waking the sleeping giant - iea-retdiea-retd.org/wp-content/uploads/2015/02/res-h-next.pdf · what...
TRANSCRIPT
WAKING THE SLEEPING GIANT NEXT GENERATION POLICY INSTRUMENTS FOR RENEWABLE HEATING & COOLING IN COMMERCIAL BUILDINGS (RES-H-NEXT)
Prepared for the IEA Implementing Agreement for
Renewable Energy Technology Deployment (IEA-RETD) February 2015
P a g e | ii IEA-RETD, RES-H/C: Waking the Sleeping Giant, February 2015.
ABOUT IEA-RETD The International Energy Agency’s Implementing Agreement for Renewable Energy Technology Deployment
(IEA-RETD) provides a platform for enhancing international cooperation on policies, measures and market
instruments to accelerate the global deployment of renewable energy technologies.
IEA-RETD aims to empower policy makers and energy market actors to make informed decisions by: (1)
providing innovative policy options; (2) disseminating best practices related to policy measures and market
instruments to increase deployment of renewable energy, and (3) increasing awareness of the short-, medium-
and long-term impacts of renewable energy action and inaction.
For further information please visit: http://iea-retd.org or contact [email protected].
Twitter: @IEA_RETD
IEA-RETD is part of the IEA Energy Technology Network.
DISCLAIMER The IEA-RETD, formally known as the Implementing Agreement for Renewable Energy Technology
Deployment, functions within a Framework created by the International Energy Agency (IEA). Views, findings
and publications of IEA-RETD do not necessarily represent the views or policies of the IEA Secretariat or of its
individual Member Countries.
COPYRIGHT This publication should be cited as:
IEA-RETD (2015), Waking the Sleeping Giant – Next Generation Policy Instruments for Renewable Heating and
Cooling in Commercial Buildings (RES-H-NEXT), [Veilleux, N., Rickerson, W. et al.; Meister Consultants Group],
IEA Implementing Agreement for Renewable Energy Technology Deployment (IEA-RETD), Utrecht, 2015.
Copyright © IEA-RETD 2015
(Stichting Foundation Renewable Energy Technology Deployment)
P a g e | iii IEA-RETD, RES-H/C: Waking the Sleeping Giant, February 2015.
ACKNOWLEDGEMENTS The authors would like to thank the following IEA-RETD RES-H-NEXT Project Steering Group (PSG) members for
their guidance and support throughout the project:
Joe Sousek, UK Department of Energy and Climate Change, PSG Chair
Kristy Revell, UK Department of Energy and Climate Change
Oliver Sutton, UK Department of Energy and Climate Change
Adam Brown, International Energy Agency
Kristian Petrick, Operating Agent Team, IEA-RETD
David de Jager, Operating Agent, IEA-RETD
LEAD AUTHORS Neil Veilleux, Meister Consultants Group
Wilson Rickerson, Meister Consultants Group
CONTRIBUTING AUTHORS Andy Belden, Meister Consultants Group
Gregor Hintler, Meister Consultants Group
Chad Laurent, Meister Consultants Group
Caroline Palmer, Meister Consultants Group
Lisa Young, Meister Consultants Group
STRATEGIC ADVISORS Veit Bürger, Oeko-Institut e.V. (Institute for Applied Ecology)
Christiane Egger, OÖ Energiesparverband (Energy Agency for Upper Austria)
Les Nelson, International Association of Plumbing and Mechanical Officials (IAPMO)
This report shall be cited as follows:
IEA-RETD (2015), Waking the sleeping giant - Next generation policy instruments for renewable heating and
cooling in the commercial sector (RES-H-NEXT), [Veilleux, N., Rickerson, W. et al.; Meister Consultants Group],
IEA Implementing Agreement for Renewable Energy Technology Deployment (IEA-RETD), Utrecht, 2015.
P a g e | iv IEA-RETD, RES-H/C: Waking the Sleeping Giant, February 2015.
EXECUTIVE SUMMARY Is a renewable transformation of heating and cooling in the commercial sector possible? Yes, but it requires
the implementation of new and innovative (next generation) policies.
Renewable heating and cooling (RES-H/C) is the sleeping giant of renewable energy. Across the globe, it is
estimated that thermal energy comprises approximately 50% of total global final energy demand (across the
residential, commercial and industrial sectors). The majority of heat demand in buildings – over three quarters
– is served by fossil fuels or traditional biomass. Modern (high efficiency, low emission) renewables are
estimated to serve only 10% of thermal energy demand.
This report focuses on the commercial building sector, a significant user of thermal energy, especially in OECD
countries. A number of country-level analyses make clear that the commercial building sector is a significant
source of carbon dioxide (CO2) emissions (e.g. 18% in the UK), due to the heating and cooling load of buildings.
It is furthermore expected that commercial building sector and energy use will increase in the future, with the
IEA estimating that the floor area of commercial buildings will almost triple by 2050 and the World Energy
Outlook estimating that commercial building energy demand will be the fastest growing energy sector.
Addressing heating and cooling in the commercial sector will be necessary to achieve a renewable energy
transformation, and many analyses estimate that it will not be possible to achieve long-term climate, security,
and energy goals without increasing the use of RES-H/C.
Despite its importance, there has historically been a lack of innovation and commitment to RES-H/C policy.
RES-H/C technologies, especially within the commercial sector, receive a disproportionally small share of policy
support (i.e. relative to renewable electricity technologies). Only a few jurisdictions – primarily located in
Europe – have taken proactive steps to encourage widespread RES-H/C market development. As a result, the
RES-H/C market in the commercial building sector has been slow to develop. This has been true even while the
broader renewable energy market has experienced significant growth.
What can awaken this sleeping giant? What can policy makers do to accelerate market growth?
There is a clear need to develop and implement “next generation” policies to rouse RES-H/C markets. The
figure below (see next page) illustrates next generation policies that could be implemented in jurisdictions
across the globe.
Next generation policies have the potential to drive market development along the deployment curve, from
the early-stage (i.e. inception) to mature (i.e. consolidated) market phases. Some of these policies have been
implemented to support RES-H/C (such as mandates) but have been limited in ambition or not sufficiently
enforced. Other policies have seen widespread implementation in the energy efficiency (EE) or renewable
electricity (RES-E) sectors, but have not been widely adapted for RES-H/C in the commercial sector (e.g.
performance based incentives).
Many of the next generation policies described here could address market barriers across all building types
(i.e. residential and commercial). Section 3 of the report though pays special attention to how RES-H/C market
barriers play out in the commercial sector and how next generation policies could address them.
P a g e | v IEA-RETD, RES-H/C: Waking the Sleeping Giant, February 2015.
This includes, for example, the role of direct incentives and financing programs to address corporate
investment and decision-making barriers; the potential for building mandates to address the split incentives
between commercial landlords and tenants; or how third-party ownership models could address the lack of
RES-H/C training among commercial building managers.
In order to drive RES-H/C market development, it is recommended that policymakers:
Develop long-term plans and policy commitments. Policymakers should develop long-term plans to
guide market development efforts for RES-H/C. This may include the creation of credible and
ambitious targets that provide investors a clear idea of market size and opportunity. Especially in early
stage markets, clear plans are needed to generate confidence among industry players. As markets
progress along the deployment curve, it will be important for policymakers to update plans in order to
address new market, technology, emission reduction, and cost developments.
Establish RES-H/C mandates for existing buildings or utilities. Strong regulatory requirements such as
building or utility mandates can drive widespread adoption of RES-H/C, especially for existing
buildings. For building mandates, policymakers can establish a mandate trigger (e.g. sale, lease, or
renovation of the building) to overcome market barriers ranging from landlord-tenant challenges to
low building refurbishment rates. In early-stage markets, it may be important to mandate RES-H/C in
public buildings or new construction in order to demonstrate the viability of RES-H/C technologies to
commercial real estate building owners. In take-off and consolidation markets, such mandates could
be extended to existing buildings. Both utility and building mandates can be implemented in
conjunction with performance based (or other) incentive programs to support compliance.
Design and implement performance-based incentives for RES-H/C. Incentives are often necessary in
inception and take-off market phases to improve the return on investment of RES-H/C and drive
market development. Upfront financial incentives such as rebates have historically supported RES-H/C
market growth, though in the future it will likely be necessary to transition to PBIs, especially as
policymakers place a higher priority on ensuring that energy production is maximized. In inception
markets, it will be important to develop heat metering guidelines, so that useful heat production can
be properly measured and rewarded. As markets develop, incentive levels should be revised
downward via degression mechanisms. For regions that are served by district heating systems,
policymakers have a unique opportunity to create new tariff and regulatory frameworks that could
enable policies similar to net metering or feed-in tariffs for heating and cooling.
Drive down soft costs for RES-H/C. Policymakers also need to focus on implementing programs to
drive down the cost of RES-H/C systems. A significant portion of installation costs for RES-H/C systems
are soft costs, which are non-hardware costs such as installation labor, permitting, or customer
acquisition costs, among others. In a few jurisdictions, policymakers have already implemented
information and awareness campaigns for RES-H/C, but there are opportunities for more focused soft
cost programs. Administrative and permitting processes should be streamlined, especially in inception
markets. Across all market deployment phases, it is essential to regularly assess the current costs of
RES-H/C in order to identify how best to drive down soft costs and/or price incentives.
Develop innovative financing and business models. Policymakers should develop enabling policies
that support innovative financing. Third-party ownership models, for example, could provide “heat as
a service” to commercial and institutional building owners, thus reducing the hassle and risk associated
with RES-H/C. To succeed, however, these models will require lender and contractor outreach and
education programs, especially in the inception and takeoff phases.
P a g e | vi IEA-RETD, RES-H/C: Waking the Sleeping Giant, February 2015.
Similarly, incentive and other programs to reduce development costs will be important to enable third-
party owners to be able to effectively deploy RES-H/C at necessary rates of return. As the market
develops, policymakers should consider implementing programs that help industry standardize
technical requirements and contracting language in order to encourage securitization and bring new
capital sources (e.g. institutional investors) to the market. These are all meaningful ways for
policymakers to intervene and reduce risk associated with the deployment of new financing and
business models.
The graph below illustrates general best practices for each policy field that can be applied to any given
jurisdictions in one of the three market development phases (i.e. inception, take-off, or consolidation):
RES-H/C can also be deployed to support a number of parallel building and energy policy priorities.
Policymakers should examine how RES-H/C fits into other energy goals and strategies, from the deployment of
district heating networks, to low energy building requirements, or the integration of RES-H/C and heat storage
with electric grid management strategies. Section 5 provides an initial exploration of how RES-H/C policies
interact with these broader energy priorities.
A handful of jurisdictions across the globe have already pioneered the use of some of these next generation
RES-H/C policies in commercial buildings. Some of these policies have been widely adopted in the RES-E or EE
sectors. Where possible, these experiences are described in case studies and text boxes throughout this
report, giving the reader a sense of the opportunities, challenges and needs to implement next generation
RES-H/C policies. By assessing the most promising next generation policies, this report shows policymakers
how they can take action in the near term and drive greater deployment of RES-H/C in commercial buildings to
meet their energy and policy priorities.
P a g e | vii IEA-RETD, RES-H/C: Waking the Sleeping Giant, February 2015.
Table of Contents About IEA-RETD ....................................................................................................................................................... ii
Acknowledgements ................................................................................................................................................ iii
Executive Summary .................................................................................................................................................iv
1 Introduction .................................................................................................................................... 1
1.1 Report Structure ...................................................................................................................................... 3
2 Methodology ................................................................................................................................... 5
2.1 Overview of Next Generation Policies .................................................................................................... 5
2.1.1 Definition of RES-H/C Technologies .................................................................................................... 7
2.1.2 Definition of Commercial & Institutional Sector ................................................................................. 9
2.2 RES-H/C Deployment Status across IEA-RETD Countries ........................................................................ 9
2.3 Economic & Technical Country conditions ............................................................................................ 12
2.3.1 Climatic Conditions............................................................................................................................ 12
2.3.2 The Status of Commercial BUILDING STOCK ..................................................................................... 13
2.3.3 Regional District Heating Infrastructure ........................................................................................... 15
2.3.4 Conventional Heating & Cooling Sources & Costs ............................................................................ 15
2.3.5 Summary: Country Conditions & Key Considerations for Policymakers ........................................... 15
2.4 Cost Effectiveness Assessment ............................................................................................................. 16
3 RES-H/C Barriers & Opportunities in the Commercial Sector ....................................................... 18
3.1 Barriers to RES-H/C in the Commerical Sector ...................................................................................... 18
3.1.1 Lack of Awareness about RES-H/C Technology ................................................................................. 18
3.1.2 Inadequate Expected Investment Returns & Capital Constraints ..................................................... 18
3.1.3 Ownership Priorities & Decision Making Barriers ............................................................................. 19
3.1.4 Split Incentives .................................................................................................................................. 19
3.1.5 Low Refurbishment Rates ................................................................................................................. 20
3.1.6 Insufficient Local Contractor Base ..................................................................................................... 20
3.1.7 Lack of Confidence in System Performance & Fuel Availability ........................................................ 20
3.1.8 Operations Staff Training Requirements ........................................................................................... 21
3.2 Opportunities for Integrating RES-H/C into Comprehensive Energy Plans ........................................... 21
4 RES-H/C Next Generation Policies ................................................................................................. 23
4.1 Overview of Next Generation Policies .................................................................................................. 23
4.2 RES-H/C Plans, Targets & Mandates ..................................................................................................... 26
P a g e | viii IEA-RETD, RES-H/C: Waking the Sleeping Giant, February 2015.
4.2.1 Background for RES-H/C Plans, Targets & Mandates ........................................................................ 26
4.2.2 Background for RES-H/C Mandates................................................................................................... 28
4.2.3 Benefits of RES-H/C Plans, Targets & Mandates ............................................................................... 29
4.2.4 Policy Options for Building Mandates ............................................................................................... 30
4.2.5 Policy Options for Utility Mandates .................................................................................................. 33
4.2.6 Cost Effectiveness ............................................................................................................................. 36
4.2.7 Summary for Policymakers................................................................................................................ 38
4.3 RES-H/C Performance Based Incentives................................................................................................ 41
4.3.1 Background........................................................................................................................................ 41
4.3.1 Benefits of RES-H/C Performance based Incentives ......................................................................... 42
4.3.2 Policy Options for RES-H/C Performance Based Incentives .............................................................. 42
4.3.3 Cost Effectiveness ............................................................................................................................. 49
4.3.4 Summary for Policymakers................................................................................................................ 52
4.4 Soft Cost Reductions for RES-H/C ......................................................................................................... 54
4.4.1 Background........................................................................................................................................ 54
4.4.2 Benefits of Soft Cost Reduction Policies for RES-H/C ........................................................................ 55
4.4.3 Policy Options for Soft Cost Reduction Initiatives ............................................................................. 56
4.4.4 Cost Effectiveness ............................................................................................................................. 58
4.4.5 Summary for Policymakers................................................................................................................ 59
4.5 Innovative Financing and Business Models for RES-H/C ....................................................................... 61
4.5.1 Background........................................................................................................................................ 61
4.5.2 Risk and Economic Considerations for Third-Party Ownership ........................................................ 63
4.5.3 Benefits of Innovative Financing for RES-H/C ................................................................................... 64
4.5.4 Policy Options to Support Third-party Financing .............................................................................. 65
4.5.5 Cost Effectiveness ............................................................................................................................. 67
4.5.6 Summary for Policymakers................................................................................................................ 68
4.6 Next Generation Policy Approaches ..................................................................................................... 69
5 RES-H/C & integrated energy planning ......................................................................................... 71
5.1 Importance of Integrated Energy Planning ........................................................................................... 71
5.1.1 RES-H/C & Low Energy Buildings ....................................................................................................... 72
5.1.2 RES-H/C & District Energy ................................................................................................................. 73
5.1.3 RES-H/C & Thermal Storage for Electric Grid Management ............................................................. 75
6 Conclusion ..................................................................................................................................... 77
P a g e | ix IEA-RETD, RES-H/C: Waking the Sleeping Giant, February 2015.
Appendix A ....................................................................................................................................................... 78
Appendix B ....................................................................................................................................................... 80
References ....................................................................................................................................................... 82
P a g e | 1 IEA-RETD, RES-H/C: Waking the Sleeping Giant, February 2015.
1 INTRODUCTION The heating sector is the largest consumer of energy across the globe. As illustrated in Figure 1 below, it is
estimated that thermal energy use comprises approximately 50% of total global final energy demand (across
the residential, commercial and industrial sectors). However, the majority of heat demand in buildings – over
three quarters – is served by fossil fuels or traditional biomass.1 Modern (high efficiency, low emission)
renewables are estimated to serve only 10% of thermal energy demand in buildings.
Figure 1. Estimated Global Final Energy Use and Heating Fuel Use in Buildings (Adapted from IEA, 2014)
Despite the significant opportunity for renewable heating and cooling, the RES-H/C market is relatively small
and slow-growing, due in large part to the fact that RES-H/C technologies receive a disproportionally small
share of policy support, especially when compared to renewable electricity technologies (Bürger et al., 2008;
IEA, 2014; Rickerson et al., 2009). Only a few countries – primarily located in Europe – have taken proactive
steps to encourage widespread RES-H/C market development. In fact, among global policymakers and industry
experts, there is limited awareness of the development potential for RES-H/C.
In 2013, the Renewable Energy Policy Network for the 21st Century (REN21) evaluated renewable energy
projections from 50 recently published scenarios and interviewed 170 leading experts to assess the “credible
possibilities” for renewable heat, electricity, and transport (see Table 1 below). There was strong expert
agreement that high shares of renewable electricity (RES-E) could be attained with relative ease. In contrast,
RES-H/C was considered much more difficult to attain in large shares. REN21 concluded that although RES-H/C
technologies have a track record of providing reliable energy, there is not widespread understanding among
policymakers and experts regarding the need for, or policies necessary to support, market growth (REN21,
2013).
1 Traditional biomass is associated with deforestation and high levels of pollution. It is generally considered that it should be reduced through the deployment of modern renewables, including high efficiency, low emission biomass thermal, solar thermal, advanced heat pumps, or other renewable heating technologies.
Buildings,83.7
Industry,78.8
Other,9
0
40
80
120
160
200
Electricity Transport Hea ng
exajoule(EJ)
GlobalFinalEnergyUse(FEH)
naturalgas,33%
oil,16%
coal,7%
tradi onalbiomass,33%
modernbiomass,10%
other,1%
0%
20%
40%
60%
80%
100%
BuildingsHea ng(83.7EJ)
Esmated%ofFinalEnergyHeat(FEH)
Hea ngFuelUseinBuildings
P a g e | 2 IEA-RETD, RES-H/C: Waking the Sleeping Giant, February 2015.
Table 1. Sectoral Shares of Renewable Energy in Recent Global Scenarios (Source: REN21, 2013).
Scenario By Year Electricity Heat Transport
By 2030 – 2040
ExxonMobil Outlook for Energy: A View to 2040 (2012) 2040 16% -- --
BP Energy Outlook 2030 (2012) 2030 25% -- 7%
IEA World Energy Outlook (2012) “New Policies” 2035 31% 14% 6%
IEA World Energy Outlook (2012) “450” 2035 48% 19% 14%
Greenpeace (2012) Energy [R]evolution 2030 61% 51% 17%
By 2050
IEA Energy Technology Perspectives (2012) “2DS” 2050 57% -- 39%
GEA Global Energy Assessment (2012) 2050 62% -- 30%
IEA Energy Technology Perspectives (2012) “2DS High Renewables” 2050 71% -- --
Greenpeace (2012) Energy [R]evolution 2050 94% 91% 72%
WWF (2011) Ecofys Energy Scenario 2050 100% 85% 100%
Notes: Transport shares for IEA WEO, IEA ETP, and BP are only for biofuels; transport share for Greenpeace includes electric vehicles; transport share for WWF is entirely biofuels. Heat share for WWF is only industry and buildings. Electricity share for BP is estimated from graphics. Electricity share for GEA is based on the central “Efficiency” case.
Despite the lack of RES-H/C market momentum, REN21 highlights that there are a number of experts who
foresee a need for a “cascade of new policies” for RES-H/C in order to meet a wide variety of country goals
(see Text Box 1 below). Similarly, a number of recent studies conclude that it will be challenging, if not
impossible, to achieve country climate, energy, and economic development goals without building local RES-
H/C markets (Beerepoot & Marmion, 2012; Brown & Müller, 2011; Bürger et al., 2008; Eisentraut & Brown,
2014).
To scale up RES-H/C markets across the globe, there are clear challenges that need to be addressed. There is
consensus that it will be difficult for RES-H/C to reach shares higher than 25% to 30% without “major
transformations” in the residential and commercial building and energy sector (REN21, 2013). As described in
Section 3.1, the RES-H/C industry faces a number of persistent barriers to development in the commercial
sector. These challenges will require an integrated approach to energy planning and the deployment of next
generation policies for RES-H/C.
This report seeks to build on experience with RES-H/C policy to date and identify next generation policies,
focusing in particular on the existing commercial building stock.2 The next generation policies described in this
report (i) are new and innovative for the RES-H/C sector, (ii) address one or more market barrier, and (iii) could
enable RES-H/C markets to achieve large-scale, cost-effective, mainstream deployment over the next several
decade.
2 Although the focus of this report is on the commercial sector, many of the next generation policies and programs suggested could be adapted across sectors, including residential, industrial, or other sectors.
P a g e | 3 IEA-RETD, RES-H/C: Waking the Sleeping Giant, February 2015.
Text Box 1. RES-H/C and Country Policy Goals
RES-H/C can help policymakers achieve a number of country goals. These may include the following:
Greenhouse gas reductions. Policymakers across the globe are discussing the potential for, and
impacts of. decarbonisation policies on their jurisdictions. Heat accounts for more than 50% of
global final energy consumption, and one-third of global energy-related carbon dioxide (CO2)
emissions (or around 10 gigatonnes of CO2) (Eisentraut & Brown, 2014). This has significant
implications for RES-H/C, which is often characterized as the “missing piece” of carbon planning
(Rickerson et al., 2009).
Climate adaptation. RES-H/C technologies can provide both climate mitigation and adaptation
solutions. Heat deaths are projected to increase significantly under climate change. It will be
essential to develop RES-H/C policies that support building owners as they upgrade infrastructure to
adapt to the changing environment, including a growing need for efficient cooling systems in
commercial buildings.
Energy security. Recent events in Ukraine and Russia have highlighted energy security issues
related to natural gas. Maintaining reliable access to natural gas, oil, or other fossil fuel sources for
heating remains a significant concern due to risks related to energy market price volatility,
geopolitical security, and economic growth impacts. There is an opportunity to manage these risks
by assessing and planning for RES-H/C technology deployment within a security paradigm rather
than just an energy paradigm. Energy security concerns will continue to drive the need for
domestic energy resources such as RES-H/C as an alternative to imported natural gas and oil.
Economic development. Economic development is a consistent objective of renewable energy
policy. Numerous studies have concluded that RES-H/C technologies are among the most cost-
effective renewable energy options for reducing fossil fuel dependency and GHG emissions
(Langniss et al., 2007). RES-H/C presents opportunities for expanding local industries around
innovative technology research, development, and manufacturing, thereby creating jobs and
wider economic benefits.
1.1 REPORT STRUCTURE This report is structured as follows:
Section 2 describes the methodology used to conduct this assessment. This includes the approach to
developing next generation RES-H/C policies in the commercial sector, an overview of the current
status of RES-H/C market deployment in IEA-RETD countries, and a review of the economic and
technical conditions that may influence RES-H/C market development. Section 2 also describes the
approach used to conduct a preliminary assessment of the cost effectiveness of next generation
policies.
Section 3 summarizes the market barriers that have limited wider adoption of RES-H/C technologies in
the commercial sector. It also describes opportunities for policymakers to integrate RES-H/C into
comprehensive energy planning processes.
P a g e | 4 IEA-RETD, RES-H/C: Waking the Sleeping Giant, February 2015.
Section 4 describes next generation policies that can enable deployment of RES-H/C technologies,
focusing on policies and practices that can be applied to new and existing buildings in the commercial
sector across a range of jurisdictions.
Section 5 describes key issues policymakers may want to consider with regard to long-term RES-H/C
energy planning and how RES-H/C policies may fit into a country’s broader energy strategy. Section 5
also takes a closer look at the potential interaction of of RES-H/C market scale-up with other emerging
energy trends.
P a g e | 5 IEA-RETD, RES-H/C: Waking the Sleeping Giant, February 2015.
2 METHODOLOGY 2.1 OVERVIEW OF NEXT GENERATION POLICIES Next generation policies for RES-H/C are defined as policies or initiatives that:
Are new and innovative in the RES-H/C sector,
Address one or more market barrier, and
Could enable RES-H/C markets to achieve large-scale, cost-effective, mainstream deployment over the
next several decades.
To identify potential next generation policies, a wide cross section of RES-H/C market development policies
and studies from across the globe were reviewed. This included reviews of existing policies in leading RES-H/C
jurisdictions such as the State of Upper Austria, Denmark, and Cyprus; policy development programs to
improve RES-H/C penetration in European Member States (i.e. the RES-H Policy project3); policies and
programs implemented in Mediterranean countries such as Israel or Tunisia; and initiatives in new or emerging
markets such as the Commonwealth of Massachusetts in the US or the United Kingdom.
It is worth noting that there is not a standard procedure to classify or categorize renewable energy policy
instruments. A variety of approaches exist depending upon the goals of the analysis and criteria considered
(Bürger et al., 2008). For the purposes of this analysis, global policy practices were categorized using the
framework summarized in Table 2.
Table 2. Overview of RES-H/C policies
Policy Category Description and overview for RES-H/C
New incentive
mechanisms for RES-
H/C
Incentive policies encompass both upfront incentives (e.g. grants, rebates) as well as
performance based incentives (PBIs). Jurisdictions like Germany or Upper Austria, which have a
long track record of incentive support for RES-H/C, have focused almost exclusively on capacity-
based incentives such as grants or rebates. PBIs are rare in the RES-H/C sector, with only a
handful of countries known to have implemented them (Beerepoot & Marmion, 2012). The
development and implementation of PBIs for RES-H/C are discussed in Section 4.3.
Innovative financing
programs
Financing programs may include low-interest loan programs (e.g. soft loans) as well as turnkey
financing (e.g. third-party ownership models). Government support for RES-H/C financing
programs, especially in Europe, has historically focused on development of soft loan programs.
Policy support to encourage turnkey financing are far less common in the commercial RES-H/C
sector. These are discussed in Section 4.5.
3 The RES-H Policy project was a multimillion dollar policy development program designed to improve RES-H/C penetration in European Member States in support of implementation of the EU Renewables Directive 2009/28/EC.
P a g e | 6 IEA-RETD, RES-H/C: Waking the Sleeping Giant, February 2015.
Policy Category Description and overview for RES-H/C
Integrated product
and workforce
standards for RES-
H/C
A number of different product, industry and workforce standards or certifications govern the
quality of RES-H/C technologies and markets. The competitive strength of the RES-H/C industry,
especially in Europe, relies upon the high quality of its products and workmanship (Sanner et al.,
2011). However, for many RES-H/C technologies, there is not currently a commonly accepted
international framework applicable to govern the certification and accreditation of RES-H/C
installers. In addition, there is a diversity of standards that governs the quality of manufactured
products across the globe. While potentially worthy of study in the future, an analysis of product
and workforce standards were determined to be outside the scope of this project.
