, local authorities or universities. They can enter into an agreement with the central government and commit to only purchase energy-efficient appliances.

Direct beneficiaries

• Investor

  Investors entering a VA are likely to realise net cost savings from the purchase of energy-efficient appliances, as the energy cost savings usually exceed the additional purchase cost of the appliances. In addition, the investors will receive credible information as well as technical or even financial support for taking up energy efficiency options.

Indirect beneficiaries

• Manufacturer

  Manufacturers may realise higher revenues and profits from selling more energy-efficient appliances, which can often be sold at higher prices. They can present themselves as caring for the environment and the consumer.

• Retail company

  Retail companies may realise higher revenues and profits from selling more energy-efficient appliances, which can often be sold at higher prices. They can present themselves as caring for the environment and the consumer.

• User

  Users are indirect beneficiaries as the investor participating in a VA purchases highly efficient appliances, or as these penetrate the market gradually. They can save energy costs and benefit from the often higher quality of energy-efficient appliances.

• Energy consultant

  Some commercial organisations or public authorities may need the assistance of energy consultants in the selection of energy-efficient appliances.

• Governmental actor

  Supranational, national, regional, and local governments can indirectly benefit from the policy or measure, because Voluntary Agreements (VAs) are more flexible and faster to be introduced and thus might accelerate the achievement of emission reduction targets (Bertoldi & Rezessy 2010).

Relevant barriers

• Knowledge and information barriers: Knowledge and information barrier for investors: particularly, unavailability of information and information and search costs. In VAs, the governmental authority provides credible information and/or technical assistances to investors, which reduces or overcomes these barriers.
• Lack of interest and motivation in energy efficiency-improvement: Especially, transaction costs or hassle/inconvenience (in combination with) time constraints, focus on core activities. (VA)s make it easier and more profitable for investors to implement energy-efficient technologies.
• Economic and financial barriers: If compliance can be ensured, VAs will achieve a higher level of energy efficiency and reduce market complexity and transaction costs.

Relevant incentives

• Saved energy costs: For investors who are also users of the appliances, an incentive is the saving of energy costs.
• Improved reputation: An environmentally-friendly image has been considered very important for companies as they try to gain public support for what they are doing. VAs can provide a “green image” to participating firms.
• Contribution to protection of the environment: This is a motivation for any actor and especially for governments as they have often set defined energy savings targets.

Voluntary Agreements (VAs) generally include information instruments, i.e., the governmental authority provides investors information about energy efficient appliances (in terms of the technologies, costs, energy savings, etc.), through various information channels.
VA works best when it is integrated into a policy package that contains, for example:

• (Partial or full) Exemption from energy/CO₂ taxation: the participation rate of VAs is higher when participating organisations can be partially or fully exempt from energy/CO₂ taxation in return for demonstrated action or target achievement and should repay the exemption in case of non-compliance (Bertoldi & Rezessy 2010).
• Regulations: organisations are more willing to enter into the VA if there is higher threat of future regulations and government’s promise to relieve them from these regulations (UNEP 2007).
• Energy audit: in order to fully explore the energy saving potentials of the participating organisations, energy audits for the organisations’ building(s) need to be conducted before the implementation of energy efficiency measures. The energy audit should then also cover the appliances in use. It can be provided for free by the governmental authorities or subsidized by the government (Bertoldi & Rezessy 2010).

The following pre-conditions are necessary to implement voluntary agreements:
Agencies or other actors responsible for implementation
A public authority with appropriate statutory powers and expertise in energy efficiency should be in place to design, implement, and evaluate VAs (Bertoldi & Rezessy 2010).
Ideally, independent third parties who are responsible for verifying energy savings of the participating organisation can be involved to enhance their compliance with the agreements (Bertoldi & Rezessy 2010).

Funding
Funding is needed for providing investors with information or technical assistance and/or an energy audit.
A smaller amount of mainly staff costs is also required for the overall administration of the VA scheme. Communicating the scheme will also require some funds.

Test procedures
An easy-to-monitor and consistent set of calculation methods for the verification of energy savings needs to be in place. If these methods are not part of energy efficiency regulations or energy labels, they need to be developed.

Following important steps are included in designing and implementing VAs:

• The governmental authority prepares targets, a baseline scenario, and implementation rules (parties’ obligations, monitoring, verification, and reporting, sanction, etc.). Sometimes, the design process may involve negotiation between the governmental authority and participating organisations;
• Organisations apply for becoming partners of the VA by submitting their action plans for energy-efficient procurement;
• The governmental authority approves the application and signs the VA with participating organisations;
• Participating organisations self-report their energy saving actions and achievements regularly. Ideally, verification is conducted by the governmental authority or an independent third party;
• To ensure the compliance, either formal or informal sanction measures are implemented by the governmental authority in case of non-compliance.

