Energy Saving in Energy Market Reform - The Feed-in Tariffs Option

The use of feed-in tariffs (FITs) is now widespread for renewable energy and under discussion for other low carbon electricity generation, but not for energy efficiency. There is a small literature on FITs for electricity demand reduction, but not energy efficiency more generally. This paper considers the general application of FITs on the demand side and sets out the economic arguments in the context of changing energy markets. It then discusses the implications of some practical issues, including the definitional problems arising from the difference between energy efficiency and demand reduction. Using experience from historical energy efficiency programmes, it considers the public benefits, payment methods and policy scope that need to be considered and how these might affect policy design. It makes some provisional estimates of economically justified payments in the context of the proposed UK energy market reform. It concludes that FITs for energy saving might be a powerful tool for incentivising energy efficiency.