RES-H/ regulations or
mandates
Though RES-H/C obligations are becoming more common for new buildings, few jurisdictions
have strong RES-H/C regulatory requirements for existing buildings. Moreover, it is notable that
there are almost no policies structured to specifically promote RES-H/C in the industry and
service sectors (Beerepoot & Marmion, 2012). There are a number of next generation building
regulatory policies that could be developed to influence adoption of RES-H/C technologies in the
commercial sector. These include RES-H/C mandates for utilities and existing buildings and are
discussed in Section 4.2.
RES-H/C system
design standards or
guidelines
When unfamiliar technologies such as RES-H/C are incorporated into the building stock, it is
critical to ensure that system designs are based on proven strategies. This usually requires the
development of RES-H/C design standards and/or training for industry. While it is recognized
that this is important to the long-term success and widespread utilization of RES-H/C
technologies, elaboration of international design standards is outside the scope of this project.
Soft cost initiatives
for RES-H/C
There is limited data available on the hard and soft costs of RES-H/C technologies. Hardware
costs consist of the mechanical equipment used in the RES-H/C system, while soft (also referred
to as business process) costs make up the remaining portion of system cost. With the right data,
policy-makers can implement targeted initiatives to drive down soft costs for RES-H/C and
increase RES-H/C competitiveness, reduce time and hassle associated with permitting, increase
public awareness, and improve market transparency for RES-H/C. Issues and options related to
soft cost policies are described in Section 4.4.
Cap and trade,
carbon taxes, and
other regulatory
approaches
A variety of other policies have been successfully deployed to support RES-H/C markets, either
directly or indirectly, such as carbon taxes or cap and trade. Many of these policies have been
responsible for increasing the cost of fossil fuels, and thus improving the cost-effectiveness of
RES-H/C technologies. It is uncertain whether these policies alone are likely to achieve the
desired impact on RES-H/C market development, however, and their impact on RES-H/C has
been assessed as “difficult to quantify and may well be negligible” (Bürger et al., 2008).
After reviewing global policy practices, the next generation policies that could support continued RES-H/C
deployment were identified and assessed (see Section 4), with a focus on policies relevant to the commercial
sector across a range of jurisdictions.
The sections below clarify terms and methodology that were used to conduct this assessment, including RES-
H/C technologies (Section 2.1.1) and the definition of the commercial sector (Section 2.1.2). Section 2.2
describes the current state of RES-H/C market deployment in IEA-RETD countries, and Section 2.3 describes
country conditions that may influence RES-H/C policy development in IEA-RETD countries.
P a g e | 7 IEA-RETD, RES-H/C: Waking the Sleeping Giant, February 2015.
Section 2.4 describes the approach to assess relevant cost-effectiveness considerations across countries for
each of the next generation policies reviewed.
2.1.1 DEFINITION OF RES-H/C TECHNOLOGIES The RES-H/C sector includes technologies that provide a range of heating and cooling services, including
domestic hot water, process heat, heat and power, cooking, and space heating and cooling. As defined by IEA-
RETD, RES-H/C includes biomass (e.g. wood pellets, chips, etc.), biogas, combined heat and power (CHP), solar
thermal, solar PV thermal, high efficiency heat pumps (air and ground-source), as well as a number of waste
heat technologies. Figure 3 below provides a summary of the major RES-H/C technologies and applications.
RES-H/C technologies have a number of features that are unique relative to EE or RES-E, and which can
influence policy design.
Custom sizing and installation. Unlike RES-E, RES-H/C is not usually integrated into an energy grid
(unless it is part of a district heating network). As a result, RES-H/C systems must be sized and installed
to meet on-site heating and cooling demand of local buildings. Because RES-H/C sizing requirements
vary by technology, application, and building conditions, commercial-scale RES-H/C installations are
complex and may require customized engineering solutions to ensure optimal performance.
Variable production profiles and applications. RES-H/C systems have a variety of different production
profiles, which may vary based on weather, time, season, and temperature. In addition, heat, unlike
electricity, is not a homogenous commodity. It can vary by temperature (i.e. low, medium or high
temperature) and application (i.e. domestic hot water, space heating, space cooling, or process heat)
(IEA, 2014).
Performance characteristics similar to both RES-E and EE. In some cases, RES-H/C technologies (e.g.
ground source heat pumps or biomass heating) produce enough energy to remove the need for fossil
fuels for building heating and cooling systems and/or can feed into a district heating grid, making them
behave like RES-E technologies. In other cases, RES-H/C technologies (e.g. solar water heating) act
more like energy efficiency technologies by significantly reducing – though not eliminating – the need
for fossil fuel heating in buildings. In the past, this has created confusion regarding whether RES-H/C
technologies should be considered energy efficiency, renewable energy technologies, or a separate
category from a policy perspective.
As discussed in Section 4, these unique features require policy decisions regarding metering, proper project
sizing, building integration requirements, and administrative protocols that may not be necessary for RES-E or
EE.
P a g e | 8 IEA-RETD, RES-H/C: Waking the Sleeping Giant, February 2015.
low temp med temp high temp cooling
EXC
ESS
HEA
T
Solar Non-concentrating collector
Direct heat
Solar High-concentrating collector
Direct heat
Solar Low-concentrating collector
Direct heat
Heat and power Steam turbine
Solid and liquid biomass
Combustion or gasification Direct heat; Heat and power
Solid and liquid biomass
Thermal gasification
Direct heat; Heat and power
Combustion
Natural gas grid Grid injection
Geothermal and enhanced geothermal
Heat exchanger Direct heat
Animal manure, energy crops, sludge
Anaerobic digestion
Direct heat; Heat and power
Combustionnn
Natural gas grid Grid injection
Natural gas grid Grid injection
Food and fiber product residues
Landfill disposal
Direct heat; Heat and power
Combustion
Geothermal Direct use Direct heat
Heat and power Steam turbine
Renewable heat or waste heat
Sorption cooling Cooling
Ambient heat (from air, ground, water), waste heat)
Heat pump Direct heat
Cooling
INPUT RENEWABLE HEAT TECHNOLOGY/PROCESS OUTPUT SO
LAR
B
IOM
ASS
H
EAT
PU
MP
S
Figure 3. RES-H/C technologies and applications in the commercial sector (adapted from IEA, 2014)
P a g e | 9 IEA-RETD, RES-H/C: Waking the Sleeping Giant, February 2015.
2.1.2 DEFINITION OF COMMERCIAL & INSTITUTIONAL SECTOR To support the policy assessment for the commercial sector, a working definition for the new and existing
buildings in the commercial and institutional sector (hereafter referred to as commercial) was also developed.
For the purposes of this project, the commercial building sector includes building types used for the principal
purposes described in Text Box 2 below. It does not include residential, industrial, manufacturing or domestic
facilities.
Text Box 2. Defining Commercial Buildings (Source: US EIA, 2003)
Commercial buildings encompass a diversity of building types and purposes. This may include:
Education includes buildings for academic or technical classroom instruction, such as elementary,
middle, or high schools, and classroom buildings on college or university campuses.
Food sales include buildings used for retail or wholesale food sales.
Food service includes buildings used for the preparation and sale of food and beverages for
consumption.
Service includes buildings in which some type of service is provided other than the sale of food or
retail goods, such as carwashes, gas stations, repair shops, post offices, kennels, or copy shops.
Health care includes buildings used as diagnostic and treatment facilities for inpatient care, as
well as facilities used for outpatient care (e.g. hospitals and clinics). The latter includes medical
offices that use diagnostic equipment.
Lodging includes buildings used as accommodation for short- and long-term residents, including
hotels, motels, retirement homes, or other residential care.
Mercantile / Commercial includes buildings used for the sale and display of goods other than
food (e.g. dealerships, galleries, etc.) as well as shopping malls comprised of multiple connected
establishments.
Office includes buildings used for general, professional, or administrative, bank, government,
contractor, or sales offices.
Public assembly includes buildings in which people gather for social or recreational activities,
including social meeting halls, cinemas, or transportation terminals.
Public order and safety includes buildings used for the preservation of law and order or public
safety, including police and fire stations, jailhouses, or courthouses.
Religious worship includes buildings in which people gather for religious activities including
chapels, churches, mosques or synagogues.
Warehouse and storage includes buildings used to store goods, manufactured products,
merchandise, raw materials, or personal belongings, including non-refrigerated warehouses as
well as distribution or shipping centers.
2.2 RES-H/C DEPLOYMENT STATUS ACROSS IEA-
RETD COUNTRIES As described in Section 3.1, a number of barriers impede deployment of RES-H/C in the commercial sector.
RES-H/C deployment is also affected by the maturity of the market and other country-specific conditions.
Accordingly, different policies are required at different phases of market development (Brown & Müller, 2011).
P a g e | 10 IEA-RETD, RES-H/C: Waking the Sleeping Giant, February 2015.
IEA has described three distinct market deployment phases for renewable energy technologies (Beerepoot &
Marmion, 2012; Brown & Müller, 2011).
The inception phase describes when the first examples of technology are deployed under commercial
terms. At this stage, the market is immature, technologies are not well established, and the local
supply chain is not in place. Financial institutions often perceive investments in the technology as risky.
The priority for policymakers is to put in place the legislative framework to catalyze initial investment
rounds.
The take-off phase describes when the market starts to grow rapidly. By this stage, technology
deployment is underway and the national supply chain is in place, even if not fully developed.
Financing institutions have increased knowledge of the technology and associated risks. The priority
for policy makers is to maintain or accelerate market growth while managing policy costs.
The market consolidation phase describes where deployment grows toward saturation. Technologies
are well established, the market has grown significantly, supply chains are robust, and finance and
public institutions have streamlined their procedures. For RES-H/C, this means that the technologies
are close to or fully competitive with fossil fuel alternatives (Brown & Müller, 2011).
Using the IEA phase and deployment curve as a model, each IEA-RETD country4 was evaluated to estimate the
approximate level of RES-H/C market penetration. These estimates were derived by reviewing the percentage
of RES-H/C technologies providing heating and cooling across all sectors in 2011 as well as each EU country’s
RES-H/C projections for 2020 as stated in the National Renewable Energy Action Plans (NREAPs). As illustrated
in Figure 3, all of the IEA-RETD countries are in either the inception or take-off phase for RES-H/C. A detailed
analysis of specific RES-H/C technologies within the commercial sector would reveal much greater variability
in the market deployment phases across countries. However, detailed information on the state of RES-H/C in
the commercial building sector – the particular focus of this study – is not readily available from government
statistics, as noted by other studies (Eisentraut & Brown, 2014).
4 The IEA-RETD member countries include Canada, Denmark, Japan, France, Germany, Ireland, Norway and the United Kingdom.
P a g e | 11 IEA-RETD, RES-H/C: Waking the Sleeping Giant, February 2015.
Figure 3. IEA-RETD countries and the RES-H/C deployment curve5
As can be seen in Figure 4, Canada, the UK, and Ireland are in the inception phase of deployment. These
are countries that have relatively new RES-H/C markets – with RES-H/C making up five percent or less of
total market share for heating .
Germany and France are in the take-off phase of deployment. Currently, Germany’s RES-H/C market
share is 12% and France is at 17%. RES-H/C technology deployment is widespread and strong national supply
chains exist. These countries have projected RES-H/C market shares of 16% and 33% by 2020, respectively
under their NREAPs.
Denmark and Norway are late-stage take-off markets. These countries have relatively large RES-H/C
markets, where RES-H/C technologies serve over 30% of the total heating market. They are projected to
have a RES-H/C market that makes up 40% and 43%, respectively, of the heating market by 2020.
5 Unable to assess (1) Japan’s and (2) Canada’s placement at this time due to lack of RES-H/C data, though it appears in both cases that these countries are in the inception phase for RES-H/C.
P a g e | 12 IEA-RETD, RES-H/C: Waking the Sleeping Giant, February 2015.
None of the countries assessed were in the consolidation phase (estimated at 50% of market share or
above). As stated above, the goal of this project is to explore development of new and innovative
policies that could drive large-scale deployment of RES-H/C – enabling countries to move along the
deployment curve. Next generation policies will help countries in the take-off phase transition into the
consolidation phase and countries in the inception phase transition into the take -off phase.
2.3 ECONOMIC & TECHNICAL COUNTRY
CONDITIONS The climate, the status of commercial building stock, heat distribution infrastructure, and conventional heating
and cooling sources and prices are important country conditions to consider when evaluating RES-H/C policy
best practices at the national level. These conditions influence the economics, feasibility, and technical
potential of renewable heating and cooling technologies. Each is described below.
2.3.1 CLIMATIC CONDITIONS Buildings perform differently in cold and hot climates. It is therefore not possible to compare the heating
and cooling requirements of northern European countries with the requirements of Australia or Southern
India (Laustsen, 2008). As a result, each of the IEA-RETD countries were classified in one of six basic
climatic zones based on heating and cooling requirements: (i) cold climate, (ii) heating-based climate, (iii)
combined climate, (iv) moderate climate, (v) cooling-based climate and (vi) hot climate.
The following figure illustrates at a high level the current status of these climatic conditions in each IEA-
RETD country.6 France and Japan have the warmest climates, and have both heating needs in the winter
and cooling needs in the summer. These countries have been classified as “combined climate” countries.
By contrast, Norway and Canada are the countries with the coldest climates, with heating needs nearly
all year round, and fall into the “cold climate” category. Ireland, the UK, Denmark, and Germany, have
heating needs in the winter and some cooling needs in the summer. The climates in these countries have
been designated as “heating-based.”
Figure 4. Climatic classifications for each IEA-RETD country7
6 A more detailed analysis would reveal that climatic conditions vary across regions within a given country; however, for the purposes of this report, such a detailed analysis was not deemed necessary. 7 Climate zone classifications presented in this paper (cold climate, heating based climate, and combined climate) were sourced from an IEA information paper on energy efficiency and building codes (Laustsen, 2008). This paper suggests a simplification of the predominant
P a g e | 13 IEA-RETD, RES-H/C: Waking the Sleeping Giant, February 2015.
Climate conditions influence the need for specific RES-H/C technologies. For example, heat pumps to
provide cooling will likely have increased importance in regions with warmer climates. In regions with
colder climates, policymakers can select from a variety of RES-H/C technologies to meet the large heating
needs of commercial buildings.
2.3.2 THE STATUS OF COMMERCIAL BUILDING STOCK RES-H/C deployment potential can be further influenced by the age, condition, and existing heating
infrastructure of commercial buildings. For example, buildings that are poorly insulated will require
greater energy input to regulate indoor temperatures. Similarly, the fact that many buildings are
designed to use and distribute heat from high temperature heating systems often makes them
unsuitable for heat pumps or other low-temperature RES-H/C systems without making significant
changes to the building infrastructure.
While a comprehensive assessment of the interaction of all building conditions on RES-H/C technologies is
beyond the scope of this report, policymakers should be cognizant of the following factors when developing
RES-H/C policies.
Thermal end uses. Possible end uses for RES-H/C may include space heating, space cooling, domestic
hot water (DHW), cooking, and process heat. Thermal load profiles in the commercial sector vary
across building types, depending upon user habits and sector requirements. As a result, commercial
buildings have a wide range of heating and hot water loads compared to the residential sector. Some
renewable thermal technologies, like ground source heat pumps, are best suited to serve stable
heating, cooling and hot water requirements such those needed for space conditioning in office
buildings or education facilities. Biomass pellet systems, on the other hand, are well suited to provide
variable heating loads or for combined heat and power (CHP). Solar thermal systems have a variable
fuel source (i.e. the sun) and generally require back-up heating systems. Solar thermal is particularly
well suited for building with high domestic hot water loads such as hospitals, car washes, or jailhouses.
Building heat distribution system. Buildings may be equipped with forced air, steam, or hydronic heat
distribution systems to serve thermal end uses. It is important to match RES-H/C technologies to the
temperature and distribution systems in the commercial building stock. Forced air systems circulate air
through a building through ducts and vents, allowing the same distribution system to either heat or
cool a property. Buildings with these heating and cooling distribution systems may be appropriate for
biomass furnaces and both air and ground-source heat pumps. Hydronic heating can be subdivided
into low and high temperature systems. Low-temperature hydronic distribution systems, such as
radiant floor heating, can effectively distribute heat at temperatures e.g. under 49 degrees Celsius (C)).
Low-temperature hydronic distribution systems may be best pared with SHW and heat pump
technologies. High temperature hydronic heat distribution (e.g. fin-tube baseboard heaters), on the
other hand, must achieve much higher water temperatures – sometimes exceeding 93 degrees C – to
effectively heat a building (Siegenthaler, 2013).
International Climate Zone classification system, as defined by the American Society of Heating, Refrigerating, and Air-Conditioning Engineers (ASHRAE) in its own Standard 169: Climatic Data for Building Design Standards.
P a g e | 14 IEA-RETD, RES-H/C: Waking the Sleeping Giant, February 2015.
Steam heating systems boil and condense water for distribution through building pipes and radiators.
For buildings with steam or high temperature hydronic systems, biomass boiler technologies may be
most appropriate (Maker, 2004).
Building space. Design and installation of thermal systems also depends upon available space at
building sites. Some RES-H/C equipment requires considerable space for installation, making available
space in basements, utility rooms, or outside storage areas a key consideration in the design and
installation. If a building uses a renewable thermal system for primary heating – and relies on fossil
fuel systems to provide back-up heating on the coldest days – then the user must ensure they have
adequate space for multiple heating units. When using multiple heating sources, then users will
typically require space for hot water accumulators (e.g. tanks) to store energy from the various heat
sources. Pellet and chip heating systems require basement or nearby (outside) space for fuel storage
and boiler equipment.
Ground conditions. The ground and drilling conditions at the building site are of particular importance
for GSHPs. Site-specific conditions frequently dictate the most appropriate ground coupling technology
choice, and will influence the efficiency and cost of GSHP systems (Veilleux et al., 2012). High bedrock
geology typically increases the drilling costs for vertical well GSHP systems. Heat pumps that can
instead use groundwater wells as the source of working transfer fluid for the heat pump can have
significantly lower the installed costs.
Roof conditions. For solar water heating systems, open access to un-shaded roof space is essential.
The output of a solar system is proportional to the intensity of sunlight falling on the system. Greater
amounts and duration of sunlight increase system performance, though systems can generate energy
even on cloudy days. Rooftops must be able to structurally withstand the natural forces imposed on
them (e.g. snow, wind, etc.), combined with the weight of the solar thermal system and other rooftop
mechanical systems
Building efficiency. The energy efficiency and thermal performance of a building can influence the
sizing, upfront costs, and operation of RES-H/C systems. Renewable thermal policies should be
carefully coordinated with energy efficiency programs in order to develop a whole-building approach.
The integrated design of an efficient building shell with a building’s heating, ventilation and cooling
(HVAC) system is a vital area of focus when developing policy for energy in buildings (Taylor, 2011).
Building ownership structure. Commercial property owners are a diverse group with a highly
differentiated goals and priorities, and these differences should be taken into account during the
policy making process. Owners can be public agencies, non-profits or commercial entities. Commercial
entities can be private corporations or publicly traded. Some owners may occupy a property
themselves or rent the property to tenants. Furthermore, owners of commercial rental properties may
manage those properties themselves or hire third parties to run the day-to-day operations of their
facilities. The financial conditions of different owner types can also vary, with some owners having
substantial access to capital while others may be unable to make large-scale investments in their
buildings due to financial constraints. Different owners may have different views on the desirability of
investing in RES-H/C technologies. Some may be willing to take on added costs or risks in order to
capture savings and/or promote sustainable energy. Others may not find the potential paybacks
compelling or may not be interested in exploring investments that are not core to their day-to-day
business. .
P a g e | 15 IEA-RETD, RES-H/C: Waking the Sleeping Giant, February 2015.
2.3.3 REGIONAL DISTRICT HEATING INFRASTRUCTURE
A key consideration for RES-H/C market development is whether central district energy infrastructure is
in place to distribute thermal energy, or whether distributed, customized RES-H/C installations must
instead be installed on individual sites. Except for Ireland, all of the IEA-RETD countries have some
existing district energy infrastructure. Denmark stands out as a leader in district heating deployment
among IEA-RETD nations. District heating serves 35% of non-residential building energy needs on
average. In 2008, the share of non-residential buildings heated via district heating networks was as high
as 65% (Klima OG Energiministeriet, 2010).
Germany leads in terms of gross sales from district heating infrastructure. In 2011, Germany fed over
77,760 GWh of heat into the district heating grid, more than the combined district heating sales in
Denmark, France, Norway, and Japan that same year. Based on available data comparisons, Japan leads
on district cooling, selling over 3 million MWh in 2011, whereas France sold less than 1 million MWh of
district cooling in the same year (EHP, 2011).
District heating infrastructure will influence the type of RES-H/C technologies that can be deployed and
determines whether distributed generators can feed excess energy into the grid. As discussed in Sections
3.2, 4.3 and 5.1.2, the presence and extent of district energy infrastructure can have significant
ramifications on technology deployment and incentive design.
2.3.4 CONVENTIONAL HEATING & COOLING SOURCES & COSTS It is clear the cost and availability of conventional energy resources is a driver of RES -H/C diffusion.
Germany and Denmark, for example, have high conventional energy costs and robust RES -H/C markets.
However, commercial decision-making about RES-H/C adoption and technology diffusion patterns are
less well understood. Norway and France, for example, have relatively low conventional energy costs,
though a number of RES-H/C technologies are also diffusing in these countries.
One of the challenges with analyzing technology diffusion is the lack of data about thermal energy use.
Tracking thermal energy use across sectors (e.g. residential, commercial, industrial, etc.) and end -uses
(e.g. space heating, cooling, hot water, etc.) is difficult, and there is generally not good data available on
heating and cooling uses in the commercial sector (Eisentraut & Brown, 2014). Given the lack of data, it
is challenging to assess the impact of conventional fuels on RES-H/C markets without conducting in-
depth national surveys. Nonetheless, it is clear from qualitative analyses that energy prices do have an
impact on the cost effectiveness of RES-H/C deployment and is an important consideration for
policymakers. While no clear correlations could be gleaned from the data for this report, this assumption
is expected to be generally true across countries.
2.3.5 SUMMARY: COUNTRY CONDITIONS & KEY CONSIDERATIONS
FOR POLICYMAKERS The conditions described above will be important factors influencing policymakers’ decisions to develop
and implement RES-H/C policies. Given the diversity of commercial building types, RES-H/C technologies,
thermal energy end uses, conventional energy costs, and heating infrastructure, it can be challenging to
develop RES-H/C policies that create broad-based markets with multiple technology types.
P a g e | 16 IEA-RETD, RES-H/C: Waking the Sleeping Giant, February 2015.
Policies that promote development of one technology in one building type may result in limited market
growth in other commercial building types. Policymakers interested in developing a self -sustaining
commercial RES-H/C market may wish to begin the policy development process by conducting a market
segmentation analysis of commercial property. Such analysis can allow policymakers to calibrate
incentives, regulations and goals based on specific market needs.
2.4 COST EFFECTIVENESS ASSESSMENT Cost effectiveness is an essential consideration for the implementation of any new policy or program. There
are well-established methodologies to evaluate policy cost-effectiveness, which typically involve identifying a
range of possible policy options, monetizing the impacts of proposed policies (where feasible), and assessing
the costs and benefits for options. Table 3 below provides a brief overview of a typical cost effectiveness
analysis methodology, adapted from the methodology used by policymakers in the United Kingdom.
Table 3. Key Stages in Assessing Policy Cost in the United Kingdom (HM Treasury, 2003)
Assessment Stage Description
1) Justify action
Justifying the need to take action may include an analysis of the possible negative consequences
of intervention, as well as the adverse results from a lack of intervention, both of which must be
weighed and addressed to justify action.
2) Set objectives
Clarify the desired outcomes and objectives of a policy intervention. This supports analysis and
identification of the full range of options available to achieve goals. At this stage, specific targets
may be set to help measure progress towards the achievement of specified goals and objectives.
3) Conduct options
appraisal
The option appraisal is often the most significant part of the analysis. Initially, a wide range of
options is created and reviewed from which a targeted shortlist may be crafted. Each option is
then appraised against a base case, and the best estimates of its costs and benefits – relative to
the base case – are developed. These estimates can then be adjusted by considering different
scenarios. In addition, each option’s sensitivity to changes can be modeled by changing key
variables.
4) Develop &
implement solution
Following option appraisal, decision criteria and judgment are used to select the best option,
which should be refined into a solution. Consultation with key stakeholders is important at this
stage, as a variety of unforeseen issues may have a material impact on the successful
implementation of proposals.
5) Evaluation
Evaluation is similar in technique to the options appraisal, although it uses historic (actual or
estimated) rather than forecasted data and takes place after the policy has been implemented. Its
main purpose is to ensure that lessons are widely learned, communicated and applied when
assessing new proposals.
P a g e | 17 IEA-RETD, RES-H/C: Waking the Sleeping Giant, February 2015.
As can be seen from Table 3 above, cost effectiveness analyses depend upon value judgments and estimates,
which are based on the unique contextual assumptions and requirements of a specific jurisdiction. Because
this project is global in nature – and does not focus on any one country or jurisdiction – it is not possible to
complete a comprehensive cost effectiveness analysis for any of the next generation policies described here.
However, a qualitative assessment of the types of costs and benefits that may be considered for any given
policy type – as well as the potential distribution of those costs and benefits across stakeholder groups – is
provided in the Distribution of Costs and Benefits sub-sections for each major next generation policy
throughout Section 4. Key findings from representative case studies of existing policy cost-effectiveness
assessments are also discussed as appropriate.
P a g e | 18 IEA-RETD, RES-H/C: Waking the Sleeping Giant, February 2015.
3 RES-H/C BARRIERS &
OPPORTUNITIES IN THE
COMMERCIAL SECTOR 3.1 BARRIERS TO RES-H/C IN THE COMMERICAL
SECTOR RES-H/C technologies have a lengthy track record of providing reliable energy in commercial buildings, but
there are a number of market barriers that have limited wider adoption of these technologies. This section
describes major barriers to RES-H/C adoption within the commercial sector based on recent literature (Brown
& Müller, 2011; IEA-RETD 2011; Langniss et al., 2007).
3.1.1 LACK OF AWARENESS ABOUT RES-H/C TECHNOLOGY Many policymakers, consumers, and commercial real estate actors (e.g. architects, real estate agents, builders,
etc.) are unfamiliar with RES-H/C technologies and their benefits, particularly in inception stage markets. A lack
of awareness may be due to a number of factors, including low level of exposure to the technologies, lack of
effective marketing by industries, and absence of government-led consumer education programs.
Manufacturers, who may have both renewable and non-renewable product lines, may have limited resources
to devote to building a base of potential customers. This difficulty may be amplified because sales staff face
the dual challenge of selling their specific product while convincing customers about the renewable thermal
opportunity more broadly. Independent RES-H/C installers may also have limited resources to devote to
building awareness of RES-H/C technologies and educating customers. Given these challenges, government
entities can intervene by creating educational, marketing, or other customer acquisition campaigns that tout
the benefits of these technologies (see Section 4.4 on soft cost reduction programs) as well as cultivating
innovative finance and business models (see Section 4.5).
3.1.2 INADEQUATE EXPECTED INVESTMENT RETURNS & CAPITAL
CONSTRAINTS In some countries, especially those with low fossil fuel prices and no policy support for RES-H/C, RES-H/C
systems will have relatively poor economics and long payback times. In other countries, especially where
conventional heating fuel prices are high, RES-H/C systems may be able to deliver significant savings and
relatively short paybacks. However, many commercial customers have very low payback requirements, making
it challenging to justify investment in RES-H/C (e.g. some hotels report that investments must meet a six-
month payback threshold).
P a g e | 19 IEA-RETD, RES-H/C: Waking the Sleeping Giant, February 2015.