Quantified target
Voluntary Agreements (VAs) can be more effective if quantified targets, e.g. amount of energy saved per year or a certain share of energy-efficient appliances in the organisation’s purchases – of course, a share of 100% is best –, are specified at the beginning.

International co-operations
International co-operations that share best practices of the design and implementation of Voluntary Agreements (VAs) can help policy-makers at trans-national, national, regional/local level to improve their design and implementation of VAs.

Monitoring
For energy savings, participating organisations self-report their saving achievements regularly. For a target on procurement of energy-efficient appliances, the organisaton will monitor and report the number and type of appliances purchased. The simplest way of measurement and verification for appliances is to stipulate deemed saving assumptions (Neme & Cowart 2012). This can be done through the authority operating the VA scheme on behalf of the government.
For evaluating economic benefits and costs, the implementing governmental authority needs to provide their costs incurred, separately for the preparation, administration, communication and evaluation costs and for any financial incentives provided by the government. Participating organisations need to provide information about the expenditures that they would have paid for the energy or power they saved and incremental costs to invest in energy efficiency measures. A standard reporting form can be provided to participating organisations for that purpose (Ciugudeanu & Bertoldi 2004).
Confidentiality needs to be guaranteed for all data provided.

Evaluation
The common approaches of evaluating the effectiveness of Voluntary Agreements (VAs) on overall energy savings targets are (1) to measure the energy consumption of the participating organisation and then compare it to a typical non-participating organisation; (2) to compare energy consumption of the participating organisations before and after taking up energy efficiency options (Gupta et al. 2007; Ciugudeanu & Bertoldi 2004). For a target on procurement of energy-efficient appliances, the number of appliances purchased needs to be multiplied by the energy savings compared to inefficient new appliances, with the latter possibly determined through a deemed savings approach. In addition to the data directly monitored for the energy efficiency programmes, evaluation of net energy savings compared to baseline trends should address side-effects such as rebound, multiplier, and free-rider effects, and the ‘lifetime’ and potential deterioration of energy savings.
In order to have a credible evaluation, it should, ideally, be conducted by an independent third party with reports made public (Bertoldi & Rezessy 2010).
However, evaluating the effectiveness of VAs is difficult because: (1) VAs are often combined with other instruments and some studies have claimed that improvements have been largely triggered by other instruments, e.g. regulatory instruments (Chidiak 2002, Johannsen 2002 and Helby 2002 in Gupta et al. 2007); (2) when comparing the participating organisations and non-participating ones there is the possibility of a selection bias, i.e. it is often the “greenest” organisations entering into VAs (Gupta et al. 2007). Studies neglecting these issues may result in an over-estimation of the VA’s effectiveness.
For evaluating the economic benefits for the society, standard values for the incremental energy supply costs that will be avoided in the long run for a kWh of energy or a kW of load should be developed by the government.

Relevant individual dynamics and side-effects

• Dynamic market transformation and/or innovation: Voluntary Agreements (VAs) drive the demand for energy efficient appliances and thus foster the market transformation towards energy-efficient products.
• Avoiding lost opportunities: A Voluntary Agreement (VA) is often complementary to regulatory measures: It aims to promote very energy-efficient appliances as opposed to inefficient products or to those just meeting MEPS requirements, and thus stimulates additional energy savings that could not have been achieved by the enforcement of the regulation alone. It therefore avoids lost opportunities. In addition, VAs should also aim to avoid lost opportunities by trying to maximise both participation rates and energy savings per participant or maximise performance of the energy-efficient appliances promoted.
• Minimising rebound effects: VAs can be designed to minimise rebound effects, for example, by requiring absolute limits on the energy consumption of energy-efficient appliances promoted, and by providing users with information on energy-efficient use of equipment.
• Minimising snap-back effects: Compliance of the participating organisations with Voluntary Agreements (VAs) needs to be reviewed or evaluated regularly. In this way, snap-back effects can be minimised.
• Minimising free-rider effects: The programmes should also be designed to minimise free-rider effects, e.g., by promoting only products with high energy efficiency levels while maximising uptake of these at the expense of low-efficiency appliances.
• Creating Spill-over effects: Voluntary Agreements (VAs) can have spill-over effects. The participating organisations receive information about good practice on energy efficiency improvements as well as them sharing their innovations through different channels provided by the government. In addition, the large and influential organisations may be able to influence other organisations in the same sector in their decision to enter into VAs or to purchase energy-efficient appliances. These in turn advance the market transformation towards energy-efficient appliances.