In almost all cases, RES-H/C technologies are capital intensive (relative to conventional heating and cooling
systems) and will have to compete for scarce internal investment dollars with other corporate or institutional
priorities. This challenge is compounded by the fact that some entities may have a bias against making large
capital investments that are not related to core business activities. As a result, decision-makers will often
determine that the opportunity costs associated with focusing time, energy or capital on evaluating potential
for RES-H/C heating systems is too great compared to potential returns (TCT, 2009).
Policy makers may be able to overcome these barriers by improving project economics through direct
incentives (like performance based incentives – see Section 4.3) or fostering the development of innovative
financing and business models (e.g. third-party ownership models – see Section 4.5) that reduce the need for
customers to invest their own capital in RES-H/C projects.
3.1.3 OWNERSHIP PRIORITIES & DECISION MAKING BARRIERS Property owners may have widely varying goals related to their real estate investments. Some commercial
buildings owners may have long-term plans to own and occupy a property, making them more inclined to
make long-term investments. Other property owners may invest in real estate with the intention of re-selling a
property within a few years. These owners may have limited motivation to make large capital investments in
building energy systems. Policymakers may need to tailor building regulations for existing buildings (Section
4.2) and incentive programs (Section 4.3) to different property ownership strategies for existing buildings in
order to ensure commercial RES-H/C expands broadly within the commercial property sector.
Additionally, internal management structures and ownership priorities may significantly influence investment
in RES-H/C technologies. Building operations staff may be able to identify cost effective renewable projects,
but without high-level management support for those projects, they are unlikely lead to viable installations.
Internal decision making and priority setting processes within the ownership group of a commercial property
can lead to underinvestment in promising, costs savings projects (Hiller et al., 2012).
3.1.4 SPLIT INCENTIVES Split incentives occur when participants in an economic exchange have different goals or incentives. In the
case of commercial rental properties, depending on lease structure, the building tenant may be responsible for
paying energy costs; however, the landlord makes investment decisions related to building heating system
upgrades. In such cases, the landlord is typically not incentivized to invest in technologies that potentially
reduce energy cost unless system costs can be passed on to the tenants, who benefit from reduced utility bills.
Additionally, tenants do not typically make large investments in energy cost saving technologies because they
do not own or have control over those building assets. This split incentive has been identified as a major
barrier to energy cost saving technologies in the commercial building sector and has been well documented in
a number of studies (Beerepoot & Marmion, 2012; TCT, 2009).
Lease structures that better align incentives have been proposed as potential solutions to this issue and efforts
to promote these structures have been launched in several jurisdictions (CRiBE, 2009; Green Lease Library,
n.d.; PlaNYC, 2014). Mandates for existing buildings can also provide the regulatory requirement necessary to
better align landlord and tenant incentives (Section 4.2).
P a g e | 20 IEA-RETD, RES-H/C: Waking the Sleeping Giant, February 2015.
3.1.5 LOW REFURBISHMENT RATES Commercial and institutional HVAC and water heating systems have long replacement cycles and low annual
refurbishment rates. Given the significant capital expense, commercial property owners may be more inclined
to make incremental repairs to older, less efficient building energy systems than to invest in new technologies.
This tendency can lead to building systems that are maintained well beyond their design life. Low
refurbishment and replacement rates reduce the opportunity to scale deployment of RES-H/C markets quickly.
Most buildings replace heating systems only once every 15 to 30 years, and so the decisions that building
owners make today will influence the RES-H/C market for the next several decades.
Mandates requiring integration of RES-H/C technologies in buildings can help address this barrier (Section 4.2).
Innovative financing and ownership mechanisms, such as the provision of heat as a service to building users,
may also offer a solution to this challenge (Section 4.5).
3.1.6 INSUFFICIENT LOCAL CONTRACTOR BASE In many early-stage RES-H/C markets, a lack of skilled and knowledgeable professionals with the expertise to
design and install reliable, high-quality RES-H/C systems can be a significant barrier to market growth. RES-H/C
technologies are often more complex than traditional heating and cooling technologies and may also require
specialized training and skills to properly design and install. Improperly installed systems can damage the
industry’s reputation. This issue has been identified as one of the reasons for the collapse of the solar water
heating market in the Unites States after several years of rapid growth in the late 1970s and early 1980s
(Sinclair, 2007).
A number of jurisdictions have implemented workforce training programs to overcome these challenges. Such
initiatives are challenging to sustain over the long term without clear signals that significant market
development will occur. While workforce training programs are not addressed specifically in this report, clear
long term plans, regulations and incentives designed to sustain orderly market development can send the
proper signal (see Sections 4.2 and 4.3).
3.1.7 LACK OF CONFIDENCE IN SYSTEM PERFORMANCE & FUEL
AVAILABILITY RES-H/C typically involves more perceived risk than more traditional heating and cooling technologies because
the technologies are unfamiliar to investors. Commercial customers may perceive risks related to overall
system performance, product quality and durability, manufacturer warranty viability, long-term fuel
availability, future fuel price uncertainty, and availability of ongoing maintenance services. These and other
perceived risks may hinder early stage RES-H/C market growth, but may be less of a concern as markets grow
and commercial and institutional customers become more familiar with these technologies.
Policymakers can foster early-stage market growth by creating programs and policies that promote RES-H/C
ownership models designed to mitigate these perceived risks for end use customers. Third-party system
owners are likely better prepared to both understand and mitigate the various operational risks associated
with RES-H/C technologies (Section 4.5).
P a g e | 21 IEA-RETD, RES-H/C: Waking the Sleeping Giant, February 2015.
3.1.8 OPERATIONS STAFF TRAINING REQUIREMENTS Without adequate maintenance, RES-H/C systems will not operate effectively, resulting in poor customer
experiences. Large RES-H/C systems may require specialized knowledge to ensure optimal performance.
Commercial and institutional entities may not wish to either hire or train employees who have with these
specialized skills, preferring to invest in technologies with which are more familiar to their existing building
operations staff. Increasing the knowledge and confidence of building managers to manage, maintain, and
operate RES-H/C systems will be essential to support widespread technology adoption. Third-party system
owners who can provide heat as a service could also be deployed to mitigate the various operational risks
associated with RES-H/C technologies (Section 4.5).
3.2 OPPORTUNITIES FOR INTEGRATING RES-H/C
INTO COMPREHENSIVE ENERGY PLANS The deployment of RES-H/C will be most successful if policymakers develop integrated policy approaches that
address commercial building needs across the energy sectors. Policymakers should carefully consider the
potential for integrating RES-H/C policies with other energy policies to better manage the development of the
electric, heating, and building sectors. Section 5 explores these issues in greater detail; however, key
considerations that may influence decisions regarding implementation of next generation RES-H/C policies are
briefly introduced here.
RES-H/C and low energy buildings. Low energy buildings are those with zero or minimal energy
requirements for energy, due to highly insulated building envelopes, limited thermal loss and efficient
appliances. Low energy building design for new construction has been taking on increased importance
in many regions of the world, and policymakers are also beginning to consider the challenge for
converting existing buildings to low energy. The trend towards low energy buildings development has
important ramifications for RES-H/C. With low energy buildings, relatively small amounts of heating
and cooling supply are sufficient to provide normal comfort levels in all seasons. There will likely
continue to be a need for indoor climate control, especially for large commercial buildings with heat
loading from electronic equipment and high number of occupants. RES-H/C technologies are often
desirable to provide heating and cooling needs for low or zero carbon buildings.
RES-H/C and district energy expansion. RES-H/C has been widely integrated into district heating
networks in regions such as northern European (e.g. Denmark). A number of other countries such as
the UK are considering district energy networks for both new and existing buildings as a means to
supply wider areas with centralized renewable heat installations. District heating systems could either
support or constrict the development of RES-H/C markets. Some experts consider the lack of district
energy a “severe structural barrier” to widespread utilization of RES-H/C, as they consider it more
straightforward to transition a few centralized heat generators to RES-H/C than to transition many
distributed building system (Bürger et al., 2008; REN21, 2013). On the other hand, RES-H/C systems
that are implemented as part of a low energy building strategy could significantly reduce building
heating demand, thus causing revenue erosion for district heating operators. Such a scenario could
create stakeholder conflict related to the expansion of distributed RES-H/C systems.
P a g e | 22 IEA-RETD, RES-H/C: Waking the Sleeping Giant, February 2015.
RES-H/C and thermal storage for electric grid management. As greater shares of variable RES-E, such
as wind or solar, are integrated into the electric grid, grid operators are facing new challenges to
ensure flexibility and reliability of the system. There are opportunities to integrate RES-H/C and
thermal storage into electric power grid planning and management in order to accommodate larger
penetrations of variable generation. In particular, recent studies have shown that using CHP, heat
pumps, and heat storage can provide significant balancing capability and contribute to a more flexible
and efficient energy system (Hedegaard, 2013; Meibom et al., 2007; Mueller et al., 2014).
P a g e | 23 IEA-RETD, RES-H/C: Waking the Sleeping Giant, February 2015.
4 RES-H/C NEXT
GENERATION POLICIES 4.1 OVERVIEW OF NEXT GENERATION POLICIES This section describes next generation policies that can enable deployment of RES-H/C technologies, focusing
in particular on policies and practices that can be applied to new and existing buildings in the commercial
sector across a range of jurisdictions. The next generation policies described in this report are new and
innovative in the RES-H/C sector, address one or more market barriers, and could enable RES-H/C markets to
achieve cost-effective, mainstream deployment over the next several decades.
It is generally expected that next generation policies will drive market development along the deployment
curve, helping countries move RES-H/C markets from the inception to take-off phase, and then from the take-
off to the consolidation phase. Over the long-term, it is expected that next generation policies will enable RES-
H/C technologies to compete with conventional, low-cost heating fuels. They will therefore be a key tool for
countries to achieve long-term energy and climate ambitions, such as climate change mitigation, climate
adaptation, economic development, and energy security.
When describing next generation RES-H/C policies, this report also takes into account lessons learned from
RES-E and EE sectors, the unique features for RES-H/C policy, special features of commercial buildings, and the
need for integrated energy policies.
Lessons learned from RES-E and EE. As noted by numerous experts, policies for RES-H/C lag several
years behind the RES-E and EE sectors (Beerepoot & Marmion, 2012; Eisentraut & Brown, 2014). Some
of the next generation policies described below have seen widespread implementation in the EE or
RES-E sectors. Accordingly, this report draws on lessons learned from the RES-E and EE sectors and
applies them to RES-H/C.
The unique features of RES-H/C. While policymakers can and should apply lessons learned from other
sectors to RES-H/C, it is important to remember that RES-H/C has a number of unique features. As
discussed in Section 2, RES-H/C technologies have custom sizing and installation requirements, variable
production profiles and applications, and, in some cases, performance characteristics similar to both
RES-E and EE. The unique features of RES-H/C require policymakers to consider special metering,
project sizing, building integration, and administrative requirements.
Special features of commercial and institutional buildings. As noted in Section 2, the commercial and
institutional building sector encompasses a wide range of building types. Commercial building types
have much higher and more variable heating loads, and more complex installation requirements, than
residential buildings. This may make it challenging for policymakers to develop uniform technical or
regulatory requirements to govern RES-H/C technologies across all building types. On the other hand,
RES-H/C policy could be more cost-effective and efficient to implement than in the residential sector
because of the potential for larger systems and fewer owners.
P a g e | 24 IEA-RETD, RES-H/C: Waking the Sleeping Giant, February 2015.
The need for integrated energy policies. As described in Section 3.2, the deployment of RES-H/C will
be most successful if policymakers develop integrated RES-H/C policies, which address needs across
the electricity, heating, and building sectors. Section 5 explores energy infrastructure planning and
investment questions that have important implications for RES-H/C policy in the future.
Table 4 below provides an overview of the next generation policies explored in this report.
Table 4. Next generation RES-H/C policies for new and existing buildings in the commercial sector
Next Generation Policy/Initiative
What Makes it Next Generation?
Develop long-term plans, targets, and mandates
Long-term plans serve to guide policy-making and investment decisions. They are often – particularly in the case of early stage markets – accompanied by formal renewable energy targets, which can send clear signals to the marketplace about future government investment and regulations. By developing clear RES-H/C plans, policymakers can encourage industry leaders and investors to make the necessary investments in infrastructure to overcome market barriers and achieve broader energy and climate goals.
While renewable energy planning and targets are common in the RES-E sector, far fewer countries have established formal planning initiatives for RES-H/C.
RES-H/C regulatory policies or mandates place a legal obligation to develop RES-H/C on specific entities, such as utilities, building owners (or developers), or fuel wholesalers. Mandates are often supported by penalties for non-compliance.
Compared to the RES-E or EE sectors, relatively few governments have implemented regulations mandating the use or development of RES-H/C. Even fewer have developed mandates focused on existing building in the commercial sector.
Mandates can be a powerful tool to provide commercial building owners with the awareness and impetus to develop RES-H/ systems. Building mandates can be developed to address split incentive barriers by requiring the installation of RES-H/C systems in new and existing buildings at the time of building sale or lease or at the time that existing heating systems are replaced.
Develop performance-based incentives (PBIs) for RES-H/C
Performance-based incentives (PBIs) compensate RES-H/C systems specifically for the amount of generation or savings they produce (e.g. $/kWhth) during a certain period of time (e.g. 10 years).
Few countries have developed performance-based incentives (PBIs) for RES-H/C. On the contrary, the majority of RES-H/C incentive programs are structured as grants or rebates.
PBIs have been widely used in the RES-E sector, and it is anticipated that they will be an important RES-H/C incentive policy in coming years, especially as RES-H/C markets move along the deployment curve and policymakers’ priorities shift from catalyzing initial investment to incentivizing efficient performance. PBIs encourage generators to maximize the quality of system installation and maintain systems over time. They also help ensure that ratepayers and taxpayers receive the full economic, environmental, and social benefits from the RES-H/C systems that are provided with incentives.
P a g e | 25 IEA-RETD, RES-H/C: Waking the Sleeping Giant, February 2015.
Next Generation Policy/Initiative
What Makes it Next Generation?
Drive soft cost reductions
There are two types of costs associated with the purchase and installation of RES-H/C technologies: hardware costs and soft costs. Hardware costs consist of the equipment used in the system, while soft costs (also referred to as business process costs) make up the remaining portion of system cost.
Soft costs have not been well tracked for commercial RES-H/C systems – or the RES-H/C sector broadly – and policymakers have not developed targeted programs to address RES-H/C soft costs. By contrast, soft cost reduction programs have led to significant price declines within the solar PV sector.
Soft cost reduction programs can help to expedite installations, reduce time and hassle associated with permitting, increase market awareness, and increase transparency and confidence in the RES-H/C market.
Enable innovative financing and business models
Innovative financing and business models are strategies that address financial or behavioral barriers to RES-H/C deployment by creating value or reducing financial risk. In particular, these include turnkey RES-H/C financing and development services such as third-party ownership or other “heat as a service” models.
Traditionally, support for RES-H/C financing has focused on low-interest (soft) loan programs through commercial banks or dedicated loan facilities. Little attention has been given to the needs, requirements, or supporting policies necessary to develop third-party financing and ownership models for RES-H/C in the commercial sector.
Third-party financing models can create benefits such as simplifying the decision-making process, reducing operating risk for system hosts, reducing the need for host sites to pursue complicated incentives, facilitating financing, and driving development of professional marketing campaigns to reach new customers for RES-H/C.
The following sections describe next generation RES-H/C policies for the commercial sector in greater detail.
Each section provides a brief background on the next generation policies and also describes:
Key policy design features,
Relevant case studies, and
Policy cost-effectiveness.
Each section concludes with a summary of key findings and best practice recommendations.
P a g e | 26 IEA-RETD, RES-H/C: Waking the Sleeping Giant, February 2015.
4.2 RES-H/C PLANS, TARGETS & MANDATES
4.2.1 BACKGROUND FOR RES-H/C PLANS, TARGETS & MANDATES Long-term plans serve to guide policy-making and investment decisions in a region. They are often –
particularly in the case of early stage markets – accompanied by renewable energy targets. By establishing a
RES-H/C target, governments make a commitment to develop a certain percentage of total heating load,
capacity (kWth), or total amount of energy (kWhth) from renewable thermal technologies. The creation of a
RES-H/C plan with supporting targets is important to consider with a view to establishing clear objectives,
identify suitable policy options, and measure progress.
Targets developed during the planning process may be mandatory or non-mandatory. Mandatory targets are
usually enshrined in official legislation or regulations. As illustrated in Figure 5 (next page), only 17 countries
have developed mandatory targets for RES-H/C.8 Germany, for example, passed the Act on the Promotion of
Renewable Energy in the Heating Sector (EEWärme Gesetz), which established a target to supply 14% of total
heating demand from a wide range of renewable energy sources (including solar thermal, biomass,
geothermal, waste heat and CHP) by 2020. Other countries (e.g. Jordan, China, Algeria, Morocco, and Sierra
Leone) have developed targets that focus on only one RES-H/C technology, such as solar thermal. There are no
targets that focus exclusively on the commercial sector.
While few countries have established mandatory RES-H/C targets, European Union and Energy Community
member countries have developed non-mandatory targets as part of National Renewable Energy Action Plans
(NREAPs).9 NREAPs set forth pathways and projections for achieving EU energy and climate targets. For
example, the United Kingdom estimates that it will achieve its formal target of 15% of energy consumption
from renewable resources by supplying around 30% of electricity demand, 12% of heating and cooling
demand, and 10% of transportation demand from renewables by 2020. In this case, the 12% renewable
heating and cooling projection does not represent a mandatory commitment and could in fact be reduced or
eliminated if regulators decided to instead increase RES-E (or renewable transportation) development. The
projection is nonetheless a useful part of the planning process which provides investors a sense of the overall
size of the market opportunity and also enables policymakers to measure RES-H/C development progress.
Once formal plans have been created, policymakers employ a variety of incentive and regulatory policies to
achieve them. Next generation incentive policies are discussed in Section 4.3. Regulatory policies or mandates
– especially those for existing buildings – are described below.
8 By comparison, there are over 144 known policy targets for the increased deployment of renewable energy across the globe, the overwhelming majority of which are focused on RES-E (REN21, 2014) 9 All EU member countries are required by the EU Directive on Renewable Energy (2009/28/EC) to develop NREAPs.
P a g e | 27 IEA-RETD, RES-H/C: Waking the Sleeping Giant, February 2015.
Figure 5. National Renewable Thermal Targets Across the Globe
Solar water heating targets
Algeria 490,000 m² collector area by 2020 Bhutan 3MW equivalent solar thermal by 2025
China 400 million m² collector area by 2015 India 15 million m² collector area by 2017
Jordan SHW on 30% of households by 2020 Lebanon 1.05 million m² collector area by 2020
Libya 450 MW installed capacity by 2025 Morocco 1.7 million m² collector area by 2020
Mozambique 100,000 solar heaters installed by 2025 Sierra Leone
5% SHW penetration in restaurants & hotels, 1% in residential sector by 2030
Swaziland SHW on 20% public buildings by 2014 Syria 100,000 m² collector area per year
Tunisia 1 million m² collector area by 2016 Uganda 30,000 m² collector area by 2017
Yemen 230 GWth generation per year
Renewable Thermal Targets
Germany 14% building heat met with solar, biomass (liquid, solid & gas), geothermal by 2020
Thailand (All ktoe) 100 solar H/C, 1,000 biogas, 8,200 biomass, 35 MSW by 2021
Solar water heating target Renewable thermal targets
P a g e | 28 IEA-RETD, RES-H/C: Waking the Sleeping Giant, February 2015.
4.2.2 BACKGROUND FOR RES-H/C MANDATES RES-H/C regulatory policies or mandates place an obligation to develop RES-H/C on specific entities, like
utilities, building owners (or developers), or fuel wholesalers. Compared to the RES-E or EE sectors, relatively
few governments have implemented regulatory policies requiring use of RES-H/C. Utility mandates such as
renewable portfolio standards (RPS) have historically focused on RES-E. Only recently have two US states –
Massachusetts and New Hampshire – developed comprehensive RES-H/C mandates for utilities (Section 4.2.5).
RES-H/C building mandates are somewhat more common, having been used in recent years especially in EU
and Middle Eastern countries to require integration of RES-H/C in new construction or building renovations.10
Next generation building mandates described here focus on existing buildings, which are far less common.
There are only a few existing examples of RES-H/C building mandates for existing commercial buildings. As
illustrated in Figure 6 below, Kenya requires new and existing buildings using 100 or more liters of hot water a
day to source 60% of their hot water load from solar thermal. In Germany, the state of Baden Württemberg
passed a local law (Erneuerbare-Wärme-Gesetz Baden Württemberg), which requires buildings replacing
central heating systems to supply at least 10% of their heat supply from renewable energy (including solar
thermal, biomass, bio-oil and biogas). Though this law currently applies only to residential buildings, it is
possible that the mandate will be extended to commercial buildings in the future.
Lastly, wholesale fuel blending mandates have been used extensively in the United States and Europe to drive
development of renewable biofuels for the heating and transportation sectors. This regulatory policy is
relatively well established and not considered next generation. It therefore is not treated in detail in this
report; however, interested readers should consult Mosey & Kreycik, 2008 and Kampman et al., 2013 for more
information.
10 In addition, it is worth noting that the EU Energy Performance of Buildings Directive (2002/91/EC, EPBD), which requires all new buildings to be nearly zero energy by 2020, strongly encourages integration of RES-H/C for new construction projects. Though it does not explicitly mandate the use of RES-H/C, by mandating low energy building development, the policy strongly encourages builders to use air source heat pumps, solar water heating, and other RES-H/C technologies in new construction
P a g e | 29 IEA-RETD, RES-H/C: Waking the Sleeping Giant, February 2015.
Figure 6. Examples of National and Sub-National Utility and Building Mandates11
4.2.3 BENEFITS OF RES-H/C PLANS, TARGETS & MANDATES In principle, there are a number of reasons to establish formal RES-H/C plans and implement regulatory
policies (i.e. mandates) to achieve them.
4.2.3.1 Benefits of Plans and Supporting Targets Targets and clear long-term plans can provide the following benefits:
Transform country energy portfolios. A national plan with clear objectives is an important first step to
drive transformation of the national generation portfolio, position domestic industry to compete
internationally, and support economic development in regions with abundant resources or chronic
unemployment (Fulton & Mellquist, 2011). Because heating and cooling makes up 50% of total energy
use (Eisentraut & Brown, 2014), it will be important for country leaders to establish develop clear long
term plans to transform the heating and cooling sector away from fossil fuels and towards renewables
to meet climate and energy goals.
11 Please see Appendix B for descriptions of each mandate above and others around the world.
P a g e | 30 IEA-RETD, RES-H/C: Waking the Sleeping Giant, February 2015.
Increase investor confidence. The planning process, including the creation of clear targets or
commitments, is important to increase investor confidence in the RES-H/C sector (Fulton & Mellquist,
2011; Rickerson, et al., 2012). By providing transparency regarding the goals for RES-H/C development,
especially as it relates to specific technologies, policymakers can reduce policy risk for investors. This in
turn could reduce the overall cost of capital for RES-H/C and improve the overall cost-effectiveness of
RES-H/C incentive programs (Fulton & Mellquist, 2011).
4.2.3.2 Benefits of Mandates Building and utility mandates provide the following benefits:
Drive energy planning decisions in commercial buildings. As described in Section 2, design and
installation of RES-H/C systems is often complex, requiring customers and installers to address
plumbing, structural, load, and other requirements. Complexity is even greater for retrofits in existing
buildings than for new construction. As a result, by implementing and enforcing building mandates,
policymakers provide commercial building owners with the awareness and regulatory requirement to
engage the necessary RES-H/C professionals to upgrade or replace their heating and cooling systems.
Address landlord tenant issues. As described in Section 3.1, split incentives between commercial
landlords and tenants inhibit the installation of RES-H/C technologies. Building mandates can help
address this issue by requiring the installation of RES-H/C systems in new and existing buildings at the
time of building sale or lease or during the replacement of the existing heating system. In such a
manner, strong regulatory policy can lead to widespread implementation of RES-H/C technologies in
existing buildings.
Integrate RES-H/C into existing building stock. The establishment of building or utility mandates can
drive market actors to make individual decisions that benefit society as a whole, i.e. improving the
renewable profile of the heating and cooling sector within a reasonable period of time. This has been
the experience, for example, of policy-makers in Carugate, Italy, where a local solar thermal mandate
in residential and commercial buildings resulted in a per capita solar energy use nearly 30 times the
national average (ESTIF, 2007).
4.2.4 POLICY OPTIONS FOR BUILDING MANDATES RES-H/C buildings mandates require building owners to source a minimum amount of their heating and cooling
load from RES-H/C technologies. Building mandates are usually expressed as a percentage of the total energy
demand of the building and the majority focus on new construction. As described above, there are a variety of
RES-H/C building mandates in the world, each with varying requirements, eligible technologies, and applicable
to various building sectors.
4.2.4.1 Compliance in New & Existing Buildings
A key question for policymakers designing building mandates is determining what triggers compliance. The
majority of energy efficiency and RES-H/C building mandates are triggered by new construction. Alternately,
changes in building ownership or tenancy, building renovation, replacement of the central heating systems, or
regularly required building energy audits could also trigger compliance.
P a g e | 31 IEA-RETD, RES-H/C: Waking the Sleeping Giant, February 2015.
Sale or lease of building. Compliance standards could be required for existing buildings, triggered by
the sale or lease of the building. For example, building inspections are a common part of the process
for real estate transactions, and buildings with boilers over a certain age (e.g. 10 to 15 years) could be
required to upgrade their heating systems with a high efficiency RES-H/C system. Currently, there are
no known RES-H/C mandates that are triggered by real estate transactions; however, the sale of a
building is a trigger for building labelling programs in Europe, and integration of energy efficiency and
RES-H/C technologies could be a logical next step to improve the energy performance of existing
buildings.
Building renovation. Because building owners are already committing to significant investment and
replacement of building systems, the building renovation process represents an opportune time to
mandate installation of RES-H/C systems. In the EU, the Energy Performance of Buildings Directive
(EPBD) already requires buildings that undergo major renovation with a useful floor area over 1000 m2
to meet minimum energy performance standards. Requiring the use of renewable heating and cooling
technologies would be a potential next step to support market scale up.
Replacement of central heating system. Jurisdictions like Germany require all heating systems over 30
years in age to be replaced by higher efficient units (dena, 2014). In the German state of Baden
Württemberg, there is a mandate requiring use of RES-H/C when the building’s heating system is
replaced. The mandate currently applies only to residential buildings, though it is expected to be
extended to commercial buildings in the future. In this case, compliance is certified by an expert and
authorized by the local building authority within three months after the system goes into operation
(ProSTO, n.d.).
Regular building audits and performance requirements. In the EU, the EPBD already requires regular
inspections of heating and air conditioning systems, and it additionally requires use of a methodology
to calculate and rate the integrated energy performance of buildings. By also requiring regular building
energy performance audits, policymakers could ensure that building systems operate efficiently in
order to meet low carbon standards and encourage the use of RES-H/C. Moreover, depending on the
age of the building, regularly required audits could help building owners identify and resolve problems
that occurred during design or construction, or address problems that have developed throughout the
building's life. Such policies are emerging in jurisdictions like California and the EU, and policymakers
could require building owners to install RES-H/C systems in order to ensure they meet a certain
building energy performance standard.
Once the mandate is implemented, local officials (e.g. building code officials and inspectors) will need to
enforce them. Depending upon the structure of the building mandate, this may include a variety of penalties,
including fines or building permit delays. Policymakers may also wish to provide financial incentives to help
building owners overcome financial barriers to complying with the mandate (e.g. property tax reductions).
Regardless of incentives it is important for local officials to have the authority to impose significant sanctions
for non-compliance. If sanctions are too weak, construction companies or building owners will most likely
ignore requirements or cut corners (ESTIF, 2007).
P a g e | 32 IEA-RETD, RES-H/C: Waking the Sleeping Giant, February 2015.
4.2.4.2 Eligible Technologies Any number of RES-H/C technologies can be integrated in building obligations. As with utility obligations (see
Section 4.2.5), policymakers may define eligible RES-H/C technologies as one or more specific technologies
that meet certain operational, application, or emission characteristics. In the case of building mandates, it may
be most suitable to provide building owners a wide variety of technologies to choose from, so that they can
meet their requirements with the lowest cost technology or the technology best suited to their building
requirements.
4.2.4.3 Eligible Buildings and Heating Loads Policymakers must specify if new and/or existing buildings are subject to the requirement. Similarly,
policymakers may choose to implement a building size threshold for compliance (e.g. buildings over a certain
size or with a certain heating load), making commercial buildings a good starting point for regulating existing
buildings. Moreover, policymakers may consider the advantages and disadvantages of placing building
mandates on various building sectors. In many cases, building mandates for RES-H/C – especially SHW – have
focused on the residential sector. Arguably, this is due to the perception that integration of residential RES-H/C
systems is less complex. On the other hand, by focusing building mandates on the commercial sector,
policymakers can limit the number of entities that they must regulate, while still covering a large portion of the
building stock (based on total floor space), thus making the regulatory process more efficient.
The building mandate should also specify what heating loads are eligible. This may include domestic hot water
(DHW), space heating, space cooling, or process heating. The percentage of the RES-H/C requirement for the
buildings heating and cooling load will also have an impact on what technologies are most suitable. For
example, it would be unreasonable to expect SHW to cover 100% of space heating load whereas biomass could
be utilized to do so. Heat pumps could cover both space heating and cooling requirements for commercial
buildings, whereas cooling remains challenging for other technologies to supply.
4.2.4.4 Measurement & Verification Once the required share of RES-H/C is established, procedures for the measurement and verification of the
obligation must be established. In general, this requires two pieces of data: the heating and cooling load for
the building (e.g. space and hot water) and the useful energy produced by the RES-H/C system. It is necessary
to define standard criteria for both calculations (ESTIF, 2007).
For the building, this may require the installation and use of meters to measure heating and cooling load or
estimation of standard building load calculations. In many markets, this will be an important step. For example,
in the US, space and especially water heating loads are not typically measured with any degree of reliability in
buildings (Navigant & MCG, 2014; Veilleux & Rickerson, 2013).As noted before, it is important to establish a
clear methodology to estimate or meter useful heat production from RES-H/C systems. More information on
methodologies to ensure useful heat production is provided in Section 4.3.2.4.
P a g e | 33 IEA-RETD, RES-H/C: Waking the Sleeping Giant, February 2015.
4.2.5 POLICY OPTIONS FOR UTILITY MANDATES Mandates for utilities, also known as a quota mechanism or renewable portfolio standard (RPS), require
utilities (or other entities12) to procure a certain percentage of energy from eligible renewable sources. This
approach is commonly used in the RES-E sector, but has not seen widespread implementation for RES-H/C.
Integration of RES-H/C technologies into existing utility obligations could serve as an expedient means to
establish new mandates. The following provides a high-level discussion of some of the key decision points and
tradeoffs and discusses specific considerations for RES-H/C. Where appropriate, this section also describes a
series of fundamental design issues that need to be addressed to implement utility mandates, specifically for
the commercial RES-H/C market.
4.2.5.1 Utility Compliance The first step in the design of a utility mandate is for regulatory or legislative authorities to establish the
appropriate obligation level for each utility. Once the obligation level is established, a mechanism must be
established for the obligated entity to demonstrate that they have complied with the requirements. One way
to do this is to use renewable energy certificates (which may or may not be tradable). Each energy certificates
typically represents one megawatt-hour thermal (MWhth) of useful thermal output. Converting non-electric
thermal output from RES-H/C generators into a measure equivalent to MWh is done using a direct conversion
factor of 3,412,000 British thermal units (BTUs) to 1 MWh.
Utilities then procure the required number of certificates from RES-H/C generators in order to meet their
specific obligation. In cases where utilities fail to obtain the necessary certificates within a determined period,
they pay a fine – or alternative compliance payment – to regulatory authorities. This is a common approach
taken to enforce compliance for utility RPS programs in the US as well as the Renewables Obligation in the UK.
Based on experiences from the RES-E sector, RES-H/C utility obligations could utilize a wide range of
procurement mechanisms and incentive programs to support compliance and the achievement of targets.
Though a comprehensive survey of potential procurement options is beyond the scope of this paper, these
may include tradable credit markets, standard offer contracts (e.g. feed-in tariffs), or competitive bidding.
Text Box 3. RES-H/C Obligations for Massachusetts Utilities
Overview of the Massachusetts Alternative Portfolio Standard. Fossil fuels for heating and cooling
contribute significantly to Greenhouse Gas (GHG) emissions. In order to meet the state’s climate target
to reduce GHGs 25% by 2020, the Massachusetts legislature passed a bill to integrate RES-H/C
technologies into the utilities’ Alternative Portfolio Standard (APS). Previously, only CHP, flywheels and a
handful of other alternative technologies were eligible.
12 In some cases, compliance with the mandates are managed by public or non-profit entities that are responsible to procure renewable energy on behalf of (or in lieu of) the established electric or natural gas utilities. The states of Illinois, New York, and Vermont in the US, for example, have authorities that are responsible for target compliance and commodity procurement under the state RPS laws. There is not a central “utility” for heating and cooling in most countries, so a separate entity responsible for compliance may be useful for RES-H/C supply mandates going forward.
P a g e | 34 IEA-RETD, RES-H/C: Waking the Sleeping Giant, February 2015.
Eligible Technologies. Eligible technologies include CHP, solar thermal, biomass, biogas, liquid biofuels
as well as ground-source and air-source heat pumps. Heat pumps must rely on naturally occurring
temperature differences in ground, air or water and biomass facilities must be low emission, high
efficiency, and use fuel produced by means of sustainable forestry practices.
Obligation Standard. The obligation lies with the electric utilities, which must obtain a certain
percentage of their retail energy from RES-H/C sources. The APS requires that 5% of the state’s electric
load must be met with “alternative energy” by 2020. Generation of alternative energy credits (AECs)
for each unit of useful thermal energy is measured on an electric equivalency basis, with 3.1412 million
BTUs of heat equal to one MWh. In 2015, the year that renewable technologies become eligible for
compliance, 3.75% of electric load must be met with alternative technologies.
Compliance and Penalties. Utilities fulfill the obligation by purchasing alternative energy credits (AECs)
from eligible generators. If utilities have not purchased enough RECs to meet their annual renewable
or alternative energy percentage obligations, they must pay an Alternative Compliance Payment
(ACPs). The state government will use ACP funds to support new renewable generation projects in the
state.
Key Considerations for RES-H/C Integration. Two major issues were debated by legislators when
considering the integration of RES-H/C into the APS.
Regulation of Heating Providers. There was some disagreement in Massachusetts regarding whether
electric utilities, and therefore their customers, should bear the costs of the program, or if instead all
heating and cooling provider companies should bear the obligation. Electricity serves only a very small
portion of heating load in the state. Fuel oil, propane, natural gas, and electric fuel providers in
Massachusetts supply the majority of heating fuel. Some of these are regulated utilities, but many are
not. State regulators determined that assigning the obligation to purchase renewable thermal credits
to such a numerous and diverse group of suppliers, and holding them accountable for compliance
with that requirement, would have been administratively burdensome. It would have moreover
imposed significant compliance costs on many small companies.
Biomass Standards. Due to concerns regarding the GHG emission reduction potential of wood burning
appliances, the eligibility of biomass in the APS proved to be a great source of controversy. To secure
support from environmental groups for the bill, several eligibility restrictions were put in place for
biomass fuels. To qualify as eligible, biomass, biogas, and bio-liquids must demonstrate that any wood
used to create them is “produced by sustainable forestry practices.” In addition, biomass technologies
must meet emission performance standards achievable by “best-in-class, commercially feasible”
technologies and achieve at least a “50% reduction in life-cycle GHG emissions” compared to the fuel
that is being displaced.
Outlook. Regulators are currently finalizing regulations to implement the APS. As a result, there is
currently no information on the impact of the legislation on the RES-H/C market. However, the policy is
generally expected to be one of several important actions taken on the part of policymakers to
jumpstart the Massachusetts RES-H/C market.
P a g e | 35 IEA-RETD, RES-H/C: Waking the Sleeping Giant, February 2015.
4.2.5.2 Calculation of Useful Heat Production A key issue for RES-H/C obligations is to ensure that RES-H/C generators receive incentives, payments, and/or
certificates only for the production of useful heat. Because renewable heat can in most cases not be fed into
the grid, and must instead be used on-site, there is a risk that generators may oversize systems or generate
excess heat in order to generate a greater volume of certificates. This may be especially problematic if the
generator receives a production payment for each unit of heat generated (see Section 4.3 for more on
incentives).
To address this, policymakers should be sure to implement a reasonable methodology to estimate or meter
useful heat production from RES-H/C systems, which can be recorded in utility tracking systems. At the same
time, policymakers should be careful to not make metering requirements too onerous, thus placing undue
administrative and technical burdens on renewable heat generators. Additional information on metering
methodologies to ensure useful heat production is provided in Section 4.3.2.5.
4.2.5.3 Eligible Technologies Any number of RES-H/C technologies can be incorporated into a utility obligation. Air-source and ground-
source heat pumps are often easiest to integrate, as they are commonly installed with utility-grade, electric
meters that monitor their production. Within the US for example, heat pumps are widely eligible under state
electric utility RPS programs.13
Technologies using forced air heating systems (as opposed to hydronic distribution systems) may pose the
greatest challenges since they are more challenging to measure. In such cases, it may be most appropriate to
estimate heat production or use some other means (other than metering) to calculate heat production (see
Section 4.3.2.5).
In determining technology eligibility, policymakers may also consider whether utility obligations will be sub-
divided, and if so, how. RES-H/C obligations may focus on one or more specific technologies, creating
technology bands or carve-outs that meet certain operational, application, and emission characteristics. When
creating such carve-outs or technology bands, policy-makers can define an optimal mix of technologies in
order to achieve policy objectives or acknowledge local market constraints (Bürger et al., 2011; Fulton &
Mellquist, 2011).
Making utility obligations technology-specific could allow the government to create demand for one or more
technologies that leverage local resources or infrastructure. Alternately, allowing a wide range of technologies
to meet mandate requirements permits greater flexibility in the response of the obligated parties and can
often reduce compliance costs (Bürger et al., 2011). Policymakers may also establish operational parameters in
order to address efficiency and GHG emission reduction goals.
13 The performance of RES-H/C technologies under RES-E standards has to date been mixed and should be carefully considered by policymakers. A number of US states allow RES-H/C technologies to be eligible, but have not had well defined pathways for them to participate in the market. As a result, RES-H/C technologies have not thrived under RES-E mandates (Rickerson, Halfpenny, & Cohan, 2009). On the other hand, a flood of SWH participation in Australia’s national RPS in 200X caused certificate market prices to crash and delayed the growth of RES-E technologies (Carbon Markets Economics, 2009). Regardless, the next generation policy here proposes that RES-H/C should have stand alone mandates, or at least clear carve-outs within broader renewable standards.
P a g e | 36 IEA-RETD, RES-H/C: Waking the Sleeping Giant, February 2015.
4.2.5.4 Eligible Counterfactual Fuels It is also important to specify what counterfactual fuels – such as natural gas, oil, or electric heating – may be
displaced by RES-H/C systems, and specifically whether the utility obligation is “fuel neutral.” A key question
regarding fuel neutrality is whether the mandated utility can procure RES-H/C certificates if the RES-H/C
installation displaces a counterfactual fuel that is not sold by the utility.
In some jurisdictions, only RES-H/C technologies that displace the utility’s fuel (e.g. electricity or natural gas)
have been eligible to meet the utility mandate. This has historically been the case for New York’s solar water
heating rebate program, which has been implemented to fulfill the electric utility’s RPS requirement. Because
very few buildings in New York use electricity to heat hot water, the program has had a very small effect on the
adoption of solar water heating across the state. The state is currently in the process of reviewing its rules to
make the program fuel neutral (e.g. able to displace fuel oil or natural gas in addition to electric heated hot
water tanks), which is expected to increase the impact on solar water heating adoption (K. Stainken, personal
communication, November 30, 2014).
Fuel neutrality may raise concerns of cross-subsidization if the utility obligation benefits consumers of other
fuels whose heating and cooling systems are replaced by RES-H/C, rather than their ratepayers. On the other
hand, some policy-makers suggest that this practice can also provide benefits. For example, policymakers in
New Hampshire noted that integration of RES-H/C into the electric utility obligation benefits electric
ratepayers, because RES-H/C technologies can fulfill the utility mandate at lower cost than RES-E technologies.
4.2.6 COST EFFECTIVENESS
4.2.6.1 Costs & Benefits for RES-H/C Mandates for RES-H/C can generate a wide range of costs and benefits. Depending upon the costs and benefits
to be considered, the calculations can become complex. RES-H/C technologies may generate a broad range of
external benefits that markets may not typically monetize, ranging from job creation to improved building
comfort or energy security benefits, among others. Text Box 4 below illustrates an example from Germany’s
Renewable Energies Heat Act (EEWärmeG), which mandates that owners of new buildings cover parts of their
heating and cooling demand from renewable sources.
Policy interactions (e.g. between mandates and incentives) can influence the outcomes of the cost-benefit
analysis. It may be most cost-effective to provide market actors a wide variety of technologies to choose from,
so that they can meet their requirements with the lowest cost technology. In the final analysis, policymakers
will need to carefully consider the range of options that will influence the implementation of a mandate to
assess costs and benefits.
Text Box 4. Cost Effectiveness of the Renewable Energies Heat Act (EEWärme) Building Mandate
Overview. The Renewable Energies Heat Act (EEWärmeG) is a German law that mandates owners of
certain building categories to cover parts of their heating and cooling demand from renewable
sources. The minimum requirements vary by technology and building type. Currently, the act only
applies to new buildings, though the individual federal states in Germany may choose to extend the
regulation to the existing building stock. It also provides incentives to owners of existing buildings to
increase the share of energy produced from RES-H/C technology.
P a g e | 37 IEA-RETD, RES-H/C: Waking the Sleeping Giant, February 2015.
The objective of the act is to increase the share or energy from RES-H/C technologies to 14% of final
energy consumption for heating and cooling by 2020. In 2012, the Federal Ministry for the Environment,
Nature Conservation, Building and Nuclear Safety estimated the cost and benefits of the act. The
analysis included the costs and benefits of all components of the act, including a RES-H/C incentive
program. The calculations below refer to the analysis of the mandate only.
Stakeholders. Stakeholders and key parameters considered in the cost benefit analysis include:
Companies: Potential impacts of increased renewable heating generation on electricity bills;
initial investment costs, administrative burdens, and impacts on rural businesses
Society: Air quality and other environmental costs and benefits, including carbon emissions
reductions
Government: Enforcement and compliance costs
Costs and benefits evaluated. The Ministry determined the (1) differential costs and (2) differential
benefits of the (EEWärmeG) mandate.
Differential costs are the sum of the differences in costs between theoretical reference systems (fossil-
fuel based) and the installed RES-H/C systems for the entire new building stock (differentiated by
reference building type).14
Differential benefits are the difference in in environmental benefits between the theoretical reference
systems (fossil-fuel based) and the installed RES-H/C systems.
Avoided environmental costs from the mandate represent avoided costs that would have been
caused by damage from emissions.15
Major costs and benefit categories included:
Carbon benefits: Approximately 640,000 tons of avoided CO2 (quantified as 10 million euros, i.e.
about 15 euro/t CO2)
Differential System Cost: RES-H/C systems were estimated to cost an additional 80 million euros
than would have otherwise been spent based on annuity, maintenance, and fuel costs.
Results. The costs of the mandate alone for new buildings outweigh the benefits by 70 million euros
based on the methodology described above. This could be attributed to the low energy demand of
new buildings, and thus the limited cost savings potential from RES-H/C. In other words, if the mandates
were applied to existing buildings, they may be more cost-effective.
In a 2012 evaluation, Fraunhofer ISI et all (2011i) finds that when the mandate was combined with an
ongoing rebate for existing buildings, the differential benefits from avoided pollution outweigh the
differential costs significantly. Costs of the act totaled 1.2 billion euros for 2011, and 1.8 billion for 2010,
compared to benefits of 2.1 and 2.6 billion respectively.
14 Differential Cost = Σg Σi [(Specific costs of the RES-H/C system(Euro/kWh))14 – Specific cost of the fossil fuel system replaced by RES-H/C(Euro/kWh)) x Energy demand of RES-H/C technology x Share of the RES-H/C technology x Number of buildings]. Where “I” is the RES-H/C technology and “g” is the reference building type 15 Avoided environmental costs = {Sum of (Average energy demand of building type x Damage caused by emissions from new buildings x Share of energy of reference building replaced by RES-H/C) – Energy demand/ m² of building type with RES-H/C system x Damage caused by emissions from RES-H/C technology} x Weighing factor of RES-H/C technology x Total new area of building type
P a g e | 38 IEA-RETD, RES-H/C: Waking the Sleeping Giant, February 2015.
4.2.6.2 Distribution of Costs & Benefits Distribution of costs and benefits will depend upon the type of mandate implemented. With regard to utility
mandates, policy cost recovery will generally fall onto ratepayers through the imposition of surcharges on each
kWh or electricity sold. As discussed in Section 4.3.3.1, the term “ratepayer” may not be neatly applicable for
heating and cooling since there is not always a heating or cooling utility to recover costs.
With regard to building mandates, the burden of compliance usually falls to building owners. It is reasonable to
expect that RES-H/C building regulations may be easier to implement in the commercial sector (as opposed to
the residential sector) because there are fewer entities that are subject to regulation and enforcement actions.
This could improve the cost efficiency of the policy.
Fuel savings (or costs) will typically accrue to the user of the building, which could be either the owner or the
tenant. To ensure compliance, policymakers will need to assume some level of costs for administration and
inspections. Social costs or benefits accrue widely to the general public through impacts to air quality, carbon
reductions, or energy security.
4.2.7 SUMMARY FOR POLICYMAKERS
Table 5. Summary Considerations for Policymakers Utility Mandates
RES-H/C Targets
Develop long term plans and targets for RES-H/C development
Policymakers should develop clear long term plans and consider the appropriateness of targets to guide policymaking and investment decisions in their jurisdiction. This can be an important first step to drive transformation of the national portfolio, position the domestic industry to compete internationally, and support economic development in regions with abundant resources or chronic unemployment.
The establishment of clear long-term plans is important across all stages of market development. For inception markets, they are needed to generate confidence among industry leaders and investors by providing a clear vision of market size and opportunity.
For take-off markets, policymakers may choose to revise or update plans in order to address new market, technology, and cost developments. As the market develops, policymakers should be prepared to implement new plans and policies, which may include both policy incentives or regulatory policies like building or utility mandates.
Building Mandates
Assess suitability of building mandates
Policymakers should consider the potential for requiring building owners to source a minimum amount of their heating and cooling load from RES-H/C technologies. By implementing building mandates, policymakers provide commercial building owners with the awareness, encouragement, or regulatory requirement necessary to engage RES-H/C professionals to upgrade or replace their heating and cooling systems.
Building mandates can also help address landlord-tenant challenges by requiring the installation of RES-H/C systems in new and existing buildings at the time of building sale or lease or during the replacement of the existing heating system.
P a g e | 39 IEA-RETD, RES-H/C: Waking the Sleeping Giant, February 2015.
Strong regulatory policies like building mandates can drive widespread implementation of RES-H/C technologies in existing buildings. This approach may be particularly suitable for maturing markets that are in the take-off or entering the consolidation phases.
Determine compliance triggers and RES-H/C eligibility
A key question for policymakers establishing a building mandate is to determine what triggers compliance. While the majority of building mandates today are triggered by new construction, RES-H/C mandates could also be triggered by: (i) the sale or lease of a building, (ii) building renovation, (iii) or the replacement of a central heating system. In addition, policymakers may consider requiring regular building audits and performance requirements for buildings.
It is reasonable to expect that RES-H/C building regulations may be easier to implement in the commercial sector (as opposed to the residential sector) because there are fewer entities that are subject to regulation and enforcement actions. This could improve the cost efficiency of the policy.
Any number of RES-H/C technologies can be integrated into building obligations. Policy-makers may define one or more specific technologies, or a basket of technologies that meet certain operational, application, or emission characteristics, as eligible. It may be most cost-effective to provide building owners a wide variety of technologies to choose from, so that they can meet their requirements with the lowest cost technology.
The building mandate should also specify what heating loads are eligible. This may include domestic hot water (DHW), space heating, space cooling, or process heating. This decision will also have an impact on what technologies are most suitable.
Determine measurement and verification requirements
Once the required share of RES-H/C is established, procedures for the measurement and verification of the obligation must be established.
For the building, this may require the installation and use of meters to measure heating and cooling load, or estimations of standard building load calculations.
Additionally, it is important to implement a clear methodology to estimate or meter useful heat production from RES-H/C systems, which can be recorded in utility tracking systems.
Utility Mandates
Assess suitability of utility mandates
Mandates for utilities, also known as a quota mechanism or renewable portfolio standard (RPS), require utilities to procure a certain percentage of energy from eligible renewable sources. This approach is commonly used in the RES-E sector, but has not seen widespread implementation for RES-H/C.
RES-H/C utility obligations can be integrated with a wide range of other policies – especially incentive programs – to support compliance and achievement of targets. By establishing stand-alone mandates or carve-outs for RES-H/C technologies – either through existing or new utility obligations – policymakers could expediently and efficiently drive RES-H/C growth.
RES-H/C utility mandates can be successfully deployed across all stages of market development, from inception, through take-off and into consolidation phases.
Determine utility obligation and RES-H/C eligibility
Regulatory or legislative authorities establish the appropriate obligation level for each utility. Once established, utilities must secure a certain amount of energy from eligible RES-H/C generators (e.g. system owners).
P a g e | 40 IEA-RETD, RES-H/C: Waking the Sleeping Giant, February 2015.
Utilities could secure certificates from eligible generators to prove compliance with the mandate, depending on how the mandate is designed. Each energy certificate typically represents one megawatt-hour thermal (MWhth) of useful thermal output.
Converting non-electric thermal output from RES-H/C generators into a measure equivalent to MWh is done using a direct conversion factor of 3,412,000 British thermal units (BTUs) to 1 MWh.
Clarify eligible counterfactual fuels
When developing utility mandates, it is important to specify what counterfactual fuels – natural gas, oil, or electric heating – may be displaced by RES-H/C systems, and specifically whether the utility obligation is “fuel neutral.”
The key question regarding fuel neutrality is whether the mandated utility can procure RES-H/C certificates if the RES-H/C installation displaces a counterfactual fuel that is not sold by the utility.
In some cases, fuel neutrality may raise concerns of cross-subsidization if the utility obligation benefits consumers of other fuels (e.g. fuel oil or propane) rather than their ratepayers.
Questions of fuel neutrality can also impact policy cost-effectiveness, depending upon the commodity price of fossil fuels in the market.
Clarify calculation requirements for “useful heat”
A key issue for RES-H/C obligations is to ensure that RES-H/C generators receive certificates only for the production of useful heat.
To address this, policy-makers may implement a reasonable methodology to define and track “useful heat” production from RES-H/C systems. In cases where the methodology requires metering of small or large commercial systems, policymakers should establish accuracy requirements for metering; ongoing maintenance and inspectional requirements; metering measurement and design procedures for various heating system configurations; as well as the thermal output calculation for heating installations.
P a g e | 41 IEA-RETD, RES-H/C: Waking the Sleeping Giant, February 2015.
4.3 RES-H/C PERFORMANCE BASED INCENTIVES
4.3.1 BACKGROUND An important component of next generation policy making for RES-H/C is to ensure that generators are
compensated (or incentivized) for the energy, commodities, and other values that they produce.
Compensation and incentives should generally be structured in a way that appropriately balances policy
objectives with system economics and investor requirements. Historically, the most active RES-H/C markets
around the world have supported market growth through the use of incentives that are calculated based on
expenditure, capacity, a flat rate, or other upfront payment mechanism.
Expenditure-based incentives. Expenditure-based payments are calculated based on total system cost.
Geothermal heat pumps in the US, for example, are eligible for a 10% federal Investment Tax Credit
(ITC) based on system cost (DSIRE, 2014).
Capacity-based incentives. Capacity-based payments are calculated based on installed system size
(e.g. $/m2 of solar collector area). For example, as part of Germany’s MAP Program, solar-combi
systems receive of 90 EUR/m2 for the first 40 m2 and 45 EUR/m2 of gross collector area for each
additional m2 (BAFA, n.d.).
Flat rate incentives. Flat rate payments are applied uniformly to certain classes of technologies. The
Ministry of Energy and Water in Lebanon created a $1.5 million that offers $200 grants for residential
solar water heating systems in parallel with a dedicated loan program.
Upfront incentives for expected performance. It is also possible to structure payments such that
systems receive upfront payments or frontloaded payments based on the expected performance of
systems. This has been the approach, for example, in the Australian small-scale technology certificates
(STCs) system, where solar thermal and heat pumps (along with numerous RES-E technologies) are
eligible.
These types of “upfront” or “frontloaded” incentives and payment systems have driven a significant share of
RES-H/C market growth around the world. While incentive regimes of this kind can encourage robust market
development,16 they do create the risk of non-performance over the long-term (Barbose et al., 2006). “Next
generation” policies will likely transition to performance-based incentives and payments, especially as RES-H/C
markets scale up and policymakers place higher priority on ensuring that ongoing energy generation is
rewarded.
Performance-based incentives (PBIs) compensate RES-H/C systems specifically for the amount of generation or
savings they produce (e.g. $/therm or $/kWhth) during a certain period of time (e.g. 10 years). Overall, PBIs
have been rare in the heating and cooling sector (Beerepoot & Marmion, 2012; Steinbach et al., 2013). Some
countries like the UK, Australia, the Netherlands, Italy, and several US states have introduced PBIs for RES-H/C–
but PBIs in general remain a policy frontier that most countries have not yet crossed.
16 The State of Upper Austria, for example, has famously developed one of the strongest renewable thermal clusters in the world thanks in part to its long standing capacity-based rebate program as well as a variety of other market development mechanisms.
P a g e | 42 IEA-RETD, RES-H/C: Waking the Sleeping Giant, February 2015.
As discussed below, the UK is one of the first jurisdictions that has made a large-scale commitment to PBIs for
the development of residential and commercial RES-H/C sectors through its Renewable Heating Incentive
(RHI). Best practices from this and other emerging examples of successful PBI policies are discussed in the
following sections.
4.3.1 BENEFITS OF RES-H/C PERFORMANCE BASED INCENTIVES There are a number of reasons for policy-makers to introduce PBIs.
Maximize quality of installation. PBIs encourage generators to maximize the quality of system
installation and maintain systems over time. The history of SWH systems in the US, for example, was
driven by expenditure-based tax credit incentives. Many of these systems were installed and
maintained poorly and gave the industry a bad reputation, which it has taken several decades to
overcome (Lane, 2011). Performance-based payments can help avoid systems that perform poorly,
and can also help to avoid “gold plated” projects that are designed to maximize expenditure-based
incentive (Hoff, 2006).