Design for sustainability aspects
Other sustainability aspects, such as resource efficiency, health aspects etc., can and should be integrated into Voluntary Agreements (VAs).

Co-benefits
An increasing demand for energy efficiency products driven by the implementation of Voluntary Agreements (VAs) can create job opportunities in these fields.

The following barriers are possible during the implementation of the policy
The implementation of Voluntary Agreements (VAs) can face the following barriers:

• Reporting & monitoring that relies on self-reporting by the participating organisations is regarded to be the weakest point of existing VAs (Bertoldi & Rezessy 2010); 
• The targets set by the government sometimes do not go beyond that in the business-as-usual level of energy performance (Bertoldi & Rezessy 2010).
• Targets set in the VAs may not be assured, i.e. non-compliance of the participating organisations (Bertoldi & Rezessy 2010).
• Governmental authorities may lack capacity to design, implement, and evaluate VAs (Bertoldi & Rezessy 2010).
• Organisations, especially, those lacking good energy-efficient procurement management and knowledge of their energy saving potentials, may tend to adopt a “wait and see” position (Ciugudeanu & Bertoldi 2004).

The following measures can be undertaken to overcome the barriers

• Reporting & monitoring issues can be addressed by engaging independent third parties for monitoring and verification of energy savings with reports made public (Bertoldi & Rezessy 2010).
• To avoid non-compliance there should be either penalties or a regulatory threat in case of non-compliance, e.g. withdrawal of a rebate on an energy tax.
• Ambitious but realistic targets higher than business-as-usual case are set and backed up by the threat of legislation. The process of negotiating and setting the targets and rules needs to be transparent (Bertoldi & Rezessy 2010).
• Capacity building related to VA design, implementation, and evaluation needs to be provided within governmental authorities (Bertoldi & Rezessy 2010).

Energy savings of Voluntary Agreements (VAs) depend on the targets set in the agreement, the commitment of the participating organisations, the size of the organisation, etc.
In the Danish Curve Breaker Agreement (CBA) programme, between 2007 and 2010, 177 agreements were concluded. By 2011, signatories had achieved an average 7.5 % of electricity demand reductions. However, this includes both the procurement of energy-efficient appliances and action to improve building energy efficiency.
The Energy Star Quantity Quotes programme calculated annual savings of 200 million kWh of electricity. The next list illustrates some relevant achievements in the period 2007-2008:

• Registered purchasers 1,200
• Registered suppliers: 150
• Purchase requests submitted: 500
• Number of units requested: 3,816,185 CFLs, 7,626 refrigerators, 2,080 clothes washers, 481 dishwashers, 31,130 room ACs
• First-year electricity savings: 200 million kWh (Reeves et al. 2008)

The cost of Voluntary Agreements (VAs) for policy or measure depends on the support the government provides (e.g. information and technical assistances), the size of the VAs, the size of incentives (e.g. tax exemptions), etc. The costs for participating organisations vary among individual projects, depending on the energy efficiency measures they implement.
In the Danish Curve Breaker Agreement (CBA) programme, the Danish Energy Saving Trust (DEST) offered various tools to promote electricity demand reductions (e.g. training courses, behavioural campaign materials, energy efficient procurement guidelines and tools). Costs of the CBA programme are not known to us but are likely to be quite small. DEST’s work, with many more programmes in addition to the CBA, was financed by an extra charge of 0.06 Eurocent/kWh on the electricity bills of private households and public institutions.

With proper design and implementation, Voluntary Agreements (VAs) can be highly cost-effective for society and policy or measure operators given their high energy saving potentials and the fact that they require much less of public budgets in comparison with other instruments, such as financial incentive programmes or also regulations.
For participating organisations, the expected net benefit can be high. On one hand, such a programme aims to trigger investment on proven energy efficiency technologies that are clearly profitable. On the other hand, the organisations also benefit from the increased public recognition as a “green” organisation.
In Denmark, the tailor-made solutions (investment in energy-efficient technology and building energy management) elaborated with the assistance of the Danish Energy Saving Trust and implemented by the Curve Breaker Agreement signatories will normally be cost-effective. The Energy Star Quantity Quote programme calculated savings of $21 million in utility bill savings (in 2008), equivalent to the annual energy bills of 11,000 average households (Reeves et al. 2008).