Maximize ratepayer value. Performance-based payments help ensure that ratepayers and taxpayers
receive the full economic, environmental, and social benefits from the RES-H/C systems that are
provided with incentives.
Support mature market development. Many countries used upfront payments to initially support
renewable electricity projects, such as PV and wind during the inception stage of market development.
However, most countries transitioned to performance-based payments for both large- and small-scale
systems as their markets increased in size. As they move up the deployment curve, the priority shifts
from catalyzing initial investment to incentivizing efficient performance and managing near-term
governmental budgetary constraints. PBIs now dominate the renewable electricity policy landscape
(e.g. feed-in tariffs, competitive tenders, tradable credits, and net metering) globally.
It is anticipated that in coming years RES-H/C policy will need to make a similar transition towards PBIs. As
discussed in greater detail below, a growing number of jurisdictions are undertaking this transition, although
there are metering, administrative, policy design, and implementation challenges with performance-based
payments for heat that need to be carefully considered and addressed.
4.3.2 POLICY OPTIONS FOR RES-H/C PERFORMANCE BASED
INCENTIVES There are a many different options for designing effective performance-based incentives. Over the past two
decades, many of these options have been discussed in great depth in literature focused on renewable
electricity policy. Despite the benefits of PBIs, the experience of PBIs in the electricity sector, and the initial
experiences of some countries for RES-H/C PBIs, there is little literature on the fundamental design features for
performance-based incentives for the commercial RES-H/C market. Policymakers are just beginning to explore
the development of performance incentives for the RES-H/C sector (Bürger et al., 2008; Steinbach et al., 2013),
and best practices are still emerging.
P a g e | 43 IEA-RETD, RES-H/C: Waking the Sleeping Giant, February 2015.
The following provides a high-level discussion of the key decision points, tradeoffs, and specific considerations
for RES-H/C. This section also describes a series of design issues that need to be addressed to implement PBIs
for the commercial RES-H/C market. The assessment draws on international case studies, including the United
Kingdom’s Renewable Heating Incentive (RHI) (see Text Box 5).
Text Box 5. Overview of the U.K.’s Renewable Heat Incentive (RHI)
Background and Goals of the RHI. In November 2011, the United Kingdom launched the renewable
heat incentive scheme. The program is intended to facilitate the uptake of renewable heating among
non-domestic consumers and contribute to the on-going shift within the United Kingdom to a low-
carbon economy. It is also expected to contribute to the Government’s objective of increasing the
share of renewable heat generated to 12% by 2020.
RHI Tariff Structure. Similar to the way that a feed-in tariff rewards solar or wind generators of
renewable electricity generation, the renewable heat incentive (RHI) rewards generators of biomass
technologies, heat pumps, solar thermal and biomethane for heat production. An administratively set
tariff17 is paid to residential, commercial, public and industrial consumers for every unit of renewable
heat generated on a pence per kWh basis. In consultation with industry and other stakeholders,
regulators established tariff levels to provide system owners an average internal rate of return (IRR) of
12%.
The amount paid to each installation is based on a tariff rate that takes into account the size of the
system and the type of technology. Tariff support is delivered in the form of payments made every
three months over a contract period that generally lasts 20 years.
The scheme is funded by from general government spending through 2017 and administered by the
Gas and Electric Market Authority (Ofgem).
4.3.2.1 Approach to Setting the Payment Rate A key issue is determining the appropriate payment level or rate for PBIs. There are multiple ways in which a
performance-based payment level can be determined. The most common include:
Administratively set. Regulators or program implementers set the rates through an administrative
process. The rates can be set, for example, based on the generation cost of specific RES-H/C
technologies, the “avoided cost” of dominant conventional heating fuels, or on some other value. This
has been the approach, for example, that the UK took in developing its Renewable Heating Incentive
(RHI) program.
Competitively bid. The payment rate for RES-H/C can also be set through competitive mechanism such
as price-based auctions.
17 In order to calculate the tariff, policymakers considered the compensation for the capital costs, which was the difference between the conventional and renewable technology while applying a 12% discount rate on this differential over the technology lifetime to calculate the annualized upfront payment. They additionally considered compensation for the operating costs (including fuel costs), which was the difference between the conventional and renewable technology as well as other non-financial barriers, which were barriers associated with the renewable technology under the relevant counterfactual.
P a g e | 44 IEA-RETD, RES-H/C: Waking the Sleeping Giant, February 2015.
Tradable credits. Payments can also be determined through short-term or spot market trading, based
on supply and demand. Tradable credit markets are typically associated with heating supplier and
utility mandates. In this case, market stakeholders who actively buy and sell tradable credits in the
market set the price of the PBI. This is the approach, for example, that the State of New Hampshire
uses for its renewable thermal RPS carve-out.
There have been vigorous debates between the comparative merits of these approaches during the past two
decades around the world. In Europe and the US, for example, the perceived tradeoff between investor
security and market competition animated a debate between proponents of tradable credits and
administratively set (e.g. feed-in tariff) rates for the RES-E sector in the mid-2000s. A similar debate between
competitively bid and administratively set rates also occurred in both Europe and the US, contrasting the price
competition supported by bidding with the inclusiveness and lower transaction costs of administratively set
rates. These debates have become more nuanced over time as policymakers have utilized these approaches in
parallel to achieve different objectives and have combined elements of each of these policies into innovative
new hybrids.
As PBIs are adapted to RES-H/C markets, policymakers will have an opportunity to leverage lessons learned
from the RES-E sector and avoid the polemical arguments that have often characterized the energy policy
dialogue. For example, while there may be both advantages and disadvantages to tradable credit and
administratively set incentives, experience shows that both approaches can be designed to provide the
transparency, longevity, and certainty necessary to attract investors and ensure long-term stable market
development. Early debates about rate setting characterized competitive and administrative rate setting
approaches as mutually exclusive alternatives (Commission of the European Communities, 2005; Hvelplund,
2001). As policies have evolved and diffused internationally, however, innovative design approaches have been
introduced, such as:
Parallel mechanisms. In some countries, tradable credits have been utilized for larger-scale systems,
whereas administratively set rates have been used for smaller scale systems or specific technologies.
This has been the case in the UK RES-E market, where the feed-in tariff has been used to support
smaller-scale development and tradable credits have been used to support larger systems, and Italy,
where a FIT was used to support PV while tradable credits were used to support non-PV systems. In
each case, both mechanisms were used to support the achievement of national targets.
Hybrid policies. In some countries, policymakers are combining elements of different policies to
create innovative structures. Many of the RPS markets in the US, for example, utilized tradable credits
exclusively in the late 1990s. Most states have now introduced some form of long-term stability for
tradable credits. This has included competitive bidding for long-term credit contracts in New York and
Connecticut, a loan program that has effectively served as a price floor in New Jersey, and standard
offer contracts for credits in Delaware (Bird et al., 2011; Heeter & Bird, 2011). These policies maintain
the ability to trade credits and utilize them for compliance, but also introduce more bankable ways for
credits to be procured.
Internationally, there are many more examples of policies that move beyond standard labels and combine
traditional approaches in new ways. By assessing policy design options, RES-H/C policymakers can move past
philosophical debates and towards balanced policy solutions that best serve national RES-H/C objectives.
P a g e | 45 IEA-RETD, RES-H/C: Waking the Sleeping Giant, February 2015.
4.3.2.2 Payment Duration The issue of payment duration can be complex. For “above market” incentives designed to provide generators
with a specific return, shorter-term performance payments (e.g. 3-5 years) can provide a perverse incentive
that encourages generators to abandon projects before the end of system life. Longer-term performance-
based incentives, on the other hand, may require higher ratepayer impacts over time to produce the same
return. Payments based on actual performance also introduce greater monitoring expense (Section 4.3.2.5)
and introduce greater administrative complexity because they require a longer-term relationship between
RES-H/C systems and program administrators (rather than a one-time payment).
However, longer-term payments can also push the final cost of RES-H/C downward because they allow capital
costs to be levelized over a longer period of time. In this way, longer-term incentives can reduce RES-H/C
levelized costs of energy to the point where they can serve as a hedge against conventional fuels – or even
create savings when compared to conventional fuel alternatives on a levelized basis.
4.3.2.3 Interconnection and Commodities transferred PBI payments may or may not require generators to transfer RES-H/C commodities (e.g. energy, renewable
energy credits, etc.) as a condition of receiving the production payment. The most basic transaction would
award payments in exchange for heat energy (e.g. a heat purchase agreement).
In the RES-E sector, energy transfer is a common feature of many feed-in tariff schemes. In such cases, a wind
generator receives a fixed payment for every kWh of electricity delivered to the grid. For RES-H/C, heat energy
transfer is generally impossible in regions where on-site heating infrastructure is most common. If district
heating is common in the region, it can allow end-users to feed heat back into the grid (see Text Box 6).
Text Box 6. Interconnecting RES-H/C into District Heating Networks: New Tariff Models, Business Models and Regulatory Frameworks
In many regions across Europe, municipalities have historically developed gas and coal-based
combined heat and power (CHP) plants, which generate electricity for the wholesale power market
and heat for local district heating customers. Municipalities have traditionally financed these CHP
plants based on the assumption that they could sell power into the European Electricity Exchange
(EEX) in order to generate stable revenues. Revenues from electricity sales in turn enabled them to
provide heat at very low cost to municipal district heating customers.
More recently, however, wholesale electricity prices on the EEX have dropped significantly, due in
large part to the greater number of solar and wind power facilities that have come online. Wind and
solar power projects, which have virtually no fuel costs, can sell power into the EEX at very low
marginal cost. This has depressed electricity prices on the EEX – in some cases leading to negative
prices on the wholesale market – making it increasingly uneconomical for municipalities to operate
gas or coal powered CHP plants.
This new market dynamic has important implications for municipal district heating networks.
Municipalities are in many cases required to provide heat to users on their district heating network.
Due to the current economics of the electricity market though, heat – which was once considered
waste energy and thus very low cost to produce – has become much more expensive. In some
municipalities in Austria, like Graz and Vienna, heat suppliers have had to operate gas-fired CHP plants
at a loss in order to meet their local heating obligations.
P a g e | 46 IEA-RETD, RES-H/C: Waking the Sleeping Giant, February 2015.
As a result, municipal energy utilities (like the one in Graz) have recently announced that they will be
shutting down gas and coal CHP plants. In Graz’s case, this means that within the next several years,
the municipality will lose nearly 80% of its current heat supply. As a result, energy planners are now
evaluating opportunities for integrating alternative energy sources into district heating networks,
including RES-H/C technologies such as biomass, solar thermal and heat pumps (Epp, 2014).
To do so, however, it may in some cases require the redevelopment of new heat networks. District
heating systems have traditionally been developed as high temperature, high pressure systems (e.g.
operating at 140 degrees C and in 15-bar networks) that are supplied from a few central locations. But
many RES-H/C technologies – like heat pumps and solar thermal – operate best at lower temperatures
and in lower pressure systems. There is significant possibility to integrate distributed heating systems into
the network, enabling buildings to feed heat into the grid at lower return temperatures.
Facilitating such a shift will require development of new tariff models, business models and regulatory
frameworks. In Denmark, for example, district heating operators are experimenting with new rate
structures, offering customers lower heat prices if they can provide district heating return temperatures
at levels that improve the utilization of renewable heat sources and facilitate greater system efficiency
(Epp, 2014). Such shifts open up new possibilities for the development of feed-in tariffs or other PBI
mechanisms for RES-H/C on next generation district heating networks.
Depending on the policy mechanisms and compliance frameworks put in place, however, other commodities
may be transferred through a performance payment. These could include, for example, tradable compliance
credits in jurisdictions (e.g. Massachusetts or New Hampshire) that have set up heat supply mandates (Section
4.2.5). As RES-H/C scales up in the future, however, there may be additional environmental (e.g. carbon
credits) or market-based commodities that could be transferred as part of a PBI system.
When designing next generation polices, the rights to current, anticipated, and/or potential commodities
under PBI payments should be clarified to the extent possible. If PBIs are intended to provide generators with a
target return, then allowing additional commodities to be retained and sold into other markets creates the
opportunity to capture excess profit. If PBIs are expected to provide only a portion of the required return, then
RES-H/C system owners face the risk of having to sell multiple commodities to multiple counterparties.
4.3.2.4 Useful Heat Requirements As mentioned in Section 2.1.1, except in cases where RES-H/C is integrated into district heating networks,
excess energy produced by RES-H/C technologies (beyond what is used on-site or practically stored) cannot be
fed back into the grid. As a result, there is a risk that PBIs could create a perverse incentive, wherein system
owners generate more heat than they can practically use or store on-site. This requires policy-makers to put in
place mechanisms that ensure that only the production of useful heat – or heat that can be used on-site to
address the operational and design needs of buildings – is incentivized.
As a first step, policy-makers may define what is meant by “useful” heat. UK and other policy-makers have
established a number of principles that describe useful heat production (see Text Box 7). While different
jurisdictions may establish different requirements, these principles provide a helpful benchmark by which to
define useful heat.
Text Box 7. Defining Useful Heat for Performance Based Incentives
P a g e | 47 IEA-RETD, RES-H/C: Waking the Sleeping Giant, February 2015.
Useful heat may be defined in a variety of ways. Policymakers have developed a number of principles
to guide “useful heat” determinations for PBI programs. The following principles have guided policy-
maker actions in the United Kingdom and in US states like Massachusetts and New Hampshire.
The heat load should serve an actual purpose. The heat load should serve an actual purpose
and not be artificially created in order to claim a performance incentive. For example, a
biomass heating system may not combust biomass and vent heat into the outside air (for no
useful purpose) in order to receive performance payments. Some policies specify eligible and
non-eligible applications for heat, characterizing uses for domestic water heating, space
heating, or process heat. In the UK, the RHI specifies that acceptable heat uses are space,
water, and process heating where the heat is used in fully enclosed structures (UK DECC, 2011).
RES-H/C should supply economically justifiable heating needs. RES-H/C technologies must
supply heat to a load that would otherwise be met by an alternative heating source (natural
gas or electricity, for example). It should not be designed to serve heat loads that would not
otherwise be used. In some cases, this could eliminate swimming pool heating or other heating
loads where the end-use application had not previously used heat from any source. Most, if
not all, end-use applications that would otherwise use fossil fuels or electricity as a heat source
should be eligible for PBI incentives, regardless of whether they are deemed to be “essential,”
or “non-essential.”
The heat load should be measurable and verifiable. Heating applications that cannot be
measured and verified are ineligible for PBIs. For example, in New Hampshire, the statute
requires monitoring and verification of energy production by an independent entity as a
condition for eligibility in the renewable thermal carve out.
Policy-makers have a number of options to ensure compliance with useful heat principles:
Minimum energy efficiency requirements. By ensuring that basic building energy efficiency
requirements are met as a pre-condition, the size of the RES-H/C system can be reduced, thus
achieving significant reductions in installed costs. RES-H/C systems should be sized to meet the
(remaining) heating and cooling load of the building. By properly sizing the RES-H/C system to meet
the building’s energy load, system owners can increase the overall efficiency of their heating
equipment and reduce the likelihood of wasting primary energy or damaging the RES-H/C system (e.g.
overheating in a solar thermal system). In such a manner, PBI systems for renewable heat can also
indirectly encourage energy efficiency measures.
Estimating RES-H/C production. There are a number of software programs and methodologies that
policymakers can require installers and developers to use to estimate the necessary energy
production. These generally provide users a means to estimate the building heat load and the optimal
sizing and placement of the RES-H/C systems to meet that load. Estimation of heat use has been used
widely in the United States and Europe to support both capacity and performance based incentive
policies. Estimating is typically the preferred approach for incentive programs for small applications
where the cost of metering can be disproportionately high. Due to the complexities of building
occupancy and usage in commercial buildings, however, it can be challenging to establish a suitable
methodology for estimating heat demand across the many building types and end-use applications
found in the commercial sector.
P a g e | 48 IEA-RETD, RES-H/C: Waking the Sleeping Giant, February 2015.
Metering heat production. Ongoing monitoring of larger RES-H/C systems is necessary to ensure that
the system is performing satisfactorily, and to measure delivered energy in order to calculate payment
amounts for true performance based systems. Heat metering has been used widely in the private
sector in many jurisdictions, especially in commercial applications; however, policy governing heat
metering products and techniques for performance-based incentive programs has not been as widely
developed, particularly in North America. Nevertheless, policy-makers are beginning to consider the
issues and options related to heat metering standards in support of performance based incentives.
4.3.2.5 Heat Metering Standards As noted above, heat metering is arguably the most accurate means of establishing confidence in the
operation of RES-H/C technologies, as it enables policymakers and other market actors to clearly verify the
heat production capabilities of RES-H/C technologies. Heat metering standards are a prerequisite to build
political and institutional support for the implementation of robust PBI programs. While heat metering in the
commercial sector is common, heat metering policies and government regulations that support RES-H/C PBIs
are just emerging
Many policymakers assume that heat metering is comparable to metering electricity; however, heat metering
can be much more complicated. Unlike electricity metering, heat metering is not nearly as standard across
technologies, and there are significant differences in metering requirements depending upon heat distribution
system (e.g. hydronic, steam, or air).
The accurate measurement of a heat stream is dependent on the location of the heat metering sensing devices
in the system to be metered. For example, heat meters used in hydronic applications are significantly affected
by the configuration of the piping in the vicinity of the measurement sensors. Also, as with any mechanical
device, heat metering equipment will require on-going maintenance and calibration. As a result, clarifying RES-
H/C metering requirements for incentive policies can be time-consuming and controversial, as has proven to
be the case in New Hampshire.
While a comprehensive assessment of heat metering is beyond the scope of this report, it is worth noting that
several jurisdictions, notably Canada and Europe, have already established heat metering standards (CSA
C900.1 and EN 1434, respectively). Canada developed their standard by adopting the CEN (European
Committee for Standardization) EN 1434 Standard, and formulating “deviation” documents for each of the six
sections of the standard to suit the Canadian market. The United States has decided to take the same
approach in the development of a US heat metering standard, an effort that is well under way. These
standards govern heat metering for hydronic systems (see Appendix A for a description of EN Standard 1434).
Every jurisdiction considering the use of metering requirements to manage PBIs will need to adopt or develop
a heat metering standard that is suitable for their RES-H/C needs. With such a standard in place, policymakers
can then establish heat metering guidelines and regulations that govern the implementation of PBI programs
for relevant RES-H/C technologies. Key policy considerations are described below.
Accuracy requirements and tradeoffs. Policymakers need to determine what level of accuracy is
required or permitted for heat meters. Generally, the greater the meter accuracy, the more expensive
the metering system. It is important to evaluate and appropriately manage the trade-offs between
metering accuracy and the cost of the project. It is important to note that it can be exceedingly
expensive for policymakers to ensure the same level of accuracy for heat metering as is common in the
electricity sector.
P a g e | 49 IEA-RETD, RES-H/C: Waking the Sleeping Giant, February 2015.
Training for metering installation and thermal production calculation. The basic thermal equation for
net energy output is well established.18 However, it is essential for installers to install meters in a
consistent manner in order to provide meaningful readings when reporting output. Policymakers may
wish to provide training for installers when introducing heat metering requirements. Key issues may
include best practices on the placement of metering sensors, pressure drop considerations that affect
accuracy, as well as how and how often output must be reported. Metering placement and design
options can vary considerably across heating system configurations. Policymakers may consider
developing best practices guidance for heat metering installations. Interested readers should review
the UK’s heat metering placement guidance documents for possible approaches to metering a variety
of renewable heating system installations (OFGEM, 2014).
Reporting requirements. Policymakers will need to establish clear guidelines related to meter
reporting. This may include requiring system owners to manually self-report meter readings on a
regular basis, installing meters capable of remote reading, or requiring third-party verification, among
other options.
Ongoing maintenance and inspections. Policymakers should determine how often meters will need to
be inspected and/or calibrated. There are commonly manufacturer specifications that provide
guidance, which policymakers could adopt. In addition, utility or program administrators will need to
designate a certified third-party to conduct meter readings and inspections to ensure the meter is
operating appropriately.
4.3.3 COST EFFECTIVENESS
4.3.3.1 Cost and Benefits for RES-H/C PBI programs for RES-H/C can generate a wide range of costs and benefits. RES-H/C technologies may also
generate a broad range of external benefits that markets may not monetize. For example, RES-H/C PBIs may
actually cross-subsidize conventional fuel consumers if the incentives RES-H/C generators receive do not match
the environmental, social, and infrastructural values that they create. In the UK, policymakers assessed
externalities such as the carbon benefits and the air quality impacts associated with biomass heating, alongside
the costs of the incentive itself. (see Text Box 8).
RES-H/C technologies may also create additional costs for the incumbent heating sector by requiring
infrastructure upgrades (e.g. improving district energy system to accommodate a greater number of
distributed thermal energy systems) or by eroding the revenue of existing players (e.g. reducing the sales of
electric or gas utilities). The balance of these costs and benefits should be assessed when calibrating PBIs over
time. This calibration will be particularly important over time as markets move from take-off and into
consolidation.
18 In particular, the basic equation for “useful thermal energy output” is (renewable thermal energy generated) – (thermal energy storage losses) – (operating energy inputs in thermal equivalent).
P a g e | 50 IEA-RETD, RES-H/C: Waking the Sleeping Giant, February 2015.
It is also important to note that cost-effectiveness can vary over time as cost and price dynamics change. As
RES-H/C technologies become more competitive, they may generate direct savings (instead of costs) when
compared to conventional fuels, as seen in some solar PV RES-E markets. In addition, commercial customers
that lock into long-term fixed price contracts for renewable heat may initially create policy costs – but may
eventually generate savings if the cost of conventional fuels rises above the RES-H/C LCOE. Accordingly,
performance-based payment frameworks may therefore serve as hedge against conventional fuel prices in the
near-term and may generate net savings over the mid- to long-term, depending on how the incentives are
structured.
Text Box 8. Cost Effectiveness of the U.K. Non-domestic Renewable Heat Incentive (Department of Energy and Climate Change, 2011)
Overview. The Non-domestic Renewable Heat Incentive is a tariff paid to commercial, public and
industrial consumers for every unit of renewable heat generated on a pence per kWh basis.
Policymakers utilized a cost-effectiveness approach to evaluate the program, taking into
consideration the different technologies and their rates of adoption, costs to consumers,
environmental impacts, and other factors.
Key objectives and success criteria for the RHI include:
Actual deployment of renewable heat installations,
Actual percentage of heat demand met by renewable heat (against trajectory), and
Cost of the scheme in relation to deployment levels
Stakeholders. Stakeholders and key parameters considered in the cost-effectiveness assessment
include:
Companies: Potential impacts of increased renewable heating generation on electricity bills;
initial investment costs, administrative burdens, and impacts on rural businesses
Society: Air quality and other environmental costs and benefits, including carbon emissions
reductions
Government: Enforcement and compliance costs
Costs and Benefits Evaluated. The UK used a formula to calculate the net present value (NPV) of the
RHI.19 The time period considered is the policy lifetime of 30 years discounted to 2010 prices, using a
private discount rate of 12% and a social discount rate of 3.5%. A positive NPV means there is a net
benefit to society. A negative NPV indicates there is a net cost to society.
Major costs and benefit categories included:
Subsidy Cost: Estimated costs are NPV £22 billion. The total paid subsidy to each installation is
based on the following calculation: (kWhth of heat generated) x (the relevant tariff for the
specific technology)
Resource Cost: Gross costs are estimated at NPV £11.5 billion. It is defined as the cost to society
as firms adopt renewable heating technology, which is more expensive than conventional
heating systems. The resource cost represents the cost difference between renewable heating
and fossil fuel powered heating. It includes the net capital and on-going costs.
19 The basic equation is: (Subsidy cost + resource cost) + (carbon benefits inside the European Trading System (ETS) + carbon benefits outside ETS) + air quality costs + metering costs + admin burdens = Total NPV
P a g e | 51 IEA-RETD, RES-H/C: Waking the Sleeping Giant, February 2015.
Carbon benefits: Provides an estimate of the net social cost per ton of GHG reduction resulting
from the RHI.
Air quality costs: Costs associated with the use of biomass are estimated at £1.8 billion. The
negative impacts of the RHI on air quality will be addressed as biomass replaces gas or electric
heating, as the switch to biomass from these fuels is expected to result in increased levels of
particulate matter (PM10) and nitrogen oxide (NOx) emissions. Alternately, if biomass replaces
heating oil or coal, then the impacts are generally positive.
Metering costs: For an organization to receive the tariff, they must install a Class 2 heat meter to
determine the amount of heat generated by the renewable heat installation. The estimated
costs for such installations are £250-£500milion.
Administrative burdens: Estimated costs are £250 million. The United Kingdom uses the Standard
Cost Model (SCM) to assess the administrative burdens faced by firms in order to comply with
the initiative. The Dept. of Energy and Climate Change applies similar burdens from other
existing policies to estimate the unit burden of the RHI.
Results. The calculation of best estimate of final net benefit for the RHI in 2011 was negative £4.2 billion.
This calculation does not take into account additional non-monetized benefits such as greater fuel
supply diversity, increased economic competitiveness in green technology, and innovation. Reduced
technology costs due to economies of scale and wider deployment are expected to reduce subsidy
and resource costs, and increase both the carbon benefits and non-monetized diversity of supply
benefits at an accelerating rate as installation drives the market up the deployment curve (UK DECC,
2011).
4.3.3.2 Distribution of Costs and Benefits As with RES-E policies, the two most common sources for policy cost recovery are ratepayers or taxpayers. In
addition, as described in Text Box 8, policy costs may also be distributed across firms and society. Historically,
the majority of RES-E incentives have been recovered from ratepayers through the imposition of surcharges on
each kWh of electricity sold. Some markets (e.g. the Netherlands) have used budget appropriations (i.e. from
tax revenues) to fund RES-E policies. However, taxpayer-funded revenue streams are generally characterized
as being more vulnerable to political change and therefore less bankable.
It is worth noting that the term “ratepayer” may not be neatly applicable for heating and cooling since there is
not always a heating or cooling utility. Although electric and gas utilities could be required to include an
additional surcharge for each unit of heat they sell, it can be more challenging to assess comparable
surcharges on less centralized heating distribution infrastructure, such as independent heating oil or propane
distributors. Different jurisdictions have taken different approaches to policy cost recovery within the heating
sector, and there are not yet common practices for recovering costs – particularly when the heating market is
served by multiple fuels and by both centralized utilities and by smaller, more “independent” operators.
As noted in the Text Box above, commercial businesses will also be impacted by PBI policies as they may need
to address administrative and compliance costs, as well as managing the burden of financing the initial upfront
costs of installation. .
Policymakers should also take into account the broad social costs and benefits that accompanies the
development of commercial RES-H/C systems. Biomass heating, for example, can add significant social costs in
the form of particulate air emissions and overall air quality. This can be mitigated, in part, by requiring use of
high efficiency, low emission biomass heating appliances.
P a g e | 52 IEA-RETD, RES-H/C: Waking the Sleeping Giant, February 2015.
RES-H/C systems can also offer significant benefits in the form of carbon emission reductions. However, the
level of benefit additionally depends upon the efficiency requirements for RES-H/C appliances, and for biomass
heating systems in particular, the sustainability of feedstock used.
4.3.4 SUMMARY FOR POLICYMAKERS
Table 6. Summary Considerations for Performance-based Incentives
Assess suitability of performance based incentive
for local jurisdiction
Policymakers should consider the potential for developing PBIs to support RES-H/C market development. By incentivizing commercial building owners for the RES-H/C energy they produce, policy-makers can maximize the quality of the installation, maximize ratepayer value, and support mature market development within the commercial sector.
Small commercial (or residential) systems may benefit from “up-front PBI” structures – which estimate future production – in order to reduce the disproportionately high costs associated with monitoring production and simplify administration. Large commercial systems, however, where ongoing metering is common are generally well suited to absorb the administrative costs related to monitoring system performance for a PBI system.
PBIs can and have been deployed across the market development spectrum – from the inception through the consolidation phase of market development. The UK for example, developed the RHI in order to jumpstart its market in the inception market phase. In some early stage markets though, policymakers may opt to develop capacity or rebate-based incentive programs, especially for small commercial systems, in order to gather market data and assess the needed price support.
Determine duration and
amount of payments
Payment levels for PBIs can be set using a variety of mechanisms including administratively set, competitively bid, and tradable credit market approaches.
There has been robust debate in policy circles regarding the pros and cons of varying approaches to setting payment levels. While the best approach for any jurisdiction will likely depend on the unique political and economic conditions and objectives in which local policymakers operate, it is important to note that policymakers can utilize these approaches in parallel to achieve targeted objectives and can also combine elements of each of these policies into innovative new hybrids.
Similarly, establishing the payment duration can also be complex. For “above market” incentives designed to provide generators with a specific return, shorter-term performance payments (e.g. 3-5 years) can provide a perverse incentive that encourages generators to abandon projects before the end of system life. Longer-term performance-based incentives, on the other hand, may require higher ratepayer impacts over time to produce the same return, though they can also push the final cost of RES-H/C down because they allow capital costs to be levelized over a longer period of time. Policymakers should consider the pros and cons of each approach and assess the suitability for their specific jurisdiction.
Clarify transfer of commodities
Because most commercial buildings generate and consume heat on-site, the transfer of energy – as is common in the RES-E sector – is often not a requirement for RES-H/C PBI systems. The exception is if the RES-H/C PBI is part of a district heating network where distributed generators can feed heat into the district heating grid.
P a g e | 53 IEA-RETD, RES-H/C: Waking the Sleeping Giant, February 2015.
Aside from energy, other commodities can easily be transferred as part of a RES-H/C PBI. These include tradable compliance credits or additional environment (e.g. carbon credits) or market-based commodities.
When designing PBIs for RES-H/C, it is essential to clarify the ownership rights associated with PBI payments as well as the means for tracking them. This can help policymakers ensure that the incentive provides generators with an appropriate return on investment.
Establish “useful heat” and metering
requirements
Policymakers should establish clear guidelines defining what heat is useful and eligibility requirements for participation in the PBI system. Useful heat guidelines may, for example, stipulate that the heat load serves an actual purpose, supply economically justifiable heating needs, or be measurable and verifiable. In addition, useful heat guidelines may also require that minimum building energy efficiency standards in order to increase the likelihood that renewable heating systems are properly sized and reduce the likelihood that primary energy is wasted.
Policymakers should ensure that a heat metering standard is in place within their jurisdiction. For example, EN1434 governs heat meters in Europe and CSA C900.1 provides guidance for Canadian policymakers. A similar standard is currently being developed within the US. With such a standard in place, policymakers can then establish heat metering guidelines and regulations that govern the implementation of PBI programs for relevant RES-H/C technologies.
In accordance with the relevant heat metering standard, policymakers should establish for small and large commercial systems the accuracy requirements for metering; ongoing maintenance and inspectional requirements; metering measurement and design procedures for various heating system configurations; as well as the thermal output calculation for heating installations.
P a g e | 54 IEA-RETD, RES-H/C: Waking the Sleeping Giant, February 2015.
4.4 SOFT COST REDUCTIONS FOR RES-H/C
4.4.1 BACKGROUND There are two types of costs associated with the purchase and installation of RES-H/C technologies: hardware
costs and soft costs. Hardware costs consist of the actual pieces of mechanical equipment used in the system.
Soft costs, also referred to as “business process” costs (Friedman et al., 2013), make up the remaining portion
of the system cost. Table 7 below describes typical soft costs associated with RES-H/C systems.
Table 7. Types of soft cost associated with RES-H/C
Soft Cost Category Description
Customer acquisition
The costs associated with customer marketing, advertising, lead development, and other closing costs related to RES-H/C customer acquisition. Lead development and customer decision time is particularly long when the customer has to become educated on the technology, find an installer, understand the investment, and navigate the permitting, incentive and other administrative procedures.
Installation labor This includes all labor costs to install the RES-H/C system.
Permitting, inspection and interconnection
These include local permitting and inspection fees associated with building and zoning codes as well as interconnection costs (if applicable) to connect with utility infrastructure.
Transaction costs and indirect corporate costs
This includes legal, accounting and other financial costs, as well as overhead and administrative costs of the developer.
Installer /developer profit This encompasses the installer / developer mark up or profit margin that is passed on to the customer.
Supply chain costs Supply chain costs include the cost of inventory, inventory replenishment and lead times, product availability costs, supply chain-related transportation costs, distributor costs and mark up, and any shipping or receiving costs.
Taxes RES-H/C systems may be subject to a variety of federal, state or local taxes, including sales, VAT, property, or other taxes.
As can be seen above, a number of soft costs categories encompass market and process related costs that may
be imposed by subnational governments who control permitting, zoning, code enforcement, and licensing
processes for RES-H/C installations. These soft costs present an immediate opportunity for policy-makers to
implement cost reduction policies, which do not rely on action at the federal or EU level or on technology cost
breakthrough scenarios.
P a g e | 55 IEA-RETD, RES-H/C: Waking the Sleeping Giant, February 2015.
It is worth noting that soft costs have not been well tracked for commercial RES-H/C systems – or the RES-H/C
sector broadly. It is thus challenging at this time to articulate the potential impact of soft cost reduction
policies on the RES-H/C market. However, by way of comparison, soft costs for solar photovoltaic (PV)
installations comprise approximately 57% of the small (<250 kW) commercial price and 52% of the large (>250
kW) commercial system price in the US (Friedman et al., 2013). As a result, even if the equipment was free, a
solar PV system would cost thousands of dollars, meaning that there is significant cost-savings to be achieved
by reducing costs associated with customer acquisition, permitting and inspection, taxes, transaction and
corporate needs, and the supply chain. It is expected that there are similar gains to be made across the RES-
H/C sector, which relies on similar labor and corporate services, and is subject to similar tax and permitting
regimes.
Preliminary analyses and interviews with RES-H/C industry experts support this hypothesis. The following
section explores opportunities to reduce soft costs for RES-H/C systems. It draws on lessons learned for solar
PV soft cost reduction programs and assessments that have taken place in the US and across Europe20 – and
considers how or if these lessons can be applied to the RES-H/C sector for commercial buildings.
4.4.2 BENEFITS OF SOFT COST REDUCTION POLICIES FOR RES-H/C Soft cost reduction policies can provide a number of benefits. These include:
Significant reduction of installation costs for RES-H/C. Soft cost reduction programs can lead to
significant reductions in the installed costs of systems. As noted above, for solar PV, soft costs typically
account for over half of the installation cost in the commercial sector. Initial analysis and interviews
with installers suggest that soft costs represent fifty percent or more of the total installed cost of
commercial scale solar water heating systems, even in active markets such as Germany
(Bundesverband Solarwirtschaft, 2012; Veilleux & Rickerson, 2013). By analyzing RES-H/C soft costs
and developing targeted programs to reduce their impact, policy-makers will likely be able to achieve
significant cost reductions.
Streamlined installation processes. As noted previously, commercial RES-H/C installations can be
complex. In many jurisdictions, it is likely that officials have put in place equally complex permitting
and inspection requirements, which increase the time and cost of installation. By streamlining
permitting and inspection processes, policy-makers can help to expedite installation, reducing time
and expense for installers, developers, and end-users. For example, research in the US indicates that
solar PV can be 10% to 15% lower in cost in jurisdictions with more favorable regulatory procedures
(Burkhardt et al., 2014). These impacts were highest for small-scale systems, suggesting that
streamlined regulatory processes will have the greatest impact on small commercial (or residential)
systems, though commercial SHW installers report that it is an important issue for all system sizes.
20 In the U.S. the Department of Energy SunShot Initiative is the national solar PV soft cost reduction program. More on the SunShot Initiative can be found at: http://energy.gov/eere/sunshot/soft-costs In Europe, PV Legal, funded by the European Commission’s Intelligent Energy for Europe Programme ran from July 2009 until February 2012. Its aim was to “contribute reducing bureaucratic barriers holding back the development of Photovoltaic (PV) energy installations throughout Europe.” See: http://www.pvlegal.eu/en/home.html
P a g e | 56 IEA-RETD, RES-H/C: Waking the Sleeping Giant, February 2015.
Streamlined permitting can be accomplished in part by educating permitting and inspection staff on
the specifics of RES-H/C technologies and helping them design appropriate permitting processes.
Awareness can also help reduce the number of inspections and delays due to concern over unfamiliar
permit requests.
Increase market awareness. Customers are commonly unaware that RES-H/C technologies are a viable
option for their building. By developing programs to increase customer awareness – and thereby
reducing customer acquisition costs – policymakers can support market growth for RES-H/C. Contract
closure rates suffer when the customer has to be educated on the merits of the technology and when
administrative processes are complex and protracted.
Increase transparency. There tends to be a lack of transparency in many RES-H/C markets, especially
those in earlier stages of development. Related to the market awareness benefits described above,
there is a need in many RES-H/C markets to increase transparency around pricing, performance, and
permitting from RES-H/C. A key step in this process is the development of standardized metering and
performance reporting data for RES-H/C systems. In doing so, policy-makers can help to drive down
costs and increase growth or RES-H/C.
4.4.3 POLICY OPTIONS FOR SOFT COST REDUCTION INITIATIVES Policy-makers have the opportunity to implement policies that standardize, streamline, and improve the
transparency of the RES-H/C installation process. Many of these processes are ignored by energy policymakers,
who tend to focus on subsidizing installations or reducing installed costs via technology improvements. While
there is clearly a need to develop policies to subsidize equipment and reduce technology costs, there is also a
need to address onerous permitting and zoning processes or provide assistance to improve customer
awareness and streamline customer acquisition processes.
4.4.3.1 Customer Acquisition Customer acquisition costs include advertising, marketing, lead time and closing costs, as well as the costs of
“dead-end” deals. These costs are especially high when the installer has to work to “convince” the customer of
the merits of the technology in small or emerging markets. Customer acquisition costs are particularly high
when it is challenging for customers to evaluate the value of the investment and/or navigate policy and
incentive options.
Again using solar PV as a benchmark, approximately 5% of leads convert to actual contracts, and installers
report that lead times can be up to a year from the time a potential customer calls to the time the system is
finally operational (Laurent, 2014). Customer acquisition costs often make up 10% of the cost of a solar PV
system.
Within the RES-H/C sector, anecdotal reports from SHW and biomass heating installers suggest that the
industry faces similar challenges. For example, within the commercial building sector, German and US solar
thermal industry leaders report that customer acquisition costs make up an even higher share of total
installation costs, estimated at 50% of more of the cost of installation.
P a g e | 57 IEA-RETD, RES-H/C: Waking the Sleeping Giant, February 2015.
There are a number of opportunities for policymakers to work to reduce these customer acquisition costs:
Creation of automated site analysis tools. Online tools that can determine the type, size, and cost of
RES-H/C technologies can help explain the benefits to customers and also streamline the process for
installers. By making such tools readily available, installers can focus more of their time and efforts on
customers who have the most suitable sites for the various RES-H/C technologies. Online tools have
been developed for solar PV and solar thermal (e.g. Solar Kataster, City of Osnabrück, and the New
York City solar resource maps).21 Within the RES-H/C sector, some manufacturers and distributors have
sought to develop comparable tools for biomass heating and heat pumps, though they tend not to be
as sophisticated and comprehensive as the solar site analysis tools, nor do they carry the neutral
imprimatur of a government.
Group discount programs. The group discount model22 uses community-based marketing and
outreach in order to drive local demand. A similar approach could be deployed for RES-H/C
technologies in the small commercial (or residential) market. The group model generally involves a
tiered pricing incentive that lowers the cost per installation as more customers sign-up over a set
amount of time. Group discount programs (e.g. solarize programs) have proven to reduce the installed
cost of solar PV by as much as 20-40% during the course of the program. Preliminary research suggests
that reductions of 20% or greater could be achieved for RES-H/C installations (Navigant & MCG, 2014).
These types of group discount programs are likely to have the greatest benefit for small commercial
customers, because customer acquisition costs for small commercial systems tend to be highest
(Friedman et al., 2013).
4.4.3.2 Permitting, Interconnection & Inspection Permitting, interconnection and inspection processes can add thousands of dollars to the cost of an
installation. These costs are particularly burdensome on small commercial systems, where the cost of
permitting can make up a disproportionate amount of the total installation cost. Simply making these
processes transparent and available online can help reduce confusion both from the perspective of the
installer and for the authority that is required to review permit applications.
In markets with low penetration of RES-H/C technologies, it is likely that permitting and inspection staff have
seen few if any installations before. Unfamiliarity with RES-H/C technologies can lead to overly cumbersome
processes with multiple inspections and redundant paper work. For example, some installers report that solar
thermal installations have required up to five inspections when only one or two is generally needed. Similarly it
can be challenging and time consuming to obtain ground source heat pump permitting approval and related
drilling permits if staff are unfamiliar with the requirements of GSHP installation requirements. As a result,
simplifying or streamlining permitting best practices can reduce permitting costs for both the permitting
authority as well as the installer or developer.
21 For more, see National Renewable Energy Laboratory tools such as PVWatts and the System Advisor Model (SAM): www.nrel.gov/analysis/models_tools.html 22 The group discount (i.e. solarize) model has been effectively deployed by a number of jurisdictions in the United States. The first campaign started as a grassroots effort in Portland, Oregon. For more information, see: NREL. (2012). The Solarize guidebook: a community guide to collective purchasing of residential PV systems. U.S. DOE Sunshot Initiative. National Renewable Energy Laboratory. DOE/GO- 102012-3578.
P a g e | 58 IEA-RETD, RES-H/C: Waking the Sleeping Giant, February 2015.
Although commercial systems are variable in their design, expedited permitting processes can be applied to
the commercial sector. For example, model design guidelines, engineering specification templates, approval of
basic system components, and engineering loading requirements could be standardized or streamlined for
commercial systems. Some developers have created model engineering specifications sheets for solar water
heating in order to help educate inspection staff. Such model guidelines could be utilized to develop an
expedited process for systems that meet key design specifications.
4.4.3.3 Installation & Performance Making buildings “RES-H/C ready” provides an opportunity to reduce labor costs, a significant category of soft
costs for new construction, renovations, or buildings undergoing a change of ownership. On the solar PV side,
a “solar ready” building can help reduce labor costs by up to 60% as compared to an installation on an existing
building that is not “solar ready.” Policymakers should conduct analyses to assess the potential for RES-H/C
readiness, among other policies, to reduce labor costs associated with RES-H/C installation.
Governments can provide guidance for RES-H/C readiness, and can also even require new and existing
buildings to be RES-H/C ready as a type of mandate (Section 4.2). RES-H/C readiness can include design
features such as:
Allowing space for related equipment in basements or utility rooms,
Providing the proper amperage service,
Providing enough space in circuit breaker boxes,
Providing enough roof space and orientation suitable for the equipment,
Pre-installing conduit or connection runs between the equipment and the interconnection or storage
locations, and
Orienting the building to make is most suitable for the technology (e.g. shading cooling equipment,
providing sunlight for SHW panels), etc.
4.4.3.4 Tracking Performance of Systems Tracking performance and creating performance databases for RES-H/C technologies can help reduce soft
costs in a number of ways. These databases can help make customers comfortable with the performance and
lifespan of the technologies. In addition, this data can help unlock innovative financing tools that rely on
securitization or standardization by making the risks and performance metrics available to financiers. For
example, in the US the National Renewable Energy Laboratory has partnered with SunSpec to build the O-
SPaRC database to draw on performance data in solar PV systems across the US, providing investors the
necessary information to conduct their analyses of solar as an asset class (NREL, 2013). A similar database for
RES-H/C technologies would allow asset class analysis to be conducted in order to help foster innovative
financing options such as those described in Section 4.5.
4.4.4 COST EFFECTIVENESS
4.4.4.1 Costs & Benefits for RES-H/C Soft cost initiatives have the potential to dramatically decrease the cost of RES-H/C technologies. Soft cost
initiatives can reduce the costs of permitting, inspection, and interconnection as well as customer acquisition,
and labor costs.
P a g e | 59 IEA-RETD, RES-H/C: Waking the Sleeping Giant, February 2015.
The impact of soft cost reduction policies can be especially hard to measure, making a cost effectiveness
assessment particularly difficult. In many cases, for example, soft cost reduction programs are designed to
“prepare” the market for scale-up and actual benefits may be several years in the future (e.g. streamlined
permitting processes). In other cases, the direct impact of the policy can be difficult to ascertain (e.g.
performance tracking programs).
4.4.4.2 Distribution of Costs & Benefits Soft cost reduction programs have historically been paid for by taxpayers through government programs. In
some instances, electricity ratepayers may bear the costs. For example, soft cost reduction programs in New
York State and Massachusetts are funded via the renewable energy or energy efficiency surcharge on utility
bills. In still other cases, some programs (e.g. customer acquisition programs) can be funded through non-
profits or via a fee paid by installers. Governments may also bear some of the cost if the permitting reform
involves a reduction in the permitting fees that governments are allowed to charge.
The benefits of these programs flow to various stakeholders:
Installers in the form of reduced customer acquisition, permitting, inspection and interconnection
costs along with more sales volume
Customers in the form of costs savings passed along by installers
Governments in the form of reduced time spent on permits and other bureaucratic processes
4.4.5 SUMMARY FOR POLICYMAKERS
Table 8. Soft Cost Reductions: Summary Considerations for Policymakers
Conduct detailed RES-H/C soft cost analysis
Policymakers should analyze the potential for soft cost reductions across RES-H/C technologies and sectors. Preliminary analyses suggest that there is significant potential for installed cost reductions by addressing soft costs. It is likely that a detailed analysis would reveal opportunities for soft cost reductions across the range of RES-H/C technologies for commercial buildings.
It may be appropriate to conduct soft cost analyses at any of the market development stages – and especially in the inception and take-off phases.
In the inception stage, a soft cost study could be integrated into a broader installed cost study, helping policymakers identify the right level of incentive support and assess potential for cost reduction initiatives in the future.
For markets in the takeoff phase, policymakers may monitor hard and soft costs and adjust incentives downward as prices decline. Similarly, results of the cost study may encourage policymakers to focus on new market development support programs to address specific soft costs (e.g. permitting, customer acquisition, etc.)
Address customer acquisition costs
Policymakers can play a key role in helping reduce customer acquisition costs. Customer acquisition costs are likely to be significant throughout both the inception and take off phases of the market. Education and outreach is typically most needed during the inception phase of the market, whereas bulk purchasing programs will help move the market from inception to take off.
P a g e | 60 IEA-RETD, RES-H/C: Waking the Sleeping Giant, February 2015.
Especially for small commercial systems, policymakers can encourage bulk purchasing policies such as solarize-style campaigns to increase the number of installations and drive down customer acquisition costs.
Policymakers can also create online site analysis and financing informational tools for small and large commercial systems.
Implementation costs associated with these types of soft cost reductions programs can either be born by taxpayers or by the private sector.
Streamline RES-H/C Permitting
Relative to residential systems, permitting costs are not as high for commercial systems. Nevertheless, policymakers can reduce the cost and (especially) the hassle of installing RES-H/C systems in the commercial sector by streamlining the permitting process for RES-H/C.
For markets in the inception phases, decreasing permitting costs can help make a jurisdiction “RES-H/C ready” and can avoid bottlenecks that would develop as the market enters the takeoff phase. Permitting cost reduction programs can also be implemented during market takeoff and should be established by the consolidation phase.
Taxpayers or ratepayers would likely bear the cost of streamlining permitting processes, because government staff time is needed to make the necessary revisions and policy changes. However, it is also expected that governments will see their operational costs decline when permitting processes are improved, because fewer inspections are needed and less time is spent reviewing applications due to application errors or rejections.
Track performance of RES-H/C systems
Performance tracking helps standardize performance metrics unlocking additional financing tools and making the financing of RES-H/C systems easier for customers to understand. Combining performance tracking with incentive payments can also help track policymaker goals.
It will be especially important to make the case for performance and effectiveness of RES-H/C technologies in the inception phase of the market, so that banks and investors are comfortable with the technology as the market starts to scale up.
Performance tracking will continue to be important in the take-off and consolidation phases to reduce the costs of capital. As more systems that are installed, investors will need clear performance metrics in order to bundle projects into pools for financing and bring low cost capital to support investment.
In the inception and early take-off stages, public tracking and standardization costs are typically born by government agencies (taxpayers). As the market matures, benefits will flow to the private sector and ratepayers when additional financing tools are developed and the installed cost of RES-H/C technologies decrease. It is reasonable to expect that the private sector will ultimately take over the performance tracking function in order to better manage investment portfolios.
P a g e | 61 IEA-RETD, RES-H/C: Waking the Sleeping Giant, February 2015.
4.5 INNOVATIVE FINANCING AND BUSINESS
MODELS FOR RES-H/C
4.5.1 BACKGROUND Innovative financing and business models are strategies that address financial or behavioral barriers to RES-
H/C deployment by creating value or reducing financial risk. A number of recent assessments have described
various financing or business models that could be deployed to grow RES-H/C markets by increasing access to
new sources of private capital (Cliburn, 2012; Kim et al., 2012; IEA-RETD RE-BIZZ, 2012) In particular, turnkey
RES-H/C financing and development services – including third-party ownership models – are gaining traction in
Europe and the United States. As illustrated in Figure 7 below, turnkey RES-H/C developers provide a range of
solutions for customers, including building energy assessment, design and planning, financing, construction
and installation, and operations and monitoring (IEA-RETD RE-BIZZ, 2012).
Figure 7. Turnkey developers can provide building owners with a range of RES-H/C services
In the strictest sense of the term, turnkey developers provide all of these services, offering building owners a
complete heating service ready for immediate use. Depending upon their specific needs, however, building
owners can also contract out these services separately. This decision to do so generally depends upon the
building owners’ comfort with managing the performance risk of the RES-H/C system, as well as the available
financing options. As described in Section 3.1, it is clear that many commercial building customers require
assistance assessing and managing the risk associated with the development and operation of RES-H/C
systems. Turnkey providers can reduce the hassle associated with the implementation of unfamiliar
technologies, simplifying the design, development, operation, and maintenance of RES-H/C systems by
providing renewable “heat as a service” for end-users.
Turnkey RES-H/C developers can also arrange third-party ownership models under which a separate entity
(sometimes the developer themselves) owns the system and assumes (in most cases) the operational risk.23
23 It is also worth noting that some energy service companies (ESCO) have developed models wherein building owners finance and own the system, though they transfer all operational risk via a performance guarantee.
Building Audit
Initial buiding assessment is
completed, including
preliminary analysis for energy efficiency
and RES-H/C
Design & Planning
The RES-H/C system is sized and
designed to match the building host's specific needs and
budget
FinancingFinancing options are evaluated and
structured, including direct and third-party ownership
options
Construction & Installation
Construction and
installation are contracted out to reputable firms
Evaluation & Monitoring
Ongoing evaluation and monitoring is performed as well
as regular maintenance to
ensure the system operates properly
P a g e | 62 IEA-RETD, RES-H/C: Waking the Sleeping Giant, February 2015.
Generally speaking, this model enables hosts to integrate RES-H/C into their building for little or no money
down, further reducing the risk and complexity related to system operation and maintenance. Assuming the
right supporting policies are in place, third-party ownership models can provide customers with immediate
cost-savings (e.g. cash flow positive in Year 1) (Cliburn, 2012).
Fostering a market for third-party ownership generally requires supportive policies. In markets where these
models for RES-H/C have been successfully implemented, enabling policies have provided incentive that create
additional project revenue as well as programs that offset development costs. For example, within the US,
California, Hawaii, Maryland, North Carolina, and Washington DC are all jurisdictions that provide a host of
incentives to drive down costs and spur third-party ownership for residential and commercial solar water
heating (U.S. EPA, 2012). As a result, companies like Nextility offer a guaranteed solar thermal savings contract
to commercial customers, an offering that is structured as a variable price power purchase agreement (PPA),
which provides savings below the cost of customers’ conventional water heating fuel (e.g. natural gas, oil, or
propane). Similarly, in Upper Austria, the state energy agency has provided grants covering 13.5% of
investment costs for a biomass heating contracting program, which helped support implementation of 140
single building (including commercial) and district heating biomass projects (see Text Box 9).
The following section describes key features of third-party ownership as well as supporting policies that can
create the conditions for third-party ownership and increased private sector investment in RES-H/C.
Text Box 9. Wood Energy Contracting: The Upper Austrian Experience
The state of Upper Austria is one of the largest markets globally for biomass heating and aims to
serve100% of space heating load with renewable heat by 2030. Supported by a range of policies, from
direct incentives, to fuel quality standards and educational programs, this market has grown
substantially over the past several decades. In 2009, it was estimated that more than 15% of total
energy in the region came from biomass and that there are over 40,000 biomass heating installations in
the state. The biomass heating market includes an estimated 310 biomass fired district heating plants
as well as an emerging third-party ownership model. Many of these systems are owned by local
farming cooperatives, creating a local market for their own wood products.
The region has supported the development of third-party owned biomass systems (both district scale
and single-building scale) through its Energy Contracting Program. Recognizing that third-parties may
be better equipped to own and operate biomass thermal systems, Upper Austria offers a 13.5 percent
investment cost subsidy (on top of other existing incentive programs) for biomass systems installed
through a third-party contracting model (Egger et al., 2010). These incentive programs, along with
stringent requirements for wood chip fuel quality and installation parameters, have enabled Upper
Austria to enable development of third-party owned systems. In total, the program has supported over
100 third-party owned biomass projects in Upper Austria.
P a g e | 63 IEA-RETD, RES-H/C: Waking the Sleeping Giant, February 2015.
4.5.2 RISK AND ECONOMIC CONSIDERATIONS FOR THIRD-PARTY
OWNERSHIP Depending upon their risk appetite, project economics and local market conditions, commercial building
owners may wish to explore third-party ownership models for RES-H/C technologies. While third-party
ownership models create benefits for site hosts, e.g. generating energy savings without the risks of project
ownership, they also have drawbacks. The addition of a third-party owner into a transaction may be less
financially advantageous for a commercial building owner when compared to direct system ownership. Third-
party owners will need to recoup their investment costs by reducing the total savings accrued to the site host.
In other words, building owners opting to host a third-party owned system will almost certainly pay more for
energy than if they owned the system outright.24
The suitability of third-party ownership for building owners generally depends on two issues: building owners’
appetite for performance risk and their financing options:
Performance risk. Building owners should evaluate how much operational risk they are willing to
absorb when installing a RES-H/C system. If the building owner opts to own the system, they will are
responsible for ensuring that the system operates as predicted. For commercial customers with
experienced building and maintenance staff, ownership may be a viable option. A lack of knowledge,
time, or experience, however, may inhibit building owners from installing RES-H/C systems. In these
cases, third-party ownership models, or other arrangements that shift performance risk away from the
building owner, can address building these concerns.
Financing options. Customers with strong balance sheets or access to low cost financing may choose
to finance the installation themselves. Many commercial customers – especially small and medium
enterprises – may have difficulty securing debt with attractive terms. Even when commercial
customers can access low-cost capital, they may not want to take on additional debt to install RES-H/C,
especially if it will affect their ability to finance projects more closely aligned with their core business.
In such cases, third-party ownership may be a good solution. RES-H/C developers can access financing
in order to develop third-party owned systems. In some regions, third-party ownership models can be
treated as off-balance sheet, which has important accounting benefits and can potentially affect
building owners’ cost of borrowing as well as their ability to take on debt.25
Table 9 below provides a description of these considerations regarding direct and third-party ownership
models.
Table 9. Key features of direct ownership and third-party ownership models
Direct Ownership Model Third-party Ownership Model
24 This, however, would not be the case if site hosts are unable to effectively monetize all of the available benefits of system ownership. For instance, third-party ownership for solar PV has been a popular option for non-profits in the United States as they are unable to take advantage of federal tax incentives. Under this scenario, the third-party system owners can benefit from those incentives and pass along a portion of that value to the site host through reduced power purchase rates. 25 This has historically been the case in the US, for example, though the accounting treatment is changing as the US attempts to harmonize its own accounting standards with those of the International Accounting Standards Board.
P a g e | 64 IEA-RETD, RES-H/C: Waking the Sleeping Giant, February 2015.
Ownership Structure
The building owner owns and finances the system. In most cases, the building owner will contract a developer to design, engineer, and install the system.
A third-party financier owns the system. The third-party owner may or may not also be as the developer.
System Performance Risk
The building owner is exposed to the majority of the system performance risk.
However, there are a number of options that can help building owners mitigate risk – including manufacturers’ warranties and performance warranties from the installer. The latter is likely to be an option if the installer manages the operation and maintenance for the system.
Alternately, building owners could enter into a performance guarantee with an ESCO, in which case the ESCO contractually absorbs all risk associated with the performance of the system, while also permitting the building owner to own and finance the system.
The third-party owner absorbs performance risk of the system as the owner of the system.
Like a building owner, the third-party owner will seek to mitigate risk by ensuring that the product has appropriate manufacturer warranties.
In addition, the third-party owner will charge the building owner a mark-up for energy produced to offset the performance risk.
Financing
Customers with strong balance sheets or access to low cost debt are usually in the best position to finance the installation themselves.
Commercial customers may not want to take on additional debt to install RES-H/C, especially if it will affect their ability to finance project more closely aligned with their core business.
Assuming the right market conditions are in place, RES-H/C developers can access financing in order to invest in third-party owned systems. This can drive large infusions of capital.
4.5.3 BENEFITS OF INNOVATIVE FINANCING FOR RES-H/C Turnkey financing models can create benefits for all parties involved in a transaction, while overcoming a range
of market barriers:
Simplify decision-making and reduce risk for system hosts. The third-party agreement typically
relieves the host of the responsibility for structuring and managing project development, system
construction, operations and maintenance (O&M), and de-commissioning of the system (U.S. EPA,
2012). This can directly address barriers associated with the complexity of the decision-making process
for building owners. By establishing one central entity – the system developer – to manage the
numerous participants involved in design, development, and installation of the RES-H/C system, third-
party owned systems can eliminate development complexity for building owners.
Facilitating financing. By addressing performance risk and helping system hosts think through
ownership options, full service developers help facilitate access to finance. In some cases, the system
host may have the most advantageous financing options. In other cases, third-party owners can bring
large amounts of upstream financing to the market.
P a g e | 65 IEA-RETD, RES-H/C: Waking the Sleeping Giant, February 2015.
Drive professional marketing. Developers offering third-party ownership models are highly motivated
to market and install RES-H/C systems. In many cases, they will have obtained upstream financing and
will need to install a certain number of systems within a specified period of time in order to provide
their investors with their required rate of return. As a result, they may develop and implement
professional marketing campaigns to reach new customers and drive development of RES-H/C
markets.
Capture value of tax Incentives. In markets where tax incentives are used to encourage RES-H/C
development, third-party ownership provides opportunities for commercial and institutional end-users
to capture the value of incentives. This is especially valuable for entities that do not have a significant
tax liability themselves.
4.5.4 POLICY OPTIONS TO SUPPORT THIRD-PARTY FINANCING There are a number of enabling policies that allow third-party ownership models to develop. These will likely
be especially important as markets move out of inception phase and into late-stage or consolidation phases.
Policy-makers may consider the following issues to encourage development of third-party models and other
financing and business model innovations:
Incentives. In order for third-party financing models to be effective, project returns must be attractive
enough to motivate both the project owner (the third-party financier) and the building site owner to
pursue the project. Depending on the cost of the technology relative to traditional energy sources, this
may require significant and sustained incentives. Alternately, policymakers could impose fossil fuel,
carbon, or other taxes that would improve RES-H/C project economics relative to counterfactual fuels.
This has been the approach taken by policymakers in Denmark. Regardless of whether policymakers
implement incentives, taxes, or some other pricing mechanism, it is important that a sustained and
credible commitment to providing market support incentives is deployed in order to induce new
entrants into the renewable thermal third-party financing market. This is especially important given
the cost and complexity associated with building a third-party renewable thermal company.26
Standardized technical requirements and contracts. Negotiating individual contracts for projects can
be a time consuming and expensive process for third-party project developers. Customized contracts
can delay project implementation and can create barriers to investment by capital providers.
Policymakers may be able to support the development of third-party financing for renewable thermal
technologies by working with industry stakeholders (e.g. manufacturers, project developers and capital
providers) to develop model contracting language for third-party owned renewable thermal systems.
In the United States, the National Renewable Energy Laboratory (NREL) has launched a similar
initiative related to solar PV market development in order to reduce transaction costs related to solar
contracting. The U.S. Environmental Protection Agency has similarly taken preliminary steps to help
standardize contracting for commercial scale solar thermal projects in the commercial sector (U.S. EPA,
2012).
26 These can include costs such as marketing, standard contract development and legal fees, developing relationships with EPC contractors, developing relationships with capital providers, etc.
P a g e | 66 IEA-RETD, RES-H/C: Waking the Sleeping Giant, February 2015.
Outreach to lenders and contractors. Capital providers may be unfamiliar with renewable thermal
technologies, their costs and benefits, and available incentives. Capital providers may mis-price the risk
associated with new or unfamiliar technologies, adding to system financing costs and reducing the
overall pool of potentially profitable projects. Policymakers can support the development of third-
party financing models for specific renewable thermal technologies by improving investor knowledge
of and confidence in these technologies. This could include the development of informational
materials targeted at the investment community, the creation of project performance data sets, and
direct engagement with financiers.
Text Box 10. Opportunities for Securitization of RES-H/C Assets
The Opportunity for Securitization in RES-H/C. Securitization refers to the process of pooling loans or
other receivables in a trust, which issues debt against the pool of assets. It provides developers access
to new sources of low cost capital, and has been used successfully in the past within housing, auto and
student loans, and credit card receivables. At the end of the third quarter 2012 there was $1.7 trillion
dollars outstanding in the asset-backed securities (SIFMA 2012).
Within clean energy, securitization has been used in several countries to scale clean energy markets.
For instance, third-party ownership providers such as Solar City and SunRun have used securitization to
support widespread deployment of solar PV in the United States. In takeoff and consolidation phase
markets, there may be an opportunity to also securitize loan products to support large-scale RES-H/C
deployment.
Debt issued in support of renewable heating and cooling project could be securitized into bonds for
issuance into secondary capital markets. By bundling projects and creating a large pool of assets,
capital providers such as pension and insurance funds may take an interest in investing in renewable
heating and cooling projects. These types of capital providers can typically provide lower cost and
longer-term debt than banks are able to provide. Lowering financing costs and lengthening
repayment periods will improve renewable heating and cooling project cash flows, increasing the
number of potentially viable projects.
Requirements for Securitization. Securitization requires appropriate underwriting standards and
transparent project performance information in order to ensure that investors can understand the risks
and benefits associated with any asset-backed security. This is an area where policymakers could
support market development.
Asset securitization requires each project within a pool to have uniform financing agreements,
because large investors are unwilling to accept risks associated with diverse, customized contracts.
Investor risk can be lowered by creating industry standards related to system warranties and
performance guarantees. Tracking by the Climate Bond Initiative suggests that bond investors are
eager to invest in renewable energy projects, with recent green bond issuances being significantly
oversubscribed. A new class of green bonds, those backed by renewable heating and cooling assets,
could be highly attractive to bond investors who have an interest in supporting proven clean energy
technologies that can result in stable cash flows.
P a g e | 67 IEA-RETD, RES-H/C: Waking the Sleeping Giant, February 2015.
Securitization of poorly underwritten debt instruments – largely in home mortgages – was a major
factor in the recent financial crisis. Proper due diligence on the part of investors and loan originators is
critical to ensuring that debt instruments perform as expected. Given this, policymaker efforts to set
RES-H/C performance standards in local markets can greatly reduce potential risk to investors in clean
energy asset backed securities.
The Outlook for RES-H/C. Government agencies have intervened in the past to help securitize
products and services. For example, KfW in Germany has long been a leader in facilitating
securitization of clean energy project-backed debt and US states are in the process of implementing
Green Bank programs and policies with the goal of securitizing debt for secondary markets.
Securitization for RES-H/C is a complex process, but there will likely be opportunities for RES-H/C to
benefit from the work already being done on the topic related to other energy technologies.
4.5.5 COST EFFECTIVENESS
4.5.5.1 Costs & Benefits for RES-H/C There are a number of costs and benefits associated with third-party ownership models for RES-H/C
technologies and the policies that support them. Some policy options, such as direct incentives, will have
varying costs and benefits based on the magnitude of the incentive provided and the overall societal benefits
of the installed system. As discussed in other sections, the distributional effects of incentives and other
enabling policies will be highly dependent on their magnitude, how they are funded, the type of technology
receiving the incentive, and the sectors and sub-sectors that can access the incentives.
Other policies and programs that could promote third-party ownership of RES-H/C systems may have limited
costs but substantial benefits. Government efforts to convene stakeholders and adopt standard contracting
language may require relatively limited expense, but could result in substantial RES-H/C market growth.
Similarly, outreach and education to contractors and lending institutions could require modest public sector
budget appropriations, but result in significantly increased market development. Given the relatively low costs
of these initiatives and the large potential societal benefits, policy makers may wish to explore the potential
effectiveness of these market interventions before designing increased incentives in order to promote third-
party ownership of RES-H/C technologies.
4.5.5.2 Distribution of Costs & Benefits Incentives that lead to the development of third-party ownership models for RES-H/C technologies will create
differential distributions of costs and benefits than markets without third-party ownership models. This is
because the addition of a third-party owner will require a new stream of benefits to flow to the system owners
than would otherwise be necessary. For this reason, developing a robust third-party ownership market may
require incentives above and what could be necessary in a well-functioning market without third-party
ownership. Despite this, promotion of third-party ownership models may be attractive for policymakers in that
they overcome a range of non-financial barriers to market development that might otherwise lead to limited
RES-H/C market growth.
P a g e | 68 IEA-RETD, RES-H/C: Waking the Sleeping Giant, February 2015.
4.5.6 SUMMARY FOR POLICYMAKERS
Summary Considerations for Policymakers: Innovative Financing and Business Models for RES-H/C
Assess suitability of turnkey business models
Third-party ownership for RES-H/C provides “heat as a service” to commercial and institutional building owners. The turnkey model provides the end-user with a range of technical and financial solutions, including the building energy assessment, design and planning, financing options, installation, and operations of a RES-H/C system.
By providing a comprehensive service, third-party ownership reduces the hassle and operational risk associated with the implementation of complex and unfamiliar technologies. Third-party ownership can also allow customers to benefit from financing they could not otherwise access and help drive professional marketing campaigns.
Determine need for enabling policies
There are a number of enabling policies that can allow third-party ownership models to thrive. These are especially important as markets move out of the inception phase and into the take-off or consolidation phases.
In order for third-party ownership to be effective, project returns must be attractive enough to motivate both the third-party project owner and the building owner. Incentives are often important in helping drive these models in the early phases of market development.
Standardized technical requirements are also important to reduce the time and expense of project development. Policymakers may be able to support third-party ownership models by helping industry stakeholders develop common contracting language for third-party owned systems.
Outreach to lenders and contractors is also important. Especially in the inception and early take-off phases, capital providers will likely be unfamiliar with the challenges and benefits associated with RES-H/C technologies and will be likely to mis-price the risk of these systems. This can add significant cost to the system and reduce the overall pool of potentially profitable projects. Policymakers can work to support the development of third-party ownership models by improving investor knowledge of and confidence in RES-H/C technologies.
Assess potential for securitization
Securitization is the process of pooling loans or other receivables in a trust, which issues debt against the pool of assets. It is an important tool to scale-up capital provision and lower the cost of capital for renewable energy technologies like RES-H/C.
For take-off and consolidation phase markets, there is potential to securitize loan products to support large-scale RES-H/C deployment. Securitization would enable institutional investors like pension and insurance funds to provide capital to the RES-H/C market, thus providing lower cost and longer-term debt than commercial banks are able to provide. Lowering the financing costs and lengthening repayment periods will improve RES-H/C project cash flows and increase the number of potentially viable projects.
Securitization requires appropriate underwriting standards and transparent project performance information in order to ensure investors understand the risks associated with the new security. Proper due diligence is critical to ensure that debt instruments perform as expected. As a result, policymaker efforts to set RES-H/C performance standards can greatly reduce potential risk to investors in clean energy backed securities.
P a g e | 69 IEA-RETD, RES-H/C: Waking the Sleeping Giant, February 2015.
4.6 NEXT GENERATION POLICY APPROACHES To bring RES-H/C markets to scale, policymakers will need to develop comprehensive policy packages suitable
for their specific jurisdiction. Policy packages should be designed to address the unique mix of barriers and
market conditions at work in any given jurisdiction. It is generally not possible to prescribe a suitable policy
package without carefully analyzing the goals, barriers and opportunities in a given jurisdiction. Having noted
this limitation, however, Figure 8 below illustrates general best practices that can be applied to any given
jurisdictions in one of the three market development phases (i.e. inception, take-off, or consolidation).
Figure 8. Next generation policies can drive deployment of RES-H/C across all stages of market development
For markets in the inception phase, it is important to develop a clear roadmap for market development, which
may include the creation of ambitious and credible RES-H/C technology targets. This is important to show
commitment to – and generate confidence in – the RES-H/C market. In addition, a suitable mix of incentive
support should be developed to stimulate the market. This may include performance based incentives that are
calculated based upon an initial assessment of installed costs and required rates of return for investors. When
piloting PBIs, it will also be important to develop comprehensive heat metering standards, so that useful heat
production can be properly metered, measured, and rewarded.
P a g e | 70 IEA-RETD, RES-H/C: Waking the Sleeping Giant, February 2015.
During the inception phase, policymakers should also ensure that the necessary regulatory framework is in
place. For example, when implementing installed cost assessments, policymakers should pay special attention
to assessing soft costs, providing policymakers the information needed to launch soft cost reduction programs
such as streamlined permitting and inspectional processes for RES-H/C. Other regulatory policies may include
the development of pilot building mandates. It would be most suitable to impose mandates on a limited
segment of the commercial building sector during the inception phase, such as public buildings or new
buildings, in order to demonstrate the viability of RES-H/C technologies and build confidence in the market.
Policymakers should also consider education and engagement programs to help customers and lenders assess
the risks and benefits of RES-H/C.
For markets in the take-off phase, it is important to refine and update plans in order to address new market,
technology, and cost developments. At this stage, policymakers may also wish to strengthen regulatory
requirements, impose more robust utility mandates, and incorporate existing buildings into RES-H/C building
mandates. For building mandates, policymakers should also calibrate the mandate trigger (e.g. sale, lease, or
renovation of the building) and to progressively address barriers such as landlord-tenant challenges and low
building refurbishment rates.
At this phase, it is also anticipated that soft cost reduction programs – such as customer aggregation or
streamlined permitting initiatives – will also place downward pressure on RES-H/C installed costs. As a result,
policymakers should ensure that degression mechanisms are in place in order to give market actors clear
signals regarding future incentive levels. It is important to set incentives at levels sufficient to ensure
continued growth in deployment. In some jurisdictions, this could enable third-party ownership and other
innovative financing programs to take root.
For regions that are served by district heating systems, policymakers have a unique opportunity to create new
tariff and regulatory frameworks that could enable net metering or feed-in tariff style policies for heating and
cooling.
For markets in the consolidation phase, policymakers will need to ensure that the broader energy market
design is commensurate with high RES-H/C penetration levels and that economic support can be progressively
phased out. Key issues and options related to energy integration and planning are addressed in the next
section (Section 5).
Policymakers should be sure that regulatory and incentive policies are adjusted so that public acceptance is
maintained, especially as deployment levels grow and projects have higher visibility and impact. As the market
develops, policymakers should consider implementing programs that help industry standardize technical
requirements and contracting language in order to encourage securitization and bring new capital sources (e.g.
institutional investors) to the market. These are all meaningful ways for policymakers to intervene and reduce
risk associated with the deployment of new financing and business models.
P a g e | 71 IEA-RETD, RES-H/C: Waking the Sleeping Giant, February 2015.
5 RES-H/C & INTEGRATED
ENERGY PLANNING 5.1 IMPORTANCE OF INTEGRATED ENERGY
PLANNING Assuming that RES-H/C does achieve significant scale across jurisdictions over the next several decades, it will
be important for policymakers to start planning now for how RES-H/C policies fit into broader energy
strategies. Section 3.2 introduced a variety of energy infrastructure planning and investment issues that have
important implications for RES-H/C, focusing in particular on how or if RES-H/C can integrate with low energy
buildings, district energy, and electric grid management strategies. The following section takes a closer look at
the implications of the commercial RES-H/C market going to scale and how it may threaten or benefit existing
and emerging energy paradigms.
There are a variety of energy infrastructure planning and investment questions that have important
implications for RES-H/C in the future:
How will RES-H/C technologies influence the development of future building stock trends, such as low
carbon or zero energy building requirements?
Should district heating systems be expanded in the future to support greater growth of RES-H/C?
How will RES-H/C technologies interact with the electricity grid and/or impact the business models of
incumbent energy providers (e.g. electric and natural gas utilities)?
Depending upon the needs and resources across jurisdictions – and the individual RES-H/C technologies that
are deployed to address those needs – the answers to these questions may vary widely. For example, some
jurisdictions may emphasize development of large-scale biomass-based CHP for district energy as part of a
broader agriculture (forestry) economic development strategy. Others may create policies that encourage
integration of on-site RES-H/C systems like air source heat pumps or solar thermal to support development of
zero or low-energy commercial buildings. Still others may drive widespread deployment of heat pumps and
thermal storage in order to electrify the heating sector in order to absorb abundant renewable electricity
resources. .
While a comprehensive analysis of these issues is beyond the scope of this report, it does raise a number of
important questions for policymakers to consider. Without a coordinated planning effort, country
policymakers could find themselves developing energy policies or strategies at odds with one another. The
following explores how RES-H/C complements, threatens, or otherwise influences future energy strategies,
focusing in particular on the interaction of commercial RES-H/C with low energy building strategies, district
heating development, and electric grid management strategies.
P a g e | 72 IEA-RETD, RES-H/C: Waking the Sleeping Giant, February 2015.
5.1.1 RES-H/C & LOW ENERGY BUILDINGS Low energy buildings are those with zero or minimal energy requirements for heating and cooling, due to
highly insulated building envelopes with thermal loss. Low energy building design and construction is taking on
increasing importance in many regions of the world. The European Union, in particular, passed a 2010 directive
requiring all new buildings to be designed to be nearly carbon-neutral by 2018-2020. RES-H/C will likely have
an important role to play in the deployment of low energy buildings across jurisdictions.
Threats and Benefits of RES-H/C. By significantly reducing energy demand, low energy buildings also reduce
the need for heating and cooling appliances, including RES-H/C. For example, an analysis of the German heat
market estimates that new building heating demand will decrease by 44% between 2005 and 2020 due to
improved thermal insulation and more efficient use of energy (Bürger et al., 2008). For individual buildings, low
energy building standards like Passive House seek to largely eliminate the need for conventional heating
systems by making efficient use of the sun, internal heat sources, and heat recovery (Passive House Institute,
2012). This could represent a threat to the viability of the RES-H/C industry in the future. However, it appears
unlikely that buildings will entirely eliminate heating loads. Thus, RES-H/C technologies will almost certainly be
the preferred (low-carbon) means to fulfill building heating needs.
As global temperatures increase, many commercial buildings – especially those in traditionally colder climates
– are experiencing or will experience a significantly increased need for cooling (Lu et al., 2008). RES-H/C
technologies such as air and ground source heat pumps, and perhaps solar thermal cooling, can offer a viable
means to cool low energy commercial buildings using renewable resources.
Jurisdictions like Baden Württemberg are also exploring ways to encourage nearly zero energy building
performance requirements in existing buildings – by requiring RES-H/C systems to be integrated into existing
buildings during building renovations or when heating systems are replaced. Such buildings typically deploy
high efficiency or RES-H/C heating equipment such as air source or ground source heat pumps. Biomass based
CHP combined with local district energy grid can also serve clusters of buildings – such as office parks,
industrial parks, or neighborhoods – in order to cost effectively meet the combined heating and electricity
needs of existing low energy buildings.
Summary. The trend towards low energy buildings provides a number of opportunities for RES-H/C, and
policymakers should carefully consider how RES-H/C policies support low energy building objectives. With low
energy buildings, relatively small amounts of heating and cooling supply are sufficient to provide normal
comfort levels in all seasons. While reduced, there will continue to be a need provide heating and cooling
supply, especially for large existing commercial buildings, which must regulate heat loading from electronic
equipment and high number of occupants. RES-H/C technologies –such as biomass pellet systems, air-source
or ground-source heat pumps, and solar thermal systems – are desirable low or zero carbon options to provide
renewable heating and cooling needs for buildings
P a g e | 73 IEA-RETD, RES-H/C: Waking the Sleeping Giant, February 2015.
5.1.2 RES-H/C & DISTRICT ENERGY District heating networks have been integrated into RES-H/C strategies in a number of regions, especially in
northern Europe where countries like Denmark are in the process of transitioning away from fossil fuels and
towards renewable heating technologies. A number of other countries like the UK are considering expansions
or new development of district heating networks as a means to supply building clusters or neighborhoods with
renewable heat. Depending upon policymakers’ priorities, next generation RES-H/C policies can both benefit
and threaten existing district energy business models.
Threats and Benefits of RES-H/C. Some experts consider the lack of district energy as a “severe structural
barrier” to widespread utilization of RES-H/C and a significant contributor to the lack of specific renewable
heating policy (REN21, 2013). District heating is considered important for RES-H/C technologies because of the
economies of scale. While some large commercial facilities can provide the necessary heat demand, there are
a number of benefits that aggregating buildings in a heating networks can provide for RES-H/C (Bürger et al.,
2008):
Extracting large amounts of geothermal heat from depths greater than 2,000 meters tends to be
economically feasible for very large heating loads, which may require the aggregation of a large
number of energy consumers (i.e. through a local heat network).
Storing solar heat in the larger heat stores of a local heat network is generally cheaper and can be
done over a longer period of time than for individual buildings alone. Experts note that aggregating
heat load across buildings is the most efficient and cost-effective way to store heat from the summer
for use in the winter.
CHP generation is most efficient for very large biomass plants. Furthermore, inexpensive, problematic
biomass sources like straw, which require more effort to clean the flue gas, can be used in larger
furnaces.
There is considerably greater complexity to developing policy to deploy many, distributed RES-H/C
systems (across a variety of building types) instead of focusing on policies that support development of
comparatively few centralized heating plants for district heating systems.
On the other hand, other policy experts point out that RES-H/C technologies are best suited to be integrated
directly into buildings, with the option to feed into district heating networks as appropriate (Epp, 2014). In
such a scenario, policymakers would need to develop new interconnection policies and tariffs to support
distributed RES-H/C generation. This will require the implementation of performance based incentives or new
tariff frameworks described in Section 4.3.2 (e.g. comparable to a feed-in tariff for RES-H/C).
For distributed RES-H/C systems on buildings to succeed in district heating networks, new tariff and regulatory
frameworks will be necessary, even if incentives are no longer required. If RES-H/C technologies become
broadly competitive with conventional fuels, there will need to be established rules in place that govern the
interconnection of RES-H/C to the heating grid, the “dispatch” order of RES-H/C technologies compared to
conventional systems, and the performance-based compensation for RES-H/C energy sources. It will also need
to be determined whether RES-H/C systems should receive payment at the “avoided cost” of conventional
fuels, or whether they should be compensated at a lower rate that reflects their specific generation costs.
Moreover, integration of RES-H/C into district heating grids will in many cases require technical upgrades to
the grid. The district heating and cooling industry has proposed the development of “smart grids” for heating
and cooling, which is based on the deployment of fourth generation district heating and cooling networks.
P a g e | 74 IEA-RETD, RES-H/C: Waking the Sleeping Giant, February 2015.
As described in Text Box 11 below, fourth generation heating and cooling networks operate at significantly
lower temperatures (55 degrees C) than conventional district heating networks and can better integrate RES-
H/C technologies like heat pumps and solar thermal. Low temperature district heating networks also operate
more efficiently and are better suited to supply low energy buildings than higher temperature networks, which
will be important to assist in the transition to low energy buildings.
Text Box 11. RES-H/C and future district heating and cooling (DHC) networks
According to Euroheat and Power (2012), district heating and cooling (DHC) will serve as “the
backbone of smart cities by 2030,” increasing communities’ flexibility to deploy energy efficiency and
renewable energy systems.
DHC demand today is mainly covered by fossil fuels (or electric chillers for cooling). As noted
previously, the high share of fossil fuels in the DHC heating markets creates challenges in terms of high
fuel import rates, lower security of supply, high carbon dioxide emissions, and increased heating costs.
DHC infrastructure can help remedy these problems by enabling the collection of waste heat and
renewable energy from distributed resources, thus reducing the need for fossil fuels for heating.
Future development of low energy buildings and RES-H/C systems served by DHC networks will require
a transition toward or new development of next (fourth) generation district heating systems, as well as
the development of district cooling networks.
First generation district heating systems consist primarily of steam systems. These systems were
historically developed to use steam from power plants, though they are as a whole typically
more expensive to construct and maintain than hot water systems and have higher operating
temperatures resulting in greater heat losses. It is not expected that these will be developed in
the future (BINE, 2007; DHC Platform, 2012).
Second generation systems consist of high temperature (~120 degree Celsius) pressurized water
systems. These systems emerged primarily in the 1930s and dominated through the 1970s.
Third generation district heating systems were introduced in the 1970s and are the current
(conventional) district heating systems. They supply medium temperature water (~90 degrees
C). These systems continued the trend in district heating toward lower distribution
temperatures, material lean components, and prefabricated components that require less
manpower at construction sites (DHC Platform, 2012).
Fourth generation district heating systems are the next generation of district heating systems.
They have been piloted in a number of regions, including Denmark, and can supply low
temperature water at approximately 55 degrees C (Wiltshire, 2012). This enables increased
integration of low temperature RES-H/C technologies such as heat pumps and solar thermal
systems. It additionally is expected to support more flexible distribution and the use of
assembly-oriented components and flexible materials. The final result will be a more
environmentally friendly, customer-oriented solution (DHC Platform, 2012).
District cooling is also an option for municipal energy networks. District cooling is an
environmentally optimized cooling solution, which uses local, natural resources such as
seawater or absorption chillers to produce cooling. As with district heating, the customer is
connected to the cooling production via a pipe network. Chilled water is distributed to the
buildings where it loses its cold content, thus cooling down the building temperature.
P a g e | 75 IEA-RETD, RES-H/C: Waking the Sleeping Giant, February 2015.
Summary. Both distributed and centralized RES-H/C generators can be integrated into district heating
networks. Commercial buildings in particular could host large RES-H/C systems on district energy networks,
providing benefits to the building owner and potentially to the heating network operator. While policies
enabling decentralized commercial buildings to feed energy into the heating grid will likely cause economic,
technical, and grid management challenges for district energy providers, experts note that it is not impossible.
In fact, such a transition parallels challenges that solar PV has faced (and continues to face) with regard to
feeding into the electric grid (IEA-RETD RE-PROSUMERS, 2014). Such strategies could drive innovation and
enable development of smart grid development for the heating sector, offering significant opportunities for
RES-H/C and low energy building development (Epp, 2014).
Policymakers should carefully consider how or whether they plan scaling up district heating networks in the
future. As policymakers increase energy efficiency and move toward a low energy building future, they should
carefully evaluate future building heating demand among buildings on existing district heating networks,
assess potential for making significant energy efficiency improvements in buildings, and consider how best to
integrate RES-H/C technologies into new and existing buildings as well as district energy infrastructure.
5.1.3 RES-H/C & THERMAL STORAGE FOR ELECTRIC GRID
MANAGEMENT As greater shares of variable RES-E, such as wind or solar, are integrated into the electric grid, grid operators
are facing new challenges to ensure flexibility and reliability of the system. There are opportunities to integrate
RES-H/C and thermal storage into electric power grid planning and management in order to accommodate
larger penetrations of variable generation. In particular, recent studies have shown that using CHP, heat
pumps, and heat storage can provide significant balancing capability and contribute to a more flexible and
efficient energy system (Hedegaard, 2013; Meibom et al., 2007; Mueller et al., 2014). These are especially
suited for commercial buildings or district energy systems with large heating loads.
A number of smart grid concepts envision – or have piloted – the use of heat pumps to satisfy thermal demand
or to replenish storage during periods of high power output from wind and solar. This results in a number of
benefits. From a technical standpoint, storing energy in the form of heat is much more cost efficient than
electrochemical storage. In addition, such they can lower investments in dispatchable power plants and
optimize operation of wind power (Hedegaard, 2013; Mueller et al., 2014).
Threats and Benefits of RES-H/C. There are two approaches to electric storage that offer opportunities for
RES-H/C technologies: short-term (hourly) storage, balancing demand shifts within a day, and longer-term
(intra-week) storage, to balance variability in demand within a week. Both of these strategies offer utilities,
district energy companies, building owners, or third-party service providers opportunities to better manage
grid variability and profit from new business services.
P a g e | 76 IEA-RETD, RES-H/C: Waking the Sleeping Giant, February 2015.
Individual heat pumps can contribute to short-term energy storage (up to a few hours). The most common
type of heat pump today is a compression heat pump that uses electricity to transfer heat – usually from the
ground or the outside air to a home. The heat energy can be stored either in water tanks or in the building
itself (e.g. in the floor or the walls) for several hours (Hedegaard, 2013). This allows heat pumps to be operated
flexibly – ramping up production at times of high electricity supply, and scaling back or turning off when there
is a supply shortage. Depending upon the size of the commercial building, building owners could participate in
the regulating power market or work with agents that aggregate heat pump capacity for the market.
For longer-term storage, large heat pumps, electric boilers, and heat storage capacity in district heating
systems have the potential to allow for the storage of substantial amounts of energy. Here, large-scale
compression heat pumps usually utilize wastewater, exhaust from industrial operations, ground water, lakes,
rivers, or the sea as a heat source. They transfer heat to district heating systems, or provide direct thermal
energy where it is required. Large heat pumps and electric boilers can also be operated flexibly and thus help
balance energy supply and demand. Storage capacities of district heating systems are usually much greater
than in individual buildings and can therefore function as a power balancing tool over longer periods of time.
However, typical thermal losses (usually around 5%) do not permit for economic storage of much more than a
week (Hedegaard, 2013). This approach offers new business and revenue generation opportunities for district
energy providers.
Summary. RES-H/C and thermal storage strategies offer a promising opportunity to support improved
management and development of the electric grid. With regard to next generation policies, utility mandates
and performance based incentives could be developed to provide additional incentives for RES-H/C systems
like ground source heat pumps that are deployed in areas which would most benefit from short- or longer-
term storage opportunities. In addition, policymakers may consider various planning measures – ranging from
strategic energy planning to energy systems modeling – to evaluate how best to facilitate the integration of
RES-H/C technologies into the power grid and to build reliable and flexible energy networks.
P a g e | 77 IEA-RETD, RES-H/C: Waking the Sleeping Giant, February 2015.
6 CONCLUSION RES-H/C holds considerable promise to help policymakers achieve long-term energy and climate ambitions –
such as climate change mitigation, climate adaptation, economic development, and energy security. In many
cases, it is already clear that it will not be possible to meet existing climate and energy goals without increasing
the use of RES-H/C (Bürger et al., 2008). To scale the market in the commercial building sector, policymakers
will need to address a number of persistent barriers to RES-H/C development. This will require targeted policy
interventions to address the unique RES-H/C technical and market conditions for jurisdictions across the globe.
RES-H/C is also an essential part of planning for the long-term energy future, and RES-H/C technologies can be
deployed to also support a number of building and energy policy priorities. The deployment of RES-H/C will be
most successful if policymakers develop integrated policy approaches, which address commercial building
needs across the energy efficiency, heating and cooling, and electricity sectors. An integrated policy approach
will enable policymakers to better manage strategies to drive development of renewable heating and cooling
markets, low energy buildings, district energy networks, as well as thermal storage for electric grid
management.
There is a clear need to develop new and innovative – next generation – policies to rouse the RES-H/C market,
overcome persistent market barriers, and enable RES-H/C to achieve massive, cost-effective, mainstream
deployment in the next several decades. This report lays the groundwork for developing next generation
policies, helping to clarify issues, options, and potential impacts and thus enable policymakers to take steps to
move RES-H/C markets in their countries along the deployment curve and address their energy goals.
P a g e | 78 IEA-RETD, RES-H/C: Waking the Sleeping Giant, February 2015.
APPENDIX A Text Box 12. EN Standard 1434 – Heat Meters
EN 1434 provides technical guidance for heat meters. The standard consists of six major parts.
Part 1. General requirements describes complete and combined heat metering instruments as well as
general parameters and operating requirements of heat meters. It also provides technical
characteristics, which outline the design criteria for a heat meter, specifying that a heat meter must
be durable under normal operating conditions, resistant to vandalism, and specifies the operational
characteristics of the heat meter’s results display. The metrological characteristics define the maximum
permissible error that is allowed for heat meters, and their subsections, to qualify for each of the three
accuracy classes: Class 1, Class 2, and Class 3, with Class 1 being the most accurate.
Part 2. Constructional requirements provide design dimensions, materials, and components for various
heat meter parts as well as guidance on how the interfaces of sub assemblies should be connected.
Constructional requirements for complete meters are also covered. The standard then classifies various
types of pulse output devices based on functionality, pulse type, and amount of electrical current.
Part 3. Data exchange and interfaces addresses the data exchange between a meter and a readout
device. A meter can have either zero or a number of different interfaces to communicate data. The
standard identifies requirements for the signal processor’s physical layer, link layer, and application
layer, each based on if it relies on a wireless, optical, current loop, or a local bus or M‐ Bus interface.
Based on the hardware interface type, the appropriate European standard is identified to guide the
design.
Part 4. Pattern approval tests defines the specifications for the heat measuring instruments and the test
conditions in the heat exchange circuit. A range of reference conditions for ambient temperature,
relative humidity, and ambient air pressure are given and may not vary during the course of the
measurement. Actual reference values and operating conditions are given in this section as well as
methods for how tests are conducted, allowable error ranges, and required document submissions to
the testing laboratory.
Part 5. Initial verification tests are divided in metrological, technical and administrative phases, and
must be performed separately for each of the heat meter’s subassemblies. This section provides
instructions and documentation to be delivered to the testing lab, and the required data sheets
containing the test results and test conditions.
Part 6. Installation, commissioning, operational monitoring and maintenance explains the procedures
and requirements for the design, installation, commissioning, operational monitoring, and
maintenance of heat meters. It explains how heat meters should be implemented into larger heating
systems; specifies installation procedures; lists the installation verification tests needed to check flow
sensor position, temperature sensor dimension, fit, and installation; defines adequate heat meter
distance from interference sources; and provides a procedure for verifying that the heat meter is
earthed and functioning as it should.
P a g e | 79 IEA-RETD, RES-H/C: Waking the Sleeping Giant, February 2015.
The Annex of Part 6 gives recommendations for the installation of heat meters into the heating system,
of which they are a component. Given the operating and environmental conditions of the heat
meter’s installation, the quality of heat conveying liquid, the primary water quality, and the secondary
water quality, the Annex provides guidance on selecting an appropriate heat meter. The standard
outlines the operational monitoring and maintenance requirements for heat meters and provides a
sample maintenance report.
P a g e | 80 IEA-RETD, RES-H/C: Waking the Sleeping Giant, February 2015.
APPENDIX B Table 10. Selected RES-H/C mandates
JURISDICTION BUILDING SECTOR NEW OR EXISTING
BUILDINGS RES-H/C TECHNOLOGY
Israel Most Residential &
Commercial New Construction Solar Thermal
Israel has the oldest solar thermal building obligation in the world (since 1980), which applies to most new residential and commercial buildings (industrial facilities excluded). The obligation has supported widespread deployment of solar thermal and the technology is now widely integrated into both new and existing buildings: Israel now has almost 600 kWth solar thermal capacity installed per 1000 inhabitants, with such broad consumer acceptance that most solar thermal installations today are voluntarily sited atop buildings that are exempt from the law.
Madrid, Spain Residential & Commercial
New Construction / Renovation
Solar Thermal
Since 2003, the City of Madrid has required all new buildings or those undergoing major renovation to cover a minimum percentage of their domestic hot water load (dependent upon the type of demand) with solar thermal. This includes both residential and commercial sectors.
Germany Residential & Non-
Residential New Construction
Solar, Biomass (gas, liquid, solid), Geothermal
In 2009, Germany established a mandate requiring use of RES-H/C in all new buildings. This was developed to achieve Germany’s legally binding renewable heating target of 14% by 2020.
Baden Wurttemberg, Germany
Residential New Construction & Existing
Buildings Solar, Biomass (bio-oil & biogas),
Heat Pumps (ground)
The German state of Baden Württemberg has required all new residential buildings constructed after 2008 to cover 20% of their yearly heat demand with renewable heat sources, and all existing residential buildings undergoing a modernization of their central heating system after 2008 to cover 10% of heat demand.
Kenya Buildings using 100+
liters/day New Construction & Existing
Buildings Solar Thermal
In 2012, Kenyan policy-makers issued legislation mandating that all new buildings using over 100 liters of hot water a day must utilize solar heating systems to meet at least 60% of their demand. Additionally, within five years, all existing buildings using over 100 liters of hot water a day must also install solar water heating systems to cover 60% of demand.
Beijing and Kunming, China
Residential and Commercial
New Construction Solar Thermal
Several Chinese cities have issued municipal solar water heating mandates, particularly for residential buildings, although Beijing and Kunming's mandates also apply to commercial buildings. In 2010, Kunming mandated that all newly constructed, renovated, and expanded residential homes, hotels, hospitals, retirement homes, school dormitories, nurseries, etc., must install solar water heating heaters during the construction process, for buildings under twelve stories. In 2012, Beijing introduced requirements that hotels, schools, hospitals, and swimming pools install solar thermal if no waste heat is used to cover domestic hot water demand.
US Virgin islands All Buildings New Construction /
Renovation Solar Thermal
All new or substantially modified developments must use efficient solar water heaters for at least 70% of the hot water
P a g e | 81 IEA-RETD, RES-H/C: Waking the Sleeping Giant, February 2015.
load.
Dubai, UAE Residential New Construction Solar Thermal
For all new villas and labor accommodations, a SWH system must be installed to provide 75% of domestic hot water requirements
New Hampshire, USA Utility Mandate 2% of State's Electric Load Solar Thermal, Biomass Thermal, &
Ground Source Heat Pumps
Requirement that 2% of the state’s electric load must be met with thermal sources, incl. Solar Thermal, Biomass Thermal, & Ground Source Heat Pumps, by 2025.
Massachusetts, USA Utility Mandate 5% of State's Electric Load CHP, Solar Thermal, Biomass, Biogas,
and Heat Pumps
Requirement that 5% of the state’s electric load must be met with “alternative energy”, incl. CHP, solar thermal, biomass, biogas, and heat pumps, by 2020.
P a g e | 82 IEA-RETD, RES-H/C: Waking the Sleeping Giant, February 2015.
REFERENCES BAFA. (n.d.). Förderung von Solarthermieanlagen. Eschborn, Germany: Bundesamt für Wirtschaft und
Ausfuhrkontrolle. Retrieved from www.bafa.de
Barbose, G., Wiser, R., & Bolinger, M. (2006). Designing PV incentive programs to promote performance: A review of current practice (No. LBNL-61643). Berkeley, CA: Lawrence Berkely National Laboratory and the Clean Energy States Alliance. Retrieved from file:///C:/Documents%20and%20Settings/Wilson/Desktop/inbox/Barbose%20-%20Designing%20PV%20programs%20to%20promote%20performance.pdf
Beerepoot, M., & Marmion, A. (2012). Policies for renewable heat: An integrated approach. Paris, Fance: International Energy Agency.
BINE. (2007). Converting steam based district heating systems to hot water. BINE Information Service.
Bird, L., Heeter, J., & Kreycik, C. (2011). Solar renewable energy certificate (SREC) markets: Status and trends (No. NREL/TP-6A20-52868). Golden, CO: National Renewable Energy Laboratory.
Brown, A., & Müller, S. (2011). Deploying renewables 2011: Best and future policy practice. Paris: International Energy Agency.
Bundesverband Solarwirtschaft. (2012). Fahrplan Solarwärme: Strategie und Massnahmen der Solarwärme-Branche für ein beschleunigtes Marktwachstum bi2 2030. Berlin, Germany: Bundesverband Solarwirtschaft e.V.
Bürger, V., Klinski, S., Lehr, U., Leprich, U., Nast, M., & Ragwitz, M. (2008). Policies to support renewable energies in the heat market. Energy Policy, 36(8), 3150–3159. doi:10.1016/j.enpol.2008.04.018
Bürger, V., Kranzl, L., Connor, P., Ericsson, K., Beurskens, L., Steinbach, J., & Ragwitz, M. (2011). Warming up to renewable heat: Policy options boosting renewables in the heating market. Intelligent Energy Europe.
Burkhardt, J., Wiser, R., Darghouth, N., Dong, C., & Huneycutt, J. (2014). How Much Do Local Regulations Matter? Exploring the Impact of Permitting and Local Regulatory Processes on PV Prices in the United States (No. LBNL-6807E). Yale University, Lawrence Berkeley National Laboratory, University of Texas at Austin, and U.S. Department of Energy.
Carbon Markets Economics. (2009). Carbon Market Economics’ submission to the Economics Legislation Committee’s inquiry into the Renewable Energy (Electricity) Amendment Bill 2009.
Cliburn, J. K. (2012). Heating up: The impact of third-party business models on the US market for solar water and space heating. Solar Electric Power Association.
Commission of the European Communities. (2005). The support of electricity from renewable energy sources (No. COM(2005) 627 final). Brussels: Commission of the European Communities. Retrieved from file:///C:/Users/Wilson/Desktop/Library/CEC%20-%20Support%20of%20electricity%20from%20renewable%20energy%20sources.pdf
CRiBE. (2009). Greening the commercial property sector: A guide for developing and implementing best practice through the UK leasing process (No. ISBN: 978-1-899895-42-7). Cardiff, UK: Centre for Research in the Built Environment, The Welsh School of Architecture. Retrieved from http://www.greenleases-uk.co.uk/Good%20Practise%20Guide%203-for%20web.pdf
P a g e | 83 IEA-RETD, RES-H/C: Waking the Sleeping Giant, February 2015.
dena. (2014). Consequences of the new Energy Saving Ordinance (EnEV). German Energy Agency. Retrieved from http://www.dena.de/en/press-releases/pressemitteilungen/consequences-of-the-new-energy-saving-ordinance-enev.html
Department of Energy and Climate Change. (2011). Renewable heat incentive impact assessment. United Kingdom Department of Energy and Climate Change.
DHC Platform. (2012). District Heating & Cooling Strategic Research Agenda. Brussels, Belgium: Euroheat & Power.
DSIRE. (2014, March 13). Federal Business Energy Investment Tax Credit (ITC). Retrieved March 25, 2014, from http://www.dsireusa.org/incentives/incentive.cfm?Incentive_Code=US02F&re=1&ee=1
EHP. (2011). District heating and cooling: Statistics overview. Retrieved from http://www.euroheat.org/Statistics-69.aspx
Eisentraut, A., & Brown, A. (2014). Heating without global warming: Market developments and policy considerations for renewable heat. Paris, France: International Energy Agency. Retrieved from http://www.iea.org/publications/freepublications/publication/FeaturedInsight_HeatingWithoutGlobalWarming_FINAL.pdf
Epp, B. (2014, October). Heat networks must enable decentralized feed-in options. Global Solar Thermal Energy Council. Austria. Retrieved from www.solarthermalworld.org
EREC. (2005). Joint declaration for a European Directive to promote renewable heating and cooling. Brussels, Belgium: European Renewable Energy Council. Retrieved from file:///C:/Users/Wilson/Desktop/Library/EREC%20-%20Joint%20declaration%20on%20renewable%20heat.pdf
ESTIF. (2007). Best practice regulations for solar thermal (No. K4RES-H, EIE/04/240/S07.38607). European Solar Thermal Industry Federation.
Friedman, B., Ardani, K., Feldman, D., Citron, R., Margolis, R., & Zuboy, J. (2013). Benchmarking non-hardware balance-of-system (soft) costs for U.S. photovoltaic systems, using a bottom-up approach and installer survey: Second edition. Golden, CO: National Renewable Energy Laboratory. Retrieved from http://www.nrel.gov/docs/fy14osti/60412.pdf
Fulton, M., & Mellquist, N. (2011). The German feed-in tariff for PV: Managing volume success with price response. New York, NY: DB Climate Change Advisors, Deutsche Bank Group.
Green Lease Library. (n.d.). Retrieved from http://www.greenleaselibrary.com/
Hedegaard, K. (2013). Wind power integration with heat pumps, heat storages, and electric vehicles: Energy systems analysis and modelling. Department of Management Engineering, Technical University of Denmark, Roskilde, Denmark.
Heeter, J., & Bird, L. (2011). Status and trends in U.S. compliance and voluntary renewable energy certificate markets (2010 data) (No. NREL/TP-6A20-52925). Golden, CO: National Renewable Energy Laboratory.
Hiller, J., Reyna, E., Riso, C., & Jay, J. (2012). The virtuous cycle of organization energy efficiency: A fresh approach to dismantling barriers. Presented at the ACEEE Summer Study on Energy Efficiency in Buildings.
HM Treasury (Ed.). (2003). The Green Book. Appraisal and Evaluation in Central Government. Treasury Guidance. Retrieved from https://www.gov.uk/government/publications/the-green-book-appraisal-and-evaluation-in-central-governent
P a g e | 84 IEA-RETD, RES-H/C: Waking the Sleeping Giant, February 2015.
Hoff, T. E. (2006). Photovoltaic incentive design handbook (No. NREL/SR-640-40845). Golden, CO: National Renewable Energy Laboratory. Retrieved from file:///C:/Users/Wilson/Desktop/Library/Hoff%20-%20PV%20incentive%20design%20handbook.pdf
Hvelplund, F. (2001, May). Political prices or political quantities? A comparison of renewable energy support systems. New Energy, 18–23.
IEA. (2014). Heating without global warming: Market developments and policy considerations for renewable heat. Retrieved from http://www.iea.org/publications/freepublications/publication/FeaturedInsight_HeatingWithoutGlobalWarming_FINAL.pdf
IEA-RETD. (2011). Overcoming environmental, administrative and socio-economic barriers to renewable energy technology deployment: A guidebook. IEA Implementing Agreement for Renewable Energy Technology Deployment (IEA-RETD), Utrecht, 2011.
IEA-RETD (2012), Business models for renewable energy in the built environment. [Würtenberger, L., Bleyl, J. W., Menkveld, M., Vethman, P., and van Tilburg, X; ECN], IEA-Implementing Agreement for Renewable Energy Technology Deployment (IEA-RETD), Utrecht, 2012.
IEA-RETD (2014). Residential prosumers: Drivers and policy options (RE-PROSUMERS). [Rickerson, W., Couture, T., Barbose, G., Jacobs, D., Parkinson, G., Chessin, E., and Belden, A.; Meister Consultants Group], IEA Implementing Agreement for Renewable Energy Technology Deployment (IEA-RETD), Utrecht, 2014.
Kampman, B., Verbeek, R., van Grinsven, A., Croezen, H., & Patuleia, A. (2013). Bringing Biofuels on the Market: Options to Increase EU Biofuels Volumes Beyond the Current Blending Limits. Delft, CE Delft.
Kim, C., O’Connor, R., Bodden, K., Hochman, S., Liang, W., Pauker, S., & Zimmermann, S. (2012). Innovations and opportunities in energy efficiency finance. New York, NY: Wilson Sosini Goodrich & Rosati (WSGR).
Klima OG Energiministeriet. (2010, June). National Action Plan for Renewable Energy in Denmark. EU Commission. Retrieved from http://ec.europa.eu/energy/renewables/action_plan_en.htm
Lane, T. (2011). A brief history of hte American solar water heating industry. Ocala, FL: Energy Conservation Services of North Florida. Retrieved from http://www.ecs-solar.com/ECS-A_Brief_History.pdf
Langniss, O., Seyboth, K., Beurskens, L., Wakker, A., Sims, R., Frasch, F., & Bosselaar, L. (2007). Renewables for heating and cooling: Untapped potential. Paris, France: International Energy Association.
Laurent, C. (2014, November). Solarize program design and implementation. Presented at the Workshop at Metropolitan Washington Council of Governments on behalf of the U.S. DOE Sunshot Initiative, Washington, DC.
Laustsen, J. (2008). Energy efficiency requirements in building codes, energy efficiency polices for new buildings. Paris, France: International Energy Agency.
Lu, N., Taylor, Z., Jiang, W., Xie, Y., Leung, L., Correia, J., … Paget, M. (2008). Climate change impacts on residential and commercial loads in the Western U.S. grid (No. PNNL-17826). Pacific Northwest National Laboratory.
Maker, T. M. (2004). Wood-Chip Heating Systems: A Guide for Institutional and Commercial Biomass Installations. Biomass Energy Research Center. Retrieved from http://www.biomasscenter.org/pdfs/Wood-Chip-Heating-Guide.pdf
Meibom, P., Kiviluoma, J., Barth, R., Brand, H., Weber, C., & Larsen, H. V. (2007). Value of electric heat boilers and heat pumps for wind power integration. Wind Energy, 10(4), 321–337.
P a g e | 85 IEA-RETD, RES-H/C: Waking the Sleeping Giant, February 2015.
Mosey, G., & Kreycik, C. (2008). State Clean Energy Practices: Renewable Fuel Standards (No. NREL/TP-670-43513). National Renewable Energy Laboratory.
Mueller, S., Tuth, R., Fischer, D., Wille-Haussmann, B., & Wittwer, C. (2014). Balancing fluctuating renewable energy generation using cogeneration and heat pump systems. Energy Technology, 2(1), 83–89. doi:10.1002/ente.201300082
Navigant, & MCG. (2014). Commonwealth Accelerated Renewable Thermal Strategy. Boston, MA: Massachusetts Department of Energy Resources.
NREL. (2013, April). NREL launches initiative to build solar performance database. Retrieved from www.nrel.gov/
OFGEM. (2014). Non-domestic renewable heat incentive (RHI) metering placement examples – Version 1. UK: Office of Gas and Electric Markets. Retrieved from www.ofgem.gov.uk
Passive House Institute. (2012). About Passive House. Retrieved from www.passiv.de/
PlaNYC. (2014). Energy Aligned Clause: Green Buildings & Energy Efficiency. Retrieved from www.nyc.gov/html/gbee/html/initiatives/clause.shtml
ProSTO. (n.d.). Renewable Heat Law Baden-Württemberg. Intelligent Energy Europe.
REN21 (Ed.). (2013). Renewables Global Futures Report. Renewable Energy Network for the 21st Century. Retrieved from http://www.ren21.net/REN21Activities/GlobalFuturesReport.aspx
REN21. (2014). Renewables 2014 global status report. Paris, France: REN21 Secretariat.
Rickerson, W., Halfpenny, T., & Cohan, S. (2009). The emergence of renewable heating and cooling policy in the United States. Policy and Society, 27(4), 365–377. doi:10.1016/j.polsoc.2009.01.004
Rickerson, W., Laurent, C., Jacobs, D., Dietrich, C., & Hanley, C. (2012). Feed-in tariffs as a policy instrument for promoting renewable energies and green economies in developing countries. Paris, France: United Nations Environment Programme. Retrieved from http://www.unep.org/pdf/UNEP_FIT_Report_2012F.pdf
Sanner, B., Kalf, R., Land, A., Mutka, K., Papillon, P., Stryi-Hipp, G., & Weiss, W. (2011). Common vision for the renewable heating & cooling sector in Europe. Belgium: European Technology Platform on Renewable Heating and Cooling.
Siegenthaler, J. (2013). Renewable Hydronic Heating. Home Power Magazine, (152). Retrieved from http://www.homepower.com/articles/solar-water-heating/space-heating/renewable-hydronic-heating
Sinclair, M. (2007). CESA state program guide: State strategies to foster solar hot water system deployment. Montpelier, VT: Clean Energy States Alliance (CESA).
Steinbach, J., Seefeldt, F., Brandt, E., Burger, V., Jacobshagen, U., Kachel, M., … Ragwitz, M. (2013). State Budget Independent, Market Based Instruments to Finance Renewable Heat Strategies. Energy and Environment, 24(1&2).
Taylor, M. (2011). Technology Roadmap: Energy Efficient Buildings: Heating and Cooling Equipment. International Energy Agency. Retrieved from http://www.iea.org/publications/freepublications/publication/buildings_roadmap.pdf
TCT. (2009). Building the future, today. London, UK: The Carbon Trust.
UK DECC. (2011). Renewable heat incentive. London, UK.
P a g e | 86 IEA-RETD, RES-H/C: Waking the Sleeping Giant, February 2015.
US EIA. (2003). Building Type Definitions. Retrieved from http://www.eia.gov/consumption/commercial/building-type-definitions.cfm
U.S. EPA. (2012). Solar heating and cooling contractual best practices for third-party financed commercial- and industrial-scale projects. Washington, D.C.: U.S. Environmental Protection Agency.
Veilleux, N., Crowe, J., Belden, A., & Rickerson, W. (2012). Massachusetts renewable heating and cooling: Opportunities and impacts study. Boston, MA: Meister Consultants Group. Prepared for Massachusetts Department of Energy Resources and Massachusetts Clean Energy Center. Retrieved from http://www.mass.gov/eea/docs/doer/renewables/renewable-thermal-study.pdf
Veilleux, N., & Rickerson, W. (2013). New York City Solar water heating roadmap. New York, NY: The City University of New York, New York City Solar America Partnership.
Wiltshire, R. (2012, April). Low Temperature District Heating. BRE Trust.